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PARSONS CORP - Quarter Report: 2019 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from     to

Commission File Number: 001-07782

 

Parsons Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

95-3232481

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

5875 Trinity Parkway #300

Centreville, Virginia

20120

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (703) 988-8500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $1 par value

 

PSN

 

New York Stock Exchange

As of August 1, 2019, the registrant had 99,434,877 shares of common stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

1

Item 1.

Financial Statements (Unaudited)

 

1

 

Consolidated Balance Sheets

 

1

 

Consolidated Statements of Income

 

2

 

Consolidated Statements of Comprehensive Income

 

3

 

Consolidated Statements of Cash Flows

 

4

 

Consolidated Statements of Shareholders’ Equity (Deficit)

 

5

 

Notes to Unaudited Consolidated Financial Statements

 

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

44

Item 4.

Controls and Procedures

 

44

PART II.

OTHER INFORMATION

 

46

Item 1.

Legal Proceedings

 

46

Item 1A.

Risk Factors

 

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

Item 3.

Defaults Upon Senior Securities

 

46

Item 4.

Mine Safety Disclosures

 

46

Item 5.

Other Information

 

46

Item 6.

Exhibits

 

46

Signatures

 

47

 

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share information)

(Unaudited)

 

 

 

 

December 31, 2018

 

 

June 30, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (including $73,794 and $40,866 Cash of consolidated joint ventures)

 

$

280,221

 

 

$

202,854

 

 

Restricted cash and investments

 

 

974

 

 

 

8,529

 

 

Accounts receivable, net (including $180,325 and $211,091 Accounts receivable of consolidated joint ventures, net)

 

 

623,286

 

 

 

734,389

 

 

Contract assets (including $21,270 and $25,779 Contract assets of consolidated joint ventures)

 

 

515,319

 

 

 

576,280

 

 

Prepaid expenses and other current assets (including $11,837 and $13,165 Prepaid expenses and other current assets of consolidated joint ventures)

 

 

69,007

 

 

 

73,910

 

 

Total current assets

 

 

1,488,807

 

 

 

1,595,962

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net (including $2,561 and $2,998 Property and equipment of consolidated joint ventures, net)

 

 

91,849

 

 

 

100,934

 

 

Right of use assets, operating leases

 

 

-

 

 

 

212,386

 

 

Goodwill

 

 

736,938

 

 

 

922,403

 

 

Investments in and advances to unconsolidated joint ventures

 

 

63,560

 

 

 

73,481

 

 

Intangible assets, net

 

 

179,519

 

 

 

229,639

 

 

Deferred tax assets

 

 

5,680

 

 

 

70,152

 

 

Other noncurrent assets

 

 

46,225

 

 

 

50,495

 

 

Total assets

 

$

2,612,578

 

 

$

3,255,452

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable (including $87,914 and $103,938 Accounts payable of consolidated joint ventures)

 

$

226,345

 

 

$

227,672

 

 

Accrued expenses and other current liabilities (including $73,209 and $65,210 Accrued expenses and other current liabilities of consolidated joint ventures)

 

 

559,700

 

 

 

602,425

 

 

Contract liabilities (including $38,706 and $48,507 Contract liabilities of consolidated joint ventures)

 

 

208,576

 

 

 

222,167

 

 

Short-term lease liabilities, operating leases

 

 

-

 

 

 

51,696

 

 

Income taxes payable

 

 

11,540

 

 

 

5,816

 

 

Total current liabilities

 

 

1,006,161

 

 

 

1,109,776

 

 

Long-term employee incentives

 

 

41,913

 

 

 

54,825

 

 

Deferred gain resulting from sale-leaseback transactions

 

 

46,004

 

 

 

-

 

 

Long-term debt

 

 

429,164

 

 

 

249,258

 

 

Long-term lease liabilities, operating leases

 

 

-

 

 

 

178,589

 

 

Deferred tax liabilities

 

 

6,240

 

 

 

6,190

 

 

Other long-term liabilities

 

 

127,863

 

 

 

118,851

 

 

Total liabilities

 

 

1,657,345

 

 

 

1,717,489

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

Redeemable common stock held by Employee Stock Ownership Plan (ESOP), $1 par value; 78,172,809 and 78,138,602 shares outstanding, recorded at redemption value

 

 

1,876,309

 

 

 

2,880,189

 

Shareholders' equity (deficit):

 

 

 

 

 

 

 

 

 

Common stock, $1 par value; authorized 1,000,000,000 shares; 125,097,684 and 146,393,959 shares issued; 0 and 21,296,275 shares outstanding

 

 

-

 

 

 

21,296

 

 

Treasury stock, 46,918,140 and 46,959,082 shares at cost

 

 

(957,025

)

 

 

(957,844

)

 

Retained earnings (accumulated deficit)

 

 

12,445

 

 

 

(424,886

)

 

Accumulated other comprehensive loss

 

 

(22,957

)

 

 

(18,144

)

 

Total Parsons Corporation shareholders' equity (deficit)

 

 

(967,537

)

 

 

(1,379,578

)

 

Noncontrolling interests

 

 

46,461

 

 

 

37,352

 

 

Total shareholders' equity (deficit)

 

 

(921,076

)

 

 

(1,342,226

)

 

Total liabilities, redeemable common stock and shareholders' equity (deficit)

 

$

2,612,578

 

 

$

3,255,452

 

 

The accompanying notes are an integral part of these consolidated financial statements.

