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PARSONS CORP - Quarter Report: 2023 March (Form 10-Q)

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, 2023

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

 

img90716642_0.jpg 

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 24, 2023, the registrant had 104,857,376 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

 

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

Controls and Procedures

 

35

PART II.

OTHER INFORMATION

 

36

Item 1.

Legal Proceedings

 

36

Item 1A.

Risk Factors

 

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 3.

Defaults Upon Senior Securities

 

36

Item 4.

Mine Safety Disclosures

 

36

Item 5.

Other Information

 

36

Item 6.

Exhibits

 

36

 

Signatures

 

38

 

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share information)

 

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents (including $96,662 and $53,193 Cash of consolidated joint ventures)

 

$

220,439

 

 

$

262,539

 

 

Accounts receivable, net (including $212,924 and $217,419 Accounts receivable of consolidated joint ventures, net)

 

 

763,720

 

 

 

717,345

 

 

Contract assets (including $9,285 and $11,313 Contract assets of consolidated joint ventures)

 

 

683,631

 

 

 

634,033

 

 

Prepaid expenses and other current assets (including $12,871 and $7,913 Prepaid expenses and other current assets of consolidated joint ventures)

 

 

133,553

 

 

 

105,866

 

 

Total current assets

 

 

1,801,343

 

 

 

1,719,783

 

 

 

 

 

 

 

 

 

 

Property and equipment, net (including $3,083 and $2,543 Property and equipment of consolidated joint ventures, net)

 

 

94,759

 

 

 

96,050

 

 

Right of use assets, operating leases (including $6,863 and $6,315 Right of use assets, operating leases of consolidated joint ventures)

 

 

148,095

 

 

 

155,090

 

 

Goodwill

 

 

1,661,913

 

 

 

1,661,850

 

 

Investments in and advances to unconsolidated joint ventures

 

 

107,416

 

 

 

107,425

 

 

Intangible assets, net

 

 

236,117

 

 

 

254,127

 

 

Deferred tax assets

 

 

140,366

 

 

 

137,709

 

 

Other noncurrent assets

 

 

65,797

 

 

 

66,108

 

 

Total assets

 

$

4,255,806

 

 

$

4,198,142

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable (including $45,581 and $49,078 Accounts payable of consolidated joint ventures)

 

$

209,462

 

 

$

201,428

 

 

Accrued expenses and other current liabilities (including $128,145 and $102,417 Accrued expenses and other current liabilities of consolidated joint ventures)

 

 

635,089

 

 

 

630,193

 

 

Contract liabilities (including $39,958 and $40,654 Contract liabilities of consolidated joint ventures)

 

 

229,225

 

 

 

213,064

 

 

Short-term lease liabilities, operating leases (including $2,992 and $2,552 Short-term lease liabilities, operating leases of consolidated joint ventures)

 

 

55,606

 

 

 

59,144

 

 

Income taxes payable

 

 

10,689

 

 

 

4,290

 

 

Total current liabilities

 

 

1,140,071

 

 

 

1,108,119

 

 

 

 

 

 

 

 

 

 

Long-term employee incentives

 

 

18,599

 

 

 

17,375

 

 

Long-term debt

 

 

744,140

 

 

 

743,605

 

 

Long-term lease liabilities, operating leases (including $3,871 and $3,763 Long-term lease liabilities, operating leases of consolidated joint ventures)

 

 

107,482

 

 

 

111,417

 

 

Deferred tax liabilities

 

 

12,555

 

 

 

12,471

 

 

Other long-term liabilities

 

 

107,429

 

 

 

109,220

 

 

Total liabilities

 

 

2,130,276

 

 

 

2,102,207

 

Contingencies (Note 12)

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

Common stock, $1 par value; authorized 1,000,000,000 shares; 146,243,639 and 146,132,016 shares issued; 42,248,807 and 40,960,845 public shares outstanding; 62,565,812 and 63,742,151 ESOP shares outstanding

 

 

146,244

 

 

 

146,132

 

 

Treasury stock, 41,429,020 shares at cost

 

 

(844,936

)

 

 

(844,936

)

Additional paid-in capital

 

 

2,712,167

 

 

 

2,717,134

 

Retained earnings

 

 

68,429

 

 

 

43,089

 

Accumulated other comprehensive loss

 

 

(18,025

)

 

 

(17,849

)

Total Parsons Corporation shareholders' equity

 

 

2,063,879

 

 

 

2,043,570

 

Noncontrolling interests

 

 

61,651

 

 

 

52,365

 

Total shareholders' equity

 

 

2,125,530

 

 

 

2,095,935

 

 

Total liabilities and shareholders' equity

 

$

4,255,806

 

 

$

4,198,142

 

 

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, 2023

 

 

March 31, 2022

 

Revenue

 

$

1,173,466

 

 

$

949,069

 

Direct cost of contracts

 

 

917,188

 

 

 

733,900

 

Equity in (losses) earnings of unconsolidated joint ventures

 

 

(5,840

)

 

 

5,598

 

Selling, general and administrative expenses

 

 

199,308

 

 

 

185,077

 

Operating income

 

 

51,130

 

 

 

35,690

 

Interest income

 

 

793

 

 

 

65

 

Interest expense

 

 

(6,458

)

 

 

(3,938

)

Other income (expense), net

 

 

1,314

 

 

 

145

 

Total other income (expense)

 

 

(4,351

)

 

 

(3,728

)

Income before income tax expense

 

 

46,779

 

 

 

31,962

 

Income tax expense

 

 

(11,503

)

 

 

(8,119

)

Net income including noncontrolling interests

 

 

35,276

 

 

 

23,843

 

Net income attributable to noncontrolling interests

 

 

(9,723

)

 

 

(3,176

)

Net income attributable to Parsons Corporation

 

$

25,553

 

 

$

20,667

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.24

 

 

$

0.20

 

Diluted

 

$

0.23

 

 

$

0.19

 

 

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, 2023

 

 

March 31, 2022

 

Net income including noncontrolling interests

 

$

35,276

 

 

$

23,843

 

Other comprehensive income, net of tax

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax

 

 

(177

)

 

 

2,874

 

Pension adjustments, net of tax

 

 

1

 

 

 

22

 

Comprehensive income including noncontrolling interests, net of tax

 

 

35,100

 

 

 

26,739

 

Comprehensive income attributable to noncontrolling interests, net of tax

 

 

(9,723

)

 

 

(3,177

)

Comprehensive income attributable to Parsons Corporation, net of tax

 

$

25,377

 

 

$

23,562

 

 

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, 2023

 

 

March 31, 2022

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income including noncontrolling interests

 

$

35,276

 

 

$

23,843

 

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

28,359

 

 

 

30,509

 

 

Amortization of debt issue costs

 

 

657

 

 

 

649

 

 

Gain on disposal of property and equipment

 

 

(3

)

 

 

(39

)

 

Provision for doubtful accounts

 

 

-

 

 

 

(3

)

 

Deferred taxes

 

 

(2,586

)

 

 

(2,566

)

 

Foreign currency transaction gains and losses

 

 

(290

)

 

 

882

 

 

Equity in losses (earnings) of unconsolidated joint ventures

 

 

5,840

 

 

 

(5,598

)

 

Return on investments in unconsolidated joint ventures

 

 

7,793

 

 

 

11,874

 

 

Stock-based compensation

 

 

6,992

 

 

 

3,898

 

 

Contributions of treasury stock

 

 

14,435

 

 

 

13,054

 

 

Changes in assets and liabilities, net of acquisitions and newly consolidated
   joint ventures:

 

 

 

 

 

 

 

Accounts receivable

 

 

(47,482

)

 

 

(46,690

)

 

Contract assets

 

 

(49,098

)

 

 

(21,212

)

 

Prepaid expenses and other assets

 

 

(27,948

)

 

 

4,496

 

 

Accounts payable

 

 

8,009

 

 

 

(39,342

)

 

Accrued expenses and other current liabilities

 

 

(10,898

)

 

 

(4,134

)

 

Contract liabilities

 

 

16,113

 

 

 

945

 

 

Income taxes

 

 

6,408

 

 

 

4,706

 

 

Other long-term liabilities

 

 

(567

)

 

 

(986

)

 

Net cash used in operating activities

 

 

(8,990

)

 

 

(25,714

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(8,146

)

 

 

(4,473

)

 

Proceeds from sale of property and equipment

 

 

19

 

 

 

112

 

 

Investments in unconsolidated joint ventures

 

 

(13,016

)

 

 

(9,713

)

 

Return of investments in unconsolidated joint ventures

 

 

-

 

 

 

644

 

 

Proceeds from sales of investments in unconsolidated joint ventures

 

 

381

 

 

 

-

 

 

Net cash used in investing activities

 

 

(20,762

)

 

 

(13,430

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from borrowings under credit agreement

 

 

5,700

 

 

 

-

 

 

Repayments of borrowings under credit agreement

 

 

(5,700

)

 

 

-

 

Contributions by noncontrolling interests

 

 

200

 

 

 

1,226

 

Distributions to noncontrolling interests

 

 

(638

)

 

 

(8,309

)

Repurchases of common stock

 

 

(6,000

)

 

 

(5,548

)

Taxes paid on vested stock

 

 

(6,064

)

 

 

(5,771

)

Net cash used in financing activities

 

 

(12,502

)

 

 

(18,402

)

Effect of exchange rate changes

 

 

154

 

 

 

425

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(42,100

)

 

 

(57,121

)

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

Beginning of year

 

 

262,539

 

 

 

343,883

 

 

End of period

 

$

220,439

 

 

$

286,762

 

 

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, 2023 and March 31, 2022

(In thousands)

(Unaudited)

 

 

 

Common
Stock

 

 

Treasury
Stock

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings
(Accumulated
Deficit)

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
Parsons
Equity

 

 

Noncontrolling
Interests

 

 

Total

 

Balance at December 31, 2022

 

$

146,132

 

 

$

(844,936

)

 

$

2,717,134

 

 

$

43,089

 

 

$

(17,849

)

 

$

2,043,570

 

 

$

52,365

 

 

$

2,095,935

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

25,553

 

 

 

-

 

 

 

25,553

 

 

 

9,723

 

 

 

35,276

 

Foreign currency translation
   loss, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(177

)

 

 

(177

)

 

 

-

 

 

 

(177

)

Pension adjustments, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

1

 

 

 

-

 

 

 

1

 

Contributions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

200

 

 

 

200

 

Distributions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(638

)

 

 

(638

)

Issuance of equity securities,
   net of retirements

 

 

251

 

 

 

-

 

 

 

(6,098

)

 

 

(213

)

 

 

-

 

 

 

(6,060

)

 

 

-

 

 

 

(6,060

)

Repurchases of common stock

 

 

(139

)

 

 

-

 

 

 

(5,861

)

 

 

-

 

 

 

-

 

 

 

(6,000

)

 

 

-

 

 

 

(6,000

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

6,992

 

 

 

-

 

 

 

-

 

 

 

6,992

 

 

 

-

 

 

 

6,992

 

Balance at March 31, 2023

 

$

146,244

 

 

$

(844,936

)

 

$

2,712,167

 

 

$

68,429

 

 

$

(18,025

)

 

$

2,063,879

 

 

$

61,651

 

 

$

2,125,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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
   gain, 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

 

 

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, 2022.

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 Policies” in the notes to our consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2022, 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 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.

6


 

4.
Acquisitions

Xator Corporation

On May 31, 2022, the Company acquired a 100% ownership interest in Xator Corporation (“Xator”), a privately-owned company, for $388.3 million in cash. The Company borrowed $300 million under the Credit Agreement, as described in “Note 11 – Debt and Credit Facilities”, to partially fund the acquisition. Xator expands Parsons’ customer base and brings differentiated technical capabilities in critical infrastructure protection, counter-unmanned aircraft systems (cUAS), intelligence and cyber solutions, biometrics, and global threat assessment and operations. In connection with this acquisition, the Company recognized $7.7 million of acquisition-related expenses in “Selling, general and administrative expense” in the consolidated statements of income for the year ended December 31, 2022, including legal fees, consulting fees, and other miscellaneous direct expenses associated with the acquisition

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

 

$

8,935

 

Accounts receivable

 

 

7,393

 

Contract assets

 

 

25,397

 

Prepaid expenses and other current assets

 

 

3,615

 

Property and equipment

 

 

1,699

 

Right of use assets, operating leases

 

 

7,517

 

Goodwill

 

 

253,190

 

Investments in and advances to unconsolidated joint ventures

 

 

698

 

Intangible assets

 

 

123,500

 

Other noncurrent assets

 

 

9,156

 

Accounts payable

 

 

(6,626

)

Accrued expenses and other current liabilities

 

 

(31,119

)

Contract liabilities

 

 

(2,080

)

Short-term lease liabilities, operating leases

 

 

(2,371

)

Long-term lease liabilities, operating leases

 

 

(5,146

)

Other long-term liabilities

 

 

(9,156

)

Net assets acquired

 

$

384,602

 

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

 

 

 

Gross
Carrying
Amount

 

 

Amortization
Period

 

 

 

 

 

(in years)

Customer relationships

 

$

37,000

 

 

15

Backlog

 

 

81,000

 

 

6

Trade Name

 

 

4,000

 

 

1

Developed technologies

 

 

1,000

 

 

3

Non-compete agreements

 

 

500

 

 

3

Amortization expense of $5.1 million related to these intangible assets was recorded for the three months ended March 31, 2023. 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 Xator and included within consolidated revenues is $112.4 million for the three months ended March 31, 2023. 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.

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

Supplemental Pro Forma Information (Unaudited)

7


 

Supplemental information of unaudited pro forma operating results assuming the Xator acquisition had been consummated as of the beginning of fiscal year 2021 (in thousands) is as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Pro forma Revenue

 

$

1,173,466

 

 

$

1,016,072

 

Pro forma Net Income including noncontrolling interests

 

 

37,574

 

 

 

27,298

 

 

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, 2023

 

 

March 31, 2022

 

Fixed-Price

 

$

341,012

 

 

$

240,574

 

Time-and-Materials

 

 

318,315

 

 

 

263,315

 

Cost-Plus

 

 

514,139

 

 

 

445,180

 

Total

 

$

1,173,466

 

 

$

949,069

 

 

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, 2023 and December 31, 2022 were as follows (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Contract assets

 

$

683,631

 

 

$

634,033

 

Contract liabilities

 

 

229,225

 

 

 

213,064

 

Net contract assets (liabilities) (1)

 

$

454,406

 

 

$

420,969

 

 

(1)
Total contract retentions included in net contract assets (liabilities) were $74.1 million as of March 31, 2023, of which $31.6 million are not expected to be paid in the next 12 months. Total contract retentions included in net contract assets (liabilities) were $73.5 million as of December 31, 2022. Contract assets at March 31, 2023 and December 31, 2022 include $130.2 million and $127.9 million, respectively, related to unapproved change orders, claims, and requests for equitable adjustment. For the three months ended March 31, 2023 and March 31, 2022, 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, 2023 and March 31, 2022, the Company recognized revenue of $78.1 million and $63.9 million, respectively, that was included in the corresponding contract liability balances at December 31, 2022 and December 31, 2021, respectively. Certain changes in contract assets and contract liabilities consisted of the following:

 

 

March 31, 2023

 

 

December 31, 2022

 

Acquired contract assets

 

$

-

 

 

$

25,397

 

Acquired contract liabilities

 

 

-

 

 

 

2,080

 

 

There was no significant impairment of contract assets recognized during the three months ended March 31, 2023 and March 31, 2022.

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, 2023 and March 31, 2022.

8


 

Accounts Receivable, net

Accounts receivable, net consisted of the following as of March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

2023

 

 

2022

 

Billed

 

$

502,600

 

 

$

502,411

 

Unbilled

 

 

265,131

 

 

 

218,945

 

   Total accounts receivable, gross

 

 

767,731

 

 

 

721,356

 

Allowance for doubtful accounts

 

 

(4,011

)

 

 

(4,011

)

   Total accounts receivable, net

 

$

763,720

 

 

$

717,345

 

 

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.

Transaction Price Allocated to the Remaining Unsatisfied Performance Obligations

The Company’s remaining unsatisfied performance obligations (“RUPO”) as of March 31, 2023 represent a measure of the total dollar value of work to be performed on contracts awarded and in-progress. The Company had $6.1 billion in RUPO as of March 31, 2023.

