PARSONS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis is intended to help investors understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion together with our consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q and in conjunction with the Company’s Form 10-K for the year ended December 31, 2020. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in the Company’s Form 10-K for the year ended December 31, 2020. We undertake no obligation to revise publicly any forward-looking statements. Actual results may differ materially from those contained in any forward-looking statements. COVID-19 Pandemic In response to the COVID-19 pandemic, the Company has taken certain actions to continue to execute under our contracts with customers and allow our people to work safely. A substantial majority of our work-force transitioned to work-from-home status during the latter part of the quarter ended March 31, 2020, and these practices remain in effect as of the date of this filing. To date, we have experienced no material disruption in our work as a consequence of these changes in our work practices. The Company has experienced an impact in the volume of work in both the Federal Solutions and Critical Infrastructure segments where customers have restricted access to certain project sites. We have not seen any substantive cancellations of previously awarded contracts. In the Federal Solutions segment, we have had some existing contracts extended. We continue to see several potential contract awards pushed out to a future date. The Company is receiving limited benefits associated with the CARES Act related to its work on certain US national security projects; however, the curtailment of work under these projects and the CARES Act benefits are not likely to have a material impact on our financial condition or results of operations. The reimbursement period for Section 3610 of the CARES Act was extended until March 31, 2021. The Company has provided additional disclosure around liquidity and capital resources which can be found in the “Liquidity and Capital Resources” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q. The Company anticipates substantially all of the Company’s subcontractors and material suppliers will be able to fulfill their contractual obligations and we do not expect a material impact from non-performance. 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. 25 PARSONS CORPORATION Enabling a safer, smarter, and more interconnected world. Engineered solutions for complex physical and digital infrastructure challenges SEGMENTS KEY FACTS AND FIGURES Technology-driven solutions for defense and intelligence customers FINANCIAL SNAPSHOT $4B Total Revenue Trailing 12-Months (Q2 2020) $4B Contract Awards Trailing 12-Months (Q2 2020) 75+ Years Of History Federal Solutions 49% Critical Infrastructure 51% Federal Solutions 58% Critical Infrastructure 42% Federal Solutions Critical Infrastructure ~16K Employees 6% Revenue Growth Trailing 12-Months (Q2 2020) 1.0X Book-To-Bill Ratio Trailing 12-Months (Q2 2020) $7.7B Backlog As Of 6/30/2020 PARSONS CORPORATION. Overview We are a leading innovative technology provider in the global 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. We operate in two reporting segments, Federal Solutions and Critical Infrastructure. Our Federal Solutions business provides advanced technical solutions to the U.S. government. Our Critical Infrastructure business provides integrated engineering and management services for complex physical and digital infrastructure to state and local governments and large companies. Our employees provide services pursuant to contracts that we are awarded by the customer and specific task orders relating to such contracts. These contracts are often multi-year, which provides us backlog and visibility on our revenues for future periods. Many of our contracts and task orders are subject to renewal and rebidding at the end of their term, and some are subject to the exercise of contract options and issuance of task orders by the applicable government entity. In addition to focusing on increasing our revenues through increased contract awards and backlog, we focus our financial performance on margin expansion and cash flow. Key Metrics We manage and assess the performance of our business by evaluating a variety of metrics. The following table sets forth selected key metrics (in thousands, except Book-to-Bill): March 31, 2021 March 31, 2020 Awards (year to date) $ 1,010,974 $ 966,095 Backlog (1) $ 8,170,126 $ 7,801,180 Book-to-Bill (year to date) 1.2 1.0 26 (1) Difference between our backlog of $8.2 billion and our remaining unsatisfied performance obligations, or RUPO, of $5.1 billion, each as of March 31, 2021, is due to (i) unissued task orders and unexercised option years, to the extent their issuance or exercise is probable, as well as (ii) contract awards, to the extent we believe contract execution and funding is probable. Awards Awards generally represent the amount of revenue expected to be earned in the future from funded and unfunded contract awards received during the period. Contract awards include both new and re-compete contracts and task orders. Given that new contract awards generate growth, we closely track our new awards each year. The following table summarizes the year to-date value of new awards for the periods presented below (in thousands): Three Months Ended March 31, 2021 March 31, 2020 Federal Solutions $ 424,621 $ 615,690 Critical Infrastructure 586,353 350,405 Total Awards $ 1,010,974 $ 966,095 The change in new awards from year to year is primarily due to ordinary course fluctuations in our business. The volume of contract awards can fluctuate in any given period due to win rate and the timing and size of the awards issued by our customers. The change in new awards in our Federal Solutions segment for the three months ended March 31, 2021 when compared to the corresponding period last year was impacted by one large contract awarded in the first quarter of 2020. The awards in Critical Infrastructure for the three months ended March 31, 2021 were impacted by several large contracts awarded in the first quarter of 2021. Backlog We define backlog to include the following two components: • Funded—Funded backlog represents the revenue value of orders for services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts. • 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. 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. The following table summarizes the value of our backlog at the respective dates presented below: (in thousands): March 31, 2021 March 31, 2020 Federal Solutions: Funded (1) $ 1,127,717 $ 1,338,903 Unfunded 4,010,656 3,716,023 Total Federal Solutions 5,138,373 5,054,926 Critical Infrastructure: Funded 2,956,255 2,707,701 Unfunded 75,498 38,553 Total Critical Infrastructure 3,031,753 2,746,254 Total Backlog (2) $ 8,170,126 $ 7,801,180 (1) As presented in the first quarter of 2020, funded backlog for the Federal Solutions segment was overstated by $320.4 million with a corresponding understatement in unfunded backlog. There was no impact on total Federal Solutions backlog or total backlog for Parsons Corporation. 27 (2) Difference between our backlog of $8.2 billion and our RUPO of $5.1 billion , each as of March 31, 2021 , is due to (i) unissued task orders and unexercised option years, to the extent their issuance or exercise is probable, as well as (ii) contract awards, to the extent we believe contract execution and funding is probable. Our backlog includes orders under contracts that in some cases extend for several years. For example, the U.S. Congress generally appropriates funds for our U.S. federal government customers on a yearly basis, even though their contracts with us may call for performance that is expected to take a number of years to complete. As a result, our federal contracts typically are only partially funded at any point during their term. All or some of the work to be performed under the contracts may remain unfunded unless and until the U.S. Congress makes subsequent appropriations and the procuring agency allocates funding to the contract. We expect to recognize $2.7 billion of our funded backlog at March 31, 2021 as revenues in the following twelve months. However, our U.S. federal government customers may cancel their contracts with us at any time through a termination for convenience or may elect to not exercise option periods under such contracts. In the case of a termination for convenience, we would not receive anticipated future revenues, but would generally be permitted to recover all or a portion of our incurred costs and fees for work performed. See “Risk Factors—Risk Relating to Our Business—We may not realize the full value of our backlog, which may result in lower than expected revenue” in the Company’s Form 10-K for the year ended December 31, 2020. The changes in backlog in both the Federal Solutions and Critical Infrastructure segments were primarily from ordinary course fluctuations in our business and the impacts related to the Company’s awards discussed above. Book-to-Bill Book-to-bill is the ratio of total awards to total revenue recorded in the same period. Our management believes our book-to-bill ratio is a useful indicator of our potential future revenue growth in that it measures the rate at which we are generating new awards compared to the Company’s current revenue. To drive future revenue growth, our goal is for the level of awards in a given period to exceed the revenue booked. A book-to-bill ratio greater than 1.0 indicates that awards generated in a given period exceeded the revenue recognized in the same period, while a book-to-bill ratio of less than 1.0 indicates that awards generated in such period were less than the revenue recognized in such period. The following table sets forth the book-to-bill ratio for the periods presented below: Three months ended March 31, 2021 