1


PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share information)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

For the Six Months Ended

 

 

 

June 29, 2018

 

 

June 30, 2019

 

 

 

June 29, 2018

 

 

June 30, 2019

 

Revenues

 

$

900,732

 

 

$

989,742

 

 

 

$

1,655,411

 

 

$

1,894,147

 

Direct costs of contracts

 

 

668,211

 

 

 

784,723

 

 

 

 

1,271,183

 

 

 

1,498,960

 

Equity in earnings of unconsolidated joint ventures

 

 

1,839

 

 

 

11,634

 

 

 

 

12,870

 

 

 

22,031

 

Indirect, general and administrative expenses

 

 

147,448

 

 

 

225,359

 

 

 

 

271,295

 

 

 

402,878

 

Operating income (loss)

 

 

86,912

 

 

 

(8,706

)

 

 

 

125,803

 

 

 

14,340

 

Interest income

 

 

1,266

 

 

 

225

 

 

 

 

2,007

 

 

 

702

 

Interest expense

 

 

(4,536

)

 

 

(6,376

)

 

 

 

(8,535

)

 

 

(14,668

)

Other income (expense), net

 

 

(1,493

)

 

 

1,506

 

 

 

 

(341

)

 

 

1,547

 

Gain associated with claim on long-term contract

 

 

76,908

 

 

 

-

 

 

 

 

74,578

 

 

 

-

 

Total other income (expense)

 

 

72,145

 

 

 

(4,645

)

 

 

 

67,709

 

 

 

(12,419

)

Income (loss) before income tax provision

 

 

159,057

 

 

 

(13,351

)

 

 

 

193,512

 

 

 

1,921

 

Income tax benefit (provision)

 

 

(9,019

)

 

 

53,496

 

 

 

 

(14,372

)

 

 

51,610

 

Net income including noncontrolling interests

 

 

150,038

 

 

 

40,145

 

 

 

 

179,140

 

 

 

53,531

 

Net (income) loss attributable to noncontrolling interests

 

 

(1,657

)

 

 

114

 

 

 

 

(5,472

)

 

 

(3,531

)

Net income attributable to Parsons Corporation

 

$

148,381

 

 

$

40,259

 

 

 

$

173,668

 

 

$

50,000

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Basic and diluted

 

$

1.83

 

 

$

0.44

 

 

 

$

2.13

 

 

$

0.59

 

 

The accompanying notes are an integral part of these consolidated financial statements.

2


PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 29, 2018

 

 

June 30, 2019

 

 

June 29, 2018

 

 

June 30, 2019

 

Net income including noncontrolling interests

 

$

150,038

 

 

$

40,145

 

 

$

179,140

 

 

$

53,531

 

Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax

 

 

(2,598

)

 

 

2,240

 

 

 

(5,382

)

 

 

4,787

 

Pension adjustments, net of tax

 

 

(18

)

 

 

17

 

 

 

(37

)

 

 

26

 

Comprehensive income including noncontrolling interests, net of tax

 

 

147,422

 

 

 

42,402

 

 

 

173,721

 

 

 

58,344

 

Comprehensive (income) loss attributable to noncontrolling interests, net of tax

 

 

(1,657

)

 

 

114

 

 

 

(5,472

)

 

 

(3,531

)

Comprehensive income attributable to Parsons Corporation,

   net of tax

 

$

145,765

 

 

$

42,516

 

 

$

168,249

 

 

$

54,813

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

For the Six Months Ended

 

 

 

 

June 29, 2018

 

 

June 30, 2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interests

 

$

179,140

 

 

$

53,531

 

 

Adjustments to reconcile net income to net cash used in operating activities

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

23,057

 

 

 

61,665

 

 

Amortization of deferred gain

 

 

(3,642

)

 

 

-

 

 

Amortization of debt issue costs

 

 

300

 

 

 

629

 

 

Gain associated with claim on long-term contract

 

 

(129,674

)

 

 

-

 

 

(Gain) loss on disposal of property and equipment

 

 

53

 

 

 

(24

)

 

Provision for doubtful accounts

 

 

6,464

 

 

 

(866

)

 

Deferred taxes

 

 

584

 

 

 

(64,924

)

 

Foreign currency transaction gains and losses

 

 

1,633

 

 

 

(352

)

 

Equity in earnings of unconsolidated joint ventures

 

 

(12,870

)

 

 

(22,031

)

 

Return on investments in unconsolidated joint ventures

 

 

12,726

 

 

 

15,023

 

 

Contributions of treasury stock

 

 

22,713

 

 

 

24,529

 

 

Changes in assets and liabilities, net of acquisitions and newly consolidated

   joint ventures:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

418,169

 

 

 

(97,450

)

 

Contract assets

 

 

(502,095

)

 

 

(50,842

)

 

Prepaid expenses and current assets

 

 

(26,458

)

 

 

(4,967

)

 

Accounts payable

 

 

2,470

 

 

 

(4,517

)

 

Accrued expenses and other current liabilities

 

 

(12,592

)

 

 

17,763

 

 

Billings in excess of costs

 

 

(151,642

)

 

 

-

 

 

Contract liabilities

 

 

164,727

 

 

 

11,464

 

 

Provision for contract losses

 

 

(13,992

)

 

 

-

 

 

Income taxes

 

 

2,978

 

 

 

(7,223

)

 

Other long-term liabilities

 

 

9,508

 

 

 

20,097

 

 

Net cash used in operating activities

 

 

(8,443

)

 

 

(48,495

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(10,565

)

 

 

(25,953

)

 

Proceeds from sale of property and equipment

 

 

112

 

 

 

1,873

 

 

Payments for acquisitions, net of cash acquired

 

 

(481,163

)

 

 

(287,482

)

 

Investments in unconsolidated joint ventures

 

 

(4,211

)

 

 

(5,049

)

 

Return of investments in unconsolidated joint ventures

 

 

-

 

 

 

4,403

 

 

Net cash used in investing activities

 

 

(495,827

)

 

 

(312,208

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

260,000

 

 

 

350,000

 

 

Repayments of borrowings

 

 

-

 

 

 

(530,000

)

 

Payments for debt costs and credit agreement

 

 

-

 

 

 

(286

)

 

Contributions by (distributions to) noncontrolling interests, net

 

 

10,892

 

 

 

(12,640

)

 

Purchase of treasury stock

 

 

(32,996

)

 

 

(819

)

 

IPO proceeds, net

 

 

-

 

 

 

537,331

 

 

Dividend paid

 

 

-

 

 

 

(52,093

)

 

Net cash provided by financing activities

 

 

237,896

 

 

 

291,493

 

 

Effect of exchange rate changes

 

 

(624

)

 

 

(602

)

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(266,998

)

 

 

(69,812

)

 

Cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

 

 

Beginning of year

 

 

446,144

 

 

 

281,195

 

 

End of period

 

$

179,146

 

 

$

211,383

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity (Deficit)

For the Three Months Ended June 30, 2019 and June 29, 2018

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

Common

 

 

Treasury

 

 

Paid-in

 

 

(Accumulated

 

 

Comprehensive

 

 

Parsons

 

 

Noncontrolling

 

 

 

 

 

 

 

Stock

 

 

 

Stock

 

 

Stock

 

 

Capital

 

 

Deficit)

 

 

Income (Loss)

 

 

Deficit

 

 

Interests

 

 

Total

 

Balance at March 31, 2019

 

$

1,875,332

 

 

 

$

-

 

 

$

(957,838

)

 

$

-

 

 

$

75,771

 

 

$

(20,401

)

 

$

(902,468

)

 

$

31,828

 

 

$

(870,640

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

40,259

 

 

 

-

 

 

 

40,259

 

 

 

(114

)

 

 

40,145

 

Foreign currency translation gain, net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,240

 

 

 

2,240

 

 

 

-

 

 

 

2,240

 

Pension adjustments, net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17

 

 

 

17

 

 

 

-

 

 

 

17

 

Purchase of treasury stock

 

 

(6

)

 

 

 

-

 

 

 

(6

)

 

 

-

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Distributions, net of contributions

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,638

 

 

 

5,638

 

Dividend paid

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(52,093

)

 

 

-

 

 

 

(52,093

)

 

 

-

 

 

 

(52,093

)

Conversion of S-Corp to C-Corp

 

 

25,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,877

)

 

 

 

 

 

 

(25,877

)

 

 

-

 

 

 

(25,877

)

IPO proceeds, net

 

 

-

 

 

 

 

21,296

 

 

 

-

 

 

 

516,034

 

 

 

-

 

 

 

-

 

 

 

537,330

 

 

 

-

 

 

 

537,330

 

Accretion of redeemable common stock

 

 

978,986

 

 

 

 

-

 

 

 

-

 

 

 

(516,034

)

 

 

(462,952

)

 

 

-

 

 

 

(978,986

)

 

 

-

 

 

 

(978,986

)

Balance at June 30, 2019

 

$

2,880,189

 

 

 

$

21,296

 

 

$

(957,844

)

 

$

-

 

 

$

(424,886

)

 

$

(18,144

)

 

$

(1,379,578

)

 

$

37,352

 

 

$

(1,342,226

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 30, 2018

 

$

1,854,938

 

 

 

$

-

 

 

$

(876,738

)

 

$

-

 

 

$

(165,116

)

 

$

(17,803

)

 

$

(1,059,657

)

 

$

37,906

 

 

$

(1,021,751

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

148,381

 

 

 

-

 

 

 

148,381

 

 

 

1,657

 

 

 

150,038

 

Foreign currency translation (loss), net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,576

)

 

 

(2,576

)

 

 

(22

)

 

 

(2,598

)

Pension adjustments, net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(18

)

 

 

(18

)

 

 

-

 

 

 

(18

)

Purchase of treasury stock

 

 

(32,629

)

 

 

 

-

 

 

 

(32,629

)

 

 

-

 

 

 

32,629

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Contributions, net of distributions

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,394

 

 

 

4,394

 

Balance at June 29, 2018

 

$

1,822,309

 

 

 

$

-

 

 

$

(909,368

)

 

$

-

 

 

$

15,894

 

 

$

(20,397

)

 

$

(913,871

)

 

$

43,935

 

 

$

(869,936

)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

5


PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity (Deficit)

