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PARSONS CORP - Quarter Report: 2022 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, 2022

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, 2022, the registrant had 103,730,134 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

 

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

 

36

Item 4.

Controls and Procedures

 

36

PART II.

OTHER INFORMATION

 

37

Item 1.

Legal Proceedings

 

37

Item 1A.

Risk Factors

 

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

Item 3.

Defaults Upon Senior Securities

 

37

Item 4.

Mine Safety Disclosures

 

37

Item 5.

Other Information

 

37

Item 6.

Exhibits

 

37

 

Signatures

 

38

 

 

 

 

i


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share information)

(Unaudited)

 

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (including $28,477 and $78,514 Cash of consolidated joint ventures)

 

$

285,622

 

 

$

342,608

 

 

Restricted cash and investments

 

 

1,140

 

 

 

1,275

 

 

Accounts receivable, net (including $166,410 and $190,643 Accounts receivable of consolidated joint ventures, net)

 

 

646,117

 

 

 

598,311

 

 

Contract assets (including $8,647 and $23,498 Contract assets of consolidated joint ventures)

 

 

600,109

 

 

 

579,216

 

 

Prepaid expenses and other current assets (including $10,694 and $18,783 Prepaid expenses and other current assets of consolidated joint ventures)

 

 

107,978

 

 

 

110,941

 

 

Total current assets

 

 

1,640,966

 

 

 

1,632,351

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net (including $1,707 and $1,721 Property and equipment of consolidated joint ventures, net)

 

 

97,922

 

 

 

104,196

 

 

Right of use assets, operating leases

 

 

171,907

 

 

 

182,672

 

 

Goodwill

 

 

1,412,834

 

 

 

1,412,690

 

 

Investments in and advances to unconsolidated joint ventures

 

 

114,234

 

 

 

110,688

 

 

Intangible assets, net

 

 

188,731

 

 

 

207,821

 

 

Deferred tax assets

 

 

137,015

 

 

 

134,393

 

 

Other noncurrent assets

 

 

45,232

 

 

 

46,129

 

 

Total assets

 

$

3,808,841

 

 

$

3,830,940

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable (including $57,700 and $78,558 Accounts payable of consolidated joint ventures)

 

$

157,080

 

 

$

196,286

 

 

Accrued expenses and other current liabilities (including $78,453 and $82,746 Accrued expenses and other current liabilities of consolidated joint ventures)

 

 

609,095

 

 

 

599,089

 

 

Contract liabilities (including $14,637 and $14,333 Contract liabilities of consolidated joint ventures)

 

 

172,932

 

 

 

171,671

 

 

Short-term lease liabilities, operating leases

 

 

57,197

 

 

 

55,902

 

 

Income taxes payable

 

 

12,551

 

 

 

7,836

 

 

Total current liabilities

 

 

1,008,855

 

 

 

1,030,784

 

 

 

 

 

 

 

 

 

 

 

 

Long-term employee incentives

 

 

15,000

 

 

 

15,997

 

 

Long-term debt

 

 

592,450

 

 

 

591,922

 

 

Long-term lease liabilities, operating leases

 

 

135,276

 

 

 

148,893

 

 

Deferred tax liabilities

 

 

11,793

 

 

 

11,400

 

 

Other long-term liabilities

 

 

94,842

 

 

 

94,832

 

 

Total liabilities

 

 

1,858,216

 

 

 

1,893,828

 

Contingencies (Note 12)

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

 

Common stock, $1 par value; authorized 1,000,000,000 shares; 146,347,283 and 146,276,880 shares issued; 34,942,580 and 33,331,494 public shares outstanding; 68,787,554 and 70,328,237 ESOP shares outstanding

 

 

146,348

 

 

 

146,277

 

 

Treasury stock, 42,617,149 shares at cost

 

 

(867,391

)

 

 

(867,391

)

 

Additional paid-in capital

 

 

2,678,761

 

 

 

2,684,979

 

 

Accumulated deficit

 

 

(32,858

)

 

 

(53,529

)

 

Accumulated other comprehensive loss

 

 

(6,673

)

 

 

(9,568

)

 

Total Parsons Corporation shareholders' equity

 

 

1,918,187

 

 

 

1,900,768

 

 

Noncontrolling interests

 

 

32,438

 

 

 

36,344

 

 

Total shareholders' equity

 

 

1,950,625

 

 

 

1,937,112

 

 

Total liabilities and shareholders' equity

 

$

3,808,841

 

 

$

3,830,940

 

 

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, 2022

 

 

March 31, 2021

 

Revenue

 

$

949,069

 

 

$

874,697

 

Direct cost of contracts

 

 

733,900

 

 

 

669,082

 

Equity in earnings of unconsolidated joint ventures

 

 

5,598

 

 

 

7,530

 

Selling, general and administrative expenses

 

 

185,077

 

 

 

187,522

 

Operating income

 

 

35,690

 

 

 

25,623

 

Interest income

 

 

65

 

 

 

98

 

Interest expense

 

 

(3,938

)

 

 

(4,541

)

Other income (expense), net

 

 

145

 

 

 

(1,791

)

Total other income (expense)

 

 

(3,728

)

 

 

(6,234

)

Income before income tax expense

 

 

31,962

 

 

 

19,389

 

Income tax expense

 

 

(8,119

)

 

 

(5,375

)

Net income including noncontrolling interests

 

 

23,843

 

 

 

14,014

 

Net income attributable to noncontrolling interests

 

 

(3,176

)

 

 

(4,975

)

Net income attributable to Parsons Corporation

 

$

20,667

 

 

$

9,039

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.20

 

 

$

0.09

 

Diluted

 

$

0.19

 

 

$

0.09

 

 

 

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, 2022

 

 

March 31, 2021

 

