Item 1. Financial Statements
Item 1. Financial Statements.
PARSONS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share information)
(Unaudited)
March 31, 2021
December 31, 2020
Assets
Current assets:
Cash and cash equivalents (including $ 52,324 and $ 75,220 Cash of consolidated joint ventures)
$
398,178
$
483,609
Restricted cash and investments
1,233
3,606
Accounts receivable, net (including $ 215,641 and $ 190,643 Accounts receivable of consolidated joint ventures, net)
693,584
698,578
Contract assets (including $ 24,539 and $ 23,498 Contract assets of consolidated joint ventures)
607,676
576,568
Prepaid expenses and other current assets (including $ 7,260 and $ 3,045 Prepaid expenses and other current assets of consolidated joint ventures)
101,536
80,769
Total current assets
1,802,207
1,843,130
Property and equipment, net (including $ 2,528 and $ 2,629 Property and equipment of consolidated joint ventures, net)
115,544
121,027
Right of use assets, operating leases
204,189
210,398
Goodwill
1,261,189
1,261,978
Investments in and advances to unconsolidated joint ventures
76,017
68,975
Intangible assets, net
222,451
245,958
Deferred tax assets
143,022
130,200
Other noncurrent assets
40,382
56,038
Total assets
$
3,865,001
$
3,937,704
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable (including $ 101,593 and $ 97,810 Accounts payable of consolidated joint ventures)
$
219,220
$
225,679
Accrued expenses and other current liabilities (including $ 75,606 and $ 68,801 Accrued expenses and other current liabilities of consolidated joint ventures)
595,058
650,753
Contract liabilities (including $ 35,744 and $ 33,922 Contract liabilities of consolidated joint ventures)
186,028
201,864
Short-term lease liabilities, operating leases
54,113
54,133
Income taxes payable
6,248
4,980
Short-term debt
50,000
50,000
Total current liabilities
1,110,667
1,187,409
Long-term employee incentives
21,218
21,828
Long-term debt
590,346
539,998
Long-term lease liabilities, operating leases
175,584
182,467
Deferred tax liabilities
13,146
12,285
Other long-term liabilities
113,598
132,300
Total liabilities
2,024,559
2,076,287
Contingencies (Note 12)
Shareholders' equity:
Common stock, $ 1 par value; authorized 1,000,000,000 shares; 146,609,288 and 146,609,288 shares issued; 26,845,697 and 25,719,350 public shares outstanding; 75,560,749 and 76,641,312 ESOP shares outstanding
146,654
146,609
Treasury stock, 44,248,626 shares at cost
( 899,328
)
( 899,328
)
Additional paid-in capital
2,667,130
2,700,925
Accumulated deficit
( 108,720
)
( 120,569
)
Accumulated other comprehensive loss
( 8,937
)
( 13,865
)
Total Parsons Corporation shareholders' equity
1,796,799
1,813,772
Noncontrolling interests
43,643
47,645
Total shareholders' equity
1,840,442
1,861,417
Total liabilities and shareholders' equity
$
3,865,001
$
3,937,704
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, 2021
March 31, 2020
Revenue
$
874,697
$
970,993
Direct cost of contracts
669,082
769,632
Equity in earnings of unconsolidated joint ventures
7,530
6,114
Selling, general and administrative expenses
187,522
183,774
Operating income
25,623
23,701
Interest income
98
228
Interest expense
( 4,541
)
( 4,022
)
Other income (expense), net
( 1,791
)
( 452
)
Total other income (expense)
( 6,234
)
( 4,246
)
Income before income tax expense
19,389
19,455
Income tax expense
( 5,375
)
( 5,084
)
Net income including noncontrolling interests
14,014
14,371
Net income attributable to noncontrolling interests
( 4,975
)
( 1,398
)
Net income attributable to Parsons Corporation
$
9,039
$
12,973
Earnings per share:
Basic
$
0.09
$
0.13
Diluted
$
0.09
$
0.13
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, 2021
March 31, 2020
Net income including noncontrolling interests
$
14,014
$
14,371
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment, net of tax
4,914
( 8,800
)
Pension adjustments, net of tax
19
( 61
)
Comprehensive income including noncontrolling interests, net of tax
18,947
5,510
Comprehensive income attributable to noncontrolling interests, net of tax
( 4,980
)
( 1,390
)
Comprehensive income attributable to Parsons Corporation,
net of tax
$
13,967
$
4,120
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, 2021
March 31, 2020
Cash flows from operating activities:
Net income including noncontrolling interests
$
14,014
$
14,371
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization
34,673
32,409
Amortization of debt issue costs
665
173
Loss (gain) on disposal of property and equipment
267
( 104
)
Deferred taxes
403
5,514
Foreign currency transaction gains and losses
2,220
1,383
Equity in earnings of unconsolidated joint ventures
( 7,530
)
( 6,114
)
Return on investments in unconsolidated joint ventures
13,180
6,551
Stock-based compensation
7,206
2,252
Contributions of treasury stock
13,153
14,871
Changes in assets and liabilities, net of acquisitions and newly consolidated
joint ventures:
Accounts receivable
2,597
( 91,734
)
Contract assets
( 31,711
)
( 52,346
)
Prepaid expenses and other assets
( 5,386
)
( 3,766
)
Accounts payable
( 6,658
)
19,788
Accrued expenses and other current liabilities
( 68,928
)
( 24,336
)
Contract liabilities
( 16,086
)
11,416
Income taxes
1,268