For the Six Months Ended June 30, 2019 and June 29, 2018

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

Common

 

 

Treasury

 

 

Paid-in

 

 

(Accumulated

 

 

Comprehensive

 

 

Parsons

 

 

Noncontrolling

 

 

 

 

 

 

 

Stock

 

 

 

Stock

 

 

Stock

 

 

Capital

 

 

Deficit)

 

 

Income (Loss)

 

 

Deficit

 

 

Interests

 

 

Total

 

Balance at December 31, 2018

 

$

1,876,309

 

 

 

$

-

 

 

$

(957,025

)

 

$

-

 

 

$

12,445

 

 

$

(22,957

)

 

$

(967,537

)

 

$

46,461

 

 

$

(921,076

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

50,000

 

 

 

-

 

 

 

50,000

 

 

 

3,531

 

 

 

53,531

 

Foreign currency translation gain, net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,787

 

 

 

4,787

 

 

 

-

 

 

 

4,787

 

Pension adjustments, net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

26

 

 

 

26

 

 

 

-

 

 

 

26

 

ASC 842 transition adjustment

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

52,608

 

 

 

-

 

 

 

52,608

 

 

 

-

 

 

 

52,608

 

Purchase of treasury stock

 

 

(819

)

 

 

 

-

 

 

 

(819

)

 

 

-

 

 

 

819

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Distributions, net of contributions

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(12,640

)

 

 

(12,640

)

Dividend paid

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(52,093

)

 

 

-

 

 

 

(52,093

)

 

 

-

 

 

 

(52,093

)

Conversion of S-Corp to C-Corp

 

 

25,877

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(25,877

)

 

 

-

 

 

 

(25,877

)

 

 

-

 

 

 

(25,877

)

IPO proceeds, net

 

 

-

 

 

 

 

21,296

 

 

 

-

 

 

 

516,034

 

 

 

-

 

 

 

-

 

 

 

537,330

 

 

 

-

 

 

 

537,330

 

Accretion of redeemable common stock

 

 

978,822

 

 

 

 

-

 

 

 

-

 

 

 

(516,034

)

 

 

(462,788

)

 

 

-

 

 

 

(978,822

)

 

 

 

 

 

 

(978,822

)

Balance at June 30, 2019

 

$

2,880,189

 

 

 

$

21,296

 

 

$

(957,844

)

 

$

-

 

 

$

(424,886

)

 

$

(18,144

)

 

$

(1,379,578

)

 

$

37,352

 

 

$

(1,342,226

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 29, 2017

 

$

1,855,305

 

 

 

$

-

 

 

$

(876,372

)

 

$

-

 

 

$

(186,035

)

 

$

(15,003

)

 

$

(1,077,410

)

 

$

27,494

 

 

$

(1,049,916

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

173,668

 

 

 

-

 

 

 

173,668

 

 

 

5,472

 

 

 

179,140

 

Foreign currency translation (loss), net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,357

)

 

 

(5,357

)

 

 

(25

)

 

 

(5,382

)

Pension adjustments, net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(37

)

 

 

(37

)

 

 

-

 

 

 

(37

)

Adoption of ASC 606

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,735

)

 

 

-

 

 

 

(4,735

)

 

 

103

 

 

 

(4,632

)

Purchase of treasury stock

 

 

(32,996

)

 

 

 

 

 

 

 

(32,996

)

 

 

-

 

 

 

32,996

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Contributions, net of distributions

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,891

 

 

 

10,891

 

Balance at June 29, 2018

 

$

1,822,309

 

 

 

$

-

 

 

$

(909,368

)

 

$

-

 

 

$

15,894

 

 

$

(20,397

)

 

$

(913,871

)

 

$

43,935

 

 

$

(869,936

)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

6


 

Parsons Corporation and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

 

1.

Description of Operations

Organization

Parsons Corporation, a Delaware corporation, and its subsidiaries (collectively, the “Company”) provide sophisticated design, engineering and technical services, and smart and agile software to the United States federal government and Critical Infrastructure customers worldwide. The Company performs work in various foreign countries through local subsidiaries, joint ventures and foreign offices maintained to carry out specific projects.

Initial Public Offering

On May 8, 2019, the Company consummated its initial public offering (“IPO”) whereby the Company sold 18,518,500 shares of common stock for $27.00 per share.  The underwriters exercised their share option on May 14, 2019 to purchase an additional 2,777,775 shares at the share price of $25.515 which was the IPO share price of $27.00 less the underwriting discount of $1.485 per share.  The net proceeds of the IPO and the underwriters’ share option were approximately $537.3 million, after deducting underwriting discounts and other fees, and were used to fund an IPO dividend of $52.1 million, repay the outstanding balance of $150.0 million under our Term Loan, and repay outstanding indebtedness under our Revolving Credit Facility.

Stock Dividend

On April 15, 2019, the board of directors of the Company declared a common stock dividend in a ratio of two shares of common stock for every one share of common stock presently held by the Company’s stockholder (the “Stock Dividend”). The record date of this common Stock Dividend, which the Company refers to as the Stock Dividend was May 7, 2019, the day immediately prior to the consummation of the Company’s IPO on May 8, 2019, and the payment date of the Stock Dividend was May 8, 2019. Purchasers of the Company’s common stock in the Company’s public offering were not entitled to receive any portion of the Stock Dividend.