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, 2023 over the following periods (in thousands):

 

 Period RUPO Will Be Satisfied

 

Within One Year

 

 

Within One to
Two Years

 

 

Thereafter

 

 Federal Solutions

 

$

1,556,366

 

 

$

426,312

 

 

$

354,968

 

 Critical Infrastructure

 

 

1,815,189

 

 

 

881,384

 

 

 

1,029,688

 

    Total

 

$

3,371,555

 

 

$

1,307,696

 

 

$

1,384,656

 

 

9


 

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 seven 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, 2023 and March 31, 2022 are as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Operating lease cost

 

$

16,625

 

 

$

16,176

 

Short-term lease cost

 

 

3,663

 

 

 

3,480

 

Amortization of right-of-use assets

 

 

516

 

 

 

548

 

Interest on lease liabilities

 

 

33

 

 

 

21

 

Sublease income

 

 

(1,124

)

 

 

(1,035

)

Total lease cost

 

$

19,713

 

 

$

19,190

 

 

Supplemental cash flow information related to leases for the three months ended March 31, 2023 and March 31, 2022 is as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Operating cash flows for operating leases

 

$

17,785

 

 

$

17,506

 

Operating cash flows for finance leases

 

 

33

 

 

 

21

 

Financing cash flows from finance leases

 

 

516

 

 

 

511

 

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

 

 

4,707

 

 

 

2,304

 

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

 

$

1,228

 

 

$

-

 

 

Supplemental balance sheet and other information related to leases as of March 31, 2023 and December 31, 2022 are as follows (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Operating Leases:

 

 

 

 

 

 

Right-of-use assets

 

$

148,095

 

 

$

155,090

 

Lease liabilities:

 

 

 

 

 

 

Current

 

$

55,606

 

 

$

59,144

 

Long-term

 

 

107,482

 

 

 

111,417

 

Total operating lease liabilities

 

$

163,088

 

 

$

170,561

 

Finance Leases:

 

 

 

 

 

 

Other noncurrent assets

 

$

4,677

 

 

$

3,965

 

Accrued expenses and other current liabilities

 

$

1,866

 

 

$

1,746

 

Other long-term liabilities

 

$

2,814

 

 

$

2,246

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term:

 

 

 

 

 

 

Operating leases

 

3.5 Year

 

 

3.6 years

 

Finance leases

 

2.8 Years

 

 

2.6 years

 

Weighted Average Discount Rate:

 

 

 

 

 

 

Operating leases

 

 

3.5

%

 

 

3.4

%

Finance leases

 

 

3.5

%

 

 

2.8

%

 

As of March 31, 2023, 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, 2023 is as follows (in thousands):

10


 

 

 

 

Operating Leases

 

 

Finance Leases

 

2023 (remaining)

 

$

47,319

 

 

$

1,559

 

2024

 

 

47,657

 

 

 

1,620

 

2025

 

 

36,241

 

 

 

1,159

 

2026

 

 

21,466

 

 

 

542

 

2027

 

 

9,869

 

 

 

45

 

Thereafter

 

 

11,958

 

 

 

-

 

Total lease payments

 

 

174,510

 

 

 

4,925

 

Less: imputed interest

 

 

(11,422

)

 

 

(245

)

Total present value of lease liabilities

 

$

163,088

 

 

$

4,680

 

7.
Goodwill

The following table summarizes the changes in the carrying value of goodwill by reporting segment from December 31, 2022 to March 31, 2023 (in thousands):

 

 

 

December 31, 2022

 

 

Acquisitions

 

 

Foreign Exchange

 

 

March 31, 2023

 

Federal Solutions

 

$

1,591,563

 

 

$

-

 

 

$

-

 

 

$

1,591,563

 

Critical Infrastructure

 

 

70,287

 

 

 

-

 

 

 

63

 

 

 

70,350

 

Total

 

$

1,661,850

 

 

$

-

 

 

$

63

 

 

$

1,661,913

 

 

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, 2023 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, 2023

 

 

December 31, 2022

 

 

Weighted
Average

 

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

 

Amortization
Period
(in years)

 

Backlog

 

$

142,200

 

 

$

(54,378

)

 

$

87,822

 

 

$

142,200

 

 

$

(45,903

)

 

$

96,297

 

 

 

4

 

Customer relationships

 

 

293,730

 

 

 

(153,514

)

 

 

140,216

 

 

 

293,730

 

 

 

(146,032

)

 

 

147,698

 

 

 

9

 

Leases

 

 

120

 

 

 

(92

)

 

 

28

 

 

 

120

 

 

 

(87

)

 

 

33

 

 

 

6

 

Developed technology

 

 

16,600

 

 

 

(12,228

)

 

 

4,372

 

 

 

16,600

 

 

 

(11,560

)

 

 

5,040

 

 

 

5

 

Trade name

 

 

5,000

 

 

 

(4,208

)

 

 

792

 

 

 

5,000

 

 

 

(3,083

)

 

 

1,917

 

 

 

1

 

Non-compete agreements

 

 

3,350

 

 

 

(2,328

)

 

 

1,022

 

 

 

3,350

 

 

 

(2,074

)

 

 

1,276

 

 

 

3

 

In process research and development

 

 

1,800

 

 

 

-

 

 

 

1,800

 

 

 

1,800

 

 

 

-

 

 

 

1,800

 

 

n/a

 

Other intangibles

 

 

275

 

 

 

(210

)

 

 

65

 

 

 

275

 

 

 

(209

)

 

 

66

 

 

 

10

 

Total intangible assets

 

$

463,075

 

 

$

(226,958

)

 

$

236,117

 

 

$

463,075

 

 

$

(208,948

)

 

$

254,127

 

 

 

 

The aggregate amortization expense of intangible assets for the three months ended March 31, 2023 and March 31, 2022 was $18.0 million and $20.1 million, respectively.

11


 

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, 2023

 

2023

 

$

50,245

 

2024

 

 

35,359

 

2025

 

 

29,818

 

2026

 

 

26,238

 

2027

 

 

25,319

 

Thereafter

 

 

67,338

 

Total

 

$

234,317

 

 

9.
Property and Equipment, Net

Property and equipment consisted of the following at March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

Useful life
(years)

Buildings and leasehold improvements

 

$

102,961

 

 

$

103,071

 

 

1-15

Furniture and equipment

 

 

86,462

 

 

 

85,088

 

 

3-10

Computer systems and equipment

 

 

156,794

 

 

 

152,511

 

 

3-10

Construction equipment

 

 

5,321

 

 

 

5,271

 

 

5-7

Construction in progress

 

 

21,622

 

 

 

21,952

 

 

 

 

 

 

373,160

 

 

 

367,893

 

 

 

Accumulated depreciation

 

 

(278,401

)

 

 

(271,843

)

 

 

Property and equipment, net

 

$

94,759

 

 

$

96,050

 

 

 

 

Depreciation expense for the three months ended March 31, 2023 and March 31, 2022 was $9.4 million and $9.7 million, respectively.

10.
Debt and Credit Facilities

Debt consisted of the following (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Long-Term Debt:

 

 

 

 

 

 

Delayed draw term loan

 

$

350,000

 

 

$

350,000

 

Convertible senior notes

 

 

400,000

 

 

 

400,000

 

Revolving credit facility

 

 

-

 

 

 

-

 

Debt issuance costs

 

 

(5,860

)

 

 

(6,395

)

Total

 

$

744,140

 

 

$

743,605

 

Delayed Draw Term Loan

In September 2022, the Company entered into a $350 million unsecured Delayed Draw Term Loan with an increase option of up to $150 million (the “2022 Delayed Draw Term Loan”). Proceeds of the 2022 Delayed Draw Term Loan Agreement may be used (a) to pay off in full, or partially payoff, the Company’s existing Senior Notes, (b) to prepay revolving loans outstanding under the Revolving Credit Agreement (as defined below), or (c) for working capital, capital expenditures and other lawful corporate purposes. The Company drew $350.0 million from the 2022 Delayed Draw Term Loan in November 2022. The Company incurred $0.9 million of debt issuance costs in connection with the delayed draw term loan as of December 31, 2022. These costs are presented as a direct deduction from long-term debt on the face of the balance sheet. Interest expense related to the Delayed Draw Term Loan was $5.1 million for the three months ended March 31, 2023. The amortization of debt issuance costs and interest expense is recorded in “Interest expense” on the consolidated statements of income. As of March 31, 2023 and December 31, 2022, there was $350.0 million outstanding under the Delayed Draw Term Loan. The rates on March 31, 2023 and December 31, 2022 were 6.1% and 5.7%, respectively.

12


 

The 2022 Delayed Draw Term Loan has a three-year maturity and permits the Company to borrow in U.S. dollars. The 2022 Delayed Draw Term Loan does not require any amortization payments by the Company. Depending on the Company’s consolidated leverage ratio (or debt rating after such time as the Company has such rating), borrowings under the 2022 Delayed Draw Term Loan Agreement will bear interest at either an adjusted Term SOFR benchmark rate plus a margin between 0.875% and 1.500% or a base rate plus a margin of between 0% and 0.500% and will initially bear interest at the middle of this range. The Company will pay a ticking fee on unused term loan commitments at a rate of 0.175% commencing with the date that is ninety (90) days after the Closing Date. Amounts outstanding under the 2022 Delayed Draw Term Loan Agreement may be prepaid at the option of the Company without premium or penalty, subject to customary breakage fees in connection with the prepayment of benchmark rate loans.

