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PARSONS CORP - Quarter Report: 2020 March (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 March 31, 2020

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

 

 

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

 

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  

As of April 27, 2020, the registrant had 100,669,694 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

 

6

Item 2.

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

 

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

37

Item 4.

Controls and Procedures

 

37

PART II.

OTHER INFORMATION

 

38

Item 1.

Legal Proceedings

 

38

Item 1A.

Risk Factors

 

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

Item 3.

Defaults Upon Senior Securities

 

38

Item 4.

Mine Safety Disclosures

 

38

Item 5.

Other Information

 

38

Item 6.

Exhibits

 

39

Signatures

 

40

 

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share information)

(Unaudited)

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (including $43,227 and $51,171 Cash of consolidated joint ventures)

 

$

119,299

 

 

$

182,688

 

 

Restricted cash and investments

 

 

7,423

 

 

 

12,686

 

 

Accounts receivable, net (including $202,462 and $166,355 Accounts receivable of consolidated joint ventures, net)

 

 

758,225

 

 

 

671,492

 

 

Contract assets (including $27,081 and $26,458 Contract assets of consolidated joint ventures)

 

 

626,513

 

 

 

575,089

 

 

Prepaid expenses and other current assets (including $11,587 and $11,182 Prepaid expenses and other current assets of consolidated joint ventures)

 

 

90,512

 

 

 

84,454

 

 

Total current assets

 

 

1,601,972

 

 

 

1,526,409

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net (including $2,752 and $2,945 Property and equipment of consolidated joint ventures, net)

 

 

124,600

 

 

 

122,751

 

 

Right of use assets, operating leases

 

 

231,269

 

 

 

233,415

 

 

Goodwill

 

 

1,044,014

 

 

 

1,047,425

 

 

Investments in and advances to unconsolidated joint ventures

 

 

65,716

 

 

 

68,620

 

 

Intangible assets, net

 

 

237,028

 

 

 

259,858

 

 

Deferred tax assets

 

 

124,816

 

 

 

130,401

 

 

Other noncurrent assets

 

 

59,190

 

 

 

61,489

 

 

Total assets

 

$

3,488,605

 

 

$

3,450,368

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable (including $89,974 and $85,869 Accounts payable of consolidated joint ventures)

 

$

235,381

 

 

$

216,613

 

 

Accrued expenses and other current liabilities (including $90,632 and $74,857 Accrued expenses and other current liabilities of consolidated joint ventures)

 

 

625,729

 

 

 

639,863

 

 

Contract liabilities (including $39,217 and $32,638 Contract liabilities of consolidated joint ventures)

 

 

241,178

 

 

 

230,681

 

 

Short-term lease liabilities, operating leases

 

 

47,217

 

 

 

49,994

 

 

Income taxes payable

 

 

1,819

 

 

 

7,231

 

 

Total current liabilities

 

 

1,151,324

 

 

 

1,144,382

 

 

Long-term employee incentives

 

 

21,458

 

 

 

56,928

 

 

Long-term debt

 

 

314,401

 

 

 

249,353

 

 

Long-term lease liabilities, operating leases

 

 

206,760

 

 

 

203,624

 

 

Deferred tax liabilities

 

 

9,234

 

 

 

9,621

 

 

Other long-term liabilities

 

 

118,049

 

 

 

125,704

 

 

Total liabilities

 

 

1,821,226

 

 

 

1,789,612

 

Contingencies (Note 12)

 

 

 

 

 

 

 

 

Shareholders' equity (deficit):

 

 

 

 

 

 

 

 

 

Common stock, $1 par value; authorized 1,000,000,000 shares; 146,440,701 and 146,440,701 shares issued; 22,271,174 and 21,772,888 public shares outstanding; 78,398,520 and 78,896,806 ESOP shares outstanding

 

 

146,441

 

 

 

146,441

 

 

Treasury stock, 45,771,008 shares at cost

 

 

(934,240

)

 

 

(934,240

)

 

Additional paid-in capital

 

 

2,652,227

 

 

 

2,649,975

 

 

Accumulated deficit

 

 

(206,052

)

 

 

(218,025

)

 

Accumulated other comprehensive loss

 

 

(23,114

)

 

 

(14,261

)

 

Total Parsons Corporation shareholders' equity

 

 

1,635,262

 

 

 

1,629,890

 

 

Noncontrolling interests

 

 

32,117

 

 

 

30,866

 

 

Total shareholders' equity

 

 

1,667,379

 

 

 

1,660,756

 

 

Total liabilities, redeemable common stock and shareholders' equity

 

$

3,488,605

 

 

$

3,450,368

 

 

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

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Revenue

 

$

970,993

 

 

$

904,405

 

Direct cost of contracts

 

 

769,632

 

 

 

714,237

 

Equity in earnings of unconsolidated joint ventures

 

 

6,114

 

 

 

10,397

 

Indirect, general and administrative expenses

 

 

183,774

 

 

 

177,519

 

Operating income

 

 

23,701

 

 

 

23,046

 

Interest income

 

 

228

 

 

 

477

 

Interest expense

 

 

(4,022

)

 

 

(8,292

)

Other income (expense), net

 

 

(452

)

 

 

41

 

Total other income (expense)

 

 

(4,246

)

 

 

(7,774

)

Income before income tax expense

 

 

19,455

 

 

 

15,272

 

Income tax expense

 

 

(5,084

)

 

 

(1,886

)

Net income including noncontrolling interests

 

 

14,371

 

 

 

13,386

 

Net income attributable to noncontrolling interests

 

 

(1,398

)

 

 

(3,645

)

Net income attributable to Parsons Corporation

 

$

12,973

 

 

$

9,741

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

0.12

 

Diluted

 

$

0.13

 

 

$

0.12

 

 

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

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Net income including noncontrolling interests

 

$

14,371

 

 

$

13,386

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax

 

 

(8,800

)

 

 

2,549

 

Pension adjustments, net of tax

 

 

(61

)

 

 

9

 

Comprehensive income including noncontrolling interests, net of tax

 