March 31, 2020 Federal Solutions 0.9 1.3 Critical Infrastructure 1.4 0.7 Overall 1.2 1.0 Factors and Trends Affecting Our Results of Operations We believe that the financial performance of our business and our future success are dependent upon many factors, including those highlighted in this section. Our operating performance will depend upon many variables, including the success of our growth strategies and the timing and size of investments and expenditures that we choose to undertake, as well as market growth and other factors that are not within our control. Government Spending Changes in the relative mix of government spending and areas of spending growth, with shifts in priorities on homeland security, intelligence, defense-related programs, infrastructure and urbanization, and continued increased spending on technology and innovation, including cybersecurity, artificial intelligence, connected communities and physical infrastructure, could impact our business and results of operations. Cost-cutting and efficiency initiatives, current and future budget restrictions, spending cuts and other efforts to reduce government spending could cause our government customers to reduce or delay funding or invest appropriated funds on a less consistent basis or not at all, and demand for our solutions or services could diminish. Furthermore, any disruption in the functioning of government agencies, including as a result of government closures and shutdowns, could have a negative impact on our operations and cause us to lose revenue or incur additional costs due to, among other things, our inability to deploy our staff to customer locations or facilities as a result of such disruptions. 28 Federal Budget Uncertainty There is uncertainty around the timing, extent, nature and effect of Congressional and other U.S. government actions to address budgetary constraints, caps on the discretionary budget for defense and non-defense departments and agencies, and the ability of Congress to determine how to allocate the available budget authority and pass appropriations bills to fund both U.S. government departments and agencies that are, and those that are not, subject to the caps. Additionally, budget deficits and the growing U.S. national debt increase pressure on the U.S. government to reduce federal spending across all federal agencies, with uncertainty about the size and timing of those reductions. Furthermore, delays in the completion of future U.S. government budgets could in the future delay procurement of the federal government services we provide. A reduction in the amount of, or delays, or cancellations of funding for, services that we are contracted to provide to the U.S. government as a result of any of these impacts or related initiatives, legislation or otherwise could have a material adverse effect on our business and results of operations. Regulations Increased audit, review, investigation and general scrutiny by government agencies of performance under government contracts and compliance with the terms of those contracts and applicable laws could affect our operating results. Negative publicity and increased scrutiny of government contractors in general, including us, relating to government expenditures for contractor services and incidents involving the mishandling of sensitive or classified information, as well as the increasingly complex requirements of the U.S. Department of Defense and the U.S. Intelligence Community, including those related to cybersecurity, could impact our ability to perform in the markets we serve. Competitive Markets The industries we operate in consist of a large number of enterprises ranging from small, niche-oriented companies to multi-billion-dollar corporations that serve many government and commercial customers. We compete on the basis of our technical expertise, technological innovation, our ability to deliver cost-effective multi-faceted services in a timely manner, our reputation and relationships with our customers, qualified and/or security-clearance personnel, and pricing. We believe that we are uniquely positioned to take advantage of the markets in which we operate because of our proven track record, long-term customer relationships, technology innovation, scalable and agile business offerings and world class talent. Our ability to effectively deliver on project engagements and successfully assist our customers affects our ability to win new contracts and drives our financial performance. Acquired Operations Braxton Science & Technology Group, LLC On November 19, 2020, we acquired Braxton for $308.8 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. Seasonality Our results may be affected by variances as a result of weather conditions and contract award seasonality impacts that we experience across our businesses. The latter issue is typically driven by the U.S. federal government fiscal year-end, September 30. While not certain, it is not uncommon for U.S. government agencies to award task orders or complete other contract actions in the weeks before the end of the U.S. federal government fiscal year in order to avoid the loss of unexpended U.S. federal government fiscal year funds. In addition, we have also historically experienced higher bid and proposal costs in the months leading up to the U.S. federal government fiscal year-end as we pursue new contract opportunities expected to be awarded early in the following U.S. federal government fiscal year as a result of funding appropriated for that U.S. federal government fiscal year. Furthermore, many U.S. state governments with fiscal years ending on June 30 tend to accelerate spending during their first quarter, when new funding becomes available. We may continue to experience this seasonality in future periods, and our results of operations may be affected by it. 29 Results of Operations Revenue Our revenue consists of both services provided by our employees and pass-through fees from subcontractors and other direct costs. Our Federal Solutions segment derives revenue primarily from the U.S. federal government and our Critical Infrastructure segment derives revenue primarily from government and commercial customers. We recognize revenue for work performed under cost-plus, time-and-materials and fixed-price contracts as follows: Under cost-plus contracts, we are reimbursed for allowable or otherwise defined costs incurred, plus a fee. The contracts may also include incentives for various performance criteria, including quality, timeliness, safety and cost-effectiveness. In addition, costs are generally subject to review by clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract. Under time-and-materials contracts, hourly billing rates are negotiated and charged to clients based on the actual time spent on a project. In addition, clients reimburse actual out-of-pocket costs for other direct costs and expenses that are incurred in connection with the performance under the contract. Under fixed-price contracts, clients pay an agreed fixed-amount negotiated in advance for a specified scope of work. 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 description of our policies on revenue recognition. The table below presents the percentage of total revenue for each type of contract. Three Months Ended March 31, 2021 March 31, 2020 Fixed-price 26.3% 31.8% Time-and-materials 27.4% 26.0% Cost-plus 46.3% 42.3% The amount of risk and potential reward varies under each type of contract. Under cost-plus contracts, there is limited financial risk, because we are reimbursed for all allowable costs up to a ceiling. However, profit margins on this type of contract tend to be lower than on time-and-materials and fixed-price contracts. Under time-and-materials contracts, we are reimbursed for the hours worked using the predetermined hourly rates for each labor category. In addition, we are typically reimbursed for other direct contract costs and expenses at cost. We assume financial risk on time-and-materials contracts because our labor costs may exceed the negotiated billing rates. Profit margins on well-managed time-and-materials contracts tend to be higher than profit margins on cost-plus contracts as long as we are able to staff those contracts with people who have an appropriate skill set. Under fixed-price contracts, we are required to deliver the objectives under the contract for a pre-determined price. Compared to time-and-materials and cost-plus contracts, fixed-price contracts generally offer higher profit margin opportunities because we receive the full benefit of any cost savings, but they also generally involve greater financial risk because we bear the risk of any cost overruns. In the aggregate, the contract type mix in our revenue for any given period will affect that period’s profitability. Over time, we have experienced a relatively stable contract mix. Our recognition of revenue on long-term contracts requires the use of assumptions related to transaction price and total cost of completion. Estimates are continually evaluated as work progresses and are revised when necessary. When a change in estimated cost or transaction price is determined to have an impact on contract profit, we record a positive or negative adjustment to revenue. Joint Ventures We conduct a portion of our business through joint ventures or similar partnership arrangements. For the joint ventures we control, we consolidate all the revenues and expenses in our consolidated statements of income (including revenues and expenses attributable to noncontrolling interests). For the joint ventures we do not control, we recognize equity in earnings (loss) of unconsolidated joint ventures. Our revenues included amounts related to services we provided 30 to our unconsolidated joint ventures for the three m onths ended March 31, 2021 and March 31, 2020 of $42.0 million and $ 40 . 4 million, respectively . Operating costs and expenses Operating costs and expenses primarily include direct costs of contracts and selling, general and administrative expenses. Costs associated with compensation-related expenses for our people and facilities, which includes ESOP contribution expenses, are the most significant component of our operating expenses. Total ESOP contribution expense for the three months ended March 31, 2021 and March 31, 2020 was $13.2 million and $14.9 million, respectively, and is recorded in “Direct cost of contracts” and “Selling, general and administrative expenses.” Direct costs of contracts consist of direct labor and associated fringe benefits, indirect overhead, subcontractor and materials (“pass-through costs”), travel expenses and other expenses incurred to perform on contracts. Selling, general and administrative expenses (“SG&A”) include salaries and wages and fringe benefits of our employees not performing work directly for customers, facility costs and other costs related to these indirect functions. Other income and expenses Other income and expenses primarily consist of interest income, interest expense and other income, net. Interest income primarily consists of interest earned on U.S. government money market funds. Interest expense consists of interest expense incurred under our Senior Notes, Convertible Senior Notes, and Credit Agreement. Other income, net primarily consists of gain or loss on sale of assets, sublease income and transaction gain or loss related to movements in foreign currency exchange rates. Adjusted EBITDA The following table sets forth Adjusted EBITDA, Net Income Margin, and Adjusted EBITDA Margin for the three months ended March 31, 2021 and March 31, 2020. Three Months Ended (U.S. dollars in thousands) March 31, 2021 March 31, 2020 Adjusted EBITDA (1) $ 68,699 $ 60,496 Net Income Margin (2) 1.6 % 1.5 % Adjusted EBITDA Margin (3) 7.9 % 6.2 % (1) A reconciliation of net income attributable to Parsons Corporation to Adjusted EBITDA is set forth below (in thousands). (2) Net Income Margin is calculated as net income including noncontrolling interest divided by revenue in the applicable period (3) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by revenue in the applicable period. 31 Three Months Ended March 31, 2021 March 31, 2020 Net income attributable to Parsons Corporation $ 9,039 $ 12,973 Interest expense, net 4,443 3,794 Income tax expense 5,375 5,084 Depreciation and amortization 34,673 32,409 Net income attributable to noncontrolling interests 4,975 1,398 Equity-based compensation 6,980 (7,721 ) Transaction-related costs (a) 2,646 12,011 Restructuring (b) 77 (33 ) Other (c) 491 581 Adjusted EBITDA $ 68,699 $ 60,496 ( a ) Reflects costs incurred in connection with acquisitions and other non-recurring transaction costs, primarily fees paid for professional services and employee retention. ( b ) Reflects costs associated with our corporate restructuring initiatives. ( c ) Includes a combination of gain/loss related to sale of fixed assets, software implementation costs, and other individually insignificant items that are non-recurring in nature. Adjusted EBITDA is a supplemental measure of our operating performance used by management and our board of directors to assess our financial performance both on a segment and on a consolidated basis. We discuss Adjusted EBITDA because our management uses this measure for business planning purposes, including to manage the business against internal projected results of operations and measure the performance of the business generally. Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Adjusted EBITDA is not a GAAP measure of our financial performance or liquidity and should not be considered as an alternative to net income as a measure of financial performance or cash flows from operations as measures of liquidity, or any other performance measure derived in accordance with GAAP. We define Adjusted EBITDA as net income (loss) attributable to Parsons Corporation, adjusted to include net income (loss) attributable to noncontrolling interests and to exclude interest expense (net of interest income), provision for income taxes, depreciation and amortization and certain other items that we do not consider in our evaluation of ongoing operating performance. These other items include, among other things, impairment of goodwill, intangible and other assets, interest and other expenses recognized on litigation matters, expenses incurred in connection with acquisitions and other non-recurring transaction costs and expenses related to our corporate restructuring initiatives. Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not reflect tax payments, debt service requirements, capital expenditures and certain other cash costs that may recur in the future, including, among other things, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. Management compensates for these limitations by relying on our GAAP results in addition to using Adjusted EBITDA supplementally. Our measure of Adjusted EBITDA is not necessarily comparable to similarly titled captions of other companies due to different methods of calculation. The following table shows Adjusted EBITDA attributable to Parsons Corporation for each of our reportable segments and Adjusted EBITDA attributable to noncontrolling interests (in thousands): Three Months Ended Variance March 31, 2021 March 31, 2020 Dollar Percent Federal Solutions Adjusted EBITDA attributable to Parsons Corporation $ 31,982 $ 31,617 $ 365 1.2 % Critical Infrastructure Adjusted EBITDA attributable to Parsons Corporation 31,657 27,357 4,300 15.7 % Adjusted EBITDA attributable to noncontrolling interests 5,060 1,522 3,538 232.5 % Total Adjusted EBITDA $ 68,699 $ 60,496 $ 8,203 13.6 % 32 The following table sets forth our results of operations for the three months ended March 31, 2021 and March 31, 2020 as a percentage of revenue. Three Months Ended March 31, 2021 March 31, 2020 Revenues 100 % 100 % Direct costs of contracts 76.5 % 79.3 % Equity in earnings of unconsolidated joint ventures 0.9 % 0.6 % Selling, general and administrative expenses 21.4 % 18.9 % Operating income (loss) 2.9 % 2.4 % Interest income 0.0 % 0.0 % Interest expense -0.5 % -0.4 % Other income, net -0.2 % 0.0 % (Interest and other expense) gain associated with claim on long-term contract 0.0 % 0.0 % Total other income (expense) -0.7 % -0.4 % Income (loss) before income tax expense 2.2 % 2.0 % Income tax benefit (provision) -0.6 % -0.5 % Net income including noncontrolling interests 1.6 % 1.5 % Net income attributable to noncontrolling interests -0.6 % -0.1 % Net income attributable to Parsons Corporation 1.0 % 1.3 % Revenue Three Months Ended Variance (U.S. dollars in thousands) March 31, 2021 March 31, 2020 Dollar Percent Revenue $ 874,697 $ 970,993 $ (96,296 ) -9.9 % Revenue decreased $96.3 million for the three months ended March 31, 2021 when compared to the corresponding period last year, primarily due to a decrease in revenue in our Critical Infrastructure segment of $70.8 million and a decrease in our Federal Solutions segment of $25.5 million. See “Segment Results” below for a further discussion. Direct costs of contracts Three Months Ended Variance (U.S. dollars in thousands) March 31, 2021 March 31, 2020 Dollar Percent Direct costs of contracts $ 669,082 $ 769,632 $ (100,550 ) -13.1 % Direct cost of contracts decreased $100.6 million for the three months ended March 31, 2021 when compared to the corresponding period last year, primarily due to decreases of $71.7 million in our Critical Infrastructure segment and $28.9 million in our Federal Solutions segment. The decrease in our Critical Infrastructure segment was primarily due to a decrease in business volume, particularly programs with high levels of pass-through costs reaching substantial completion. The decrease in our Federal Solutions segment was primarily due to a decrease in business volume. Equity in earnings of unconsolidated joint ventures Three Months Ended Variance (U.S. dollars in thousands) March 31, 2021 March 31, 2020 Dollar Percent Equity in earnings of unconsolidated joint ventures $ 7,530 $ 6,114 $ 1,416 23.2 % 33 Equity in earnings of unconsolidated joint ventures increased $1.4 million for the three months ended March 31, 2021 compared to the corresponding period last year, primarily related to increased activity and margins in certain joint ventures, partially offset by reduction in activity on others. Selling, general and administrative expenses Three Months Ended Variance (U.S. dollars in thousands) March 31, 2021 March 31, 2020 Dollar Percent Selling, general and administrative expenses $ 187,522 $ 183,774 $ 3,748 2.0 % Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2021 and March 31, 2020 include $7.0 million and $(7.7) million, respectively, of compensation cost (income) related to equity-based awards. Equity awards issued prior to the Company’s IPO settle in cash and are remeasured to an updated fair value at each reporting period until the award is settled. Compensation cost is trued-up at each reporting period for changes in fair value pro-rated for the portion of the requisite service period rendered. Prior to the IPO on May 8, 2019, the fair value of a share of the Company’s common stock was established by the ESOP trustee. See “Note 19 – Fair Value of Financial Instruments” in the Company’s Form 10-K for the year ended December 31, 2020 for a further discussion of how a share of the Company’s common stock was valued prior to the IPO. Subsequent to the IPO, the share price of the Company’s common stock is based on quoted prices on the New York Stock Exchange. Excluding the compensation costs discussed above, SG&A for the three months ended March 31, 2021 and March 31, 2020 was $180.5 million and $191.5 million, respectively. The decrease in SG&A of $11.0 million, exclusive of equity compensation cost, for the three months ended March 31, 2021 when compared to the corresponding period last year was primarily due to a $9.7 million reduction in transaction-related costs and $3.1 million reduction in other costs. These decreases were partially offset by a $1.8 million increase in intangible asset amortization. Total other income (expense) Three Months Ended Variance (U.S. dollars in thousands) March 31, 2021 March 31, 2020 Dollar Percent Interest income $ 98 $ 228 $ (130 ) -57.0 % Interest expense (4,541 ) (4,022 ) (519 ) 12.9 % Other income (expense), net (1,791 ) (452 ) (1,339 ) 296.2 % Total other income (expense) $ (6,234 ) $ (4,246 ) $ (1,988 ) 46.8 % Interest income is related to interest earned on cash balances held. Interest expense is primarily due to debt related to our business acquisitions and Convertible Senior Note. The amounts in other income (expense), net are primarily related to transaction gains and losses on foreign currency transactions and sublease income. Income tax expense Three Months Ended Variance (U.S. dollars in thousands) March 31, 2021 March 31, 2020 Dollar Percent Income tax expense $ 5,375 $ 5,084 $ 291 5.7 % The Company’s effective tax rate was 27.7% and 26.1% and income tax expense was $5.4 million and $5.1 million for the three months ended March 31, 2021 and March 31, 2020, respectively. The most significant items contributing to the change in the effective tax rate relate to an increase of foreign losses which have no tax benefit and a settlement of a state tax audit. The difference between the statutory U.S. federal income tax rate of 21.0% and the effective tax rate for 34 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 . Segment Results We evaluate segment operating performance using segment revenue and segment Adjusted EBITDA attributable to Parsons Corporation. Adjusted EBITDA attributable to Parsons Corporation is Adjusted EBITDA excluding Adjusted EBITDA attributable to noncontrolling interests. Presented above, in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, is a discussion of our definition of Adjusted EBITDA, how we use this metric, why we present this metric and the material limitations on the usefulness of this metric. See “Note 18—Segments Information” in the notes to the consolidated financial statements in this Form 10-Q for further discussion regarding our segment Adjusted EBITDA attributable to Parsons Corporation. The following table shows Adjusted EBITDA attributable to Parsons Corporation for each of our reportable segments and Adjusted EBITDA attributable to noncontrolling interests: Three Months Ended (U.S. dollars in thousands) March 31, 2021 March 31, 2020 Federal Solutions Adjusted EBITDA attributable to Parsons Corporation $ 31,982 $ 31,617 Critical Infrastructure Adjusted EBITDA attributable to Parsons Corporation 31,657 27,357 Adjusted EBITDA attributable to noncontrolling interests 5,060 1,522 Total Adjusted EBITDA $ 68,699 $ 60,496 Federal Solutions Three Months Ended Variance (U.S. dollars in thousands) March 31, 2021 March 31, 2020 Dollar Percent Revenue $ 452,069 $ 477,571 $ (25,502 ) -5.3 % Adjusted EBITDA attributable to Parsons Corporation $ 31,982 $ 31,617 $ 365 1.2 % The decrease in Federal Solutions revenue for the three months ended March 31, 2021 compared to the corresponding periods last year was primarily due to a decrease in business volume. The increase in Federal Solutions Adjusted EBITDA attributable to Parsons Corporation for the three months ended March 31, 2021 compared to the corresponding period last year was primarily related to higher profits margins and acquisitions, offset by lower business volume. Critical Infrastructure Three Months Ended Variance (U.S. dollars in thousands) March 31, 2021 March 31, 2020 Dollar Percent Revenue $ 422,628 $ 493,422 $ (70,794 ) -14.3 % Adjusted EBITDA attributable to Parsons Corporation $ 31,657 $ 27,357 $ 4,300 15.7 % The decrease in Critical Infrastructure revenue for the three months ended March 31, 2021 compared to the corresponding periods last year was primarily due to a decrease in business volume on contracts with pass-through revenue. The increase in Adjusted EBITDA attributable to Parsons Corporation in Critical Infrastructure for the three months ended March 31, 2021 was primarily related to a decrease in SG&A, an increase in contract profitability and an increase in equity in earnings of unconsolidated joint ventures. 35 Liquidity and Capital Resources We finance our operations and capital expenditures through a combination of internally generated cash from operations, our Senior Notes, Convertible Senior Notes, 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 our Credit Agreement to meet cash demands. Our management regularly monitors certain liquidity measures to monitor performance. We calculate our available liquidity as a sum of cash and cash equivalents from our consolidated balance sheet plus the amount available and unutilized on our Credit Agreement. As of March 31, 2021, 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. We do not anticipate that the COVID-19 pandemic-related economic impacts will impair our ability to continue to maintain compliance with our debt covenants or access available borrowing capacity from our banks. Cash Flows Cash received from customers, either from the payment of invoices for work performed or for advances in excess of revenue recognized, is our primary source of cash. We generally do not begin work on contracts until funding is appropriated by the customers. Billing timetables and payment terms on our contracts vary based on a number of factors, including whether the contract type is cost-plus, time-and-materials, or fixed-price. We generally bill and collect cash more frequently under cost-plus and time-and-materials contracts, as we are authorized to bill as the costs are incurred or work is performed. In contrast, we may be limited to bill certain fixed-price contracts only when specified milestones, including deliveries, are achieved. A number of our contracts may provide for performance-based payments, which allow us to bill and collect cash prior to completing the work. Accounts receivable is the principal component of our working capital and is generally driven by revenue growth. Accounts receivable reflects amounts billed to our clients as of each balance sheet date and receivable amounts that are currently due but unbilled. The total amount of our accounts receivable can vary significantly over time, but is generally sensitive to revenue levels. Net days sales outstanding, which we refer to as net DSO, is calculated by dividing (i) (accounts receivable plus contract assets) less (contract liabilities plus 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 71 days at March 31, 2021 and 64 days at March 31, 2020. Our working capital (current assets less current liabilities) was $691.5 million at March 31, 2021 and $655.7 million at December 31, 2020. Our cash, cash equivalents and restricted cash decreased by $87.8 million to $399.4 million at March 31, 2021 from $487.2 million at December 31, 2020. The following table summarizes our sources and uses of cash over the periods presented (in thousands): Three Months Ended March 31, 2021 March 31, 2020 Net cash used in operating activities $ (65,965 ) $ (118,983 ) Net cash used in investing activities (11,045 ) (12,202 ) 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 ) 36 Operating Activities Net cash used in operating activities consists primarily of net income (loss) adjusted for noncash items, such as: equity in earnings (loss) of unconsolidated joint ventures, contributions of treasury stock, depreciation and amortization of property and equipment and intangible assets, and provisions for doubtful accounts. 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. Our operating cash flows are primarily affected by our ability to invoice and collect from our clients in a timely manner, our ability to manage our vendor payments and the overall profitability of our contracts. Net cash used in operating activities decreased $53.0 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The change in net cash used in operating activities is from a $6.9 million increase in net income after adjusting for non-cash items, a $23.8 million change in other long-term liabilities, and a $22.3 million decrease in cash outflows from our working capital accounts (primarily from accounts receivable and contract liabilities offset by accrued expenses, accounts payable and contract assets). Investing Activities Net cash used in investing activities consists primarily of cash flows associated with capital expenditures, joint ventures and business acquisitions. Net cash used in investing activities decreased $1.2 million for the three months ended March 31, 2021, when compared to the three months ended March 31, 2020, primarily due to a decrease in cash used for capital expenditures of $8.2 million, offset by proceeds from sale of investments in unconsolidated joint ventures, net of return of investments in unconsolidated joint ventures of $7.8 million. The Company had no business acquisitions during the three months ended March 31, 2021 and March 31, 2020. Financing Activities Net cash provided by financing activities is primarily associated with proceeds from debt, the repayment thereof, and distributions to noncontrolling interests. Net cash provided by financing activities decreased $74.9 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The change in cash flows from financing activities is primarily due to no borrowings and larger distributions to noncontrolling interests. Letters of Credit We also have 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 as of March 31, 2021. Letters of credit outstanding under the Credit Agreement total $45.3 million. Recent Accounting Pronouncements See the information set forth in “Note 3—Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” in the notes to our consolidated financial statements. Off-Balance Sheet Arrangements As of March 31, 2021, we have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. 37