Parsons Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparable quarter ended March 30, 2018. Parsons provides technology, engineering and technical services to U.S. federal and critical-infrastructure customers. The 2019 quarter had 90 days versus 91 in 2018. The company completed its IPO after quarter-end, on May 8, 2019.
Financial results and liquidity
Dollar amounts are in millions except per-share data and percentages.
| Metric | Q1 2018 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $754.7 | $904.4 | +19.8% |
| Operating income / margin | $38.9 / 5.2% | $23.0 / 2.5% | Down |
| Net income attributable to Parsons | $25.3 | $9.7 | Down 61.5% |
| Basic and diluted EPS | $0.31 | $0.12 | Down |
| Adjusted EBITDA / margin | $47.7 / 6.3% | $68.2 / 7.5% | +42.8% |
| Operating cash flow | $(65.4) | $(60.1) | Cash use improved $5.3 |
| Capital expenditures | $5.2 | $11.0 | Increased |
- Revenue growth was led by Federal Solutions, up 45.1% to $422.8 million; Critical Infrastructure rose 3.9% to $481.6 million.
- Federal Solutions Adjusted EBITDA increased 92.8% to $38.9 million; Critical Infrastructure Adjusted EBITDA increased 8.0% to $25.6 million. Adjusted EBITDA is a non-GAAP measure and includes adjustments for items such as acquisition, restructuring and implementation costs.
- Cash used in operating activities remained substantial. Working-capital movements included a $47.0 million cash outflow from contract assets and a $28.2 million outflow from accounts payable. Cash, cash equivalents and restricted cash totaled $130.5 million at March 31, versus $281.2 million at December 31, 2018.
- At March 31, total debt was $659.0 million: $260.0 million outstanding on the revolver, $250.0 million in senior notes, and $150.0 million on a short-term term loan. The company reported compliance with debt covenants. Its $550 million revolving facility was subject to outstanding letters of credit, including $48.8 million under that facility.
- Current assets were $1.43 billion and current liabilities $1.19 billion. Working capital was $242.3 million, down from $482.6 million at December 31, 2018.
Material changes versus the prior comparable period
- Acquisitions drove much of the growth. OGSystems was acquired in January 2019 for $292.4 million; it contributed $29.0 million of quarterly revenue. Polaris Alpha, acquired in May 2018, contributed $93.4 million of quarterly revenue.
- Indirect, general and administrative expense rose 43.3% to $177.5 million. The company attributed the increase principally to acquired operations, $20.4 million of acquisition-related intangible amortization, and $9.4 million of transaction costs.
- Interest expense increased to $8.3 million from $4.0 million, primarily due to acquisition-related borrowing. Intangible amortization rose to $20.9 million from $1.8 million.
- Revenue mix shifted toward cost-plus contracts, which increased to 43.2% of revenue from 34.6%; fixed-price contracts declined to 28.5% from 35.2%.
- Awards increased to $1.22 billion from $608.3 million, and book-to-bill improved to 1.35 from 0.81. Backlog was $8.55 billion at March 31, 2019, up from $6.32 billion a year earlier; remaining unsatisfied performance obligations were $5.3 billion.
Outlook, risks and unusual items
- Management stated it believed liquidity and capital resources were adequate for operations, debt service and its acquisition strategy over the next 12 months. No specific earnings or revenue guidance was provided.
- Management expects some ongoing operating expenses to increase with growth and public-company costs, while generally expecting costs to decline as a percentage of revenue as the business scales. Results can be seasonal around government fiscal-year spending patterns.
- The IPO ended Parsons’ S-corporation tax status. Management expects the change to C-corporation status to increase the effective tax rate and reduce net income; it estimated a $55–$61 million tax-related impact from recording deferred tax effects, subject to revision. The filing presented pro forma C-corporation tax rates of 33.02% for Q1 2018 and 31.29% for Q1 2019.
- The IPO raised approximately $533.8 million net of discounts and fees. Proceeds were used to fund a $52.1 million dividend, repay the $150.0 million term loan, and repay outstanding revolver indebtedness; the amount of revolver repayment was not specified here. The company also effected a two-for-one stock dividend before the IPO.
- Operating leases added $234.3 million of recognized lease liabilities following adoption of the new lease standard. Adoption also resulted in a $52.6 million cumulative adjustment to retained earnings; management said the standard did not affect the income statement.
- Significant contingencies include the Peninsula Corridor Joint Powers Board lawsuit seeking more than $100 million, which Parsons disputes; management said the outcome and potential loss could not yet be assessed. A separate False Claims Act case was remanded to the district court, and its outcome and potential loss were also uncertain. The filing also identifies government contract audits and potential cost disallowances as risks.
- Other key risks include federal budget delays or reductions, contract cancellations or non-exercise of options, competitive bidding, contract cost overruns, and collection of claims and unapproved change orders. The filing reports $49.4 million of contract assets related to unapproved change orders, claims and requests for equitable adjustment.
Important facts for investors to verify
- Whether acquisition-driven revenue and awards translate into sustained organic growth and margins, particularly given lower GAAP operating income despite higher Adjusted EBITDA.
- The realization, funding and timing of the $8.55 billion backlog; $3.43 billion was unfunded, and backlog includes probable options and orders not yet issued.
- Post-IPO debt balances and interest costs after repayment of the term loan and revolver indebtedness, and the company’s continuing liquidity needs.
- The final tax impact of conversion from S-corporation to C-corporation status, including the estimated $55–$61 million deferred-tax effect and future effective tax rate.
- Developments in the JPB and False Claims Act litigation, government audits, and collection of contract claims and unapproved change orders.
- Cash conversion and working-capital trends, including contract assets, receivables, and the restricted cash held by consolidated joint ventures.