 

5,510

 

 

 

15,944

 

Comprehensive income attributable to noncontrolling interests, net of tax

 

 

(1,390

)

 

 

(3,645

)

Comprehensive income attributable to Parsons Corporation,

   net of tax

 

$

4,120

 

 

$

12,299

 

 

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 Three Months Ended

 

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interests

 

$

14,371

 

 

$

13,386

 

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

32,409

 

 

 

30,591

 

 

Amortization of debt issue costs

 

 

173

 

 

 

244

 

 

Gain on disposal of property and equipment

 

 

(104

)

 

 

(27

)

 

Provision for doubtful accounts

 

 

-

 

 

 

(279

)

 

Deferred taxes

 

 

5,514

 

 

 

1,486

 

 

Foreign currency transaction gains and losses

 

 

1,383

 

 

 

618

 

 

Equity in earnings of unconsolidated joint ventures

 

 

(6,114

)

 

 

(10,397

)

 

Return on investments in unconsolidated joint ventures

 

 

6,551

 

 

 

10,794

 

 

Stock-based compensation

 

 

2,252

 

 

 

-

 

 

Contributions of treasury stock

 

 

14,871

 

 

 

12,250

 

 

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

   joint ventures:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(91,734

)

 

 

(17,135

)

 

Contract assets

 

 

(52,346

)

 

 

(46,984

)

 

Prepaid expenses and current assets

 

 

(3,766

)

 

 

(1,424

)

 

Accounts payable

 

 

19,788

 

 

 

(28,182

)

 

Accrued expenses and other current liabilities

 

 

(24,336

)

 

 

(24,023

)

 

Contract liabilities

 

 

11,416

 

 

 

14,884

 

 

Income taxes

 

 

(6,212

)

 

 

(3,645

)

 

Other long-term liabilities

 

 

(43,099

)

 

 

(12,265

)

 

Net cash used in operating activities

 

 

(118,983

)

 

 

(60,108

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(12,637

)

 

 

(11,041

)

 

Proceeds from sale of property and equipment

 

 

485

 

 

 

135

 

 

Payments for acquisitions, net of cash acquired

 

 

-

 

 

 

(287,482

)

 

Investments in unconsolidated joint ventures

 

 

(50

)

 

 

(4,905

)

 

Return of investments in unconsolidated joint ventures

 

 

-

 

 

 

2,234

 

 

Net cash used in investing activities

 

 

(12,202

)

 

 

(301,059

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

131,500

 

 

 

290,000

 

 

Repayments of borrowings

 

 

(66,500

)

 

 

(60,000

)

 

Payments for debt costs and credit agreement

 

 

-

 

 

 

(286

)

 

Contributions by noncontrolling interests

 

 

221

 

 

 

708

 

 

Distributions to noncontrolling interests

 

 

(360

)

 

 

(18,986

)

 

Purchase of treasury stock

 

 

-

 

 

 

(813

)

 

Taxes paid on vested stock

 

 

(1,149

)

 

 

-

 

 

Net cash provided by financing activities

 

 

63,712

 

 

 

210,623

 

 

Effect of exchange rate changes

 

 

(1,179

)

 

 

(182

)

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(68,652

)

 

 

(150,726

)

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

Beginning of year

 

 

195,374

 

 

 

281,195

 

 

End of period

 

$

126,722

 

 

$

130,469

 

 

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 March 31, 2020 and March 31, 2019

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Other

 

 

Parsons

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

Common

 

 

Treasury

 

 

Paid-in

 

 

(Accumulated

 

 

Comprehensive

 

 

Equity

 

 

Noncontrolling

 

 

 

 

 

 

 

Stock

 

 

 

Stock

 

 

Stock

 

 

Capital

 

 

Deficit)

 

 

Income (Loss)

 

 

(Deficit)

 

 

Interests

 

 

Total

 

Balance at December 31, 2019

 

$

-

 

 

 

$

146,441

 

 

$

(934,240

)

 

$

2,649,975

 

 

$

(218,025

)

 

$

(14,261

)

 

$

1,629,890

 

 

$

30,866

 

 

$

1,660,756

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12,973

 

 

 

-

 

 

 

12,973

 

 

 

1,398

 

 

 

14,371

 

Foreign currency translation gain, net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,792

)

 

 

(8,792

)

 

 

(8

)

 

 

(8,800

)

Pension adjustments, net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(61

)

 

 

(61

)

 

 

-

 

 

 

(61

)

Adoption of ASU 2016-13

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,000

)

 

 

-

 

 

 

(1,000

)

 

 

-

 

 

 

(1,000

)

Contributions

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

221

 

 

 

221

 

Distributions

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(360

)

 

 

(360

)

Stock-based compensation

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

2,252

 

 

 

-

 

 

 

-

 

 

 

2,252

 

 

 

-

 

 

 

2,252

 

Balance at March 31, 2020

 

$

-

 

 

 

$

146,441

 

 

$

(934,240

)

 

$

2,652,227

 

 

$

(206,052

)

 

$

(23,114

)

 

$

1,635,262

 

 

$

32,117

 

 

$

1,667,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

$

1,876,309

 

 

 

$

-

 

 

$

(957,025

)

 

$

-

 

 

$

12,445

 

 

$

(22,957

)

 

$

(967,537

)

 

$

46,461

 

 

$

(921,076

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,741

 

 

 

-

 

 

 

9,741

 

 

 

3,645

 

 

 

13,386

 

Foreign currency translation gain, net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,547

 

 

 

2,547

 

 

 

-

 

 

 

2,547

 

Pension adjustments, net

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

9

 

 

 

-

 

 

 

9

 

ASC 842 transition adjustment

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

52,608

 

 

 

-

 

 

 

52,608

 

 

 

-

 

 

 

52,608

 

Purchase of treasury stock

 

 

(813

)

 

 

 

-

 

 

 

(813

)

 

 

-

 

 

 

813

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Contributions

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

708

 

 

 

708

 

Distributions

 

 

(164

)

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

164

 

 

 

-

 

 

 

164

 

 

 

(18,986

)

 

 

(18,822

)

Balance at March 31, 2019

 

$

1,875,332

 

 

 

$

-

 

 

$

(957,838

)

 

$

-

 

 

$

75,771

 

 

$

(20,401

)

 

$

(902,468

)

 

$

31,828

 

 

$

(870,640

)

 

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

 

 

 

 

5


 

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”) is a leading provider of technology-driven solutions in the defense, intelligence and critical infrastructure markets. We provide software and hardware products, technical services and integrated solutions to support our customers’ missions. We have developed significant expertise and differentiated capabilities in key areas of cybersecurity, intelligence, missile defense, C5ISR, space, geospatial, and connected communities. By combining our talented team of professionals and advanced technology, we help solve complex technical challenges to enable a safer, smarter and more interconnected world.