2.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") and pursuant to the interim period reporting requirements of Form 10-Q.  They do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with our consolidated financial statements and the notes thereto included in the Company’s Form S-1/A filed on April 29, 2019.

In the opinion of management, the consolidated financial statements reflect all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented.  The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year or for future years.  

This Quarterly Report on Form 10-Q includes the accounts of our wholly-owned subsidiaries, and joint ventures of which we are the primary beneficiary.  The equity method of accounting is applied for the joint ventures in which the Company does not have a controlling interest, but exerts a significant influence (see “Note 16 – Investments in and Advances to Joint Ventures" for further discussion).

In the first quarter of 2019 the Company adopted Accounting Standards Update (‘ASU”) 2016-02, “Leases” (“Topic 842”), using the modified retrospective method.  The new guidance was applied to leases that existed or were entered into on or after January 1. 2019.  The Company’s results for the reporting period beginning January 1, 2019 have been presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with previous guidance.  See “Note 6 – Leases” for further discussion of the adoption and the impact on the Company’s financial statements.

7


 

 

Accumulated Deficit

The Company's accounting policy is to record dividends and accretion of redeemable stock as a reduction of retained earnings. In the absence of retained earnings, the Company will charge the dividends and/or accretion of redeemable stock to Additional Paid in Capital until depleted and will then charge the remainder to accumulated deficit. As a result of the change in tax status from "S" Corporation to "C" Corporation, the Company reclassified historical retained earnings for the "S" Corporation from retained earnings to Additional Paid in Capital as of the date of conversion. The accumulated deficit in the second quarter of 2019 was primarily the result of the accretion of redeemable common stock to the maximum redemption value thereby depleting Additional Paid in Capital and resulting in an Accumulated Deficit.

Fiscal Periods

In October 2018, our board of directors approved a change in our annual and quarterly fiscal period ends from the last Friday on or before the calendar year or quarterly month-end to the last day of the calendar year or quarterly month-end. Accordingly, the period end for the first and second quarters of fiscal 2018 and fiscal 2019 are March 30, 2018 and June 29, 2018, respectively, and March 31, 2019 and June 30, 2019, respectively.  The number of days in the three and six month periods ended June 29, 2018 and June 30, 2019 were 91 and 182, respectively and 91 and 181, respectively.

Use of Estimates

The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. The Company’s most significant estimates and judgments involve revenue recognition with respect to the determination of the costs to complete contracts and transaction price; determination of self-insurance reserves; valuation of the Company’s fair value of common stock (for periods prior to the IPO); useful lives of property and equipment and intangible assets; calculation of allowance for doubtful accounts; valuation of deferred income tax assets and uncertain tax positions, among others. Please see “Note 2 – Summary of Significant Accounting Policies” of Notes to Consolidated Financial Statements included in the Company’s Form S-1/A filed April 29, 2019, for a discussion of the significant estimates and assumptions affecting our consolidated financial statements.  Estimates of costs to complete contracts are continually evaluated as work progresses and are revised when necessary. When a change in estimate is determined to have an impact on contract profit, the Company records a positive or negative adjustment to the consolidated statement of income.  

8


 

3.

Recently Adopted Accounting Pronouncements

In the first quarter of 2019, the Company adopted Topic 842.  See “Note 6 – Leases” for further discussion of the adoption and the impact on the Company’s financial statements.

In the first quarter of 2019, the Company adopted ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” under which the Company did not elect to reclassify the income tax effects stranded in accumulated other comprehensive income to retained earnings as a result of the enactment of comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act.  As a result, there was no impact on the Company’s financial position, results of operations or cash flows.

On December 30, 2017, the Company adopted ASC 606, “Revenue from Contracts with Customers”, using the modified retrospective method, which provides for a cumulative effect adjustment to retained earnings beginning in fiscal 2018 for those uncompleted contracts impacted by the adoption of the new standard. The difference between the recognition criteria under ASC 606 and our previous recognition practices under ASC 605-35 was recognized through a cumulative adjustment of $4.7 million that was made to the opening balance of accumulated deficit as of December 30, 2017.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the test for goodwill impairment by removing the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied prospectively with early adoption permitted. The Company early adopted the new standard as of the beginning of fiscal 2018 and its adoption did not have a material impact on the consolidated financial statements.

4.

Acquisitions

Polaris Alpha

On May 31, 2018, the Company acquired a 100% ownership interest in Polaris Alpha, a privately owned, advanced technology-focused provider of innovative mission solutions for complex defense, intelligence, and security customers, as well as other U.S. federal government customers, for $489.1 million paid in cash. The Company borrowed $260 million under the credit agreement, as described in “Note 12 – Debt and Credit Facilities,” to partially fund the acquisition. In connection with this acquisition, the Company recognized $6.2 million of acquisition-related expenses in “Indirect, general and administrative expense” in the consolidated statements of income for the fiscal year ended December 31, 2018, including legal fees, consulting fees, and other miscellaneous direct expenses associated with the acquisition. Polaris Alpha enhances the Company’s artificial intelligence and data analytics expertise with new technologies and solutions. Customers of both companies will benefit from existing, complementary technologies and increased scale, enabling end-to-end solutions under the shared vision of rapid prototyping and agile development.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands):