Net income including noncontrolling interests

 

$

23,843

 

 

$

14,014

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax

 

 

2,874

 

 

 

4,914

 

Pension adjustments, net of tax

 

 

22

 

 

 

19

 

Comprehensive income including noncontrolling interests, net of tax

 

 

26,739

 

 

 

18,947

 

Comprehensive income attributable to noncontrolling interests, net of tax

 

 

(3,177

)

 

 

(4,980

)

Comprehensive income attributable to Parsons Corporation, net of tax

 

$

23,562

 

 

$

13,967

 

 

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, 2022

 

 

March 31, 2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interests

 

$

23,843

 

 

$

14,014

 

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

30,509

 

 

 

34,673

 

 

Amortization of debt issue costs

 

 

649

 

 

 

665

 

 

(Gain) loss on disposal of property and equipment

 

 

(39

)

 

 

267

 

 

Provision for doubtful accounts

 

 

(3

)

 

 

-

 

 

Deferred taxes

 

 

(2,566

)

 

 

403

 

 

Foreign currency transaction gains and losses

 

 

882

 

 

 

2,220

 

 

Equity in earnings of unconsolidated joint ventures

 

 

(5,598

)

 

 

(7,530

)

 

Return on investments in unconsolidated joint ventures

 

 

11,874

 

 

 

13,180

 

 

Stock-based compensation

 

 

3,898

 

 

 

7,206

 

 

Contributions of treasury stock

 

 

13,054

 

 

 

13,153

 

 

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

   joint ventures:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(46,690

)

 

 

2,597

 

 

Contract assets

 

 

(21,212

)

 

 

(31,711

)

 

Prepaid expenses and other assets

 

 

4,496

 

 

 

(5,386

)

 

Accounts payable

 

 

(39,342

)

 

 

(6,658

)

 

Accrued expenses and other current liabilities

 

 

(4,134

)

 

 

(68,928

)

 

Contract liabilities

 

 

945

 

 

 

(16,086

)

 

Income taxes

 

 

4,706

 

 

 

1,268

 

 

Other long-term liabilities

 

 

(986

)

 

 

(19,312

)

 

Net cash used in operating activities

 

 

(25,714

)

 

 

(65,965

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(4,473

)

 

 

(4,449

)

 

Proceeds from sale of property and equipment

 

 

112

 

 

 

164

 

 

Payments for acquisitions, net of cash acquired

 

 

-

 

 

 

1,064

 

 

Investments in unconsolidated joint ventures

 

 

(9,713

)

 

 

(22,240

)

 

Return of investments in unconsolidated joint ventures

 

 

644

 

 

 

116

 

 

Proceeds from sales of investments in unconsolidated joint ventures

 

 

-

 

 

 

14,300

 

 

Net cash used in investing activities

 

 

(13,430

)

 

 

(11,045

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Contributions by noncontrolling interests

 

 

1,226

 

 

 

7

 

 

Distributions to noncontrolling interests

 

 

(8,309

)

 

 

(8,989

)

 

Repurchases of common stock

 

 

(5,548

)

 

 

-

 

 

Taxes paid on vested stock

 

 

(5,771

)

 

 

(2,242

)

 

Net cash used in financing activities

 

 

(18,402

)

 

 

(11,224

)

 

Effect of exchange rate changes

 

 

425

 

 

 

430

 

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(57,121

)

 

 

(87,804

)

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

Beginning of year

 

 

343,883

 

 

 

487,215

 

 

End of period

 

$

286,762

 

 

$

399,411

 

 

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

4


 

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended March 31, 2022 and March 31, 2021

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Treasury

 

 

Paid-in

 

 

(Accumulated

 

 

Comprehensive

 

 

Parsons

 

 

Noncontrolling

 

 

 

 

 

 

 

Stock

 

 

Stock

 

 

Capital

 

 

Deficit)

 

 

Income (Loss)

 

 

Equity

 

 

Interests

 

 

Total

 

Balance at December 31, 2021

 

$

146,277

 

 

$

(867,391

)

 

$

2,684,979

 

 

$

(53,529

)

 

$

(9,568

)

 

$

1,900,768

 

 

$

36,344

 

 

$

1,937,112

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20,667

 

 

 

-

 

 

 

20,667

 

 

 

3,176

 

 

 

23,843

 

Foreign currency translation loss, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,873

 

 

 

2,873

 

 

 

1

 

 

 

2,874

 

Pension adjustments, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

22

 

 

 

22

 

 

 

-

 

 

 

22

 

Contributions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,226

 

 

 

1,226

 

Distributions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,309

)

 

 

(8,309

)

Issuance of equity securities, net of retirements

 

 

222

 

 

 

-

 

 

 

(4,719

)

 

 

4

 

 

 

-

 

 

 

(4,493

)

 

 

-

 

 

 

(4,493

)

Repurchases of common stock

 

 

(151

)

 

 

-

 

 

 

(5,397

)

 

 

-

 

 

 

-

 

 

 

(5,548

)

 

 

-

 

 

 

(5,548

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

3,898

 

 

 

-

 

 

 

-

 

 

 

3,898

 

 

 

-

 

 

 

3,898

 

Balance at March 31, 2022

 

$

146,348

 

 

$

(867,391

)

 

$

2,678,761

 

 

$

(32,858

)

 

$

(6,673

)

 

$

1,918,187

 

 

$

32,438

 

 

$

1,950,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

$

146,609

 

 

$

(899,328

)

 

$

2,700,925

 

 

$

(120,569

)

 

$

(13,865

)

 

$

1,813,772

 

 

$

47,645

 

 

$

1,861,417

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,039

 

 

 

-

 

 

 

9,039

 

 

 

4,975

 

 

 

14,014

 

Foreign currency translation gain, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,909

 

 

 

4,909

 

 

 

5

 

 

 

4,914

 

Pension adjustments, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19

 

 

 

19

 

 

 

-

 

 

 

19

 

Adoption of ASU 2020-06

 

 

 

 

 

 

 

 

 

 

(40,002

)

 

 

2,782

 

 

 

 

 

 

 

(37,220

)

 

 

 

 

 

 

(37,220

)

Contributions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

 

 

7

 

Distributions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,989

)

 

 

(8,989

)

Issuance of equity securities, net of retirements

 

 

45

 

 

 

-

 

 

 

(999

)

 

 

28

 

 

 

-

 

 

 

(926

)

 

 

-

 

 

 

(926

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

7,206

 

 

 

-

 

 

 

-

 

 

 

7,206

 

 

 

-

 

 

 

7,206

 

Balance at March 31, 2021

 

$

146,654

 

 

$

(899,328

)

 

$

2,667,130

 

 

$

(108,720

)

 

$

(8,937

)

 

$

1,796,799

 

 

$

43,643

 

 

$

1,840,442

 

 

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”) 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.          

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, 2021.

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 Parsons Corporation and its subsidiaries and affiliates which 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.

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, 2021, 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.  

Stock Repurchase Plan

During the third quarter of 2021, the Company’s Board of Directors authorized the Company to acquire a number of shares of Common Stock having an aggregate market value of not greater than $100,000,000 from time to time. Repurchased shares of common stock are retired and included in “Repurchases of common stock” in cash flows from financing activities in the Consolidated Statements of Cash Flows.

 

6


 

 

3.

New Accounting Pronouncements

In the first quarter of 2022, the Company early adopted ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The new guidance requires that the approach of ASC 606, Revenue from Contracts with Customers, should be used to measure an acquired revenue contract in a business combination. This guidance is to be applied (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The early adoption of ASU 2021-08 did not have a material impact on the consolidated financial statements.

In the first quarter of 2021, the Company early adopted Accounting Standards Update (“ASU”) ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06)”. The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. The guidance also includes targeted improvements to the disclosures for convertible instruments and earnings per share. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company adopted ASU 2020-06 in the first quarter of 2021 using the modified retrospective method which resulted in a reduction in non-cash interest expense and reclassification of the equity portion of the Convertible Senior Notes to “Long-term debt” on the consolidated balance sheet.

In the first quarter of 2021, the Company adopted 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. 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. The adoption of ASU 2019-12 did not have a material impact on the consolidated financial statements.  

4.

Acquisitions   

BlackHorse Solutions, Inc.

On July 6, 2021, the Company acquired a 100% ownership interest in BlackHorse Solutions, Inc (“BlackHorse”), a privately-owned company, for $205.0 million in cash. BlackHorse expands Parsons’ capabilities and products in next-generation military, intelligence, and space operations, specifically in cyber electronic warfare and information dominance. The acquisition was entirely funded by cash on-hand.

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

 

$

15,428

 

Accounts receivable

 

 

3,351

 

Contract assets

 

 

5,979

 

Prepaid expenses and other current assets

 

 

937

 

Property and equipment

 

 

2,239

 

Right of use assets, operating leases

 

 

6,157

 

Goodwill

 

 

143,086

 

Intangible assets

 

 

65,000

 

Accounts payable

 

 

(2,326

)

Accrued expenses and other current liabilities

 

 

(17,190

)

Contract liabilities

 

 

(320

)

Short-term lease liabilities, operating leases

 

 

(1,011

)

Long-term lease liabilities, operating leases

 

 

(5,146

)

Deferred tax liabilities

 

 

(10,916

)

Other long-term liabilities

 

 

(235

)

Net assets acquired

 

$

205,033

 

7


 

 

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

 

$

39,000

 

 

16

Backlog

 

 

23,000

 

 

3

Trade name

 

 

1,000

 

 

2

Developed technologies

 

 

1,000

 

 

3

Non-compete agreements

 

 

1,000

 

 

3

 

 

Amortization expense of $3.6 million related to these intangible assets was recorded for the three months ended March 31, 2022. The entire value of goodwill was assigned to the Federal Solutions reporting unit and represents synergies expected to be realized from this business combination. Goodwill of $10.6 million is deductible for tax purposes.

The amount of revenue generated by BlackHorse and included within consolidated revenues is $18.4 million for the three months ended March 31, 2022.  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 BlackHorse acquisition had been consummated as of the beginning of fiscal year 2020 (in thousands) is as follows:

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

Pro forma Revenue

 

$

949,069

 

 

$

891,402

 

Pro forma Net Income including noncontrolling interests

 

 

25,882

 

 

 

13,508

 

Echo Ridge LLC

On July 30, 2021, the Company acquired a 100% ownership interest in Echo Ridge LLC (“Echo Ridge”), a privately-owned company, for $9.0 million in cash. Echo Ridge adds position, navigation, and timing devices; modeling, simulation, test, and measurement tools; and deployable software defined radio products and signal processing services to Parsons’ space portfolio. The acquisition was entirely funded by cash on-hand. The Company allocated the purchase price to the appropriate classes of tangible assets and liabilities and assigned the excess of $7.2 million to goodwill. The entire value of goodwill 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 Echo Ridge and included within consolidated revenues for the three months ended March 31, 2022 is $1.6 million.

          

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, 2022

 

 

March 31, 2021

 

Fixed-Price

 

$

240,574

 

 

$

229,942

 

Time-and-Materials

 

$

263,315

 

 

 

239,665

 

Cost-Plus

 

$

445,180

 

 

 

405,090

 

Total

 

$

949,069

 

 

$

874,697

 

 

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

8


 

Contract Assets and Contract Liabilities

Contract assets and contract liabilities balances at March 31, 2022 and December 31, 2021 were as follows (in thousands):

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Contract assets

 

$

600,109

 

 

$

579,216

 

Contract liabilities

 

 

172,932

 

 

 

171,671

 

Net contract assets (liabilities) (1)

 

$

427,177

 

 

$

407,545

 

 

(1)

Total contract retentions included in net contract assets (liabilities) were $80.5 million as of March 31, 2022, of which $38.2 million are not expected to be paid in the next 12 months. Total contract retentions included in net contract assets (liabilities) were $91.7 million as of December 31, 2021. Contract assets at March 31, 2022 and December 31, 2021 include $102.8 million and $98.6 million, respectively, related to unapproved change orders, claims, and requests for equitable adjustment. For the three months ended March 31, 2022 and March 31, 2021, 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, 2022 and March 31, 2021, the Company recognized revenue of $63.9 million and $69.1 million, respectively, that was included in the corresponding contract liability balances at December 31, 2021 and December 31, 2020, respectively. Certain changes in contract assets and contract liabilities consisted of the following:

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Acquired contract assets

 

$

-

 

 

$

5,979

 

Acquired contract liabilities

 

 

-

 

 

 

320

 

 

  There was no significant impairment of contract assets recognized during the three months ended March 31, 2022 and March 31, 2021.

 There were no 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, 2022 and March 31, 2021.   

 

Accounts Receivable, net

Accounts receivable, net consisted of the following as of March 31, 2022 and December 31, 2021 (in thousands):

 

 

 

2022

 

 

2021

 

Billed

 

$

443,818

 

 

$

434,776

 

Unbilled

 

 

206,251

 

 

 

167,490

 

   Total accounts receivable, gross

 

 

650,069

 

 

 

602,266

 

Allowance for doubtful accounts

 

 

(3,952

)

 

 

(3,955

)

   Total accounts receivable, net

 

$

646,117

 

 

$

598,311

 

 

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.

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. 

9


 

Transaction Price Allocated to the Remaining Unsatisfied Performance Obligations

The Company’s remaining unsatisfied performance obligations (“RUPO”) as of March 31, 2022 represent a measure of the total dollar value of work to be performed on contracts awarded and in-progress. The Company had $5.5 billion in RUPO as of March 31, 2022.

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, 2022 over the following periods (in thousands):

 

Period RUPO Will Be Satisfied

 

Within One Year

 

 

Within One to

Two Years

 

 

Thereafter

 

Federal Solutions

 

$

1,291,914

 

 

$

748,839

 

 

$

295,965

 

Critical Infrastructure

 

 

1,543,717

 

 

 

837,968

 

 

 

824,811

 

Total

 

$

2,835,631

 

 

$

1,586,807

 

 

$

1,120,776

 

 

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 8 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 after the third year.   

The components of lease costs for the three months ended March 31, 2022 and March 31, 2021 are as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

Operating lease cost

 

$

16,176

 

 

$

16,361

 

Short-term lease cost

 

 

3,480

 

 

 

2,032

 

Amortization of right-of-use assets

 

 

548

 

 

 

474

 

Interest on lease liabilities

 

 

21

 

 

 

29

 

Sublease income

 

 

(1,035

)

 

 

(776

)

Total lease cost

 

$

19,190

 

 

$

18,120

 

 

Supplemental cash flow information related to leases for the three months ended March 31, 2022 and March 31, 2021 is as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

Operating cash flows for operating leases

 

$

17,506

 

 

$

16,627

 

Operating cash flows for finance leases

 

 

21

 

 

 

30

 

Financing cash flows from finance leases

 

 

511

 

 

 

480

 

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

 

 

2,304

 

 

 

4,865

 

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

 

$

-

 

 

$

619

 

10


 

 

 

Supplemental balance sheet and other information related to leases as of March 31, 2022 and December 31, 2021 are as follows (in thousands):

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Operating Leases:

 

 

 

 

 

 

 

 

Right-of-use assets

 

$

171,907

 

 

$

182,672

 

Lease liabilities:

 

 

 

 

 

 

 

 

Current

 

$

57,197

 

 

$

55,902

 

Long-term

 

 

135,276

 

 

 

148,893

 

Total operating lease liabilities

 

$

192,473

 

 

$

204,795

 

Finance Leases:

 

 

 

 

 

 

 

 

Other noncurrent assets

 

$

3,842

 

 

$

4,389

 

Accrued expenses and other current liabilities

 

$

1,661

 

 

$

1,822

 

Other long-term liabilities

 

$

2,073

 

 

$

2,422

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term:

 

 

 

 

 

 

 

 

Operating leases

 

4.1 Years

 

 

4.3 years

 

Finance leases

 

2.7 Years

 

 

2.9 years

 

Weighted Average Discount Rate:

 

 

 

 

 

 

 

 

Operating leases

 

 

3.4

%

 

 

3.5

%

Finance leases

 

 

2.1

%

 

 

2.1

%

 

As of March 31, 2022, the Company has no operating leases that have not yet commenced.  

 

A maturity analysis of the future undiscounted cash flows associated with the Company’s operating and finance lease liabilities as of March 31, 2022 is as follows (in thousands):

 

 

 

Operating Leases

 

 

Finance Leases

 

2022 (remaining)

 

$

48,184

 

 

$

1,378

 

2023

 

 

53,184

 

 

 

1,221

 

2024

 

 

41,599

 

 

 

812

 

2025

 

 

30,955

 

 

 

454

 

2026

 

 

17,564

 

 

 

11

 

Thereafter

 

 

14,607

 

 

 

-

 

Total lease payments

 

 

206,093

 

 

 

3,876

 

Less: imputed interest

 

 

(13,620

)

 

 

(142

)

Total present value of lease liabilities

 

$

192,473

 

 

$

3,734

 

            

7.

Goodwill

The following table summarizes the changes in the carrying value of goodwill by reporting segment from December 31, 2021 to March 31, 2022 (in thousands):

 

 

 

December 31, 2021

 

 

Acquisitions

 

 

Foreign Exchange

 

 

March 31, 2022

 

Federal Solutions

 

$

1,339,117

 

 

$

(744

)

 

$

-

 

 

$

1,338,373

 

Critical Infrastructure

 

 

73,573

 

 

 

-

 

 

 

888

 

 

 

74,461

 

Total

 

$

1,412,690

 

 

$

(744

)

 

$

888

 

 

$

1,412,834

 

 

The Company performed a qualitative triggering analysis and determined there was no triggering event indicating a potential impairment to the carrying value of its goodwill at March 31, 2022 and concluded there has not been an impairment.

11


 

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, 2022

 

 

December 31, 2021

 

 

Weighted

Average

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Amortization

Period

(in years)

 

Backlog

 

$

170,455

 

 

$

(131,981

)

 

$

38,474

 

 

$

169,455

 

 

$

(126,637

)

 

$

42,818

 

 

 

3

 

Customer relationships

 

 

301,829

 

 

 

(166,221

)

 

 

135,608

 

 

 

301,829

 

 

 

(158,405

)

 

 

143,424

 

 

 

8

 

Leases

 

 

670

 

 

 

(623

)

 

 

47

 

 

 

670

 

 

 

(618

)

 

 

52

 

 

 

5

 

Developed technology

 

 

113,939

 

 

 

(103,342

)

 

 

10,597

 

 

 

113,939

 

 

 

(96,765

)

 

 

17,174

 

 

 

4

 

Trade name

 

 

9,200

 

 

 

(8,575

)

 

 

625

 

 

 

9,200

 

 

 

(8,444

)

 

 

756

 

 

 

1

 

Non-compete agreements

 

 

5,250

 

 

 

(3,739

)

 

 

1,511

 

 

 

5,250

 

 

 

(3,523

)

 

 

1,727

 

 

 

3

 

In process research and development

 

 

1,800

 

 

 

-

 

 

 

1,800

 

 

 

1,800

 

 

 

-

 

 

 

1,800

 

 

n/a

 

Other intangibles

 

 

275

 

 

 

(206

)

 

 

69

 

 

 

275

 

 

 

(205

)

 

 

70

 

 

 

10

 

Total intangible assets

 

$

603,418

 

 

$

(414,687

)

 

$

188,731

 

 

$

602,418

 

 

$

(394,597

)

 

$

207,821

 

 

 

 

 

  

The aggregate amortization expense of intangible assets for the three months ended March 31, 2022 and March 31, 2021 was $20.1 million and $24.5 million, respectively. 

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, 2022

 

2022

 

$

46,164

 

2023

 

 

50,123

 

2024

 

 

18,892

 

2025

 

 

13,637

 

2026

 

 

10,265

 

Thereafter

 

 

47,850

 

Total

 

$

186,931

 

 

9.

Property and Equipment, Net

Property and equipment consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):

 

 

 

March 31, 2022

 

 

December 31, 2021

 

 

Useful life

(years)

Buildings and leasehold improvements

 

$

100,961

 

 

$

99,543

 

 

1-15

Furniture and equipment

 

 

87,179

 

 

 

86,862

 

 

3-10

Computer systems and equipment

 

 

159,280

 

 

 

157,633

 

 

3-10

Construction equipment

 

 

6,806

 

 

 

6,806

 

 

5-7

Construction in progress

 

 

11,123

 

 

 

12,970

 

 

 

 

 

 

365,349

 

 

 

363,814

 

 

 

Accumulated depreciation

 

 

(267,427

)

 

 

(259,618

)

 

 

Property and equipment, net

 

$

97,922

 

 

$

104,196

 

 

 

 

Depreciation expense for the three months ended March 31, 2022 and March 31, 2021 was $9.7 million and $9.6 million, respectively.

       

12


 

 

10.

Debt and Credit Facilities

Debt consisted of the following (in thousands):

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Long-Term:

 

 

 

 

 

 

 

 

Senior notes

 

 

200,000

 

 

 

200,000

 

Convertible senior notes

 

 

400,000

 

 

 

400,000

 

Debt issuance costs

 

 

(7,550

)

 

 

(8,078

)

Total long-term

 

 

592,450

 

 

 

591,922

 

Total Debt

 

$

592,450

 

 

$

591,922

 

 

Revolving Credit Facility

 

In June 2021, the Company entered into a $650 million unsecured revolving credit facility (the “Credit Agreement”). The Company incurred $1.9 million of costs in connection with this Credit Agreement. The 2021 Credit Agreement replaced an existing Fifth Amended and Restated Credit Agreement dated as of November 15, 2017. Under the new agreement, the Company’s revolving credit facility was increased from $550 million to $650 million. The credit facility has a five-year maturity, which may be extended up to two times for periods determined by the Company and the applicable extending lenders, and permits the Company to borrow in U.S. dollars, certain specified foreign currencies, and each other currency that may be approved in accordance with the 2021 Facility. The borrowings under the Credit Agreement bear interest at either a eurocurrency rate plus a margin between 1.0% and 1.625% or a base rate (as defined in the Credit Agreement) plus a margin of between 0% and 0.625%. The rates on March 31, 2022 and December 31, 2021 were 1.70% and 1.36%, respectively. Borrowings under this Credit Agreement are guaranteed by certain Company operating subsidiaries. Letters of credit commitments outstanding under this agreement aggregated to $44.5 million and $44.3 million at March 31, 2022 and December 31, 2021, respectively, which reduced borrowing limits available to the Company. Interest expense related to the Credit Agreement was $0.1 million and $0.1 million for the three months ended March 31, 2022 and March 31, 2021, respectively. There were no loan amounts outstanding under the Credit Agreement on March 31, 2022.  

Private Placement

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 the three months ended March 31, 2022 and March 31, 2021 was $2.6 million and $3.2 million, respectively.  The amortization of debt issuance costs and interest expense is recorded in “Interest expense” on the consolidated statements of income. The Company paid the $50 million Series A tranche of the Senior Note as scheduled in July 2021. The Company made interest payments of $5.1 million and $6.2 million for the three months ended March 31, 2022 and March 31, 2021, respectively.  Interest payable of $2.2 million and $4.7 million is recorded in “Accrued expenses and other current liabilities” on the consolidated balance sheets at March 31, 2022 and December 31, 2021, respectively, related to the Senior Notes. 

13


 

Using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality, and risk profile, the Company estimated that the fair value (Level 2) of its Senior Notes at March 31, 2022 approximates $208.4 million. See “Note 16 – Fair Value of Financial Instruments” for the definition of Level 2 of the fair value hierarchy.

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, 2022 and December 31, 2021.

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 $220.6 million and $223.0 million at March 31, 2022 and December 31, 2021, respectively.

 

Convertible Senior Notes

In August 2020, the Company issued an aggregate $400.0 million of 0.25% Convertible Senior Notes due 2025, including the exercise of a $50.0 million initial purchasers’ option. The Company received proceeds from the issuance and sale of the Convertible Senior Notes of $389.7 million, net of $10.3 million of transaction fees and other third-party offering expenses. The Convertible Senior Notes accrue interest at a rate of 0.25% per annum, payable semi-annually on February 15 and August 15 of each year beginning on February 15, 2021, and will mature on August 15, 2025, unless earlier repurchased, redeemed or converted.

The Convertible Senior Notes are the Company’s senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness, to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries

Each $1,000 of principal of the Notes will initially be convertible into 22.2913 shares of our common stock, which is equivalent to an initial conversion price of $44.86 per share, subject to adjustment upon the occurrence of specified events. On or after March 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date of the Convertible Senior Notes, holders may convert all or a portion of their Convertible Senior Notes, regardless of the conditions below.

Prior to the close of business on the business day immediately preceding March 15, 2025, the Notes will be convertible at the option of the holders thereof only under the following circumstances:

 

during any calendar quarter commencing after the calendar quarter ending on December 31, 2021, if the last reported sale price of the Company’s common stock for at least 20 trading days, whether or not consecutive, during a period of 30 consecutive trading days ending on, and including the last trading day of the immediately preceding calendar quarter, is greater than or equal to 130% of the conversion price on each applicable trading day;

 

during the five business day period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of Convertible Senior Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

 

if the Company calls such Convertible Senior Notes for redemption; or

 

upon the occurrence of specified corporate events described in the Indenture.

14


 

 

The Company may redeem all or any portion of the Convertible Senior Notes for cash, at its option, on or after August 21, 2023 and before the 51st scheduled trading day immediately before the maturity date at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for a specified period of time. In addition, calling any Convertible Senior Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Convertible Senior Note, in which case the conversion rate applicable to the conversion of that Convertible Senior Note will be increased in certain circumstances if it is converted after it is called for redemption.

Upon the occurrence of a fundamental change prior to the maturity date of the Convertible Senior Notes, holders of the Convertible Senior Notes may require the Company to repurchase all or a portion of the Convertible Senior Notes for cash at a price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Upon conversion, the Company may settle the Convertible Senior Notes for cash, shares of the Company’s common stock, or a combination thereof, at the Company’s option. If the Company satisfies its conversion obligation solely in cash or through payment and delivery of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of common stock due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 50-trading day observation period.

Under existing GAAP at the time of issuance during 2020, convertible debt instruments that may be settled in cash on conversion were required to be separated into liability and equity components in a manner that reflects the issuer’s non-convertible debt borrowing rate. The carrying amount of the liability component is based on the fair value of a similar instrument that does not contain an equity conversion option. The carrying amount allocated to the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the notes and the fair value of the liability component of the notes. Based on this debt to equity ratio, debt issuance costs are then allocated to the liability and equity components in a similar manner. Accordingly, at issuance the Company allocated $336.1 million to the debt liability and $53.6 million to additional paid-in capital. The difference between the principal amount of the Convertible Senior Notes and the liability component, inclusive of issuance costs, represents the debt discount, which the Company amortized to interest expense over the term of the Convertible Senior Notes using an effective interest rate of 3.25%. During the year ended December 31, 2020, the Company recognized interest expense of $4.4 million. As of December 31, 2020, the net carrying value of the Notes was $340.6 million.

In the first quarter of 2021, the Company early adopted ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Equity’s Own Equity (Subtopic 815-40)”. The Company used the modified retrospective method which resulted in a reduction in non-cash interest expense and reclassification of equity component of the convertible senior notes of $55.0 million and equity component of the debt issuance costs of $1.4 million to liabilities on the consolidated balance sheet. The Company also adjusted the carrying amount of the convertible senior notes to what it would have been if the Company had applied ASU 2020-06 from the inception of the Notes and recorded the offset of the carrying amount adjustment of $3.7 million in retained earnings on January 1, 2021.

The Company recognized interest expense of $0.7 million and $0.7 million for the three months ended March 31, 2022 and March 31, 2021, respectively.  As of March 31, 2022 and December 31, 2021, the carrying value of the Notes was $400.0 million.

Convertible Note Hedge and Warrant Transactions

In connection with the sale of the Convertible Senior Notes, the Company purchased a bond hedge designed to mitigate the potential dilution from the conversion of the Convertible Senior Notes. Under the five-year term of the bond hedge, upon a conversion of the bonds, the Company will receive the number of shares of common stock equal to the remaining common stock deliverable upon conversion of the Convertible Senior Notes if the conversion value exceeds the principal amount of the Notes. The aggregate number of shares that the Company could be obligated to issue upon conversion of the Convertible Senior Notes is approximately 8.9 million shares. The cost of the convertible note hedge transactions was $55.0 million.

15


 

The cost of the convertible note hedge was partially offset by the Company’s sale of warrants to acquire approximately 8.9 million shares of the Company’s common stock. The warrants were initially exercisable at a price of at least $66.46 per share and are subject to customary adjustments upon the occurrence of certain events, such as the payment of dividends. The Company received $13.8 million in cash proceeds from the sales of these warrants.  

The bond hedge and warrant transactions effectively increased the conversion price associated with the Convertible Senior Notes during the term of these transactions from 35%, or $44.86, to 100%, or $66.46, at their issuance, thereby reducing the dilutive economic effect to shareholders upon actual conversion.

The bond hedges and warrants are indexed to, and potentially settled in, shares of the Company’s common stock. The net cost of $41.2 million for the purchase of the bond hedges and sale of the warrants was recorded as a reduction to additional paid-in capital in the consolidated balance sheets.

At issuance, the Company recorded a deferred tax liability of $16.2 million related to the Convertible Senior Notes debt discount and the capitalized debt issuance costs. The Company also recorded a deferred tax asset of $16.5 million related to the convertible note hedge transactions and the tax basis of the capitalized debt issuance costs through additional paid-in capital. The deferred tax liability and deferred tax asset were included net in “Deferred tax assets” on the consolidated balance sheets. Upon adoption of ASU 2020-06, the Company reversed the deferred tax liability of $13.9 million that the Company had recorded at issuance related to the Convertible Senior Note debt discount and recorded an additional deferred tax liability of $0.4 million related to the capitalized debt issuance costs. In addition, the Company recorded a $0.9 million adjustment to the deferred tax asset through retained earnings related to the tax effect of book accretion recorded in 2020 and reversed upon adoption.

11.

Income Taxes

The Company’s effective tax rate was 25.4% and 27.7% for the three months ended March 31, 2022 and 2021, respectively. The change in the effective tax rate was due primarily to a decrease of withholding tax and a change in the jurisdictional mix of earnings.  The difference between the effective tax rate and the statutory U.S. Federal income tax rate of 21.0% for the three months ended March 31, 2022 primarily relates to state income taxes and an increased expense for uncertain tax positions, partially offset by benefits related to untaxed income attributable to noncontrolling interests and federal research tax credits.  

As of March 31, 2022, the Company’s deferred tax assets were subject to a valuation allowance of $28.0 million primarily related to foreign net operating loss carryforwards, foreign tax credit carryforwards, and capital losses that the Company has determined are not more-likely-than-not to be realized. The factors used to assess the likelihood of realization include:  the past performance of the 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, 2022 and December 31, 2021, the liability for income taxes associated with uncertain tax positions was $22.5 million and $21.2 million, respectively.  It is reasonably possible that the Company may realize a decrease in our uncertain tax positions of approximately $0.5 million during the next 12 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 audits could be materially different, both favorably and unfavorably.  It is reasonably possible that certain audits 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.

16


 

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.

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 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.

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 2013 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, 2022 and December 31, 2021, total shares of the Company’s common stock outstanding were 103,730,134 and 103,659,731, respectively, of which 68,787,554 and 70,328,237, 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.

17


 

Total ESOP contribution expense was $13.1 million and $13.2 million for the three months ended March 31, 2022 and March 31, 2021, respectively.  The expense is recorded in “Direct costs of contracts” and “Selling, general and administrative expense” in the consolidated statements of income. The fiscal 2022 ESOP contribution has not yet been made.  The amount is currently included in accrued liabilities.         

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 $73.2 million at March 31, 2022 and December 31, 2021.

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, 2022

 

 

December 31, 2021

 

Current assets

 

$

214,229

 

 

$

246,342

 

Noncurrent assets

 

 

2,338

 

 

 

2,180

 

Total assets

 

 

216,567

 

 

 

248,522

 

Current liabilities

 

 

150,474

 

 

 

175,637

 

Total liabilities

 

 

150,474

 

 

 

175,637

 

Total joint venture equity

 

$

66,093

 

 

$

72,885

 

 

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

Revenue

 

$

95,534

 

 

$

96,624

 

Costs

 

 

88,842

 

 

 

86,306

 

Net income

 

$

6,692

 

 

$

10,318

 

Net income attributable to noncontrolling interests

 

$

3,176

 

 

$

4,975

 

 

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 joint ventures 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, 2022

 

 

December 31, 2021

 

Current assets

 

$

1,707,836

 

 

$

1,620,735

 

Noncurrent assets

 

 

539,798

 

 

 

531,261

 

Total assets

 

 

2,247,634

 

 

 

2,151,996

 

Current liabilities

 

 

1,252,393

 

 

 

1,088,985

 

Noncurrent liabilities

 

 

603,929

 

 

 

669,911

 

Total liabilities

 

 

1,856,322

 

 

 

1,758,896

 

Total joint venture equity

 

$

391,312

 

 

$

393,100

 

Investments in and advances to unconsolidated joint ventures

 

$

114,234

 

 

$

110,688

 

 

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

Revenue

 

$

384,581

 

 

$

236,517

 

Costs

 

 

373,286

 

 

 

210,847

 

Net income

 

$

11,295

 

 

$

25,670

 

Equity in earnings of unconsolidated joint ventures

 

$

5,598

 

 

$

7,530

 

 

The Company received net distributions from its unconsolidated joint ventures for the three months ended March 31, 2022 and March 31, 2021 of $2.8 million and $5.4 million, respectively.     

             

15.

Related Party Transactions

The Company often provides services to unconsolidated joint ventures and revenues include amounts related to recovering costs for these services. Revenues related to services the Company provided to unconsolidated joint ventures for the three months ended March 31, 2022 and March 31, 2021 were $47.3 million and $53.7 million, respectively.  For the three months ended March 31, 2022 and March 31, 2021, the Company incurred $33.7 million and $41.4 million, respectively, of reimbursable costs. The revenue and reimbursable cost prior period amounts have been updated to reflect all joint ventures for the comparable period. Amounts included in the consolidated balance sheets related to services the Company provided to unconsolidated joint ventures are as follows (in thousands):

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Accounts receivable

 

$

36,097

 

 

$

30,246

 

Contract assets

 

 

19,819

 

 

 

16,069

 

Contract liabilities

 

 

11,466

 

 

 

10,605

 

 

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, 2022 and December 31, 2021, 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).

In addition, the guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are:

 

Level 1

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities;

 

Level 2

Pricing inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument; and

 

Level 3

Prices or valuations that require inputs that are both significant to the fair value measurements and unobservable.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Refer to Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2021 for a more complete discussion of the various items within the consolidated financial statements measured at fair value and the methods used to determine fair value.

17.

Earnings Per Share

The following tables reconcile the denominator and numerator used to compute basic earnings per share (“EPS”) to the denominator and numerator used to compute diluted EPS for the three months ended March 31, 2022 and March 31, 2021.  Basic EPS is computed using the weighted average number of shares outstanding during the period and income available to shareholders. Diluted EPS is computed similar to basic EPS, except the income available to shareholders is adjusted to add back interest expense, after tax, related to the Convertible Senior Note, and the weighted average number of shares outstanding is adjusted to reflect the dilutive effects of stock-based awards and shares underlying the Convertible Senior Note.

           Convertible Senior Note dilution impact is calculated using the if-converted method which was required upon adoption of ASU 2020-06. As a result, the Company elected to adopt the if-converted method when the Convertible Senior Notes were issued during the third quarter of 2020. In connection with the offerings of the Notes, the Company entered into a convertible note hedge and warrants (see Note 10 Debt and Credit Facilities); however, the convertible note hedge is not considered when calculating dilutive shares given its impact is anti-dilutive. The impact of the bond hedge would offset the dilutive impact of the shares underlying the Convertible Senior Note. The warrants have a strike price above our average share price during the period and are out of the money and not included in the tables below.

Dilutive potential common shares include, when circumstances require, shares the Company could be obligated to issue from its Convertible Senior Notes and warrants (see Note 10 for further discussion) and stock-based awards. Shares to be provided to the Company from its bond hedge purchased concurrently with the issuance of Convertible Senior Notes are anti-dilutive and are not included in its diluted shares. Anti-dilutive stock-based awards excluded from the calculation of earnings per share for the three months ended March 31, 2022 and March 31, 2021 were 13,117 and 145, respectively.     

20


 

The weighted average number of shares used to compute basic and diluted EPS were:

 

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

Basic weighted average number of shares outstanding

 

 

103,768,636

 

 

 

102,375,923

 

Stock-based awards

 

 

779,834

 

 

 

573,048

 

Convertible senior notes

 

 

8,916,530

 

 

 

8,916,530

 

Diluted weighted average number of shares outstanding

 

 

113,465,000

 

 

 

111,865,501

 

The net income available to shareholders to compute basic and diluted EPS were (in thousands):

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

Net income attributable to Parsons Corporation

 

 

20,667

 

 

 

9,039

 

Convertible senior notes if-converted method interest adjustment

 

 

540

 

 

 

528

 

Diluted net income attributable to Parsons Corporation

 

 

21,207

 

 

 

9,567

 

Share Repurchases

In August 2021, the Company’s Board of Directors authorized a stock repurchase program to repurchase up to $100.0 million of shares of Commons stock.  Repurchases under this stock repurchase program commenced on August 12, 2021.  Any and all shares of Common Stock purchased by the Company pursuant to the program shall be retired upon their acquisition and shall not become treasury shares but instead shall resume the status of authorized but unissued shares of Common Stock.  The table below presents information on this repurchase program:

 

 

 

Three Months Ended

 

 

 

March 31, 2022

 

Total shares repurchased

 

 

151,436

 

Total shares retired

 

 

151,436

 

Average price paid per share

 

$

36.64

 

 

As of March 31, 2022, the Company has $72.8 million remaining under the stock repurchase program.

18.

Segment Information

The Company operates in two reportable segments: Federal Solutions and Critical Infrastructure.

The Federal Solutions segment provides advanced technical solutions to the U.S. government, delivering timely, cost-effective hardware, software and services for mission-critical projects. The segment provides advanced technologies, supporting national security missions in cybersecurity, missile defense, and military facility modernization, logistics support, hazardous material remediation and engineering services.

The Critical Infrastructure segment provides integrated engineering and management services for complex physical and digital infrastructure around the globe. The Critical Infrastructure segment is a technology innovator focused on next generation digital systems and complex structures. Industry leading capabilities in engineering and project management allow the Company to deliver significant value to customers by employing cutting-edge technologies, improving timelines and reducing costs.

The Company defines its reportable segments based on the way the chief operating decision maker (“CODM”), its Chairman and Chief Executive Officer, evaluates the performance of each segment and manages the operations of the Company for purposes of allocating resources among the segments. The CODM evaluates segment operating performance using segment Revenue and segment Adjusted EBITDA attributable to Parsons Corporation.

21


 

The following table summarizes business segment revenue for the periods presented (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

Federal Solutions revenue

 

$

491,629

 

 

$

452,069

 

Critical Infrastructure revenue