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 option on May 14, 2019 to purchase an additional 2,777,775 shares at the net 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’ option were $536.9 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 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 Annual Report on Form 10-K for the year ended December 31, 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 include the accounts of Parsons Corporation and its subsidiaries and affiliates with it controls.  Interests in joint ventures that are controlled by the Company, or for which the Company is otherwise deemed to be the primary beneficiary, are consolidated.  For joint ventures in which the Company does not have a controlling interest, but exerts a significant influence, the Company applies the equity method of accounting. (see “Note 14 – Investments in and Advances to Joint Ventures" for further discussion).  Intercompany accounts and transactions are eliminated in consolidation.

 

6


 

 

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; 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and “Note 2—Summary of Significant Accounting Polices” in the notes to our consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 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.  

3.

New Accounting Pronouncements

In the first quarter of 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments.” The amendments in ASU 2016-13 replace the incurred loss impairment methodology in current practice with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements.

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued as a means to reduce the complexity of accounting for income taxes for those entities that fall within the scope of the standard. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact of ASU 2019-12 on its consolidated financial statements.

4.

Acquisitions   

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 10—Debt and Credit Facilities,” to partially fund the acquisition. In connection with this acquisition, the Company recognized $5.4 million of acquisition-related expenses in “Indirect, general and administrative expense” in the consolidated statements of income for the year ended December 31, 2019, 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.

7


 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed based on the 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

 

 

(1,178

)

Deferred tax liabilities

 

 

(1,195

)

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

 

Amortization expense of $5.9 million related to these intangible assets was recorded for both the three months ended March 31, 2020 and March 31, 2019. The entire value of goodwill of $183.5 million was assigned to the Federal Solutions reporting unit and represents synergies expected to be realized from this business combination. Goodwill of $16 million is deductible for tax purposes.

The amount of revenue generated by OGSystems and included within consolidated revenues is $33.2 million and $29.0 million for the three months ended March 31, 2020 and March 31, 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 (Unaudited)

Supplemental information of unaudited pro forma operating results assuming the OGSystems acquisition had been consummated as of the beginning of fiscal year 2018 (December 30, 2017) (in thousands) is as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Pro forma revenue

 

$

970,993

 

 

$

906,360

 

Pro forma net income including noncontrolling interests

 

$

14,846

 

 

$

17,458

 

 

8


 

QRC Technologies

On July 31, 2019 the Company acquired a 100% ownership interest in QRC Technologies (“QRC”), a privately-owned company, for $214.1 million in cash.  QRC provides design and development of open-architecture radio-frequency products.  The Company borrowed $140.0 million under the Revolving Credit Facility to partially fund the transaction. In connection with this acquisition, the Company recognized $4.9 million of acquisition-related expenses in “Indirect, general and administrative expense” in the consolidated statements of income for the fiscal year ended December 31, 2019, including legal fees, consulting fees, and other miscellaneous direct expenses associated with the acquisition. QRC is an agile, disruptive product company that specializes in radio frequency spectrum survey, record and playback; signals intelligence; and electronic warfare missions. QRC complements our existing portfolio, increases our presence in the high-growth markets of spectrum awareness and surveillance, and adds critical intellectual property that complements and expands the Company’s available capabilities for the Special Operations and Intelligence Communities.

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

 

$

5,925

 

Accounts receivable

 

 

5,587

 

Prepaid expenses and other current assets

 

 

5,727

 

Property and equipment

 

 

1,205

 

Right of use assets, operating leases

 

 

5,228

 

Goodwill

 

 

125,091

 

Intangible assets

 

 

76,200

 

Accounts payable

 

 

(1,567

)

Accrued expenses and other current liabilities

 

 

(4,025

)

Short-term lease liabilities, operating leases

 

 

(545

)

Long-term lease liabilities, operating leases

 

 

(4,683

)

Net assets acquired

 

$

214,143

 

 

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

 

$

49,800

 

 

12

Developed technologies

 

 

21,800

 

 

3 to 5

In-process research and development

 

 

1,800

 

 

3 to 5

Non-compete agreements

 

 

1,200

 

 

4

Trade name

 

 

800

 

 

2

Backlog

 

 

800

 

 

1

 

The Company is still in the process of finalizing its valuation of the net assets acquired.

Amortization expense of $3.6 million related to these intangible assets was recorded for the three months ended March 31, 2020. The entire value of goodwill of $125.1 million was assigned to the Federal Solutions reporting unit and represents synergies expected to be realized from this business combination. Goodwill in its entirety is deductible for tax purposes.

The amount of revenue generated by QRC and included within consolidated revenues for the three months ended March 31, 2020 is $4.4 million. 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.

9


 

Supplemental Pro Forma Information

Supplemental information on an unaudited pro forma basis, assuming the QRC Technologies acquisition had been consummated as of the beginning of fiscal year 2018 (December 30, 2017) (in thousands) is as follows:

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Pro forma revenue

 

$

970,993

 

 

$

910,997

 

Pro forma net income including noncontrolling interests

 

$

15,736

 

 

$

10,845

 

 

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

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Fixed-Price

 

$

308,308

 

 

$

257,695

 

Time-and-Materials

 

 

252,439

 

 

 

255,706

 

Cost-Plus

 

 

410,246

 

 

 

391,004

 

Total

 

$

970,993

 

 

$

904,405

 

 

See “Note 18 – Segments Information” for the Company’s revenues by business lines.

Contract Assets and Contract Liabilities

Contract assets and contract liabilities balances at March 31, 2020 and December 31, 2019 were as follows (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Contract assets

 

$

626,513

 

 

$

575,089

 

Contract liabilities

 

 

241,178

 

 

 

230,681

 

Net contract assets (liabilities) (1)

 

$

385,335

 

 

$

344,408

 

 

(1)

Total contract retentions included in net contract assets (liabilities) were $88.9 million as of March 31, 2020, of which $47.5 million are not expected to be paid in the next 12 months. Total contract retentions included in net contract assets (liabilities) were $85.5 million as of December 31,2019. Contract assets at March 31, 2020 and December 31, 2019 include $87.8 million and $73.0 million, respectively, related to unapproved change orders, claims, and requests for equitable adjustment. For the three months ended March 31, 2020 and March 31, 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 March 31, 2020 and March 31, 2019, the Company recognized revenue of $94.3 million and $85.7 million, respectively, that was included in the corresponding contract liability balance at December 31, 2019 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:

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Acquired contract assets

 

$

-

 

 

$

9,747

 

Acquired contract liabilities

 

 

-

 

 

 

1,300

 

Change in the estimate of variable consideration

 

 

-

 

 

 

12,166

 

 

  There was no significant impairment of contract assets recognized during the three months ended March 31, 2020 and March 31, 2019.

10


 

There were no amounts due to revisions in estimates, such as changes in estimated claims or incentives, related to performance obligations partially satisfied in previous periods that individually had an impact of $5 million or more on revenue during the three months ended March 31, 2020 and March 31, 2019.  

Accounts Receivable, net

Accounts receivable, net consisted of the following as of March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Billed

 

$

544,444

 

 

$

475,528

 

Unbilled

 

 

220,278

 

 

 

201,461

 

   Total accounts receivable, gross

 

 

764,722

 

 

 

676,989

 

Allowance for doubtful accounts

 

 

(6,497

)

 

 

(5,497

)

   Total accounts receivable, net

 

$

758,225

 

 

$

671,492

 

Billed accounts receivable represents amounts billed to clients that have not been collected. Unbilled accounts receivable represents amounts where the Company has a present contractual right to bill but an invoice has not been issued to the customer at the period-end date.

In connection with the adoption of ASU 2016-13, we have modified the historical presentation of gross receivables and the allowance for doubtful accounts to reflect only expected credit losses in the allowance in conformity with the current period presentation.

The allowance for doubtful accounts was determined based on consideration of trends in actual and forecasted credit quality of clients, including delinquency and payment history, type of client, such as a government agency or commercial sector client, and general economic conditions and particular industry conditions that may affect a client’s ability to pay. COVID-19 Impacts: We do not expect there to be a risk of non-payment with our government agency customers, but there is likely to be a delay in payments from our government agency customers in the Middle East.  We generally don’t expect there to be a risk of non-payment from our commercial sector clients but do anticipate an unknown level of payment delays.

Transaction Price Allocated to the Remaining Unsatisfied Performance Obligations

The Company’s remaining unsatisfied performance obligations (“RUPO”) as of March 31, 2020 represent a measure of the total dollar value of work to be performed on contracts awarded and in-progress. The Company had $5.1 billion in RUPO as of March 31, 2020.

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.

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 March 31, 2020 over the following periods (in thousands):

 

Period RUPO Will Be Satisfied

 

Within One Year

 

 

Within One to

Two Years

 

 

Thereafter

 

Federal Solutions

 

$

1,319,438

 

 

$

550,073

 

 

$

315,965

 

Critical Infrastructure

 

 

1,691,579

 

 

 

533,120

 

 

 

713,875

 

Total

 

$

3,011,017

 

 

$

1,083,193

 

 

$

1,029,840

 

 

11


 

6.

Leases

  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 seven years, and some of which may include options to terminate the leases up to the eighth year.   

The components of lease costs for the three months ended March 31, 2020 and March 31, 2019 are as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Operating lease cost

 

$

17,271

 

 

$

18,285

 

Short-term lease cost

 

 

3,651

 

 

 

2,004

 

Amortization of right-of-use assets

 

 

254

 

 

 

225

 

Interest on lease liabilities

 

 

12

 

 

 

16

 

Sublease income

 

 

(880

)

 

 

(930

)

Total lease cost

 

$

20,308

 

 

$

19,600

 

 

Supplemental cash flow information related to leases for the three months ended March 31, 2020 and March 31, 2019 are as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Operating cash flows for operating leases

 

$

16,420

 

 

$

18,333

 

Operating cash flows for financing activities

 

 

25

 

 

 

16

 

Financing cash flows from finance leases

 

 

278

 

 

 

246

 

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

 

 

15,106

 

 

 

249,848

 

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

 

$

-

 

 

$

1,341

 

 

Supplemental balance sheet and other information related to leases as of March 31, 2020 and December 31, 2019 are as follows (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Operating Leases:

 

 

 

 

 

 

 

 

Right-of-use assets

 

$

231,269

 

 

$

233,415

 

Lease liabilities:

 

 

 

 

 

 

 

 

Current

 

$

47,217

 

 

$

49,994

 

Long-term

 

 

206,760

 

 

 

203,624

 

Total operating lease liabilities

 

$

253,977

 

 

$

253,618

 

Finance Leases:

 

 

 

 

 

 

 

 

Other noncurrent assets

 

$

2,123

 

 

$

2,377

 

Accrued expenses and other current liabilities

 

$

1,056

 

 

$

1,075

 

Other long-term liabilities

 

$

943

 

 

$

1,202

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term:

 

 

 

 

 

 

 

 

Operating leases

 

6 years

 

 

6 years

 

Finance leases

 

2 years

 

 

3 years

 

Weighted Average Discount Rate:

 

 

 

 

 

 

 

 

Operating leases

 

 

3.9

%

 

 

4.0

%

Finance leases

 

 

4.5

%

 

 

4.5

%

 

As of March 31, 2020, the Company has additional operating leases, primarily for office spaces, that have not yet commenced of $2.8 million. These operating leases will commence in 2020 with lease terms of 3 years to 6 years.

12


 

A maturity analysis of the future undiscounted cash flows associated with the Company’s operating and finance lease liabilities as of March 31, 2020 is as follows (in thousands):

 

 

 

Operating Leases

 

 

Finance Leases

 

2020

 

$

40,845

 

 

$

850

 

2021

 

 

57,697

 

 

 

870

 

2022

 

 

51,705

 

 

 

326

 

2023

 

 

44,759

 

 

 

48

 

2024

 

 

34,445

 

 

 

-

 

Thereafter

 

 

53,434

 

 

 

-

 

Total lease payments

 

 

282,885

 

 

 

2,094

 

Less: imputed interest

 

 

(28,908

)

 

 

(95

)

Total present value of lease liabilities

 

$

253,977

 

 

$

1,999

 

 

       Rental expense for the three months ended March 31, 2020 and March 31, 2019 was $20.9 million and $20.3 million, respectively and is recorded in “Indirect, general and administrative expenses” in the consolidated statements of income.

7.

Goodwill

The following table summarizes the changes in the carrying value of goodwill by reporting segment at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

December 31, 2019

 

 

Foreign Exchange

 

 

March 31, 2020

 

Federal Solutions

 

$

975,405

 

 

$

-

 

 

$

975,405

 

Critical Infrastructure

 

 

72,020

 

 

 

(3,411

)

 

 

68,609

 

Total

 

$

1,047,425

 

 

$

(3,411

)

 

$

1,044,014

 

 

The ultimate impact from the COVID-19 pandemic is difficult to predict.  While many uncertainties exist, we currently anticipate no material change in our financial condition or results of operations.  Although the Company does not anticipate a material change to our financial condition or results of operations, the Company reassessed the carrying value of its goodwill at March 31, 2020 and concluded there has not been an impairment.  

8.

Intangible Assets

The gross amount and accumulated amortization of intangible assets with finite useful lives included in “Intangible assets, net” on the consolidated balance sheets are as follows (in thousands except for years):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

Weighted

Average

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Amortization

Period

(in years)

 

Backlog

 

$

109,255

 

 

$

(91,704

)

 

$

17,551

 

 

$

109,255

 

 

$

(87,510

)

 

$

21,745

 

 

 

3

 

Customer relationships

 

 

228,529

 

 

 

(78,533

)

 

 

149,996

 

 

 

228,529

 

 

 

(67,809

)

 

 

160,720

 

 

 

7

 

Leases

 

 

670

 

 

 

(585

)

 

 

85

 

 

 

670

 

 

 

(580

)

 

 

90

 

 

 

5

 

Developed technology

 

 

110,939

 

 

 

(47,799

)

 

 

63,140

 

 

 

110,939

 

 

 

(40,749

)

 

 

70,190

 

 

 

4

 

Trade name

 

 

8,200

 

 

 

(6,242

)

 

 

1,958

 

 

 

8,200

 

 

 

(5,667

)

 

 

2,533

 

 

 

1

 

Non-compete agreements

 

 

3,600

 

 

 

(1,200

)

 

 

2,400

 

 

 

3,600

 

 

 

(925

)

 

 

2,675

 

 

 

3

 

In process research and development

 

 

1,800

 

 

 

 

 

 

 

1,800

 

 

 

1,800

 

 

 

-

 

 

 

1,800

 

 

n/a

 

Other intangibles

 

 

275

 

 

 

(177

)

 

 

98

 

 

 

275

 

 

 

(170

)

 

 

105

 

 

 

10

 

Total intangible assets

 

$

463,268

 

 

$

(226,240

)

 

$

237,028

 

 

$

463,268

 

 

$

(203,410

)

 

$

259,858

 

 

 

 

 

  

The aggregate amortization expense of intangible assets for the three months ended March 31, 2020 and March 31, 2019 was $22.7 million and $21.0 million, respectively.

13


 

Estimated amortization expense for the remainder of the current fiscal year and in each of the next four years and beyond is as follows (in thousands):

 

 

 

March 31, 2020

 

2020 (remaining)

 

$

64,042

 

2021

 

 

81,527

 

2022

 

 

35,864

 

2023

 

 

23,549

 

2024

 

 

9,098

 

Thereafter

 

 

21,147

 

Total

 

$

235,227

 

 

9.

Property and Equipment, Net

Property and equipment consisted of the following at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

Useful lives

(years)

Buildings and leasehold improvements

 

$

88,781

 

 

$

81,065

 

 

1-15

Furniture and equipment

 

 

88,667

 

 

 

91,720

 

 

3-10

Computer systems and equipment

 

 

166,178

 

 

 

164,161

 

 

3-10

Construction equipment

 

 

11,626

 

 

 

11,765

 

 

5-7

 

 

 

355,252

 

 

 

348,711

 

 

 

Accumulated depreciation

 

 

(230,652

)

 

 

(225,960

)

 

 

Property and equipment, net

 

$

124,600

 

 

$

122,751

 

 

 

 

Depreciation expense for the three months ended March 31, 2020 and March 31, 2019 was $9.6 million and $9.7 million, respectively.

       

10.