( 6,212
)
Other long-term liabilities
( 19,312
)
( 43,099
)
Net cash used in operating activities
( 65,965
)
( 118,983
)
Cash flows from investing activities:
Capital expenditures
( 4,449
)
( 12,637
)
Proceeds from sale of property and equipment
164
485
Payments for acquisitions, net of cash acquired
1,064
-
Investments in unconsolidated joint ventures
( 22,240
)
( 50
)
Return of investments in unconsolidated joint ventures
116
-
Proceeds from sales of investments in unconsolidated joint ventures
14,300
-
Net cash used in investing activities
( 11,045
)
( 12,202
)
Cash flows from financing activities:
Proceeds from borrowings under credit agreement
-
131,500
Repayments of borrowings under credit agreement
-
( 66,500
)
Contributions by noncontrolling interests
7
221
Distributions to noncontrolling interests
( 8,989
)
( 360
)
Taxes paid on vested stock
( 2,242
)
( 1,149
)
Net cash (used in) provided by financing activities
( 11,224
)
63,712
Effect of exchange rate changes
430
( 1,179
)
Net decrease in cash, cash equivalents, and restricted cash
( 87,804
)
( 68,652
)
Cash, cash equivalents and restricted cash:
Beginning of year
487,215
195,374
End of period
$
399,411
$
126,722
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, 2021 and March 31, 2020
(In thousands)
(Unaudited)
Retained
Accumulated
Additional
Earnings
Other
Total
Common
Treasury
Paid-in
(Accumulated
Comprehensive
Parsons
Noncontrolling
Stock
Stock
Capital
Deficit)
Income (Loss)
Equity
Interests
Total
Balance at December 31, 2020
$
146,609
$
( 899,328
)
$
2,700,925
$
( 120,569
)
$
( 13,865
)
$
1,813,772
$
47,645
$
1,861,417
Comprehensive income
Net income
-
-
-
9,039
-
9,039
4,975
14,014
Foreign currency translation gain, net
-
-
-
-
4,909
4,909
5
4,914
Pension adjustments, net
-
-
-
-
19
19
-
19
Adoption of ASU 2020-06
-
-
( 40,002
)
2,782
-
( 37,220
)
-
( 37,220
)
Contributions
-
-
-
-
-
-
7
7
Distributions
-
-
-
-
-
-
( 8,989
)
( 8,989
)
Issuance of equity securities, net of retirements
45
-
( 999
)
28
-
( 926
)
-
( 926
)
Stock-based compensation
-
-
7,206
-
-
7,206
-
7,206
Balance at March 31, 2021
$
146,654
$
( 899,328
)
$
2,667,130
$
( 108,720
)
$
( 8,937
)
$
1,796,799
$
43,643
$
1,840,442
Balance at December 31, 2019
$
146,441
$
( 934,240
)
$
2,649,975
$
( 218,025
)
$
( 14,261
)
$
1,629,890
$
30,866
$
1,660,756
Comprehensive income
Net income
-
-
-
12,973
-
12,973
1,398
14,371
Foreign currency translation gain, net
-
-
-
-
( 8,792
)
( 8,792
)
( 8
)
( 8,800
)
Pension adjustments, net
-
-
-
-
( 61
)
( 61
)
-
( 61
)
Adoption of ASU 2016-13
-
-
-
( 1,000
)
-
( 1,000
)
-
( 1,000
)
Contributions
-
-
-
-
-
-
221
221
Distributions
-
-
-
-
-
-
( 360
)
( 360
)
Stock-based compensation
-
-
2,252
-
-
2,252
-
2,252
Balance at March 31, 2020
$
146,441
$
( 934,240
)
$
2,652,227
$
( 206,052
)
$
( 23,114
)
$
1,635,262
$
32,117
$
1,667,379
The accompanying notes are an integral part of these consolidated financial statements.
5
Parsons Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
1.
Description of Operations
Organization
Parsons Corporation, a Delaware corporation, and its subsidiaries (collectively, the “Company”) is a leading provider of technology-driven solutions in the defense, intelligence and critical infrastructure markets. We provide software and hardware products, technical services and integrated solutions to support our customers’ missions. We have developed significant expertise and differentiated capabilities in key areas of cybersecurity, intelligence, missile defense, C5ISR, space, geospatial, and connected communities. By combining our talented team of professionals and advanced technology, we help solve complex technical challenges to enable a safer, smarter and more interconnected world.
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, 2020.
In the opinion of management, the consolidated financial statements reflect all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year or for future years.
This Quarterly Report on Form 10-Q includes the accounts of Parsons Corporation and its subsidiaries and affiliates which it controls. Interests in joint ventures that are controlled by the Company, or for which the Company is otherwise deemed to be the primary beneficiary, are consolidated. For joint ventures in which the Company does not have a controlling interest, but exerts a significant influence, the Company applies the equity method of accounting (see “Note 14 – Investments in and Advances to Joint Ventures" for further discussion). Intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. The Company’s most significant estimates and judgments involve revenue recognition with respect to the determination of the costs to complete contracts and transaction price; determination of self-insurance reserves; useful lives of property and equipment and intangible assets; calculation of allowance for doubtful accounts; valuation of deferred income tax assets and uncertain tax positions, among others. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and “Note 2—Summary of Significant Accounting Polices” in the notes to our consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2020, 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.
Employee Stock Purchase Plan
During the second quarter of fiscal 2020, initial purchases of the Company’s common Stock were made under the Parsons Employee Stock Purchase Program (“ESPP”). Under the ESPP, eligible employees who elect to participate are granted the right to purchase shares of the common stock of Parsons at a discount that is limited to 5 % of the per-share market value on the day shares are sold to employees. Purchases of common stock under the ESPP are included in
6
“proceeds from issuance of common stock” in cash flows from financing activities in the Consolidated Statements of Cash Flows.
3 .
New Accounting Pronouncements
In the first quarter of 2021, the Company early adopted Accounting Standards Update (“ASU”) ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06)”. The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. The guidance also includes targeted improvements to the disclosures for convertible instruments and earnings per share. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company adopted ASU 2020-06 in the first quarter of 2021 using the modified retrospective method which resulted in a reduction in non-cash interest expense and reclassification of the equity portion of the Convertible Senior Notes to “Long-term debt” on the consolidated balance sheet.
In the first quarter of 2021, the Company adopted ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”)”. ASU 2019-12 was issued as a means to reduce the complexity of accounting for income taxes. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The adoption of ASU 2019-12 did not have a material impact on the consolidated financial statements.
In the first quarter of 2020, the Company adopted ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The amendments in ASU 2016-13 replaced the incurred loss impairment methodology in current practice with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements.
4.
Acquisitions
Braxton Science & Technology Group
On November 19, 2020, the Company acquired a 100 % ownership interest in Braxton Science & Technology Group (“Braxton”), a privately-owned company, for $ 308.8 million in cash. 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 entirely funded by cash on hand in August 2020, as described in “Note 12—Debt and Credit Facilities”. In connection with this acquisition, the Company recognized $ 0.6 million of acquisition-related “Selling, general and administrative expense” in the consolidated statements of income for the three months ended March 31, 2021, including legal fees, consulting fees, and other miscellaneous direct expenses associated with the acquisition. Braxton allows Parsons to capitalize on the quickly evolving space missions of its national security space customers and address rapid market growth driven by proliferated low earth orbit constellations, small satellite expansion, and space cyber resiliency.
7
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed based on the purchase price allocation as of the date of acquisition (in thousands):
Amount
Cash and cash equivalents
$
7,006
Accounts receivable
18,163
Contract assets
8,350
Prepaid expenses and other current assets
3,036
Property and equipment
5,114
Right of use assets, operating leases
10,788
Goodwill
211,524
Intangible assets
74,950
Accounts payable
( 7,464
)
Accrued expenses and other current liabilities
( 9,845
)
Contract liabilities
( 300
)
Short-term lease liabilities, operating leases
( 1,915
)
Long-term lease liabilities, operating leases
( 8,873
)
Deferred tax liabilities
( 1,694
)
Net assets acquired
$
308,840
Of the total purchase price, the following values were assigned to intangible assets (in thousands, except for years):
Gross
Carrying
Amount
Amortization
Period
(in years)
Customer relationships
$
34,100
12
Backlog
38,200
3
Developed technologies
2,000
6
Non-compete agreements
650
3
Amortization expense of $ 4.1 million related to these intangible assets was recorded for the three months ended March 31, 2021. The entire value of goodwill was assigned to the Federal Solutions reporting unit and represents synergies expected to be realized from this business combination. Goodwill of $ 196.3 million is deductible for tax purposes.
The amount of revenue generated by Braxton and included within consolidated revenues is $ 31.0 million for the three months ended March 31, 2021. 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 the net assets acquired.
Supplemental Pro Forma Information (Unaudited)
Supplemental information of unaudited pro forma operating results assuming the Braxton acquisition had been consummated as of the beginning of fiscal year 2019 (in thousands) is as follows:
Three Months Ended
March 31, 2021
March 31, 2020
Pro forma Revenue
$
874,697
$
1,001,337
Pro forma Net Income
15,354
14,459
8
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, 2021
March 31, 2020
Fixed-Price
$
229,942
$
308,308
Time-and-Materials
239,665
252,439
Cost-Plus
405,090
410,246
Total
$
874,697
$
970,993
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, 2021 and December 31, 2020 were as follows (in thousands):
March 31, 2021
December 31, 2020
Contract assets
$
607,676
$
576,568
Contract liabilities
186,028
201,864
Net contract assets (liabilities) (1)
$
421,648
$
374,704
(1)
Total contract retentions included in net contract assets (liabilities) were $ 92.3 million as of March 31, 2021, of which $ 41.0 million are not expected to be paid in the next 12 months. Total contract retentions included in net contract assets (liabilities) were $ 93.8 million as of December 31, 2020. Contract assets at March 31, 2021 and December 31, 2020 include $ 117.8 million and $ 116.6 million, respectively, related to unapproved change orders, claims, and requests for equitable adjustment. For the three months ended March 31, 2021 and March 31, 2020, 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, 2021 and March 31, 2020, the Company recognized revenue of $ 69.1 million and $ 94.3 million, respectively that was included in the corresponding contract liability balances at December 31, 2020 and December 31, 2019, respectively. Certain changes in contract assets and contract liabilities consisted of the following:
March 31, 2021
December 31, 2020
Acquired contract assets
$
-
$
8,350
Acquired contract liabilities
-
300
There was no significant impairment of contract assets recognized during the three months ended March 31, 2021 and March 31, 2020.
There were no amounts due to revisions in estimates, such as changes in estimated claims or incentives, related to performance obligations partially satisfied in previous periods that individually had an impact of $ 5 million or more on revenue during the three months ended March 31, 2021 and March 31, 2020.
9
Accounts Receivable, net
Accounts receivable, net consisted of the following as of March 31, 2021 and December 31, 2020 (in thousands):
2021
2020
Billed
$
521,031
$
512,357
Unbilled
176,552
190,222
Total accounts receivable, gross
697,583
702,579
Allowance for doubtful accounts
( 3,999
)
( 4,001
)
Total accounts receivable, net
$
693,584
$
698,578
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. COVID-19 Impacts: We have not seen and do not expect there to be a risk of non-payment from either our government agency or commercial customers. We have experienced payment delays due to administrative limitations from both types of customers.
Transaction Price Allocated to the Remaining Unsatisfied Performance Obligations
The Company’s remaining unsatisfied performance obligations (“RUPO”) as of March 31, 2021 represent a measure of the total dollar value of work to be performed on contracts awarded and in-progress. The Company had $ 5.1 billion in RUPO as of March 31, 2021.
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, 2021 over the following periods (in thousands):
Period RUPO Will Be Satisfied
Within One Year
Within One to
Two Years
Thereafter
Federal Solutions
$
1,096,552
$
493,388
$
376,121
Critical Infrastructure
1,590,691
603,192
980,126
Total
$
2,687,243
$
1,096,580
$
1,356,247
10
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 9 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 .
The components of lease costs for the three months ended March 31, 2021 and March 31, 2020 are as follows (in thousands):
Three Months Ended
March 31, 2021
March 31, 2020
Operating lease cost
$
16,361
$
17,271
Short-term lease cost
2,032
3,651
Amortization of right-of-use assets
474
254
Interest on lease liabilities
29
12
Sublease income
( 776
)
( 880
)
Total lease cost
$
18,120
$
20,308
Supplemental cash flow information related to leases for the three months ended March 31, 2021 and March 31, 2020 is as follows (in thousands):
Three Months Ended
March 31, 2021
March 31, 2020
Operating cash flows for operating leases
$
16,627
$
16,420
Operating cash flows for finance leases
30
25
Financing cash flows from finance leases
480
278
Right-of-use assets obtained in exchange for new operating lease liabilities
4,865
15,106
Right-of-use assets obtained in exchange for new finance lease liabilities
$
619
$
-
Supplemental balance sheet and other information related to leases as of March 31, 2021 and December 31, 2020 are as follows (in thousands):
March 31, 2021
December 31, 2020
Operating Leases:
Right-of-use assets
$
204,189
$
210,398
Lease liabilities:
Current
$
54,113
$
54,133
Long-term
175,584
182,467
Total operating lease liabilities
$
229,697
$
236,600
Finance Leases:
Other noncurrent assets
$
3,526
$
3,363
Accrued expenses and other current liabilities
$
1,596
$
1,461
Other long-term liabilities
$
1,740
$
1,733
Weighted Average Remaining Lease Term:
Operating leases
4.8 years
5 years
Finance leases
2.5 years
3 years
Weighted Average Discount Rate:
Operating leases
3.6
%
3.7
%
Finance leases
3.3
%
3.8
%
As of March 31, 2021, the Company has no operating leases that have not yet commenced.
11
A maturity analysis of the future undiscounted cash flows associated with the Company’s operating and finance lease liabilities as of March 31, 2021 is as follows (in thousands):
Operating Leases
Finance Leases
2021 (remaining)
$
46,223
$
1,314
2022
56,945
1,240
2023
49,438
605
2024
39,044
212
2025
28,543
87
Thereafter
29,952
-
Total lease payments
250,145
3,458
Less: imputed interest
( 20,448
)
( 122
)
Total present value of lease liabilities
$
229,697
$
3,336
7 .
Goodwill
The following table summarizes the changes in the carrying value of goodwill by reporting segment from December 31, 2020 to March 31, 2021 (in thousands):
December 31, 2020
Acquisitions
Foreign Exchange
March 31, 2021
Federal Solutions
$
1,188,882
$
( 1,953
)
$
-
$
1,186,929
Critical Infrastructure
73,096
-
1,164
74,260
Total
$
1,261,978
$
( 1,953
)
$
1,164
$
1,261,189
The ultimate impact from the COVID-19 pandemic is difficult to predict. While many uncertainties exist, we currently anticipate no material change in our financial condition or results of operations. Although the Company does not anticipate a material change to our financial condition or results of operations, the Company 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, 2021 and concluded there has no t 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, 2021
December 31, 2020
Weighted
Average
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortization
Period
(in years)
Backlog
$
147,456
$
( 106,573
)
$
40,883
$
145,855
$
( 101,038
)
$
44,817
3
Customer relationships
262,830
( 122,265
)
140,565
264,129
( 110,450
)
153,679
8
Leases
670
( 604
)
66
670
( 599
)
71
5
Developed technology
112,939
( 75,887
)
37,052
112,039
( 68,968
)
43,071
4
Trade name
8,200
( 8,067
)
133
8,200
( 7,967
)
233
1
Non-compete agreements
4,250
( 2,372
)
1,878
4,250
( 2,043
)
2,207
3
In process research and development
1,800
-
1,800
1,800
-
1,800
n/a
Other intangibles
275
( 201
)
74
275
( 195
)
80
10
Total intangible assets
$
538,420
$
( 315,969
)
$
222,451
$
537,218
$
( 291,260
)
$
245,958
The aggregate amortization expense of intangible assets for the three months ended March 31, 2021 and March 31, 2020 was $ 24.5 million and $ 22.7 million, respectively.
12
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, 2021
2021
$
73,531
2022
51,972
2023
38,595
2024
12,273
2025
9,713
Thereafter
34,567
Total
$
220,651
9 .
Property and Equipment, Net
Property and equipment consisted of the following at March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021
December 31, 2020
Useful life
(years)
Buildings and leasehold improvements
$
96,645
$
98,151
1-15
Furniture and equipment
88,674
91,036
3-10
Computer systems and equipment
163,433
160,305
3-10
Construction equipment
8,899
8,920
5-7
Construction in progress
6,878
9,202
364,529
367,614
Accumulated depreciation
( 248,985
)
( 246,587
)
Property and equipment, net
$
115,544
$
121,027
Depreciation expense for both the three months ended March 31, 2021 and March 31, 2020 was $ 9.6 million.
1 0 .
Debt and Credit Facilities
Debt consisted of the following (in thousands):
March 31, 2021
December 31, 2020
Short-Term:
Senior notes
$
50,000
$
50,000
Total Short-Term
50,000
50,000
Long-Term:
Senior notes
200,000
200,000
Convertible senior notes
400,000
400,000
Debt discount
-
( 51,138
)
Debt issuance costs
( 9,654
)
( 8,864
)
Total long-term
590,346
539,998
Total Debt
$
640,346
$
589,998
Revolving Credit Facility
In November 2017 , the Company entered into an amended and restated Credit Agreement. The Company incurred $ 2.0 million of costs in connection with this amendment. Under the agreement, the Company’s revolving credit facility was increased from $ 500 million to $ 550 million and the term of the agreement was extended through November 2022 . The borrowings under the Credit Agreement bear interest, at the Company’s option, at either the Base Rate (as defined in the Credit Agreement), plus an applicable margin, or LIBOR plus an applicable margin. The applicable margin for Base Rate loans is a range of 0.125 % to 1.00 % and the applicable margin for LIBOR loans is a range of 1.125 % to 2.00 %, both based on the leverage ratio of the Company at the end of each fiscal quarter. The rates on March 31, 2021 and December 31, 2020 were 1.86 % and 1.87 %, respectively. Borrowings under this Credit Agreement are guaranteed by certain
13
Company operating subsidiaries. Letters of credit commitments outstanding under this agreement aggregated to $ 45.3 million and $ 44.9 million at March 31 , 20 2 1 and December 3 1 , 20 20 , respectively, which reduced borrowing limits available to the Company. Interest expense related to the C redit A greement was $ 0.1 million and $ 0.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively . There were no loan amounts outstanding under the Credit Agreement on March 31 , 202 1 .
Private Placement
On July 1, 2014, the Company finalized a private placement whereby the Company raised an aggregate amount of $ 250.0 million in debt as follows (in thousands):
Tranche
Debt Amount
Maturity Date
Interest Rates
Senior Note, Series A
$
50,000
July 15, 2021
4.44
%
Senior Note, Series B
100,000
July 15, 2024
4.98
%
Senior Note, Series C
60,000
July 15, 2026
5.13
%
Senior Note, Series D
40,000
July 15, 2029
5.38
%
The Company incurred $ 1.1 million of debt issuance costs in connection with the private placement. On August 10, 2018, the Company finalized an amended and restated intercreditor agreement related to this private placement to more closely align certain covenants and definitions with the terms under the 2017 amended and restated Credit Agreement and incurred $ 0.5 million of additional issuance costs. These costs are presented as a direct deduction from the debt on the face of the consolidated balance sheets. Interest expense related to the Senior Notes for both the three months ended March 31, 2021 and March 31, 2020 was $ 3.2 million . The amortization of debt issuance costs and interest expense is recorded in “Interest expense” on the consolidated statements of income. The Company made interest payments of $ 6.2 million for both the three months ended March 31, 2021 and March 31, 2020, respectively. Interest payable of $ 2.4 million and $ 2.6 million is recorded in “Accrued expenses and other current liabilities” on the consolidated balance sheets on March 31, 2021 and December 31, 2020, respectively, related to the Senior Notes.
The Credit Agreement and private placement includes various covenants, including restrictions on indebtedness, liens, acquisitions, investments or dispositions, payment of dividends and maintenance of certain financial ratios and conditions. The Company was in compliance with these covenants at March 31, 2021 and December 31, 2020.
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 $ 203.9 million and $ 193.1 million at March 31, 2021 and December 31, 2020, respectively.
Using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality, and risk profile, the Company estimated the fair value (Level 2) of its Senior Notes at March 31, 2021 approximates $ 270.5 million. See “Note 16 – Fair Value of Financial Instruments” for the definition of Level 2 of the fair value hierarchy.
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
14
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, 2020, 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.
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 51 st scheduled trading day immediately before the maturity date at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, but only if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price for a specified period of time. In addition, calling any Convertible Senior Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Convertible Senior Note, in which case the conversion rate applicable to the conversion of that Convertible Senior Note will be increased in certain circumstances if it is converted after it is called for redemption.
Upon the occurrence of a fundamental change prior to the maturity date of the Convertible Senior Notes, holders of the Convertible Senior Notes may require the Company to repurchase all or a portion of the Convertible Senior Notes for cash at a price equal to 100 % of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Upon conversion, the Company may settle the Convertible Senior Notes for cash, shares of the Company’s common stock, or a combination thereof, at the Company’s option. If the Company satisfies its conversion obligation solely in cash or through payment and delivery of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of common stock due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 50-trading day observation period.
Under existing GAAP at the time of issuance during 2020, convertible debt instruments that may be settled in cash on conversion are required to be separated into liability and equity components in a manner that reflects the issuer’s non-convertible debt borrowing rate. The carrying amount of the liability component is based on the fair value of a similar instrument that does not contain an equity conversion option. The carrying amount allocated to the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the notes and the fair value of the liability component of the notes. Based on this debt to equity ratio, debt issuance costs are then allocated to the liability and equity components in a similar manner. Accordingly, at issuance the Company allocated $ 336.1 million to the debt liability and $ 53.6 million to additional paid-in capital. The difference between the principal amount of the Convertible Senior Notes and the liability component, inclusive of issuance costs, represents the debt discount, which the Company amortized to interest expense over the term of the Convertible Senior Notes using an effective interest rate of 3.25 %. During the year ended December 31, 2020, the Company recognized interest expense of $ 4.4 million. As of December 31, 2020, the net carrying value of the Notes was $ 340.6 million.
In the first quarter of 2021, the Company early adopted ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Equity’s Own Equity (Subtopic 815-40). The Company used the modified retrospective method which resulted in a reduction in non-cash interest expense and reclassification of equity component of the convertible senior notes of $ 55.0 million and equity component of the debt issuance costs of $ 1.4 million to liabilities on the consolidated balance sheet. The Company also adjusted the carrying
15
amount of the convertible senior notes to what it would have been if the Company had applied the amendments from the inception of the Notes and recorded the offset of the carrying amount adjustment of $ 3.7 million in retained earnings on January 1, 2021. During the year ended March 31, 2021, the Company recognized interest expense of $ 0.6 million. As of March 31, 2021, the carrying value of the Notes was $ 400.0 million.
Convertible Note Hedge and Warrant Transactions
In connection with the sale of the Convertible Senior Notes, the Company purchased a bond hedge designed to mitigate the potential dilution from the conversion of the Convertible Senior Notes. Under the five-year term of the bond hedge, upon a conversion of the bonds, the Company will receive the number of shares of common stock equal to the remaining common stock deliverable upon conversion of the Convertible Senior Notes if the conversion value exceeds the principal amount of the Notes. The aggregate number of shares that the Company could be obligated to issue upon conversion of the Convertible Senior Notes is approximately 8.9 million shares. The cost of the convertible note hedge transactions was $ 55.0 million.
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 ASU2020-06, 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
On January 5, 2021, the Treasury Department and Internal Revenue Service issued final regulations which provide guidance on applying the limitations on the deductibility of business interest expense under IRC Section 163(j). On January 6, 2021, the government published final regulations under IRC Section 451. The final regulations include guidance related to (1) timing of income inclusion for taxpayers with an applicable financial statement using an accrual method of accounting under IRC Section 451(b), and (2) advance payments for goods, services, and certain other items under IRC Section 451(c). The Company is currently assessing the impact of the new regulations but does not expect any material impact to its consolidated financial statements.
The Company’s effective tax rate was 27.7 % and 26.1 % for the three months ended March 31, 2021 and 2020, respectively. The change in the effective tax rate was due primarily to an increase of foreign tax losses which will not provide any tax benefit to the Company and a settlement of a state tax audit. The difference between the effective tax rate and the statutory U.S. Federal income tax rate of 21.0 % for the quarter ended March 31, 2021 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.
As of March 31, 2021, the Company’s deferred tax assets included a valuation allowance of $ 30.5 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
16
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, 2021 and December 31, 2020, the liability for income taxes associated with uncertain tax positions was $ 17.4 million and $ 16.4 million, respectively. It is reasonably possible that the Company may realize a decrease in our uncertain tax positions of approximately $ 0.2 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.
1 2 .
Contingencies
The Company is subject to certain lawsuits, claims and assessments that arise in the ordinary course of business. Additionally, the Company has been named as a defendant in lawsuits alleging personal injuries as a result of contact with asbestos products at various project sites. Management believes that any significant costs relating to these claims will be reimbursed by applicable insurance and, although there can be no assurance that these matters will be resolved favorably, management believes that the ultimate resolution of any of these claims will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows. A liability is recorded when it is both probable that a loss has been incurred and the amount of loss or range of loss can be reasonably estimated. When using a range of loss estimate, the Company records the liability using the low end of the range. The Company records a corresponding receivable for costs covered under its insurance policies. Management judgment is required to determine the outcome and the estimated amount of a loss related to such matters. Management believes that there are no claims or assessments outstanding which would materially affect the consolidated results of operations or the Company’s financial position.
On or about March 1, 2017, the Peninsula Corridor Joint Powers Board, or the JPB, filed a lawsuit against Parsons Transportation Group, Inc., or PTG, in the Superior Court of California, County of San Mateo, in connection with a positive train control project on which PTG was engaged prior to termination of its contract by the JPB. PTG had previously filed a lawsuit against the JPB for breach of contract and wrongful termination. The JPB seeks damages in excess of $ 100.0 million, which the Company is currently disputing. In addition to filing a complaint for breach of contract and wrongful termination, the Company has denied the allegations raised by the JPB and, accordingly, filed affirmative defenses. The Company is currently defending against the JPB’s claims and the parties are still engaged in discovery. The Company also has a professional liability insurance policy to the extent the JPB proves any errors or omissions occurred. At this time, the Company is unable to determine the probability of the outcome of the litigation or determine a potential range of loss, if any. The Company has also filed a third-party claim against a subcontractor for indemnification in connection with this matter.
In September 2015, a former Parsons employee filed an action in the United States District Court for the Northern District of Alabama against us as a qui tam relator on behalf of the United States (the “Relator”) alleging violation of the False Claims Act. The United States government did not intervene in this matter as it is allowed to do so under the statute. The Company filed a motion to dismiss the lawsuit on the grounds that the Relator did not meet the applicable statute of limitations. The District Court granted the motion to dismiss. The Relator’s attorney appealed the decision to the United States Court of Appeals of the Eleventh Circuit, which ultimately ruled in favor of the Relator, and the Company petitioned the United States Supreme Court to review the decision. The Supreme Court reviewed the decision and accepted the position of the Relator. The case was thus remanded to the United States District Court for the Northern District of Alabama. The defendants, including Parsons, will file appropriate pleadings opposing the allegations. At this time, the Company is unable to determine the probability of the outcome of the litigation or determine a potential range of loss, if any.
17
On or about October 4, 2019, LBH Engineers, LLC (“LBH”) filed a lawsuit against Parsons, PTG, and various other parties in the US District Court of for the Northern District of Georgia, in connection with an alleged infringement of LBH’s patent. LBH seeks damages and costs incurred by LBH, a post - judgment royalty, and treble damages if the infringement is found to be willful, among other damages, which the Company and the other defendants are currently disputing. At this time, the Company is unable to determine the probability of the outcome of the litigation or determine a potential range of loss, if any.
Federal government contracts are subject to audits, which are performed for the most part by the Defense Contract Audit Agency (“DCAA”). Audits by the DCAA and other agencies consist of reviews of our overhead rates, operating systems and cost proposals to ensure that we account for such costs in accordance with the Cost Accounting Standards (“CAS”). If the DCAA determines we have not accounted for such costs in accordance with the CAS, the DCAA may disallow these costs. The disallowance of such costs may result in a reduction of revenue and additional liability for the Company. Historically, the Company has not experienced any material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future. All audits of costs incurred on work performed through 2010 have been closed, and years thereafter remain open.
Although there can be no assurance that these matters will be resolved favorably, management believes that their ultimate resolution will not have a material adverse impact on the Company’s consolidated financial position, results of operations, or cash flows.
1 3 .
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, 2021 and December 31, 2020, total shares of the Company’s common stock outstanding were 102,406,446 and 102,360,662 , respectively, of which 75,560,749 and 76,641,312 , respectively, were held by the ESOP.
A participant’s interest in their ESOP account is redeemable upon certain events, including retirement, death, termination due to permanent disability, a severe financial hardship following termination of employment, certain conflicts of interest following termination of employment, or the exercise of diversification rights. Distributions from the ESOP of participants’ interests are made in the Company’s common stock based on quoted prices of a share of the Company’s common stock on the NYSE. A participant will be able to sell such shares of common stock in the market, subject to any requirements of the federal securities laws.
Total ESOP contribution expense was $ 13.2 million and $ 14.9 million for the three months ended March 31, 2021 and March 31, 2020, respectively. The expense is recorded in “Direct costs of contracts” and “Selling, general and administrative expense” in the consolidated statements of income. The fiscal 2021 ESOP contribution has not yet been made. The amount is currently included in accrued liabilities.
1 4 .
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
18
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 $ 67.4 million and $ 59.3 million at March 31, 2021 and December 31, 2020, respectively.
In the table below, aggregated financial information relating to the Company’s joint ventures is provided because their nature, risk and reward characteristics are similar. None of the Company’s current joint ventures that meet the characteristics of a VIE are individually significant to the consolidated financial statements.
Consolidated Joint Ventures
The following represents financial information for consolidated joint ventures included in the consolidated financial statements (in thousands):
March 31, 2021
December 31, 2020
Current assets
$
299,764
$
292,407
Noncurrent assets
2,888
2,990
Total assets
302,652
295,397
Current liabilities
214,015
201,270
Total liabilities
214,015
201,270
Total joint venture equity
$
88,637
$
94,127
Three Months Ended
March 31, 2021
March 31, 2020
Revenue
$
96,624
$
100,278
Costs
86,306
97,150
Net income
$
10,318
$
3,128
Net income attributable to noncontrolling interests
$
4,975
$
1,398
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.
19
Unconsolidated Joint Ventures
The Company accounts for its unconsolidated joint ventures using the equity method of accounting. Under this method, the Company recognizes its proportionate share of the net earnings of these joint ventures as “Equity in earnings (loss) of unconsolidated joint ventures” in the consolidated statements of income. The Company’s maximum exposure to loss as a result of its investments in unconsolidated joint ventures is typically limited to the aggregate of the carrying value of the investment and future funding commitments.
The following represents the financial information of the Company’s unconsolidated joint ventures as presented in their unaudited financial statements (in thousands):
March 31, 2021
December 31, 2020
Current assets
$
740,595
$
774,646
Noncurrent assets
580,224
585,802
Total assets
1,320,819
1,360,448
Current liabilities
673,872
703,287
Noncurrent liabilities
528,168
517,697
Total liabilities
1,202,040
1,220,984
Total joint venture equity
$
118,779
$
139,464
Investments in and advances to unconsolidated joint ventures
$
76,017
$
68,975
Three Months Ended
March 31, 2021
March 31, 2020
Revenue
$
236,517
$
238,188
Costs
210,847
223,686
Net income
$
25,670
$
14,502
Equity in earnings of unconsolidated joint ventures
$
7,530
$
6,114
The Company received net distributions from and sale proceeds for its unconsolidated joint ventures for the three months ended March 31, 2021 and March 31, 2020 of $ 5.4 million and $ 6.5 million, respectively.
15.
Related Party Transactions
The Company often provides services to unconsolidated joint ventures and revenues include amounts related to recovering overhead costs for these services. Revenues related to services the Company provided to unconsolidated joint ventures for the three months ended March 31, 2021 and March 31, 2020 were $ 42.0 million and $ 40.4 million, respectively. For the three months ended March 31, 2021 and March 31, 2020, the Company incurred $ 31.3 million and $ 31.5 million, respectively, of reimbursable costs. Amounts included in the consolidated balance sheets related to services the Company provided to unconsolidated joint ventures are as follows (in thousands):
March 31, 2021
December 31, 2020
Accounts receivable
$
34,709
$
37,544
Contract assets
11,410
8,889
Contract liabilities
5,726
5,720
1 6 .
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, 2021 and December 31, 2020, the Company’s financial instruments include cash, cash equivalents, accounts receivable, accounts payable, and other liabilities. The fair values of these financial instruments approximate their carrying values due to their short-term maturities.
20
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, 2020 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.
1 7 .
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, 2021 and March 31, 2020. 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 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, 2021 and March 31, 2020 were 145 and 27,596 , respectively.
21
The weighted average number of shares used to compute basic and diluted EPS were:
Three Months Ended
March 31, 2021
March 31, 2020
Basic weighted average number of shares outstanding
102,375,923
100,669,693
Stock-based awards
573,048
229,631
Convertible senior notes
8,916,530
-
Diluted weighted average number of shares outstanding
111,865,501
100,899,324
The net income available to shareholders to compute basic and diluted EPS were (in thousands):
Three Months Ended
March 31, 2021
March 31, 2020
Net income attributable to Parsons Corporation
9,039
12,973
Convertible senior notes if-converted method interest adjustment
528
-
Diluted net income attributable to Parsons Corporation
9,567
12,973
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”), currently its Chairman and Chief Executive Officer, evaluates the performance of each segment and manages the operations of the Company for purposes of allocating resources among the segments. The CODM evaluates segment operating performance using segment Revenue and segment Adjusted EBITDA attributable to Parsons Corporation.
The following table summarizes business segment revenue for the periods presented (in thousands):
Three Months Ended
March 31, 2021
March 31, 2020
Federal Solutions revenue
$
452,069
$
477,571
Critical Infrastructure revenue
422,628
493,422
Total revenue
$
874,697
$
970,993
22
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, 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, 2021
March 31, 2020
Federal Solutions
$
31,982
$
31,617
Critical Infrastructure
31,657
27,357
Adjusted EBITDA attributable to Parsons Corporation
63,639
58,974
Adjusted EBITDA attributable to noncontrolling interests
5,060
1,522
Depreciation and amortization
( 34,673
)
( 32,409
)
Interest expense, net
( 4,443
)
( 3,794
)
Income tax expense
( 5,375
)
( 5,084
)
Equity-based compensation income (expense)
( 6,980
)
7,721
Transaction-related costs (a)
( 2,646
)
( 12,011
)
Restructuring expense (b)
( 77
)
33
Other (c)
( 491
)
( 581
)
Net income including noncontrolling interests
14,014
14,371
Net income attributable to noncontrolling interests
4,975
1,398
Net income attributable to Parsons Corporation
$
9,039
$
12,973
(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, 2021
March 31, 2020
Revenue
North America
$
716,346
$
797,946
Middle East
153,643
168,859
Rest of World
4,708
4,188
Total Revenue
$
874,697
$
970,993
The geographic location of revenue is determined by the location of the customer.
March 31, 2021
December 31, 2020
Property and Equipment, Net
North America
$
111,398
$
116,460
Middle East
4,146
4,567
Total Property and Equipment, Net
$
115,544
$
121,027
23
North America includes revenue in the United States for the three months ended March 31, 2021 and March 31, 2020 of $ 652.2 million and $ 735.8 million, respectively. North America property and equipment, net includes $ 104.8 million and $ 109.6 million of property and equipment, net in the United States at March 31, 2021 and December 31, 2020, respectively.
The following table presents revenues by business units (in thousands):
Three Months Ended
March 31, 2021
March 31, 2020
Revenue
Cyber & Intelligence
$
83,328
$
98,882
Space & Geospatial Solutions
83,059
51,288
Missile Defense & C5ISR
144,715
154,569
Engineered Systems
140,967
172,832
Federal Solutions revenues
452,069
477,571
Connected Communities
89,883
101,901
Mobility Solutions
332,745
391,521
Critical Infrastructure revenues
422,628
493,422
Total Revenue
$
874,697
$
970,993
19.
Subsequent Events
None noted.
24
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.