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.

13


 

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.

The Company recognized interest expense of $0.7 million for both the three months ended March 31, 2023 and March 31, 2022. As of March 31, 2023 and December 31, 2022, the carrying value of the Notes was $400.0 million.

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 the Term SOFR 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, 2023 and December 31, 2022 were 6.2% and 5.7%, respectively. Borrowings under this Credit Agreement are guaranteed by certain Company operating subsidiaries. Letters of credit commitments outstanding under this agreement aggregated to $43.9 million and $44.5 million at March 31, 2023 and December 31, 2022, 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, 2023 and March 31, 2022, respectively. There were no loan amounts outstanding under the Credit Agreement at March 31, 2023.

The Credit Agreement 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, 2023 and December 31, 2022.

Letters of Credit

 

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 approximately $224.3 million and $222.5 million at March 31, 2023 and December 31, 2022, respectively.

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

14


 

conversion of the Convertible Senior Notes is approximately 8.9 million shares. The cost of the convertible note hedge transactions was $55.0 million.

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 24.6% and 25.4% for the three months ended March 31, 2023 and March 31, 2022, respectively. The change in the effective tax rate was due primarily to a discrete tax benefit from equity-based compensation, partially offset by an increase in withholding taxes, 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% for the three months ended March 31, 2023 primarily relates to state income taxes and foreign withholding taxes, partially offset by benefits related to untaxed income attributable to noncontrolling interests and federal research tax credits.

As of March 31, 2023, the Company’s deferred tax assets were subject to a valuation allowance of $28.6 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, 2023 and December 31, 2022, the liability for income taxes associated with uncertain tax positions was $22.4 million and $22.8 million, respectively. It is reasonably possible that the Company may realize a decrease in our uncertain tax positions of approximately $1.8 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.

15


 

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 unless some amount within the range of loss appears at that time to be a better estimate than any other amount in 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 plaintiff alleges that, as a result of these actions, the United States paid in excess of $1 million per month between February and September 2006 that it should have paid to another contractor, plus $2.9 million to acquire vehicles for the contractor defendant to perform its security services. The lawsuit sought (i) that we cease and desist from violating the False Claims Act, (ii) monetary damages equal to three times the amount of damages that the United States has sustained because of our alleged violations, plus a civil penalty of not less than $5,500 and not more than $11,000 for each alleged violation of the False Claims Act, (iii) monetary damages equal to the maximum amount allowed pursuant to §3730(d) of the False Claims Act, and (iv) Relator’s costs for this action, including recovery of attorneys’ fees and costs incurred in the lawsuit. The United States government did not intervene in this matter as it is allowed to do so under the statute. The parties are concluding discovery and we anticipate that the court will hear dispositive and/or pre-trial motions in early or mid-2023. Depending upon the court’s rulings upon such motions, a trial may be scheduled in 2023.

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, 2023 and December 31, 2022, total shares of the Company’s common stock outstanding were 104,814,619 and 104,702,996, respectively, of which 62,565,812 and 63,742,151, 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.

16


 

Total ESOP contribution expense was $14.4 million and $13.1 million for the three months ended March 31, 2023 and March 31, 2022, respectively. The expense is recorded in “Direct costs of contracts” and “Selling, general and administrative expense” in the consolidated statements of income. The fiscal 2023 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 $105.9 million and $106.8 million at March 31, 2023 and December 31, 2022.

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, 2023

 

 

December 31, 2022

 

Current assets

 

$

331,742

 

 

$

289,837

 

Noncurrent assets

 

 

10,693

 

 

 

9,961

 

Total assets

 

 

342,435

 

 

 

299,798

 

Current liabilities

 

 

216,682

 

 

 

194,701

 

Noncurrent liabilities

 

 

3,871

 

 

 

3,763

 

Total liabilities

 

 

220,553

 

 

 

198,464

 

Total joint venture equity

 

$

121,882

 

 

$

101,334

 

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Revenue

 

$

161,484

 

 

$

95,534

 

Costs

 

 

141,598

 

 

 

88,842

 

Net income

 

$

19,886

 

 

$

6,692

 

Net income attributable to noncontrolling interests

 

$

9,723

 

 

$

3,176

 

 

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.

17


 

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 (losses) earnings 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, 2023

 

 

December 31, 2022

 

Current assets

 

$

1,291,910

 

 

$

1,610,246

 

Noncurrent assets

 

 

493,501

 

 

 

491,658

 

Total assets

 

 

1,785,411

 

 

 

2,101,904

 

Current liabilities

 

 

848,105

 

 

 

1,255,297

 

Noncurrent liabilities

 

 

540,967

 

 

 

468,056

 

Total liabilities

 

 

1,389,072

 

 

 

1,723,353

 

Total joint venture equity

 

$

396,339

 

 

$

378,551

 

Investments in and advances to unconsolidated joint ventures

 

$

107,416

 

 

$

107,425

 

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Revenue

 

$

349,157

 

 

$

384,581

 

Costs

 

 

359,395

 

 

 

373,286

 

Net income

 

$

(10,238

)

 

$

11,295

 

Equity in (losses) earnings of unconsolidated joint ventures

 

$

(5,840

)

 

$

5,598

 

 

The Company had net contributions to its unconsolidated joint ventures for the three months ended March 31, 2023 of $4.8 million and received net distributions from its unconsolidated joint ventures for the three months ended March 31, 2022 of $2.8 million.

For the three months ended March 31, 2023, the Company recorded a $6.8 million adjustment on an unconsolidated joint venture in the Critical Infrastructure segment from lower margin change orders resulting in
profits being delayed to future periods. For the three months ended March 31, 2023, this adjustment decreased operating and net income by $
6.8 million and $5.1 million, respectively, and decreased diluted earnings per share by $0.04.

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, 2023 and March 31, 2022 were $50.9 million and $47.3 million, respectively. For the three months ended March 31, 2023 and March 31, 2022, the Company incurred $39.2 million and $33.7 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, 2023

 

 

December 31, 2022

 

Accounts receivable

 

$

46,984

 

 

$

40,320

 

Contract assets

 

 

32,217

 

 

 

30,578

 

Contract liabilities

 

 

14,407

 

 

 

14,906

 

 

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, 2023 and December 31, 2022, the Company’s financial instruments include

18


 

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.

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, 2022 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, 2023 and March 31, 2022. 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, 2023 and March 31, 2022 were 8,831 and 13,117, respectively.

19


 

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

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Basic weighted average number of shares outstanding

 

 

104,805,195

 

 

 

103,768,636

 

Stock-based awards

 

 

1,031,742

 

 

 

779,834

 

Convertible senior notes

 

 

8,916,530

 

 

 

8,916,530

 

Diluted weighted average number of shares outstanding

 

 

114,753,467

 

 

 

113,465,000

 

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

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Net income attributable to Parsons Corporation

 

$

25,553

 

 

$

20,667

 

Convertible senior notes if-converted method interest adjustment

 

 

551

 

 

 

540

 

Diluted net income attributable to Parsons Corporation

 

$

26,104

 

 

$

21,207

 

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, 2023

 

 

March 31, 2022

 

Total shares repurchased

 

 

139,398

 

 

 

151,436

 

Total shares retired

 

 

139,398

 

 

 

151,436

 

Average price paid per share

 

$

43.04

 

 

$

36.64

 

 

As of March 31, 2023, the Company has $50.3 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 Chair 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.

20


 

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

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Federal Solutions revenue

 

$

634,546

 

 

$

491,629

 

Critical Infrastructure revenue

 

 

538,920

 

 

 

457,440

 

Total revenue

 

$

1,173,466

 

 

$

949,069

 

 

The Company defines Adjusted EBITDA attributable to Parsons Corporation as Adjusted EBITDA excluding Adjusted EBITDA attributable to noncontrolling interests. The Company defines Adjusted EBITDA as net income (loss) attributable to Parsons Corporation, adjusted to include net income (loss) attributable to noncontrolling interests and to exclude interest expense (net of interest income), provision for income taxes, depreciation and amortization and certain other items that are not considered in the evaluation of ongoing operating performance. These other items include net income (loss) attributable to noncontrolling interests, asset impairment charges, equity-based compensation, income and expense recognized on litigation matters, expenses incurred in connection with acquisitions and other non-recurring transaction costs and expenses related to our prior restructuring. The following table reconciles business segment Adjusted EBITDA attributable to Parsons Corporation to Net Income attributable to Parsons Corporation for the periods presented (in thousands):

 

 

 

Three Months Ended

 

Adjusted EBITDA attributable to Parsons Corporation

 

March 31, 2023

 

 

March 31, 2022

 

     Federal Solutions

 

$

56,148

 

 

$

42,638

 

     Critical Infrastructure

 

 

24,357

 

 

 

28,315

 

Adjusted EBITDA attributable to Parsons Corporation

 

 

80,505

 

 

 

70,953

 

Adjusted EBITDA attributable to noncontrolling interests

 

 

9,886

 

 

 

3,295

 

Depreciation and amortization

 

 

(28,359

)

 

 

(30,509

)

Interest expense, net

 

 

(5,665

)

 

 

(3,873

)

Income tax expense

 

 

(11,503

)

 

 

(8,119

)

Equity-based compensation expense

 

 

(6,703

)

 

 

(3,898

)

Transaction-related costs (a)

 

 

(1,618

)

 

 

(2,398

)

Restructuring expense (b)

 

 

(546

)

 

 

(213

)

Other (c)

 

 

(721

)

 

 

(1,395

)

Net income including noncontrolling interests

 

 

35,276

 

 

 

23,843

 

Net income attributable to noncontrolling interests

 

 

9,723

 

 

 

3,176

 

Net income attributable to Parsons Corporation

 

$

25,553

 

 

$

20,667

 

 

(a)
Reflects costs incurred in connection with acquisitions and other non-recurring transaction costs, primarily fees paid for professional services and employee retention.
(b)
Reflects costs associated with corporate restructuring initiatives.
(c)
Includes a combination of gain/loss related to sale of fixed assets, software implementation costs, and other individually insignificant items that are non-recurring in nature.

Asset information by segment is not a key measure of performance used by the CODM.

The following tables present revenues and property and equipment, net by geographic area (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Revenue

 

 

 

 

 

 

North America

 

$

948,715

 

 

$

785,708

 

Middle East

 

 

217,398

 

 

 

158,063

 

Rest of World

 

 

7,353

 

 

 

5,298

 

Total Revenue

 

$

1,173,466

 

 

$

949,069

 

 

21


 

The geographic location of revenue is determined by the location of the customer.

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Property and Equipment, Net

 

 

 

 

 

 

North America

 

$

89,022

 

 

$

91,217

 

Middle East

 

 

5,737

 

 

 

4,833

 

Total Property and Equipment, Net

 

$

94,759

 

 

$

96,050

 

North America includes revenue in the United States for the three months ended March 31, 2023 and March 31, 2022 of $882.3 million and $718.0 million, respectively. North America property and equipment, net includes $82.5 million and $84.4 million of property and equipment, net in the United States at March 31, 2023 and December 31, 2022, respectively.

The following table presents revenues by business units (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Revenue

 

 

 

 

 

 

Defense and Intelligence

 

$

364,360

 

 

$

335,527

 

Engineered Systems

 

 

270,186

 

 

 

156,102

 

Federal Solutions revenues

 

 

634,546

 

 

 

491,629

 

Mobility Solutions

 

 

382,749

 

 

 

294,786

 

Connected Communities

 

 

156,171

 

 

 

162,654

 

Critical Infrastructure revenues

 

 

538,920

 

 

 

457,440

 

Total Revenue

 

$

1,173,466

 

 

$

949,069

 

Effective June 1, 2022, the Company made changes to its Federal Solutions business units by transferring a portion of legacy Defense and Intelligence business unit to the Engineered Systems business unit. The prior year information in the table above has been reclassified to conform to the business line changes.

19.
Subsequent Events

On April 13, 2023, the Company entered into a merger agreement to acquire a 100% ownership interest in IPKeys Power Partners (“IPKeys”), a privately-owned company, for $43.2 million from cash on hand. The merger brings IPKeys' established customer base, expanding Parsons' presence in two rapidly growing end markets: grid modernization and cyber resiliency for critical infrastructure. Headquartered in Tinton Falls, New Jersey, IPKeys is a trusted provider of enterprise software platform solutions that is actively delivering cyber and operational security to hundreds of electric, water, and gas utilities across North America. At the timing of the filing of this Form 10-Q, the Company has just started the process of obtaining the relevant data to make the required acquisition related disclosures.

22


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis is intended to help investors understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion together with our consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q and in conjunction with the Company’s Form 10-K for the year ended December 31, 2022.

The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in the Company’s Form 10-K for the year ended December 31, 2022. We undertake no obligation to revise publicly any forward-looking statements. Actual results may differ materially from those contained in any forward-looking statements.

img90716642_1.jpg 

PARSONS CORPORATION Enabling a safer, smarter, and more interconnected world. Engineered solutions for complex physical and digital infrastructure challenges SEGMENTS KEY FACTS AND FIGURES Technology-driven solutions for defense and intelligence customers FINANCIAL SNAPSHOT $4B Total Revenue Trailing 12-Months (Q2 2020) $4B Contract Awards Trailing 12-Months (Q2 2020) 75+ Years Of History Federal Solutions 49% Critical Infrastructure 51% Federal Solutions 58% Critical Infrastructure 42% Federal Solutions Critical Infrastructure ~16K Employees 6% Revenue Growth Trailing 12-Months (Q2 2020) 1.0X Book-To-Bill Ratio Trailing 12-Months (Q2 2020) $7.7B Backlog As Of 6/30/2020 PARSONS CORPORATION.

Overview

We are a leading provider of the integrated solutions and services required in today’s complex security environment and a world of digital transformation. We deliver innovative technology-driven solutions to customers worldwide. We have developed significant expertise and differentiated capabilities in key areas of cybersecurity, intelligence, missile defense, C5ISR, space, transportation, water/wastewater and environmental remediation. By combining our talented team of professionals and advanced technology, we solve complex technical challenges to enable a safer, smarter, more secure and more connected world.

We operate in two reporting segments, Federal Solutions and Critical Infrastructure. Our Federal Solutions business provides advanced technical solutions to the U.S. government. Our Critical Infrastructure business provides integrated engineering and management services for complex physical and digital infrastructure to state and local governments and large companies.

Our employees provide services pursuant to contracts that we are awarded by the customer and specific task orders relating to such contracts. These contracts are often multi-year, which provides us backlog and visibility on our revenues for future periods. Many of our contracts and task orders are subject to renewal and rebidding at the end of their term, and some are subject to the exercise of contract options and issuance of task orders by the applicable government

23


 

entity. In addition to focusing on increasing our revenues through increased contract awards and backlog, we focus our financial performance on margin expansion and cash flow.

Key Metrics

We manage and assess the performance of our business by evaluating a variety of metrics. The following table sets forth selected key metrics (in thousands, except Book-to-Bill):

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Awards (year to date)

 

$

1,382,229

 

 

$

917,156

 

Backlog (1)

 

$

8,365,242

 

 

$

8,224,785

 

Book-to-Bill (year to date)

 

 

1.2

 

 

 

1.0

 

(1)
Difference between our backlog of $8.4 billion and our remaining unsatisfied performance obligations, or RUPO, of $6.1 billion, each as of March 31, 2023, is due to (i) unissued task orders and unexercised option years, to the extent their issuance or exercise is probable, as well as (ii) contract awards, to the extent we believe contract execution and funding is probable.

Awards

Awards generally represent the amount of revenue expected to be earned in the future from funded and unfunded contract awards received during the period. Contract awards include both new and re-compete contracts and task orders. Given that new contract awards generate growth, we closely track our new awards each year.

The following table summarizes the year to-date value of new awards for the periods presented below (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Federal Solutions

 

$

695,644

 

 

$

456,888

 

Critical Infrastructure

 

 

686,585

 

 

 

460,268

 

Total Awards

 

$

1,382,229

 

 

$

917,156

 

 

The change in new awards from year to year is primarily due to ordinary course fluctuations in our business. The volume of contract awards can fluctuate in any given period due to win rate and the timing and size of the awards issued by our customers. The increase in awards for the three months ended March 31, 2023 when compared to the corresponding period last year was primarily driven by significant awards in both our Federal Solutions and Critical Infrastructure segments.

Backlog

We define backlog to include the following two components:

Funded—Funded backlog represents future revenue anticipated from orders for services under existing contracts for which funding is appropriated or otherwise authorized.
Unfunded—Unfunded backlog represents future revenue anticipated from orders for services under existing contracts for which funding has not been appropriated or otherwise authorized.

Backlog includes (i) unissued task orders and unexercised option years, to the extent their issuance or exercise is probable, as well as (ii) contract awards, to the extent we believe contract execution and funding is probable.

24


 

The following table summarizes the value of our backlog at the respective dates presented below (in thousands):

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Federal Solutions:

 

 

 

 

 

 

Funded

 

$

1,694,740

 

 

$

1,300,476

 

Unfunded

 

 

3,175,568

 

 

 

3,883,550

 

Total Federal Solutions

 

 

4,870,308

 

 

 

5,184,026

 

Critical Infrastructure:

 

 

 

 

 

 

Funded

 

 

3,445,068

 

 

 

2,976,099

 

Unfunded

 

 

49,866

 

 

 

64,660

 

Total Critical Infrastructure

 

 

3,494,934

 

 

 

3,040,759

 

Total Backlog (1)

 

$

8,365,242

 

 

$

8,224,785

 

(1)
Difference between our backlog of $8.4 billion and our RUPO of $6.1 billion, each as of March 31, 2023, is due to (i) unissued task orders and unexercised option years, to the extent their issuance or exercise is probable, as well as (ii) contract awards, to the extent we believe contract execution and funding is probable.

Our backlog includes orders under contracts that in some cases extend for several years. For example, the U.S. Congress generally appropriates funds for our U.S. federal government customers on a yearly basis, even though their contracts with us may call for performance that is expected to take a number of years to complete. As a result, our federal contracts typically are only partially funded at any point during their term. All or some of the work to be performed under the contracts may remain unfunded unless and until the U.S. Congress makes subsequent appropriations and the procuring agency allocates funding to the contract.

We expect to recognize $3.4 billion of our funded backlog at March 31, 2023 as revenues in the following twelve months. However, our U.S. federal government customers may cancel their contracts with us at any time through a termination for convenience or may elect to not exercise option periods under such contracts. In the case of a termination for convenience, we would not receive anticipated future revenues, but would generally be permitted to recover all or a portion of our incurred costs and fees for work performed. See “Risk Factors—Risk Relating to Our Business—We may not realize the full value of our backlog, which may result in lower than expected revenue” in the Company’s Form 10-K for the year ended December 31, 2022.

The changes in backlog in both the Federal Solutions and Critical Infrastructure segments were primarily from ordinary course fluctuations in our business and the impacts related to the Company’s awards discussed above.

Book-to-Bill

Book-to-bill is the ratio of total awards to total revenue recorded in the same period. Our management believes our book-to-bill ratio is a useful indicator of our potential future revenue growth in that it measures the rate at which we are generating new awards compared to the Company’s current revenue. To drive future revenue growth, our goal is for the level of awards in a given period to exceed the revenue booked. A book-to-bill ratio greater than 1.0 indicates that awards generated in a given period exceeded the revenue recognized in the same period, while a book-to-bill ratio of less than 1.0 indicates that awards generated in such period were less than the revenue recognized in such period. The following table sets forth the book-to-bill ratio for the periods presented below:

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Federal Solutions

 

 

1.1

 

 

 

0.9

 

Critical Infrastructure

 

 

1.3

 

 

 

1.0

 

Overall

 

 

1.2

 

 

 

1.0

 

 

Factors and Trends Affecting Our Results of Operations

We believe that the financial performance of our business and our future success are dependent upon many factors, including those highlighted in this section. Our operating performance will depend upon many variables, including the success of our growth strategies and the timing and size of investments and expenditures that we choose to undertake, as well as market growth and other factors that are not within our control.

25


 

Government Spending

Changes in the relative mix of government spending and areas of spending growth, with shifts in priorities on homeland security, intelligence, defense-related programs, infrastructure and urbanization, and continued increased spending on technology and innovation, including cybersecurity, artificial intelligence, connected communities and physical infrastructure, could impact our business and results of operations. Cost-cutting and efficiency initiatives, current and future budget restrictions, spending cuts and other efforts to reduce government spending could cause our government customers to reduce or delay funding or invest appropriated funds on a less consistent basis or not at all, and demand for our solutions or services could diminish. Furthermore, any disruption in the functioning of government agencies, including as a result of government closures and shutdowns, could have a negative impact on our operations and cause us to lose revenue or incur additional costs due to, among other things, our inability to deploy our staff to customer locations or facilities as a result of such disruptions.

Federal Budget Uncertainty

There is uncertainty around the timing, extent, nature and effect of Congressional and other U.S. government actions to address budgetary constraints, caps on the discretionary budget for defense and non-defense departments and agencies, and the ability of Congress to determine how to allocate the available budget authority and pass appropriations bills to fund both U.S. government departments and agencies that are, and those that are not, subject to the caps. Additionally, budget deficits and the growing U.S. national debt increase pressure on the U.S. government to reduce federal spending across all federal agencies, with uncertainty about the size and timing of those reductions. Furthermore, delays in the completion of future U.S. government budgets could in the future delay procurement of the federal government services we provide. A reduction in the amount of, or delays, or cancellations of funding for, services that we are contracted to provide to the U.S. government as a result of any of these impacts or related initiatives, legislation or otherwise could have a material adverse effect on our business and results of operations.

Regulations

Increased audit, review, investigation and general scrutiny by government agencies of performance under government contracts and compliance with the terms of those contracts and applicable laws could affect our operating results. Negative publicity and increased scrutiny of government contractors in general, including us, relating to government expenditures for contractor services and incidents involving the mishandling of sensitive or classified information, as well as the increasingly complex requirements of the U.S. Department of Defense and the U.S. Intelligence Community, including those related to cybersecurity, could impact our ability to perform in the markets we serve.

Competitive Markets

The industries we operate in consist of a large number of enterprises ranging from small, niche-oriented companies to multi-billion-dollar corporations that serve many government and commercial customers. We compete on the basis of our technical expertise, technological innovation, our ability to deliver cost-effective multi-faceted services in a timely manner, our reputation and relationships with our customers, qualified and/or security-clearance personnel, and pricing. We believe that we are uniquely positioned to take advantage of the markets in which we operate because of our proven track record, long-term customer relationships, technology innovation, scalable and agile business offerings and world class talent. Our ability to effectively deliver on project engagements and successfully assist our customers affects our ability to win new contracts and drives our financial performance.

Acquired Operations

Xator Corporation

On May 31, 2022, the Company acquired Xator Corporation for $388.3 million. This strategic acquisition expands Parsons’ presence within the U.S. Special Operations Command, the Intelligence Community, Federal Civilian customers, and global critical infrastructure markets, while providing new customer access at the Department of State. Xator also expands Parsons’ customer base and brings differentiated technical capabilities in critical infrastructure protection, counter-unmanned aircraft systems (cUAS), intelligence and cyber solutions, biometrics, and global threat assessment and operations, increasing our addressable market in both the Federal Solutions and Critical Infrastructure segments. The financial results of Xator have been included in our consolidated results of operations from May 31, 2022 onward.

26


 

Seasonality

Our results may be affected by variances as a result of weather conditions and contract award seasonality impacts that we experience across our businesses. The latter issue is typically driven by the U.S. federal government fiscal year-end, September 30. While not certain, it is not uncommon for U.S. government agencies to award task orders or complete other contract actions in the weeks before the end of the U.S. federal government fiscal year in order to avoid the loss of unexpended U.S. federal government fiscal year funds. In addition, we have also historically experienced higher bid and proposal costs in the months leading up to the U.S. federal government fiscal year-end as we pursue new contract opportunities expected to be awarded early in the following U.S. federal government fiscal year as a result of funding appropriated for that U.S. federal government fiscal year. Furthermore, many U.S. state governments with fiscal years ending on June 30 tend to accelerate spending during their first quarter, when new funding becomes available. We may continue to experience this seasonality in future periods, and our results of operations may be affected by it.

Results of Operations

Revenue

Our revenue consists of both services provided by our employees and pass-through fees from subcontractors and other direct costs. Our Federal Solutions segment derives revenue primarily from the U.S. federal government and our Critical Infrastructure segment derives revenue primarily from government and commercial customers.

We enter into the following types of contracts with our customers:

Under cost-plus contracts, we are reimbursed for allowable or otherwise defined costs incurred, plus a fee. The contracts may also include incentives for various performance criteria, including quality, timeliness, safety and cost-effectiveness. In addition, costs are generally subject to review by clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract.
Under time-and-materials contracts, hourly billing rates are negotiated and charged to clients based on the actual time spent on a project. In addition, clients reimburse actual out-of-pocket costs for other direct costs and expenses that are incurred in connection with the performance under the contract.
Under fixed-price contracts, clients pay an agreed fixed-amount negotiated in advance for a specified scope of work.

Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and “Note 2—Summary of Significant Accounting Policies” in the notes to our consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2022 for a description of our policies on revenue recognition.

The table below presents the percentage of total revenue for each type of contract.

 

 

 

Three Months Ended

 

 

March 31, 2023

 

March 31, 2022

Fixed-price

 

29.1%

 

25.4%

Time-and-materials

 

27.1%

 

27.7%

Cost-plus

 

43.8%

 

46.9%

 

27


 

The amount of risk and potential reward varies under each type of contract. Under cost-plus contracts, there is limited financial risk, because we are reimbursed for all allowable costs up to a ceiling. However, profit margins on this type of contract tend to be lower than on time-and-materials and fixed-price contracts. Under time-and-materials contracts, we are reimbursed for the hours worked using the predetermined hourly rates for each labor category. In addition, we are typically reimbursed for other direct contract costs and expenses at cost. We assume financial risk on time-and-materials contracts because our labor costs may exceed the negotiated billing rates. Profit margins on well-managed time-and-materials contracts tend to be higher than profit margins on cost-plus contracts as long as we are able to staff those contracts with people who have an appropriate skill set. Under fixed-price contracts, we are required to deliver the objectives under the contract for a pre-determined price. Compared to time-and-materials and cost-plus contracts, fixed-price contracts generally offer higher profit margin opportunities because we receive the full benefit of any cost savings, but they also generally involve greater financial risk because we bear the risk of any cost overruns. In the aggregate, the contract type mix in our revenue for any given period will affect that period’s profitability. Over time, we have experienced a relatively stable contract mix.

Our recognition of profit on long-term contracts requires the use of assumptions related to transaction price and total cost of completion. Estimates are continually evaluated as work progresses and are revised when necessary. When a change in estimated cost or transaction price is determined to have an impact on contract profit, we record a positive or negative adjustment to revenue.

Joint Ventures

We conduct a portion of our business through joint ventures or similar partnership arrangements. For the joint ventures we control, we consolidate all the revenues and expenses in our consolidated statements of income (including revenues and expenses attributable to noncontrolling interests). For the joint ventures we do not control, we recognize equity in (losses) earnings of unconsolidated joint ventures. Our revenues included amounts related to services we provided to our unconsolidated joint ventures for the three months ended March 31, 2023 and March 31, 2022 of $50.9 million and $47.3 million, respectively.

Operating costs and expenses

Operating costs and expenses primarily include direct costs of contracts and selling, general and administrative expenses. Costs associated with compensation-related expenses for our people and facilities, which includes ESOP contribution expenses, are the most significant component of our operating expenses. Total ESOP contribution expense for the three months ended March 31, 2023 and March 31, 2022 was $14.4 million and $13.1 million, respectively, and is recorded in “Direct cost of contracts” and “Selling, general and administrative expenses.”

Direct costs of contracts consist of direct labor and associated fringe benefits, indirect overhead, subcontractor and materials (“pass-through costs”), travel expenses and other expenses incurred to perform on contracts.

Selling, general and administrative expenses (“SG&A”) include salaries and wages and fringe benefits of our employees not performing work directly for customers, facility costs and other costs related to these indirect functions.

Other income and expenses

Other income and expenses primarily consist of interest income, interest expense and other income, net.

Interest income primarily consists of interest earned on U.S. government money market funds.

Interest expense consists of interest expense incurred under our Senior Notes, Convertible Senior Notes, and Credit Agreement.

Other income, net primarily consists of gain or loss on sale of assets, sublease income and transaction gain or loss related to movements in foreign currency exchange rates.

28


 

Adjusted EBITDA

The following table sets forth Adjusted EBITDA, Net Income Margin, and Adjusted EBITDA Margin for the three months ended March 31, 2023 and March 31, 2022.

 

 

 

Three Months Ended

 

(U.S. dollars in thousands)

 

March 31, 2023

 

 

March 31, 2022

 

Adjusted EBITDA (1)

 

$

90,391

 

 

$

74,248

 

Net Income Margin (2)

 

 

3.0

%

 

 

2.5

%

Adjusted EBITDA Margin (3)

 

 

7.7

%

 

 

7.8

%

(1)
A reconciliation of net income attributable to Parsons Corporation to Adjusted EBITDA is set forth below (in thousands).
(2)
Net Income Margin is calculated as net income including noncontrolling interest divided by revenue in the applicable period
(3)
Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by revenue in the applicable period.

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Net income attributable to Parsons Corporation

 

$

25,553

 

 

$

20,667

 

Interest expense, net

 

 

5,665

 

 

 

3,873

 

Income tax expense

 

 

11,503

 

 

 

8,119

 

Depreciation and amortization

 

 

28,359

 

 

 

30,509

 

Net income attributable to noncontrolling interests

 

 

9,723

 

 

 

3,176

 

Equity-based compensation

 

 

6,703

 

 

 

3,898

 

Transaction-related costs (a)

 

 

1,618

 

 

 

2,398

 

Restructuring (b)

 

 

546

 

 

 

213

 

Other (c)

 

 

721

 

 

 

1,395

 

Adjusted EBITDA

 

$

90,391

 

 

$

74,248

 

 

(a)
Reflects costs incurred in connection with acquisitions and other non-recurring transaction costs, primarily fees paid for professional services and employee retention.
(b)
Reflects costs associated with our corporate restructuring initiatives.
(c)
Includes a combination of gain/loss related to sale of fixed assets, software implementation costs, and other individually insignificant items that are non-recurring in nature.

Adjusted EBITDA is a supplemental measure of our operating performance used by management and our board of directors to assess our financial performance both on a segment and on a consolidated basis. We discuss Adjusted EBITDA because our management uses this measure for business planning purposes, including to manage the business against internal projected results of operations and measure the performance of the business generally. Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry.

Adjusted EBITDA is not a GAAP measure of our financial performance or liquidity and should not be considered as an alternative to net income as a measure of financial performance or cash flows from operations as measures of liquidity, or any other performance measure derived in accordance with GAAP. We define Adjusted EBITDA as net income (loss) attributable to Parsons Corporation, adjusted to include net income (loss) attributable to noncontrolling interests and to exclude interest expense (net of interest income), provision for income taxes, depreciation and amortization and certain other items that we do not consider in our evaluation of ongoing operating performance. These other items include, among other things, impairment of goodwill, intangible and other assets, interest and other expenses recognized on litigation matters, expenses incurred in connection with acquisitions and other non-recurring transaction costs and expenses related to our corporate restructuring initiatives. Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not reflect tax payments, debt service requirements, capital expenditures and certain other cash costs that may recur in the future, including, among other things, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. Management compensates for these limitations by relying on our GAAP results in addition to using Adjusted EBITDA supplementally. Our measure of Adjusted EBITDA is not necessarily comparable to similarly titled captions of other companies due to different methods of calculation.

29


 

The following table shows Adjusted EBITDA attributable to Parsons Corporation for each of our reportable segments and Adjusted EBITDA attributable to noncontrolling interests (in thousands):

 

 

 

Three Months Ended

 

 

Variance

 

 

 

March 31, 2023

 

 

March 31, 2022

 

 

Dollar

 

 

Percent

 

Federal Solutions Adjusted EBITDA attributable to Parsons Corporation

 

$

56,148

 

 

$

42,638

 

 

$

13,510

 

 

 

31.7

%

Critical Infrastructure Adjusted EBITDA attributable to Parsons Corporation

 

 

24,357

 

 

 

28,315

 

 

 

(3,958

)

 

 

-14.0

%

Adjusted EBITDA attributable to noncontrolling interests

 

 

9,886

 

 

 

3,295

 

 

 

6,591

 

 

 

200.0

%

Total Adjusted EBITDA

 

$

90,391

 

 

$

74,248

 

 

$

16,143

 

 

 

21.7

%

 

The following table sets forth our results of operations for the three months ended March 31, 2023 and March 31, 2022 as a percentage of revenue.

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Revenues

 

 

100

%

 

 

100

%

Direct costs of contracts

 

 

78.2

%

 

 

77.3

%

Equity in (losses) earnings of unconsolidated joint ventures

 

 

-0.5

%

 

 

0.6

%

Selling, general and administrative expenses

 

 

17.0

%

 

 

19.5

%

Operating income

 

 

4.4

%

 

 

3.8

%

Interest income

 

 

0.1

%

 

 

0.0

%

Interest expense

 

 

-0.6

%

 

 

-0.4

%

Other income, net

 

 

0.1

%

 

 

0.0

%

Total other income (expense)

 

 

-0.4

%

 

 

-0.4

%

Income before income tax expense

 

 

4.0

%

 

 

3.4

%

Income tax benefit (provision)

 

 

-1.0

%

 

 

-0.9

%

Net income including noncontrolling interests

 

 

3.0

%

 

 

2.5

%

Net income attributable to noncontrolling interests

 

 

-0.8

%

 

 

-0.3

%

Net income attributable to Parsons Corporation

 

 

2.2

%

 

 

2.2

%

 

Revenue

 

 

 

Three Months Ended

 

 

Variance

 

(U.S. dollars in thousands)

 

March 31, 2023

 

 

March 31, 2022

 

 

Dollar

 

 

Percent

 

Revenue

 

$

1,173,466

 

 

$

949,069

 

 

$

224,397

 

 

 

23.6

%

 

Revenue increased $224.4 million for the three months ended March 31, 2023 when compared to the corresponding period last year, due to increases in revenue in both our Federal Solutions and Critical Infrastructure segments of $142.9 million and $81.5 million, respectively. The increase in revenue in Federal Solutions includes $112.4 million from business acquisitions. See “Segment Results” below for a further discussion of the changes in the Company's revenue.

Direct costs of contracts

 

 

 

Three Months Ended

 

 

Variance

 

(U.S. dollars in thousands)

 

March 31, 2023

 

 

March 31, 2022

 

 

Dollar

 

 

Percent

 

Direct costs of contracts

 

$

917,188

 

 

$

733,900

 

 

$

183,288

 

 

 

25.0

%

 

30


 

Direct cost of contracts increased $183.3 million for the three months ended March 31, 2023 when compared to the corresponding period last year, was primarily due to an increase of $119.9 million in our Federal Solutions segment and $63.4 million in our Critical Infrastructure segment. The increases were primarily due to an increase in business volume from exisitng contractrs in both segments, an increase from new contract awards in the Critical Infrastuructre segment, and a $94.2 million increase from business acquisitions in the Federal Solutions segment.

Equity in (losses) earnings of unconsolidated joint ventures

 

 

 

Three Months Ended

 

 

Variance

 

(U.S. dollars in thousands)

 

March 31, 2023

 

 

March 31, 2022

 

 

Dollar

 

 

Percent

 

Equity in (losses) earnings of unconsolidated joint ventures

 

$

(5,840

)

 

$

5,598

 

 

$

(11,438

)

 

 

-204.3

%

 

Equity in (losses) earnings of unconsolidated joint ventures decreased $11.4 million for the three months ended March 31, 2023 compared to the corresponding period last year. The decrease was primarily related to lower margin change orders which delayed joint venture profits to future periods and write-offs in certain joint ventures.

Selling, general and administrative expenses

 

 

 

Three Months Ended

 

 

Variance

 

(U.S. dollars in thousands)

 

March 31, 2023

 

 

March 31, 2022

 

 

Dollar

 

 

Percent

 

Selling, general and administrative expenses

 

$

199,308

 

 

$

185,077

 

 

$

14,231

 

 

 

7.7

%

The increase in SG&A of $14.2 million for the three months ended March 31, 2023 when compared to the corresponding period last year was primarily due to a $7.7 million increase from business acquisitions, an increase of $5.8 million primarily related to business development and sales activities, and an increase in stock-based compensation cost of $2.8 million. These increases were offset in part by a $2.1 million decrease in intangible asset amortization.

Total other income (expense)

 

 

 

Three Months Ended

 

 

Variance

 

(U.S. dollars in thousands)

 

March 31, 2023

 

 

March 31, 2022

 

 

Dollar

 

 

Percent

 

Interest income

 

$

793

 

 

$

65

 

 

$

728

 

 

 

1120.0

%

Interest expense

 

 

(6,458

)

 

 

(3,938

)

 

 

(2,520

)

 

 

64.0

%

Other income (expense), net

 

 

1,314

 

 

 

145

 

 

 

1,169

 

 

 

806.2

%

Total other income (expense)

 

$

(4,351

)

 

$

(3,728

)

 

$

(623

)

 

 

16.7

%

 

Interest income is related to interest earned on cash balances held. Interest expense is primarily due to debt related to our Delayed Draw Term Loan and Convertible Senior Notes. The increase in interest expense is primarily related to an increase in debt balances during the three months ended March 31, 2023 compared to the corresponding period last year as well as an increase in interest rates. The amounts in other income (expense), net are primarily related to transaction gains and losses on foreign currency transactions and sublease income.

Income tax expense

 

 

 

Three Months Ended

 

 

Variance

 

(U.S. dollars in thousands)

 

March 31, 2023

 

 

March 31, 2022

 

 

Dollar

 

 

Percent

 

Income tax expense

 

$

11,503

 

 

$

8,119

 

 

$

3,384

 

 

 

41.7

%

 

The Company’s effective tax rate was 24.6% and 25.4% and income tax expense was $11.5 million and $8.1 million for the three months ended March 31, 2023 and March 31, 2022, respectively. The most significant items contributing to the change in the effective tax rate relate to a discrete tax benefit from equity-based compensation, partially offset by an increase in withholding taxes, and a change in the jurisdictional mix of earnings. The difference between the statutory U.S. federal income tax rate of 21.0% and the effective tax rate for the quarter ended March 31,

31


 

2023 primarily relates to state income taxes and foreign withholding taxes, partially offset by benefits related to untaxed income attributable to noncontrolling interests and federal research tax credits.

Segment Results

We evaluate segment operating performance using segment revenue and segment Adjusted EBITDA attributable to Parsons Corporation. Adjusted EBITDA attributable to Parsons Corporation is Adjusted EBITDA excluding Adjusted EBITDA attributable to noncontrolling interests. Presented above, in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, is a discussion of our definition of Adjusted EBITDA, how we use this metric, why we present this metric and the material limitations on the usefulness of this metric. See “Note 18—Segments Information” in the notes to the consolidated financial statements in this Form 10-Q for further discussion regarding our segment Adjusted EBITDA attributable to Parsons Corporation.

The following table shows Adjusted EBITDA attributable to Parsons Corporation for each of our reportable segments and Adjusted EBITDA attributable to noncontrolling interests:

 

 

 

Three Months Ended

 

(U.S. dollars in thousands)

 

March 31, 2023

 

 

March 31, 2022

 

Federal Solutions Adjusted EBITDA attributable to Parsons Corporation

 

$

56,148

 

 

$

42,638

 

Critical Infrastructure Adjusted EBITDA attributable to Parsons Corporation

 

 

24,357

 

 

 

28,315

 

Adjusted EBITDA attributable to noncontrolling interests

 

 

9,886

 

 

 

3,295

 

Total Adjusted EBITDA

 

$

90,391

 

 

$

74,248

 

Federal Solutions

 

 

Three Months Ended

 

 

Variance

 

(U.S. dollars in thousands)

 

March 31, 2023

 

 

March 31, 2022

 

 

Dollar

 

 

Percent

 

Revenue

 

$

634,546

 

 

$

491,629

 

 

$

142,917

 

 

 

29.1

%

Adjusted EBITDA attributable to Parsons Corporation

 

$

56,148

 

 

$

42,638

 

 

$

13,510

 

 

 

31.7

%

The increase in Federal Solutions revenue for the three months ended March 31, 2023 compared to the corresponding period last year was primarily due to increases from business acquisitions described above and increases in business volume from existing contracts offset by the completion and winding down of certain contracts.

The increase in Federal Solutions Adjusted EBITDA attributable to Parsons Corporation for the three months ended March 31, 2023 compared to the corresponding period last year was primarily due to factors impacting revenue discussed above offset in part by an increase in selling general and administrative expenses, primarily from business acquisitions.

Critical Infrastructure

 

 

Three Months Ended

 

 

Variance

 

(U.S. dollars in thousands)

 

March 31, 2023

 

 

March 31, 2022

 

 

Dollar

 

 

Percent

 

Revenue

 

$

538,920

 

 

$

457,440

 

 

$

81,480

 

 

 

17.8

%

Adjusted EBITDA attributable to Parsons Corporation

 

$

24,357

 

 

$

28,315

 

 

$

(3,958

)

 

 

-14.0

%

 

32


 

 

The increase in Critical Infrastructure revenue for the three months ended March 31, 2023 compared to the corresponding periods last year was primarily due to an increase in business volume from recent contract awards and existing contracts offset by reduced volume on certain contracts.

The decrease in Critical Infrastructure Adjusted EBITDA attributable to Parsons Corporation for the three months ended March 31, 2023 compared to the corresponding period last year was primarily due to a decrease in equity in earnings of unconsolidated joint ventures driven by lower margin change orders which wil