Debt and Credit Facilities

Debt consisted of the following (in thousands):

 

Long-Term:

 

March 31, 2020

 

 

December 31, 2019

 

Revolving credit facility

 

$

65,000

 

 

$

-

 

Senior notes

 

 

250,000

 

 

 

250,000

 

Debt issuance costs

 

 

(599

)

 

 

(647

)

Total long-term

 

$

314,401

 

 

$

249,353

 

 

In November 2017, the Company entered into an amended and restated Credit Agreement. The Company incurred $2.0 million of costs in connection with this amendment. Under the agreement, the Company’s revolving credit facility was increased from $500 million to $550 million and the term of the agreement was extended through November 2022. The borrowings under the Credit Agreement bear interest, at the Company’s option, at either the Base Rate (as defined in the Credit Agreement), plus an applicable margin, or LIBOR plus an applicable margin. The applicable margin for Base Rate loans is a range of 0.125% to 1.00% and the applicable margin for LIBOR loans is a range of 1.125% to 2.00%, both based on the leverage ratio of the Company at the end of each fiscal quarter. The rates at March 31, 2020 and December 31, 2019 were 1.90% and 3.02%, respectively. Borrowings under this Credit Agreement are guaranteed by certain of the Company’s operating subsidiaries. Letters of credit commitments outstanding under this agreement aggregated to $44.9 million and $43.7 million at March 31, 2020 and December 31, 2019, respectively, which reduced borrowing limits available to the Company. Interest expense related to the credit agreement was $0.3 million and $3.4 million for the three months ended March 31, 2020 and March 31, 2019, respectively.   

14


 

On July 1, 2014, the Company finalized a private placement whereby the Company raised an aggregate amount of $250.0 million in debt as follows (in thousands):

 

Tranche

 

Debt Amount

 

 

Maturity Date

 

Interest Rates

 

Senior Note, Series A

 

$

50,000

 

 

July 15, 2021

 

 

4.44

%

Senior Note, Series B

 

 

100,000

 

 

July 15, 2024

 

 

4.98

%

Senior Note, Series C

 

 

60,000

 

 

July 15, 2026

 

 

5.13

%

Senior Note, Series D

 

 

40,000

 

 

July 15, 2029

 

 

5.38

%

 

The Company incurred $1.1 million of debt issuance costs in connection with the private placement. On August 10, 2018, the Company finalized an amended and restated intercreditor agreement related to this private placement to more closely align certain covenants and definitions with the terms under the 2017 amended and restated Credit Agreement and incurred $0.5 million of additional issuance costs. These costs are presented as a direct deduction from the debt on the face of the consolidated balance sheets.  Interest expense related to the Senior Notes for both the three months ended March 31, 2020 and March 31, 2019 was $3.1 million, respectively. The amortization of debt issuance costs and interest expense are recorded in “Interest expense” on the consolidated statements of income. The Company made interest payments related to the Senior Notes for both the three months ended March 31, 2020 and March 31, 2019 of $6.2 million, respectively.  Interest payable of $2.6 million and $5.7 million is recorded in “Accrued expenses and other current liabilities” on the consolidated balance sheets at March 31, 2020 and December 31, 2019, respectively, related to the Senior Notes.

The Credit Agreement and private placement includes various covenants, including restrictions on indebtedness, liens, acquisitions, investments or dispositions, payment of dividends and maintenance of certain financial ratios and conditions. The Company was in compliance with these covenants at March 31, 2020 and December 31, 2019.

The Company also has in place several secondary bank credit lines for issuing letters of credit, principally for foreign contracts, to support performance and completion guarantees. Letters of credit commitments outstanding under these bank lines aggregated $193.5 million and $197.3 million at March 31, 2020 and December 31, 2019, respectively.

Using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality, and risk profile, the Company estimated the fair value (Level 2) of its senior notes at March 31, 2020 approximates $263.9 million. See “Note 16 – Fair Value of Financial Instruments” for the definition of Level 2 of the fair value hierarchy.

In January 2019, the Company borrowed $150.0 million under our Term Loan Agreement to partially finance the OGSystems acquisition.  On May 10, 2019, the Company used proceeds from its May 8, 2019 IPO to repay the $150.0 million outstanding balance under the Term Loan and this loan is now closed. Interest expense related to the Term Loan was $1.4 million for the three months ended March 31, 2019.  There were no amounts outstanding in fiscal 2020.   

11.

Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits Net Operating Loss (“NOL“) carryovers to offset 100% of taxable income for tax years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding tax years to generate a refund of previously paid income taxes. The CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. The CARES Act also accelerates the refund of AMT credits that were previously accumulated.  The Company is currently evaluating the impact of the CARES Act; however, at present it does not expect that the modifications on the limitation of business interest or AMT credits would have any impact to the Company. Under the NOL carryback provision, the Company expects to carry back some of its NOLs, including certain amounts associated with acquisitions which may be subject to certain seller shareholders’ claims.

Prior to the Company’s IPO, the Company had elected to be taxed under the provisions of Subchapter “S” of the Internal Revenue Code for federal tax purposes. As a result, income had not been subject to U.S. federal income taxes or state income taxes in those states where the “S” Corporation status is recognized. Therefore, previously, no provision or liability for federal or state income tax had been provided in the consolidated financial statements except for those states where the “S” Corporation status was not recognized, or where states imposed a tax on “S” Corporations.  The provision

15


 

for income tax in the historical periods prior to the IPO consists of these state taxes and taxes from certain foreign jurisdictions where the Company is subject to tax.

In connection with the Company’s IPO on May 8, 2019, the “S” Corporation status was terminated, and the Company is now treated as a “C” Corporation under the Code. The termination of the “S” Corporation election has had a material impact on the Company’s results of operations, financial condition, and cash flows as reflected in the March 31, 2020 consolidated financial statements. The effective tax rate has increased, and net income has decreased as compared to the Company’s “S” Corporation tax years, since the Company is now subject to both U.S. federal and state corporate income taxes on its earnings.

The Company’s effective tax rate was 26.13% and 12.35% for the three months ended March 31, 2020 and 2019, respectively. The most significant items contributing to the change in the effective tax rate relate to the Company’s change in “S” Corporation to “C” Corporation status and change in jurisdictional earnings. The difference between the effective tax rate and the statutory U.S. Federal income tax rate of 21.0% for the quarter ended March 31, 2020 primarily relates to state income taxes.

As of March 31, 2020, the Company’s deferred tax assets included a valuation allowance of $18.2 million primarily related to foreign net operating loss carryforwards, foreign tax credit carryforwards, and capital losses that the Company determined are not more-likely-than-not to be realized. The factors used to assess the likelihood of realization were the past performance of the related entities, forecasts of future taxable income, future reversals of existing taxable temporary differences, and available tax planning strategies that could be implemented to realize the deferred tax assets. The ability or failure to achieve the forecasted taxable income in these entities could affect the ultimate realization of deferred tax assets.

As of March 31, 2020 and December 31, 2019, the liability for income taxes associated with uncertain tax positions was $14.8 million and $15.5 million, respectively.  The Company does not anticipate a material change within twelve months as a result of concluding various tax audits and closing tax years.  Although the Company believes its reserves for its tax positions are reasonable, the final outcome of tax examination could be materially different, both favorably and unfavorably.  It is reasonably possible that certain examinations may conclude in the next 12 months and that the unrecognized tax benefits the Company has recorded in relation to these tax years may change compared to the liabilities recorded for these periods. However, it is not currently possible to estimate the amount, if any, of such change.          

12.

Contingencies

The Company is subject to certain lawsuits, claims and assessments that arise in the ordinary course of business. Additionally, the Company has been named as a defendant in lawsuits alleging personal injuries as a result of contact with asbestos products at various project sites. Management believes that any significant costs relating to these claims will be reimbursed by applicable insurance and, although there can be no assurance that these matters will be resolved favorably, management believes that the ultimate resolution of any of these claims will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows. A liability is recorded when it is both probable that a loss has been incurred and the amount of loss or range of loss can be reasonably estimated.  When using a range of loss estimate, the Company records the liability using the low end of the range. The Company records a corresponding receivable for costs covered under its insurance policies.  Management judgment is required to determine the outcome and the estimated amount of a loss related to such matters. Management believes that there are no claims or assessments outstanding which would materially affect the consolidated results of operations or the Company’s financial position.

 On or about March 1, 2017, the Peninsula Corridor Joint Powers Board, or the JPB, filed a lawsuit against Parsons Transportation Group, Inc., or PTG, in the Superior Court of California, County of San Mateo, in connection with a positive train control project on which PTG was engaged prior to termination of its contract by the JPB. PTG had previously filed a lawsuit against the JPB for breach of contract and wrongful termination. The JPB seeks damages in excess of $100.0 million, which the Company is currently disputing. In addition to filing a complaint for breach of contract and wrongful termination, the Company has denied the allegations raised by the JPB and, accordingly, filed affirmative defenses. The Company is currently defending against the JPB’s claims and the parties are still engaged in discovery. The Company also has a professional liability insurance policy to the extent the JPB proves any errors or omissions occurred. At this time, the Company is unable to determine the probability of the outcome of the litigation or determine a potential range of loss, if any. The Company has also filed a third-party claim against a subcontractor for indemnification in connection with this matter.

In September 2015, a former Parsons employee filed an action in the United States District Court for the Northern District of Alabama against us as a qui tam relator on behalf of the United States (the “Relator”) alleging violation of the

16


 

False Claims Act. The United States government did not intervene in this matter as it is allowed to do so under the statute. The Company filed a motion to dismiss the lawsuit on the grounds that the Relator did not meet the applicable statute of limitations. The District Court granted the motion to dismiss. The Relator’s attorney appealed the decision to the United States Court of Appeals of the Eleventh Circuit, which ultimately ruled in favor of the Relator, and the Company petitioned the United States Supreme Court to review the decision. The Supreme Court reviewed the decision and accepted the position of the Relator.  The case was thus remanded to the United States District Court for the Northern District of Alabama.  The defendants, including Parsons, will file appropriate pleadings opposing the allegations.  At this time, the Company is unable to determine the probability of the outcome of the litigation or determine a potential range of loss, if any.

On or about October 4, 2019, LBH Engineers, LLC (“LBH”) filed a lawsuit against Parsons, PTG, and various other parties in the US District Court of for the Northern District of Georgia, in connection with an alleged infringement of LBH’s patent. LBH seeks damages and costs incurred by LBH, a post-judgment royalty, treble damages if the infringement is found to be willful, among other damages, which the Company and the other defendants are currently disputing. At this time, the Company is unable to determine the probability of the outcome of the litigation or determine a potential range of loss, if any.

Federal government contracts are subject to audits, which are performed for the most part by the Defense Contract Audit Agency (“DCAA”). Audits by the DCAA and other agencies consist of reviews of our overhead rates, operating systems and cost proposals to ensure that we account for such costs in accordance with the Cost Accounting Standards (“CAS”). If the DCAA determines we have not accounted for such costs in accordance with the CAS, the DCAA may disallow these costs. The disallowance of such costs may result in a reduction of revenue and additional liability for the Company. Historically, the Company has not experienced any material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future. All audits of costs incurred on work performed through 2010 have been closed, and years thereafter remain open.

Although there can be no assurance that these matters will be resolved favorably, management believes that their ultimate resolution will not have a material adverse impact on the Company’s consolidated financial position, results of operations, or cash flows.

13.

Retirement Benefit Plan

The Company’s principal retirement benefit plan is the Parsons Employee Stock Ownership Plan (“ESOP”), a stock bonus plan, established in 1975 to cover eligible employees of the Company and certain affiliated companies. Contributions of treasury stock to the ESOP are made annually in amounts determined by the Company’s board of directors and are held in trust for the sole benefit of the participants. Shares allocated to a participant’s account are fully vested after three years of credited service, or in the event(s) of reaching age 65, death or disability while an active employee of the Company. As of March 31, 2020 and December 31, 2019, total shares of the Company’s common stock were 100,669,694 and 100,669,694, respectively, of which 78,398,520 and 78,896,806, respectively, were held by the ESOP.

A participant’s interest in their ESOP account is redeemable upon certain events, including retirement, death, termination due to permanent disability, a severe financial hardship following termination of employment, certain conflicts of interest following termination of employment, or the exercise of diversification rights.  Distributions from the ESOP of participants’ interests are made in the Company’s common stock based on quoted prices of a share of the Company’s common stock on the NYSE.  A participant will be able to sell such shares of common stock in the market, subject to any requirements of the federal securities laws.

Total ESOP contribution expense was $14.9 million and $12.2 million for the three months ended March 31, 2020 and March 31, 2019, respectively.  The expense is recorded in “Direct costs of contracts” and “Indirect, general and administrative expense” in the consolidated statements of income. The fiscal 2020 ESOP contribution has not yet been made.  The amount is currently included in accrued liabilities.

  On April 3, 2019, the board of directors of the Company declared a cash dividend to the Company’s sole existing shareholder at that time, the ESOP, in the amount of $2.00 per share, or $52.1 million in the aggregate (the “IPO Dividend”). The IPO Dividend was paid on May 10, 2019. 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 then

17


 

held by the Company’s shareholder (the “Stock Dividend”). The record date of 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.  

14.

Investments in and Advances to Joint Ventures

The Company participates in joint ventures to bid, negotiate and complete specific projects. The Company is required to consolidate these joint ventures if it holds the majority voting interest or if the Company meets the criteria under the consolidation model, as described below.

The Company performs an analysis to determine whether its variable interests give the Company a controlling financial interest in a Variable Interest Entity (“VIE”) for which the Company is the primary beneficiary and should, therefore, be consolidated. Such analysis requires the Company to assess whether it has the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

The Company analyzed all of its joint ventures and classified them into two groups: (1) joint ventures that must be consolidated because they are either not VIEs and the Company holds the majority voting interest, or because they are VIEs and the Company is the primary beneficiary; and (2) joint ventures that do not need to be consolidated because they are either not VIEs and the Company holds a minority voting interest, or because they are VIEs and the Company is not the primary beneficiary.

Many of the Company’s joint venture agreements provide for capital calls to fund operations, as necessary; however, such funding is infrequent and is not anticipated to be material.

Letters of credit outstanding described in “Note 10 – Debt and Credit Facilities” that relate to project ventures are $48.4 million and $55.0 million at March 31, 2020 and December 31, 2019, respectively.

In the table below, aggregated financial information relating to the Company’s joint ventures is provided because their nature, risk and reward characteristics are similar. None of the Company’s current joint ventures that meet the characteristics of a VIE are individually significant to the consolidated financial statements.

Consolidated Joint Ventures

The following represents financial information for consolidated joint ventures included in the consolidated financial statements (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Current assets

 

$

284,357

 

 

$

255,167

 

Noncurrent assets

 

 

2,441

 

 

 

2,860

 

Total assets

 

 

286,798

 

 

 

258,027

 

Current liabilities

 

 

219,880

 

 

 

193,583

 

Total liabilities

 

 

219,880

 

 

 

193,583

 

Total joint venture equity

 

$

66,918

 

 

$

64,444

 

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Revenue

 

$

100,278

 

 

$

115,104

 

Costs

 

 

97,150

 

 

 

107,206

 

Net income

 

$

3,128

 

 

$

7,898

 

Net income attributable to noncontrolling interests

 

$

1,398

 

 

$

3,645

 

 

The assets of the consolidated joint ventures are restricted for use only by the particular joint venture and are not available for the Company’s general operations.

18


 

Unconsolidated Joint Ventures

The Company accounts for its unconsolidated joint ventures using the equity method of accounting. Under this method, the Company recognizes its proportionate share of the net earnings of these joint ventures as “Equity in earnings (loss) of unconsolidated joint ventures” in the consolidated statements of income. The Company’s maximum exposure to loss as a result of its investments in unconsolidated VIEs is typically limited to the aggregate of the carrying value of the investment and future funding commitments.

The following represents the financial information of the Company’s unconsolidated joint ventures as presented in their unaudited financial statements (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Current assets

 

$

735,279

 

 

$

801,335

 

Noncurrent assets

 

 

527,529

 

 

 

564,160

 

Total assets

 

 

1,262,808

 

 

 

1,365,495

 

Current liabilities

 

 

663,622

 

 

 

655,495

 

Noncurrent liabilities

 

 

475,463

 

 

 

507,131

 

Total liabilities

 

 

1,139,085

 

 

 

1,162,626

 

Total joint venture equity

 

 

123,723

 

 

 

202,869

 

Investments in and advances to unconsolidated joint ventures

 

$

65,716

 

 

$

68,620

 

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Revenue

 

$

238,188

 

 

$

229,466

 

Costs

 

 

223,686

 

 

 

216,780

 

Net income

 

$

14,502

 

 

$

12,686

 

Equity in earnings of unconsolidated joint ventures

 

$

6,114

 

 

$

10,397

 

 

The Company received net distributions from its unconsolidated joint ventures for the three months ended March 31, 2020 and March 31, 2019 of $6.5 million and $8.1 million, respectively.  

15.

Related Party Transactions

The Company often provides services to unconsolidated joint ventures and revenues include amounts related to recovering overhead costs for these services. Revenues related to services the Company provided to unconsolidated joint ventures for the three months ended March 31, 2020 and March 31, 2019 were $40.4 million and $33.6 million, respectively. For the three months ended March 31, 2020 and March 31, 2019, the Company incurred $31.5 million and $27.2 million, respectively, of reimbursable costs. Amounts included in the consolidated balance sheets related to services the Company provided to unconsolidated joint ventures are as follows (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Accounts receivable

 

$

35,674

 

 

$

37,425

 

Contract assets

 

 

7,876

 

 

 

6,955

 

Contract liabilities

 

 

4,359

 

 

 

4,509

 

 

16.

Fair Value of Financial Instruments

The authoritative guidance on fair value measurement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an “exit price”). At March 31, 2020 and December 31, 2019, the Company’s financial instruments include cash, cash equivalents, accounts receivable, accounts payable, and other liabilities. The fair values of these financial instruments approximate their carrying values due to their short-term maturities.

19


 

Investments measured at fair value are based on one or more of the following three valuation techniques:

 

Market approach—Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;

 

Cost approach—Amount that would be required to replace the service capacity of an asset (i.e., replacement cost); and

 

Income approach—Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing models and lattice models).