 

 

 

Amount

 

Cash and cash equivalents

 

$

7,914

 

Accounts receivable

 

 

29,688

 

Contract assets

 

 

35,229

 

Prepaid expenses and other current assets

 

 

9,295

 

Property and equipment

 

 

9,024

 

Goodwill

 

 

243,471

 

Intangible assets

 

 

199,520

 

Other noncurrent assets

 

 

2,203

 

Accounts payable

 

 

(13,942

)

Accrued expenses and other current liabilities

 

 

(26,419

)

Contract liabilities

 

 

(3,529

)

Deferred tax liabilities

 

 

(2,231

)

Other long-term liabilities

 

 

(1,146

)

Net assets acquired

 

$

489,077

 

 

9


 

Of the total purchase price, the following values were assigned to intangible assets (in thousands, except for years):

 

 

 

Gross

Carrying

Amount

 

 

Amortization

Period

 

 

 

 

 

 

(in years)

Developed technology

 

$

84,900

 

 

4

Customer relationships

 

 

76,000

 

 

8

Backlog

 

 

34,900

 

 

2

Trade name

 

 

3,600

 

 

1

Leases

 

$

120

 

 

6

 

Amortization expense of $4.3 million and $14.3 million related to these intangible assets was recorded for the three months ended June 29, 2018 and June 30, 2019, respectively, and $4.3 million and $28.0 million for the six months ended June 29, 2018 and June 30, 2019, respectively. The entire value of goodwill of $243.5 million was assigned to the Parsons Federal reporting unit and represents synergies expected to be realized from this business combination. Goodwill of $50.1 million is deductible for tax purposes.

The amount of revenue generated by Polaris Alpha and included within consolidated revenues is $29.9 million and $102.7 million for the three months ended June 29, 2018 and June 30, 2019, respectively, and $29.9 million and $196.1 million for the six months ended June 29, 2018 and June 30, 2019, respectively. The Company has determined that the presentation of net income from the date of acquisition is impracticable due to the integration of general corporate functions upon acquisition.

Supplemental Pro Forma Information

Supplemental information on an unaudited pro forma operating results assuming the Polaris Alpha acquisition had been consummated as of the beginning of fiscal year 2018 (December 31, 2017) (in thousands) is as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 29, 2018

 

 

June 29, 2018

 

Pro forma revenue

 

$

968,220

 

 

$

1,808,707

 

Pro forma net income including noncontrolling interests

 

$

116,288

 

 

$

126,819

 

 

The unaudited pro forma supplemental information is based on estimates and assumptions which the Company believes are reasonable and reflects the pro forma impact of additional amortization related to the fair value of acquired intangible assets, pro forma impact of reflecting acquisition costs, which consisted of legal, advisory and due diligence fees and expenses and the additional pro forma interest expense related to the borrowings under the credit agreement as of the assumed acquisition date. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been consummated during the periods for which pro forma information is presented.

OGSystems

On January 7, 2019, the Company acquired a 100% ownership interest in OGSystems. A privately owned company, for $292.4 million paid in cash. OGSystems provides geospatial intelligence, big data analytics and threat mitigation for defense and intelligence customers.  The Company borrowed $110 million under the credit agreement and $150 million on a short-term loan, as described in “Note 12 – Debt and Credit Facilities,” to partially fund the acquisition. In connection with this acquisition, the Company recognized $0.8 million and $4.9 million of acquisition-related expenses in “Indirect, general and administrative expense” in the consolidated statements of income for the three and six months ended June 30, 2019, respectively, including legal fees, consulting fees, and other miscellaneous direct expenses associated with the acquisition. OGSystems enhances the Company’s artificial intelligence and data analytics expertise with new technologies and solutions. Customers of both companies will benefit from existing, complementary technologies and increased scale, enabling end-to-end solutions under the shared vision of rapid prototyping and agile development.

10


 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed based on the preliminary purchase price allocation as of the date of acquisition (in thousands):

 

 

 

Amount

 

Cash and cash equivalents

 

$

5,772

 

Accounts receivable

 

 

9,904

 

Contract assets

 

 

9,747

 

Prepaid expenses and other current assets

 

 

4,307

 

Property and equipment

 

 

4,085

 

Right of use assets, operating leases

 

 

8,826

 

Goodwill

 

 

183,540

 

Intangible assets

 

 

92,300

 

Other noncurrent assets

 

 

10

 

Accounts payable

 

 

(5,450

)

Accrued expenses and other current liabilities

 

 

(7,147

)

Contract liabilities

 

 

(1,300

)

Short-term lease liabilities, operating leases

 

 

(805

)

Income tax payable

 

 

(1,469

)

Deferred tax liabilities

 

 

(904

)

Long-term lease liabilities, operating leases

 

 

(8,021

)

Other long-term liabilities

 

 

(1,015

)

Net assets acquired

 

$

292,380

 

 

Of the total purchase price, the following values were assigned to intangible assets (in thousands, except for years):

 

 

 

Gross

Carrying

Amount

 

 

Amortization

Period

 

 

 

 

 

 

(in years)

Customer relationships

 

$

57,100

 

 

5

Backlog

 

 

27,700

 

 

3

Trade name

 

 

3,800

 

 

2

Non compete agreements

 

 

2,400

 

 

3

Developed technologies

 

$

1,300

 

 

3

 

The Company is still in the process of finalizing its valuation of developed technology acquired.

Amortization expense of $5.9 million and $11.9 million related to these intangible assets was recorded for the three and six months ended June 30, 2019, respectively. The entire value of goodwill of $183.5 million was assigned to the Parsons Federal reporting unit and represents synergies expected to be realized from this business combination. Goodwill of $16.0 million is deductible for tax purposes.

The amount of revenue generated by OGSystems since the acquisition and included within consolidated revenues for the three and six months ended June 30, 2019 is $46.1 million and $75.1 million, respectively. The Company has determined that the presentation of net income from the date of acquisition is impracticable due to the integration of general corporate functions upon acquisition.    

11


 

Supplemental Pro Forma Information

Supplemental information on an unaudited pro forma operating results assuming the OGSystems acquisition had been consummated as of the beginning of fiscal year 2018 (December 31, 2017) (in thousands) is as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 29, 2018

 

 

June 30, 2019

 

 

June 29, 2018

 

 

June 30, 2019

 

Pro forma revenue

 

$

925,561

 

 

$

985,742

 

 

$

1,707,779

 

 

$

1,892,102

 

Pro forma net income including noncontrolling interests

 

$

141,943

 

 

$

40,145

 

 

$

157,682

 

 

$

57,603

 

 

The unaudited pro forma supplemental information is based on estimates and assumptions which the Company believes are reasonable and reflects the pro forma impact of additional amortization related to the fair value of acquired intangible assets, pro forma impact of reflecting acquisition costs, which consisted of legal, advisory and due diligence fees and expenses and the additional pro forma interest expense related to the borrowings under the credit agreement as of the assumed acquisition date. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been consummated during the periods for which pro forma information is presented.

5.

Contracts with Customers

Disaggregation of Revenue

The Company’s contracts contain both fixed-price and cost reimbursable components. Contract types are based on the component that represents the majority of the contract. The following table presents revenue disaggregated by contract type (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 29, 2018

 

 

June 30, 2019

 

 

June 29, 2018

 

 

June 30, 2019

 

Fixed-Price

 

$

267,591

 

 

$

304,647

 

 

$

532,999

 

 

$

562,342

 

Time-and-Materials

 

 

250,379

 

 

 

269,364

 

 

 

478,120

 

 

 

525,070

 

Cost-Plus

 

 

382,762

 

 

 

415,731

 

 

 

644,292

 

 

 

806,735

 

Total

 

$

900,732

 

 

$

989,742

 

 

$

1,655,411

 

 

$

1,894,147

 

 

See “Note 20 – Segments Information” for the Company’s revenues by business lines.

Contract Assets and Contract Liabilities

Contract assets and contract liabilities balances at December 31, 2018 and June 30, 2019 were as follows (in thousands):

 

 

 

December 31, 2018

 

 

June 30, 2019

 

 

$ change

 

 

% change

 

Contract assets

 

$

515,319

 

 

$

576,280

 

 

$

60,961

 

 

 

11.8

%

Contract liabilities

 

 

208,576

 

 

 

222,167

 

 

 

13,591

 

 

 

6.5

%

Net contract assets (liabilities) (1)

 

$

306,743

 

 

$

354,113

 

 

$

47,370

 

 

 

15.4

%

 

(1)

Total contract retentions included in net contract assets (liabilities) were $89.6 million as of December 31, 2018. Total contract retentions included in net contract assets (liabilities) were $91.8 million as of June 30, 2019, of which $46.6 million are not expected to be paid in the next 12 months. Contract assets at December 31, 2018 and June 30, 2019 include approximately $47.1 million and $56.8 million, respectively, related to unapproved change orders, claims, and requests for equitable adjustment. For the three and six months ended June 29, 2018 and June 30, 2019, there were no material losses recognized related to the collectability of claims, unapproved change orders, and requests for equitable adjustment.

During the three months ended June 29, 2018 and June 30, 2019, the Company recognized revenue of approximately $73.3 million and $27.3 million, respectively, and $99.6 million and $113.0 million during the six months ended June 29, 2018 and June 30, 2019, respectively, that was included in the corresponding contract liability balance at

12


 

December 30, 2017 and December 31, 2018, respectively. The changes in contract assets and contract liabilities were the result of normal business activity and not significantly impacted by other factors, except as follows:

 

 

 

December 31, 2018

 

 

June 30, 2019

 

Acquired contract assets

 

$

35,229

 

 

$

9,747

 

Acquired contract liabilities

 

 

3,529

 

 

 

1,300

 

Reversal of provision for contract losses (1)

 

$

133,180

 

 

$

-

 

 

(1)

Reversal of provision for contract losses of $133.2 million, of which $55.1 million was recorded as an increase in revenue with the remainder recorded as other income.

There was no significant impairment of contract assets recognized during the three and six months ended June 29, 2018 and June 30, 2019.

During the three months ended June 29, 2018 and June 30, 2019, the Company recognized revenues of $0.8 million and $6.4 million, respectively and for the six months ended June 29, 2018 and June 30, 2019, $19.6 million and $10.9 million, respectively, related to unapproved change orders and claims from changes in transaction price associated with performance obligations that were satisfied or partially satisfied. These amounts represent management’s estimates of additional contract revenues that had been earned and were probable of collection. The amount ultimately realized by the Company cannot currently be determined but could be significantly higher or lower than the estimated amount.

Transaction Price Allocated to the Remaining Unsatisfied Performance Obligations

The Company’s remaining unsatisfied performance obligations (“RUPO”) as of June 30, 2019 represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The Company had $5.4 billion in RUPO as of June 30, 2019.

RUPO will increase with awards of new contracts and decrease as the Company performs work and recognizes revenue on existing contracts. Projects are included within RUPO at such time the project is awarded and agreement on contract terms has been reached. The difference between RUPO and backlog relates to unexercised option years that are included within backlog and the value of Indefinite Delivery/Indefinite Quantity (“IDIQ”) contracts included in backlog for which delivery orders have not been issued for the Federal Solutions segment.

RUPO is comprised of: (a) original transaction price, (b) change orders for which written confirmations from our customers have been received, (c) pending change orders for which the Company expects to receive confirmations in the ordinary course of business, and (d) claim amounts that the Company has made against customers for which it has determined that it has a legal basis under existing contractual arrangements and a significant reversal of revenue is not probable, less revenue recognized to-date.

The Company expects to satisfy its RUPO as of June 30, 2019 over the following periods (in thousands):

 

Period RUPO Will Be Satisfied

 

Within One Year

 

 

Within One to

Two Years

 

 

Thereafter

 

Federal Solutions

 

$

1,130,931

 

 

$

537,654

 

 

$

239,180

 

Critical Infrastructure

 

 

1,773,035

 

 

 

936,023

 

 

 

757,593

 

Total

 

$

2,903,966

 

 

$

1,473,677

 

 

$

996,773

 

 

13


 

 

6.

Leases

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which is a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets obtained in exchange for lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company elected to adopt the standard, and available practical expedients, effective January 1, 2019.  These practical expedients allowed the Company to keep the lease classification assessed under the previous lease accounting standard (ASC 840) without reassessment under the new standard, and allowed all separate lease components, including non-lease components, to be accounted for as a single lease component for all existing leases prior to adoption of the new standard.  Furthermore, the Company made an accounting policy election to not recognize a lease liability and ROU asset for leases with lease terms of twelve months or less.  

The Company adopted this new standard under the modified retrospective transition approach without adjusting comparative periods in the financial statements, as allowed under Topic 842, and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

The standard had a material impact on the Company’s consolidated balance sheets but did not have an impact on the consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while accounting for finance leases remained substantially unchanged.

As a result of the adoption, the Company recorded a cumulative-effect adjustment to retained earnings of $52.6 million net of deferred tax asset adjustment of $0.7 million, representing the unamortized portion of a deferred gain previously recorded as a sale-leaseback transaction associated with the sale of an office building in 2011. The Company concluded the transaction resulted in the transfer of control of the office building to the buyer-lessor at market terms and would have qualified as a sale under Topic 842 with gain recognition in the period the sale was recognized.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets and current and long-term operating lease liabilities in the consolidated balance sheets. Finance leases are included in other noncurrent assets, accrued expenses and other current liabilities and other long-term liabilities in the consolidated balance sheets.  

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, incremental borrowing rates are used based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives.  Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

14


 

The Company has operating and finance leases for corporate and project office spaces, vehicles, heavy machinery and office equipment. Our leases have remaining lease terms of one year to 11 years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the leases up to the seventh year. As of June 30, 2019, assets recorded under finance leases were $1.8 million and accumulated depreciation associated with finance leases was $0.3 million. 

The components of lease costs for the three and six months ended June 30, 2019 are as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2019

 

Operating lease cost

 

$

17,581

 

 

$

35,866

 

Short-term lease cost

 

 

3,492

 

 

 

5,496

 

Amortization of right-of-use assets

 

 

110

 

 

 

335

 

Interest on lease liabilities

 

 

15

 

 

 

31

 

Sublease income

 

 

(1,085

)

 

 

(2,015

)

Total lease cost

 

$

20,113

 

 

$

39,713

 

 

Supplemental cash flow information related to leases for the six months ended June 30, 2019 is as follows (in thousands):

 

 

 

Six Months Ended

 

 

 

June 30, 2019

 

Operating cash flows for operating leases

 

$

35,012

 

Operating cash flows for financing activities

 

 

412

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

254,084

 

Right-of-use assets obtained in exchange for new finance lease liabilities

 

$

1,818

 

 

Supplemental balance sheet and other information related to leases as of June 30, 2019 is as follows (in thousands):

 

 

 

June 30, 2019

 

Operating Leases:

 

 

 

 

Right-of-use assets

 

$

212,386

 

Lease liabilities:

 

 

 

 

Current

 

$

51,696

 

Long-term

 

 

178,589

 

Total operating lease liabilities

 

$

230,285

 

Finance Leases:

 

 

 

 

Other noncurrent assets

 

$

1,483

 

Accrued expenses and other current liabilities

 

$

574

 

Other long-term liabilities

 

$

863

 

 

 

 

 

 

Weighted Average Remaining Lease Term:

 

 

 

 

Operating leases

 

6 years

 

Finance leases

 

3 years

 

Weighted Average Discount Rate: