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Item 7. Management’s Discussion and Analysis

2024-02-14 compared with 2023-02-17 · 158 added, 131 removed, 574 unchanged (33% of the section changed)

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You should read this discussion together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

Certain amounts may not foot due to rounding.

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.

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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.

We have developed significant expertise and differentiated capabilities in key areas of cybersecurity and intelligence, space and missile defense, critical infrastructure protection, transportation, environmental remediation and urban development.

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.

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 Federal Solutions business is an advanced technology provider to the U.S.

Our Critical Infrastructure business provides integrated design and engineering services for complex physical and digital infrastructure around the globe.

Our employees provide services pursuant to contracts that we are awarded by the customer and specific task orders relating to such contracts.

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The following table sets forth selected key metrics (in thousands, except Book-to-Bill):

Fiscal Year Ended

December 31, 2023

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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 change in new awards in our Federal Solutions segment for the year ended December 31, 2022 when compared to the corresponding period last year was primarily due to a significant contract awarded in the second quarter of 2021.

The awards in Critical Infrastructure for the year ended December 31, 2022 were higher primarily due to several new awards and a large contract value increase during 2022.

The change in new awards in both our Federal Solutions and Critical Infrastructure segments for the year ended December 31, 2023 when compared to the corresponding period last year was primarily driven by an overall increase in the number of large contract awards.

We define backlog to include the following two components:

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• Unfunded—Unfunded backlog represents the revenue value of orders for services under existing contracts for which funding has not been appropriated or otherwise authorized less revenue previously recognized on these contracts.

Unfunded backlog does not include potential task orders expected to be awarded under multiple awards IDIQ contract vehicles, where task orders are competitively awarded and separately priced.

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.

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See “Risk Factors—Risks Relating to Our Business—We may not realize the full value of our backlog, which may result in lower than expected revenue.”

The change in backlog in our Federal Solutions segment between 2022 and 2021 was impacted by from higher revenue activity in 2022 compared to 2021, partially offset by contributions of $0.2 billion from business acquisitions.

The change in backlog in our Critical Infrastructure segment between 2022 and 2021 was primarily from ordinary course fluctuations in our business and the impacts related to

awards discussed above.

The changes in backlog in our Federal Solutions segment between 202 1 and 202 0 included contributions of $0.1 billion from business acquisitions.

The change in backlog in our Critical Infrastructure segment between 202 1 and 202 0 was primarily from ordinary course fluctuations in our business and the impacts related to awards discussed above.

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.

Our backlog will fluctuate in any given period based on the volume of awards issued and the rate of revenue generated from our existing contracts.

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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.

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.

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.

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Acquired Operations

Engineers, LLC

On October 31, 2023, the Company entered into a Membership Interest Purchase Agreement to acquire a 100% ownership interest in I.S.

Engineers, LLC, a privately-owned company, for $12.2 million, subject to certain adjustments.

Headquartered in Texas, I.S.

Engineers, LLC provides full-service consulting specializing in transportation engineering, including roads and highways, and program management.

The financial results of I.S.

Engineers have been included in our consolidated results of operations from October 31, 2023 onward.

Sealing Technologies, Inc.

On August 23, 2023, the Company acquired a 100% ownership interest in Sealing Technologies, Inc (“SealingTech”), a privately-owned company, for $179.3 million and up to an additional $25 million in the event an earn out revenue target is exceeded.

Headquartered in Maryland, SealingTech expands Parsons’ customer base across the Department of Defense and Intelligence Community, and further enhances the company’s capabilities in defensive cyber operations;

integrated mission-solutions powered by artificial intelligence (AI) and machine learning (ML);

edge computing and edge access modernization;

critical infrastructure protection;

and secure data management.

The financial results of SealingTech have been included in our consolidated results of operations from August 23, 2023 onward.

IPKeys Power Partners

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 $43.0 million.

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.

The financial results of IPKeys have been included in our consolidated results of operations from April 13, 2023 onward.

Xator Corporation

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The financial results of Echo Ridge have been included in our consolidated results of operations from July 30, 2021 onward.

Braxton Science & Technology Group, LLC

On November 19, 2020, we acquired Braxton for $310.9 million.

Braxton operates at the forefront of satellite operations, ground system automation, flight dynamics, and spacecraft and antenna simulation for the U.S.

Department of Defense and Intelligence Community.

The acquisition was funded by cash on-hand.

The financial results of Braxton have been included in our consolidated results of operations from November 19, 2020 onward.

Our results may be affected by variances as a result of weather conditions and contract award seasonality impacts that we experience across our businesses.

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• Under fixed-price contracts, clients pay an agreed fixed-amount negotiated in advance for a specified scope of work.

R efer 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 Polices ” in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of our policies on revenue recognition applicable to each type of contract .

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 Polices ” in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of our policies on revenue recognition applicable to each type of contract.

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

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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 earnings of unconsolidated joint ventures.

For the joint ventures we do not control, we recognize equity in earnings (losses) of unconsolidated joint

Our revenues included $213.8 million in 2023, $217.4 million in 2022, and $204.7 million in 2021 related to services we provided to our unconsolidated joint ventures.

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government money market funds.

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

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.

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

Other income, net primarily consists of gain or loss on sale of assets, sublease income.

transaction gain or loss related to movements in foreign currency exchange rates, and contingent consideration.

Year ended December 31, 2023 compared to year ended December 31, 2022

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Direct costs of contracts

Equity in earnings of unconsolidated joint ventures

Equity in (losses) earnings of unconsolidated joint ventures

Selling, general and administrative expenses

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Income before income tax expense

Income tax benefit (expense)

Income tax expense

Net income including noncontrolling interests

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December 31, 2022

Revenue for the year ended December 31, 2022 compared to the prior year increased $534.5 million.

This increase was primarily due to an increase in revenue in our Federal Solutions segment of $324.9 million and an increase in our Critical Infrastructure segment of $209.6 million.

Revenue for the year ended December 31, 2023 compared to the prior year increased $1.2 billion.

Revenue increased in both the Federal Solutions and Critical Infrastructure segments by $807.7 million and $439.8 million, respectively.

See “—Segment Results” below for further discussion.

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Direct cost of contracts

Direct cost of contracts for the year ended December 31, 2022 compared to the prior year increased $440.6 million This increase was primarily due to an increase in direct cost of contracts in our Federal Solutions segment of $272.6 million and an increase in our Critical Infrastructure segment of $168.0 million.

The increases were primarily due to an increase in business volume from recent contract awards and business acquisitions.

Equity in earnings of unconsolidated joint ventures

Direct cost of contracts for the year ended December 31, 2023 compared to the prior year increased $988.2 million.

Direct cost of contracts increased in both the Federal Solutions and Critical Infrastructure segments by $672.1 million and $316.1 million, respectively.

The increases were primarily due to an increase in business volume and from business acquisitions offset by a decrease of $37.9 million in the Critical Infrastructure segment related to a legal matter on a previously completed contract.

Equity in (losses) earnings of unconsolidated joint ventures

Fiscal Year Ended

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December 31, 2022

Equity in earnings of unconsolidated joint ventures

Equity in earnings of unconsolidated joint ventures for the year ended December 31, 2022 decreased by $20.5 million compared to the prior year.

The decrease was primarily related to change orders which delayed joint venture profits to future periods and a reduction in activity.

Equity in (losses) earnings of unconsolidated joint ventures

Equity in (losses) earnings of unconsolidated joint ventures for the year ended December 31, 2023 decreased by $64.1 million compared to the prior year.

The decrease was primarily related to write-downs on joint ventures of $83.4 million.

$57.9 million of the joint venture write-downs related to Parsons’ participation in a design build joint venture.

The write-down relates to supply chain challenges identified during the procurement of materials which impacted the estimate to complete the project.

Selling, general and administrative expenses

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SG&A expenses for the year ended December 31, 2023 increased by $92.5 million compared to the prior year.

The increase in SG&A was primarily due to a $17.2 million increase from business acquisitions, a $12.6 million increase related to investments in future growth and general increases in operating costs, a $9.0 million increase in incentives, a $6.2 million increase in transaction related costs primarily related to business acquisition activity, and a $4.8 million increase in compensation costs related to equity-based awards.

These increases were partially offset by a $25.0 million decrease in intangible asset amortization primarily related to the drop-off in intangible asset amortization from the Company’s older acquisitions offset by intangible amortization from the Company’s more recent acquisitions and a reduction in the Company’s liability insurance costs of $4.6 million.

Total other (expense) income

The increase in SG&A was primarily due to an increase of $35.9 million related to employee incentive programs, a $23.7 million increase from business acquisitions, a $17.0 million increase primarily related to business development and sales activities, and a $7.3 million increase in general liability insurance costs.

As a percent of revenue, our SG&A declined from 18.5% in 2022 to 16.0% in 2023.

Total other income (expense)

Fiscal Year Ended

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Total other income (expense)

Interest expense increased for the year ended December 31, 2022 compared to the corresponding period last year primarily due to interest expense from borrowings under the Credit Agreement and Delayed Draw Term Loan, neither of which had outstanding balances during the year ended December 31, 2021.

Interest expense for the year ended December 31, 2022 included $2.1 million associated with a make-whole payment and remaining unamortized debt issuance costs resulting from the repayment of all outstanding Senior Notes under the Company’s Private Placement.

The amounts in other income (expense), net, are primarily related to transaction gains and losses on foreign currency transactions and sublease income.

Interest income increased for the year ended December 31, 2023 compared to the corresponding period last year primarily due to an increase in interest rates compared to the prior year on investments in government money funds.

Interest expense increased for the year ended December 31, 2023 compared to the corresponding period last year primarily due to higher interest rates on borrowings.

The amounts in other income (expense), net, are primarily related to transaction gains and losses on foreign currency transactions, sublease income, and contingent consideration.

Income tax expense

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Income tax expense

Income tax expense increased in fiscal 2022 primarily due to an increase in earnings and a decrease in foreign tax credits, partially offset by a change in jurisdictional mix of earnings and nonrecurring write down of a foreign tax receivable included in 2021.

Income tax expense increased in fiscal 2023 primarily due to an increase in overall earnings and an increase in foreign withholding taxes partially offset by increases in the foreign-derived intangible income (FDII) deduction and earnings in lower tax jurisdictions.

Our effective tax rate was 21.3% and 23.9% for the years ended December 31, 2023 and 2022, respectively.

The difference between the statutory U.S.

federal income tax rate of 21% and the effective tax rate for the year ended December 31, 2022 primarily relates to state income taxes and a recorded valuation allowance on foreign tax credit carryovers, offset in part by benefits related to income attributable to noncontrolling interest, earnings in lower tax jurisdictions and federal research tax credits.

For the year ended December 31, 2021, the difference primarily relates to state income taxes and a recorded valuation allowance on foreign tax credit carryovers, a write down of a foreign tax receivable and an increase in executive compensation subject to IRC Section 162(m) limitations, offset by benefits related to income attributable to noncontrolling interest, release of uncertain tax positions, and federal research tax credits.

federal income tax rate of 21% and the effective tax rate for the year ended December 31, 2023 primarily relates to state income taxes, valuation allowance on foreign tax credit carryovers originating from foreign withholding taxes offset in part by benefits related to income attributable to noncontrolling interests, earnings in lower tax jurisdictions, the FDII deduction, and federal business tax credits.

Effective for tax year 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to currently deduct research and development expenditures in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes (15 years for foreign research and development expenditures).

This provision resulted in additional cash tax liability and additional net deferred tax assets for the 2022 tax year of approximately $16 million.

This 2022 additional cash tax liability was offset by other carryforward tax attributes.

This provision is expected to increase our 2023 cash tax liability by approximately $12 million.

The actual impact on 2023 cash tax liability will depend on the actual amount of research and development expenses incurred in 2023, among other factors.

While the largest impact of this provision will be to our 2022 cash tax liability, the impact will continue to decline over the five-year amortization period and is expected to have an immaterial impact beginning in year six.

This provision resulted in additional cash tax liability for the 2023 tax year of approximately $12 million.

On January 31, 2024, the House of Representatives passed a tax relief package (the Tax Relief for American Families and Workers Act of 2024).

The key tax proposal that would impact our tax position is a deferral of the mandatory capitalization of research expenditures for domestic expenditures, retroactive to expenses paid or incurred after December 31, 2021 and before January 1, 2026.

If this tax proposal is enacted, we would expect a $15 million and a $12 million decrease to our cash tax liabilities for tax years 2022 and 2023, respectively.

We would recognize any changes in our financial results in the period of enactment.

Year ended December 31, 2022 compared to year ended December 31, 2021

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Income before income tax expense

Income tax benefit (expense)

Income tax expense

Net income including noncontrolling interests

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December 31, 2021

Revenue for the year ended December 31, 2021 compared to the prior year decreased $258.2 million.

This decrease was primarily due to a decrease in revenue in our Critical Infrastructure segment of $234.3 million and a decrease in our Federal Solutions segment of $23.8 million.

Revenue for the year ended December 31, 2022 compared to the prior year increased $534.5 million.

This increase was primarily due to an increase in revenue in our Federal Solutions segment of $324.9 million and an increase in our Critical Infrastructure segment of $209.6 million.

See “—Segment Results” below for further discussion.

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Direct cost of contracts

Direct cost of contracts decreased in 2021 primarily due to a decrease of $197.0 million in our Critical Infrastructure segment and a decrease of $37.1 million in our Federal Solutions segment.

The decrease was primarily attributable to a decrease in business volume on contracts with significant pass-through costs and a decrease in business volume from project completions and transitions.

Direct cost of contracts for the year ended December 31, 2022 compared to the prior year increased $440.6 million.

This increase was primarily due to an increase in direct cost of contracts in our Federal Solutions segment of $272.6 million and an increase in our Critical Infrastructure segment of $168.0 million.

The increases were primarily due to an increase in business volume from recent contract awards and business acquisitions.

Equity in earnings of unconsolidated joint ventures

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Equity in earnings of unconsolidated joint ventures

Equity in earnings of unconsolidated joint ventures increased in fiscal 2021 primarily due to $7.5 million from newly started joint ventures in 2021.

The remaining fluctuation was due to decreases associated with the timing of the completion of joint ventures and other small changes across multiple joint ventures as part of ordinary course timing fluctuations in our business.

In addition, there were

offsetting write-downs of $15.6 million and $15.5 million in 2021 and 2020, respectively, on a project in the Critical Infrastructure segment.

Equity in earnings of unconsolidated joint ventures for the year ended December 31, 2022 decreased by $20.5 million compared to the prior year.

The decrease was primarily related to change orders which delayed joint venture profits to future periods and a reduction in activity.

Selling, general and administrative expenses

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Selling, general and administrative expenses

SG&A expenses for the years ended December 31, 2021 and December 31, 2020 include $19.6 million and $9.8 million, respectively, of compensation cost associated with equity-based awards.

Equity awards issued prior to the Company’s IPO were settled in cash and were remeasured to an updated fair value at each reporting period until the award was settled.

Compensation cost was trued-up at each reporting period for changes in fair value pro-rated for the portion of the requisite service period rendered.

Subsequent to the IPO, the share price of the Company’s common stock is based on quoted prices on the New York Stock Exchange.

The plans in which these awards were granted have been frozen and the Company does not currently intend to grant any further cash settled equity-based awards.

Excluding the compensation costs discussed above, SG&A for the years ended December 31, 2021 and December 31, 2020 was $737.6 million and $719.3 million, respectively.

The increase in SG&A of $18.3 million, exclusive of equity compensation cost, was primarily due to additional expenses of $25.4 million associated with business acquisitions and $15.3 million intangible asset amortization.

These increases were partially offset by $8.7 million reduction in transaction-related costs, $11.9 million reduction in incentive costs, and $1.8 million in other costs.

SG&A expenses for the year ended December 31, 2022 increased by $20.2 million compared to the prior year.

Total other (expense) income

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Total other income (expense)

Interest expense decreased in 2021 primarily due to early adoption of ASU 2020-06 in the first quarter of 2021, resulting in no interest expense related to amortization of the debt discount during 2021 compared to $3.8 million in 2020.

Refer to “Note 2 – Summary of Significant Accounting Policies” and “Note 11 – Debt and Credit Facilities” in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Interest expense increased for the year ended December 31, 2022 compared to the corresponding period last year primarily due to interest expense from borrowings under the Credit Agreement and

Delayed Draw Term Loan, neither of which had outstanding balances during the year ended December 31, 2021.

The amounts in other income (expense), net, are primarily related to transaction gains and losses on foreign currency transactions and sublease income.

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Income tax expense

Income tax expense decreased in fiscal 2021 primarily due to an increase in untaxed income attributable to noncontrolling interests, release of a valuation allowance on foreign tax credits, a change in jurisdictional earnings, and a release of uncertain tax positions, partially offset by a write down of a foreign tax receivable and an increase in executive compensation subject to IRC Section 162(m) limitations.

Our effective tax rate was 23.9% and 21.0% for the years ended December 31, 2022 and 2021, respectively.

The difference between the statutory U.S.

federal income tax rate of 21% and the effective tax rate for the year ended December 31, 2021 primarily relates to state income taxes and a recorded valuation allowance on foreign tax credit carryovers, a write down of a foreign tax receivable and an increase in executive compensation subject to IRC Section 162(m) limitations, offset by benefits related to income attributable to noncontrolling interest, release of uncertain tax positions, and federal research tax credits.

For the year ended December 31, 2020, the difference primarily relates to state income taxes and a recorded valuation allowance on foreign tax credits, partially offset by benefits related to income attributable to noncontrolling interest and federal research tax credits.

This provision resulted in additional cash tax liability and additional net deferred tax assets for the 2022 tax year of approximately $16 million.

This 2022 additional cash tax liability was offset by other carryforward tax attributes.

While the largest impact of this provision was to our 2022 cash tax liability, the impact will decline over the five-year amortization period and is expected to have an immaterial impact beginning in year six.

Congress is considering legislation that would defer the amortization requirement to later years, possibly with retroactive effect.

Non-GAAP Financial Measures:

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Adjusted EBITDA Margin (3)

A reconciliation of net income (loss) attributable to Parsons Corporation to Adjusted EBITDA is set forth below (in thousands).

(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.

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Adjusted EBITDA

Reflects costs incurred in connection with acquisitions, and other non-recurring transaction costs, primarily fees paid for professional services and employee retention.

Reflects costs associated with and related to our corporate restructuring initiatives.

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.

(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 and related to 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 included in this Annual Report on Form 10-K because it is used by management and our board of directors to assess our financial performance both on a segment and on a consolidated basis.

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We define Adjusted EBITDA as net income attributable to Parsons Corporation, adjusted to include net income 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, equity-based compensation, and expenses related to our corporate restructuring initiatives.

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, equity-based compensation, 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.

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Adjusted EBITDA attributable to Parsons Corporation

The increase in Federal Solutions revenue for the year ended December 31, 2022 compared to the corresponding period last year was primarily due to increases from business acquisitions of $205 million, and increases in business volume from recent contract awards and increased activity on existing contracts.

The increase in Federal Solutions Adjusted EBITDA attributable to Parsons Corporation for the year ended December 31, 2022 compared to the prior year was primarily due to increases in business volume, increases related to acquisitions, and a write down on a project in the corresponding period last year.

The increase in Federal Solutions revenue for the year ended December 31, 2023 compared to the corresponding period last year was primarily due to organic growth of 25% and increases from business acquisitions of $264.1 million.

The increase in Federal Solutions Adjusted EBITDA attributable to Parsons Corporation for the year ended December 31, 2023 compared to the prior year was primarily due to the factors impacting revenue discussed above and non-recurring incentive fees of approximately $20 million.

These increases were offset by higher selling general and administrative costs from business acquisitions, business development and sales activities, and incentive compensation costs as a result of the company's strong operating performance and growing employee base.

Critical Infrastructure

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Adjusted EBITDA attributable to Parsons Corporation

The increase in revenue for the year ended December 31, 2022 compared to the corresponding period last year was primarily due to an increase in business volume from recent contract awards, increased activity on existing contracts, increased hiring activity, and write downs on projects in the corresponding period last year.

The increase in Critical Infrastructure Adjusted EBITDA attributable to Parsons for the year ended December 31, 2022 compared to the corresponding period last year was primarily due to increases in business volume, partially offset by reduced equity in earnings of $21.9 million and increased SG&A.

The increase in Critical Infrastructure revenue for the year ended December 31, 2023 compared to the corresponding period last year was substantially due to organic growth.

The increase in Critical Infrastructure Adjusted EBITDA attributable to Parsons for the year ended December 31, 2023 compared to the corresponding period last year was primarily due to increases in business volume and a decrease in direct cost of contracts of $38 million related to a legal matter on a previously completed contract, offset by write-downs on joint ventures discussed above and higher selling general and administrative costs from business development and sales activities and higher incentive compensation costs as a result of the company's strong operating performance and growing employee base.

Year ended December 31, 2022 compared to year ended December 31, 2021

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Adjusted EBITDA attributable to Parsons Corporation

The decrease in Federal Solutions revenue for the year ended December 31, 2021 compared to the corresponding period last year was primarily due to a decrease in business volume from program completions and transitions, a reserve taken on a program, and the competitive hiring environment for cleared personnel.

The decreases were partially offset by increases from business acquisitions of $160.8 million.

The decrease in Federal Solutions Adjusted EBITDA attributable to Parsons Corporation for the year ended December 31, 2021 compared to the prior year was primarily due to a $5.5 million net impact from a reserve taken on a program during 2021, compared to a $13.9 million incentive fee recognized during 2020, partially offset by an increase related to business acquisitions.

Critical Infrastructure

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Adjusted EBITDA attributable to Parsons Corporation

The decrease in revenue for the year ended December 31, 2021 compared to the corresponding period last year was primarily related to a decrease in business volume from program completions and transitions, lower pass through revenue, and write downs on projects during the year.

The decrease in Critical Infrastructure Adjusted EBITDA attributable to Parsons for the year ended December 31, 2021 compared to the corresponding period last year was primarily due to write downs on projects and a decrease in business volume.

Liquidity and Capital Resources

We currently finance our operations and capital expenditures through a combination of internally generated cash from operations, our Senior Notes, Convertible Senior Notes, Delayed Draw Term Loan and periodic borrowings under our Revolving Credit Facility.

We currently finance our operations and capital expenditures through a combination of internally generated cash from operations, our Convertible Senior Notes, Delayed Draw Term Loan and periodic borrowings under our Revolving Credit Facility.

Generally, cash provided by operating activities has been adequate to fund our operations.

Due to fluctuations in our cash flows and growth in our operations, it may be necessary from time to time in the future to borrow under Credit Agreement to meet cash demands.

Due to fluctuations in our cash flows and growth in our operations, it may be necessary from time to time in the future to borrow under our Credit Agreement to meet cash demands.

Our management regularly monitors certain liquidity measures to monitor performance.

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As of December 31, 2023, we believe we have adequate liquidity and capital resources to fund our operations, support our debt service and support our ongoing acquisition strategy for at least the next twelve months based on the liquidity from cash provided by our operating activities, cash and cash equivalents on-hand and our borrowing capacity under our Revolving Credit Facility.

During October 2022, we prepaid the private placement debt of $200.0 million with borrowings under the revolving credit facility and subsequently borrowed $350.0 million on the 2022 Delayed Draw Term Loan.

Management continually monitors debt maturities to strategically execute optimal terms and ensure appropriate levels of working capital liquidity are maintained for the company.

During October 2022, we prepaid private placement debt of $200.0 million with borrowings under the revolving credit facility and subsequently borrowed $350.0 million on the 2022 Delayed Draw Term Loan.

Proceeds from the Delayed Draw Term Loan were used to pay down the borrowings under the revolving credit facility.

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Net days sales outstanding, which we refer to as net DSO, is calculated by dividing (i) accounts receivable (net of project accruals, billings in excess of revenue and accounts payable) by (ii) average revenue per day (calculated by dividing trailing twelve months revenue by the number of days in that period).

We focus on collecting outstanding receivables to reduce net DSO and working capital.

Net DSO was 69 days at December 31, 2022, up from 68 days at December 31, 2021.

DSO was 64 days at December 31, 2020.

We focus on collecting outstanding receivables to reduce net DSO and improve working capital.

Net DSO was 59 days at December 31, 2023, down from 69 days at December 31, 2022.

and 68 days at December 31, 2021.

Our working capital (current assets less current liabilities) was $726.6 million at December 31, 2023, $611.7 million at December 31, 2022 and $601.6 million at December 31, 2021.

Our cash, cash equivalents and restricted cash decreased by $81.3 million to $262.5 million at December 31, 2022 from $343.9 million at December 31, 2021.

This compares to a decrease in cash, cash equivalents and restricted cash of $143.3 million to $343.9 million at December 31, 2021 from $487.2 million at December 31, 2020.

Our cash and cash equivalents increased by $10.4 million to $272.9 million at December 31, 2023 from $262.5 million at December 31, 2022.

This compares to a decrease in cash and cash equivalents of $81.3 million to $262.5 million at December 31, 2022 from $343.9 million at December 31, 2021.

The following table summarizes our sources and uses of cash over the periods presented (in thousands):

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Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash (used in) provided by financing activities

Effect of exchange rate changes

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for noncash items, such as:

equity in earnings of unconsolidated joint ventures, contributions of treasury stock, depreciation and amortization of property and equipment and intangible assets, provisions for doubtful accounts, amortization of deferred gains, and impairment charges.

equity in (losses) earnings of unconsolidated joint ventures, contributions of treasury stock, depreciation and amortization of property and equipment and intangible assets, provisions for doubtful accounts, amortization of deferred gains, and impairment charges.

The timing between the conversion of our billed and unbilled receivables into cash from our customers and disbursements to our employees and vendors is the primary driver of changes in our working capital.

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Net cash provided by operating activities increased $170.2 million to $407.7 million during 2023 compared to $237.5 million during 2022.

The increase in net cash provided by operating activities is primarily due to a $170.1 million change in net income after adjusting for non-cash items and the 10-day improvement in DSO.

This increase was offset, in part, from changes in our working capital accounts of $6.3 million.

The changes in the Company's various working capital accounts were driven primarily by the significant increase in business volume during the year ended December 31, 2023 compared to the corresponding period last year.

Net cash provided by operating activities increased $32.0 million to $237.5 million during 2022 compared to $205.6 million during 2021.

The increase in net cash provided by operating activities is primarily due to a $40.4 million change in net income after adjusting for non-cash items and a change in the use of cash related to other long-term liabilities of $50.1 million.

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Net DSO increased one day to 69 days as of December 31, 2022, compared to 68 as of December 31, 2021.

Net cash provided by operating activities decreased $83.6 million to $205.6 million during 2021 compared to $289.2 million during 2020.

The decrease in net cash provided by operating activities is primarily due to a $32.9 million change in net income after adjusting for non-cash items and a change in the use of cash related to our working capital accounts of $35.6 million (primarily from accounts receivable, contract assets, prepaid expenses and current assets, offset by accounts payable and accrued expenses).

Under the CARES Act, the Company received a net cash benefit in 2020 of $35.2 million from the deferral of social security taxes otherwise due from April 10, 2020 through the year ended December 31, 2020.

One-half of the deferred amount was paid during the third quarter of 2021.

The decrease was also due to a $15.0 million change in other long-term liabilities.

Net DSOs increased from 64 days to 68 days primarily driven by the change in our working capital accounts discussed above.

Investing Activities

Net cash used in investing activities consists primarily of cash flows associated with capital expenditures and business acquisitions.

Net cash used in investing activities increased $176.6 million to $417.5 million during 2022 compared to $240.9 million during 2021, primarily due to the use of $379.5 million, net of cash acquired during 2022 for the acquisition of Xator compared to the use of cash of $189.6 million, net of cash acquired, for the acquisition of BlackHorse and the use of $8.7 million, net of cash acquired, for the acquisition of Echo Ridge, both in 2021.

Also impacting the increase in cash used in investing activities was a decrease in proceeds from sale of investments in unconsolidated joint ventures to zero during 2022

compared to $14.8 million during 2021.

Net cash used in investing activities decreased $41.5 million to $376.0 million during 2023 compared to $417.5 million during 2022.

The change was primarily driven by a $157.5 million reduction in payments for acquisitions offset in part by a $102.0 million increase in investments in unconsolidated joint ventures, a $9.8 million increase in capital expenditures (primarily from computer systems and equipment) and a change from return of investments in unconsolidated joint ventures of $4.4 million.

Net cash used in investing activities increased $176.6 million to $417.5 million during 2022 compared to $240.9 million during 2021, primarily due to the use of $379.5 million, net of cash acquired

during 2022 for the acquisition of Xator compared to the use of cash of $189.6 million, net of cash acquired, for the acquisition of BlackHorse and the use of $8.7 million, net of cash acquired, for the acquisition of Echo Ridge, both in 2021.

Also impacting the increase in cash used in investing activities was a decrease in proceeds from sale of investments in unconsolidated joint ventures to zero during 2022 compared to $14.8 million during 2021.

These increases in cash used in investment activities were offset in part by a $20.8 million decrease in investments in unconsolidated joint ventures.

Net cash used in investing activities decreased $105.5 million to $240.9 million during 2021 compared to $346.4 million during 2020, primarily due to the use of $189.6 million, net of cash acquired, for the acquisition of BlackHorse and the use of $8.7 million, net of cash acquired, for the acquisition of Echo Ridge in 2021, compared to $302.4 million, net of cash acquired, for the acquisition of Braxton in 2020.

Net cash used in investing activities also decreased due to proceeds from sale of investments in unconsolidated joint ventures of $14.8 million and a decrease in cash used for capital expenditures of $12.9 million, offset by increased investments in unconsolidated joint ventures of $27.4 million.

Financing Activities

Net cash provided by (used in) financing activities is primarily associated with proceeds from debt, the repayment thereof, transactions related to the Company’s common stock, and contributions by and distributions to noncontrolling interests.

Net cash provided by (used in) financing activities increased $206.9 million to $100.4 million in 2022 compared to $(106.5) million in 2021.

Net cash (used in) provided by financing activities changed by $122.2 million to $(21.9) million in 2023 compared to $100.4 million in 2022.

This change was primarily due to a decrease of $150.0 million from net borrowing related activities and a $7.4 million change in contributions by noncontrolling interests offset by a decrease in distributions to noncontrolling interests of $11.6 billion, a decrease in cash used to repurchase common stock of $11.0 million and from $11.2 million of payments in warrants for the year ended December 31, 2022 that did not reoccur in 2023.

Net cash provided by (used in) financing activities increased $206.9 million to $100.4 million in 2022

compared to $(106.5) million in 2021.

Cash provided by financing activities in 2022 included $916.0 million in proceeds from borrowings under our credit agreement and $350 million in proceeds from the Delayed Draw Term Loan.

These increases in cash provided by financing activities were offset in part by a change in repayments borrowings under our credit agreement of $866.0 million and a $200 million repayment under our private placement debt.

Net cash (used in) provided by financing activities decreased $454.7 million to ($106.5) million in 2021 compared to $348.2 million in 2020.

2021 activities include repayment of the $50.0 million Series A tranche of our Senior Note during July 2021, repurchases of common stock of $21.7 million and increased distributions to noncontrolling interests of $32.1 million, compared to $348.5 million of net proceeds from the issuance of Convertible Senior Notes in 2020.

Letters of Credit

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Revenue Recognition and Cost Estimation

In our industry, recognition of revenue and profit on long-term contracts requires the use of assumptions and estimates related to total contract revenue, total cost at completion, and the measurement of progress towards completion.

In our industry, recognition of revenue and profit on long-term contracts requires the use of assumptions and estimates related to total contract revenue, total cost at completion, and the

measurement of progress towards completion.

Estimates are continually evaluated as work progresses and are revised when necessary.

When a change in estimate is determined to have an impact on contract revenue or profit, we record a positive or negative adjustment to the consolidated statements of income.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

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Our contracts generally do not include a significant financing component.

The transaction price for our contracts may include variable consideration, which includes increases to the transaction price for approved and unpriced change orders, claims and incentives, and reductions to transaction price for liquidated damages.

The transaction price for our contracts may include variable consideration, which includes award and incentive fees, increases to the transaction price for approved and unpriced change orders, claims, and reductions to transaction price for liquidated damages.

We recognize adjustments in estimated profit on contracts under the cumulative catch-up method.

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We recognize revenue for most of our contracts over time as performance obligations are satisfied, as we are continuously transferring control to the customer.

Typically, revenue is recognized over time using an input measure (i.e., costs incurred to date relative to total estimated costs at completion) to measure progress.

Typically, revenue is recognized over time

using an input measure (i.e., costs incurred to date relative to total estimated costs at completion) to measure progress.

We often enter into contracts in which the amount billed to the customer corresponds directly with the amount of work performed.

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We determine if an arrangement is a lease at inception.

Operating leases are included in operating lease ROU assets and current and long-term operating lease liabilities in the consolidated balance sheets.

Operating leases are included in operating lease right-of-use (ROU) assets and current and long-term operating lease liabilities in the consolidated balance sheets.

Finance leases are included in other noncurrent assets, accrued expenses and other current liabilities and other long-term liabilities in the consolidated balance sheets.

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We have 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 10 years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the leases up to the seventh year.

Our leases have remaining lease terms of one year to eight years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the leases up to the third year.

Business Combinations

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Transaction costs associated with business combinations are expensed as incurred.

The determination of fair values of assets acquired and liabilities assumed requires the Company to make estimates and use valuation techniques when a market value is not readily available.

determination of fair values of assets acquired and liabilities assumed requires the Company to make estimates and use valuation techniques when a market value is not readily available.

The Company adjusts the preliminary purchase prices allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as the Company obtains more information as to facts and circumstances existing at the acquisition date.

Certain business acquisitions include contingent earn-out arrangements, which are generally based on meeting a revenue target.

The fair value of this contingent consideration is included as part of the purchase price of the acquired company on the acquisition date and recorded in at its fair value within other liabilities or other long-term liabilities, as appropriate on the consolidated balance sheets.

We measure our contingent consideration at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy.The fair value of contingent consideration is determined using the option pricing method prescribed in the earnout valuation guide published by The Appraisal Foundation.

We consider three major risks associated with earnout, i.e.

risk in the underlying metric, risk in the earnout structure, and counterparty credit risk.

Our valuation model is based on the Black Scholes option pricing formula and major assumptions including projected revenue, the revenue discount rate, the revenue volatility, and the Company's credit adjusted discount rate.

Subsequent adjustments to these assumptions can cause changes to the measure of contingent consideration.

The Company reassess the estimated fair value of contingent consideration on a quarterly basis with any change in the fair value recorded to selling, general and administrative expense in the current quarter.

The updated fair value could differ materially from the acquisition date fair value.

The amount of contingent consideration ultimately paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows.

Any amounts paid in excess of the liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows.

Goodwill and Intangible Assets

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This process requires significant judgments and estimates, including assumptions about our strategic plans for operations as well as the interpretation of current economic indicators.

Development of the present value of future cash flow projections includes assumptions and estimates derived from a review of our expected revenue growth rates, profit margins, business plans, cost of capital and tax rates.

Development of the present value of future cash flow projections includes assumptions and estimates derived from a review of our expected

revenue growth rates, profit margins, business plans, cost of capital and tax rates.

We also make certain assumptions about future market conditions, market prices, interest rates and changes in business strategies.

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The guideline company approach focuses on comparing the reporting unit to select reasonably similar (or ”guideline”) publicly traded companies.

Under this method, valuation multiples are derived from the median of the operating data of selected guideline companies and applied to the operating data of the reporting unit to arrive at an indicati ve value.

In the similar transactions approach, consideration is given to prices paid in recent transactions that have occurred in the reporting unit's industry or in related industries.

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Equal weighing is given to each of the methods used to estimate the fair value of reporting units.

Our last review at October 1, 20 2 2 (i.e.

, the first day of our fourth quarter in fiscal 20 2 2 ), indicated that we had no impairment of goodwill, and all of our reporting units had estimated fair values that were in excess of their carrying values, including goodwill.

Our last review at October 1, 2023 (i.e., the first day of our fourth quarter in fiscal 2023), indicated that we had no impairment of goodwill, and all of our reporting units had estimated fair values that were in excess of their carrying values, including goodwill.

Intangible assets with finite lives arise from business acquisitions and are amortized based on the period over which the contractual or economic benefit of the intangible assets are expected to be realized or on a straight-line basis over the useful lives of the underlying assets, ranging from one to ten years.

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or (c) an equity investor has voting rights that are disproportionate to its economic interest and substantially all of the entity’s activities are on behalf of the investor with disproportionately low voting rights.

Our VIEs may be funded through contributions, loans and/or advances from the joint venture partners or by advances and/or letters of credit provided by clients.

Our VIEs may be funded through contributions, loans and/or advances from the joint venture

partners or by advances and/or letters of credit provided by clients.

Certain VIEs are directly governed, managed, operated and administered by the joint venture partners.

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Contributions of our common stock to the ESOP are made annually in amounts determined by our 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.

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, whichever occurs first.

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 our common stock based on quoted prices of a share of our common stock on the NYSE.

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We recognize compensation costs for these awards on either a straight-line or accelerated basis over the vesting period of the award in “Selling, general and administrative expenses” in the consolidated statements of income.

For awards that include market conditions, the grant date fair value is determined using a Monte Carlo simulation.

Self-Insurance

We are self-insured for a portion of our losses and liabilities primarily associated with workers’ compensation, general, professional, automobile, employee matters, certain medical plans, and project specific liability claims.

Losses are accrued based upon our estimates of the aggregate liability for claims incurred using historical experience and certain actuarial assumptions, as provided by an independent

Losses are accrued based upon our estimates of the aggregate liability for claims incurred using historical experience and certain actuarial assumptions, as provided by an independent actuary.

The estimate of self-insurance liability includes an estimate of incurred but not reported claims, based on data compiled from historical experience.

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Management believes that there are no claims or assessments outstanding which would materially affect our consolidated results of operations or our financial position.

Qualitative and Quantitative Disclosure About Market Risk

Qualitative and Quantita tive Disclosure About Market Risk

Interest Rate Risk

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As of December 31, 2023 and December 31, 2022, there were no amounts outstanding under the Revolving Credit Facility.

Borrowings under the Revolving Credit Facility effective June 2021 bear interest at either an adjusted 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%, both based on the leverage ratio of the Company at the end of each quarter.

Prior to June 2021, interest on borrowings under the Credit Facility were at either the base rate (as defined in the Credit Agreement), plus an applicable margin, or LIBOR plus an applicable margin.

The applicable margin for base rate loans was a range of 0.125% to 1.00% and the applicable margin for LIBOR loans was a range of 1.125% to 2.00%, both based on the leverage ratio of the Company at the end of each quarter.

Borrowings under the Revolving Credit Facility effective June 2021 bear interest

at either an adjusted 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%, both based on the leverage ratio of the Company at the end of each quarter.

As of December 31, 2023, there was $350.0 million outstanding under the 2022 Delayed Draw Term Loan.

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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.

The interest rate at December 31, 2022 was 5.7%.

The interest rate at December 31, 2023 and December 31, 2022 was 6.6% and 5.6%, respectively.

Foreign Currency Exchange Risk

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As a result of this natural hedge, we generally do not need to hedge foreign currency cash flows for contract work performed.

Financial Statements and Supplementary Data.

Financial Statement s and Supplementary Data.

The information required by this item 8 is submitted as a separate section beginning on page F-1 of this Annual Report on Form 10-K and is incorporated by reference.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis