Parsons: Thirty-Five Years Owned by Its Own Employees

What happened

Parsons became 100% owned by its own employee stock ownership plan in 1984, with no founder stake and no outside shareholder. That made the plan the buyer whenever anyone left, and the redemptions were real money: $111.4 million in 2017 alone, against two flat years of revenue around $3 billion and a 2016 net loss. In 2018 revenue jumped 18% to $3.561 billion, largely bought through acquisition, net income reached $222.3 million, and redemptions took another $125.8 million. The structure had solved who buys the business when an owner leaves by making the buyer permanent.

The case, start to finish

The company was the only buyer of its own stock, and the price it had to pay rose every year the business did well.

The buyer was already inside the building

Parsons commenced operations in 1944 and, in its own words, became 100% owned by the Parsons Employee Stock Ownership Plan in 1984. For the next thirty-five years the ESOP was the sole stockholder. No founder stake, no private-equity sponsor, no public market, and no clock forcing a sale.

As a solution to the succession problem, that is elegant. The company sells engineering, science and programming work into long federal and infrastructure contracts, and by January 2019 it employed 15,633 people. It is a business whose only asset walks out at six o'clock, which is exactly why handing the ownership to the people doing the walking is a structural idea rather than a sentimental one.

The tax structure quietly funded a great deal of it. Because the company was an S corporation whose sole shareholder was a tax-exempt ESOP trust, its taxable income passed through to an owner that owed no federal income tax, so for thirty-five years Parsons paid essentially none. That is the real subsidy inside this arrangement, and it is not small.

Being your own stock exchange

The cost arrives in a line no ordinary company carries. Under the plan, on retirement, death, disability, hardship or a diversification election, a participant's account is redeemable at the current price per share, in cash. The price is set annually by the ESOP Trustee on a third-party valuation. The company is therefore the only buyer of its own stock, permanently, on a schedule chosen by its own workforce.

The accounting reflects that reality rather than hiding it: every ESOP share sits outside permanent equity at redemption value, which is why a profitable business reported a shareholders' deficit of $921.1 million at the end of 2018.

The cruel part is the direction the repurchase obligation moves. A rising appraised share price is the plan working, and it simultaneously raises the price of every share you will have to buy back. In 2018 alone the share-price adjustment added $99.8 million to the ESOP balance while the company was paying out $125.8 million in cash. Success compounds the bill.

What the numbers looked like by 2018

Across 2016 to 2018 Parsons spent $385.9 million redeeming shares while earning $306.5 million in net income. The market the company ran for its own shares cost more than the business made.

The individual years show why that is dangerous rather than merely expensive. 2016 revenue was $3.039 billion, and an $85.1 million impairment pushed the year to a $13.1 million net loss. The company still paid $148.7 million to buy shares back from departing employees, because the obligation does not care what kind of year you had. 2017 revenue was $3.017 billion, down 0.7%, a second flat year, with another $111.4 million going out. The growth that finally arrived in 2018, an 18.0% jump to $3.561 billion, was largely bought, with the Polaris Alpha acquisition alone adding $227.4 million.

By December 2018 the redeemable ESOP stock stood at $1.876 billion against $2.613 billion of total assets and $206.4 million of cash. Nothing was wrong with the business. It simply had a standing claim on it more than six times what it had earned in three years, payable in cash, with no exit valve because nobody had designed one.

Firing yourself as the exchange

On May 9, 2019 Parsons sold 18,518,500 shares at $27.00, exactly $500.0 million gross. Read carefully, that was not a change of owner: the ESOP kept 80.8% of the voting power, making Parsons a controlled company on the NYSE. It was a change of who writes the check when an employee-owner retires. The S-1 puts it in one line, that with a public market cash would no longer be required for ESOP redemptions.

The alternatives were worse in instructive ways. Stretching payouts over more years buys twelve months and costs the thing the plan is built on, because employee ownership is only worth something if the promise converts to money on the day someone retires. And the unredeemed shares keep accruing at the new appraised value anyway. Holding the appraised price down is not even available: an independent trustee sets it and owes fiduciary duties to the participants, so suppressing it means deliberately underpaying the retirees the plan exists to pay.

If you are considering an ESOP handover, take the structure seriously as a succession answer and then model the repurchase obligation out twenty-five years before you sign anything. The year it becomes unaffordable is not a year you get to choose, and it will most likely be a year in which your revenue is flat and your workforce is retiring.

Timeline

• 1944 The company commences its principal operations: engineering and construction work that becomes, over decades, defense, intelligence and infrastructure programs.
• 1984 In the S-1's own words: 'we became 100% owned by the Parsons Employee Stock Ownership Plan.' The ESOP is the sole stockholder. There is no founder stake, no private-equity sponsor, and no public market, for the next thirty-five years.
• 2016 Revenue $3.039B. An $85.1M impairment of goodwill and other assets pushes the year to a $13.1M net loss. In the same year the company pays $148.7M in cash to buy shares back from departing employees. The internal market does not care whether you had a good year.
• 2017 Revenue $3.017B, down 0.7%, the second flat year running. Another $111.4M goes out in redemptions. The ESOP stock carried on the balance sheet rises to $1.855B.
• 2018 Revenue jumps 18.0% to $3.561B, largely bought: the Polaris Alpha acquisition alone adds $227.4M. Net income reaches $222.3M. Redemptions take $125.8M. The ESOP claim ends the year at $1.876B against total assets of $2.613B, and the balance sheet shows a shareholders' deficit of $921.1M.
• May 9, 2019 IPO: 18,518,500 shares at $27.00, exactly $500.0M gross. The ESOP keeps 80.8% of the voting power, making Parsons a 'controlled company' on the NYSE. The S-1 states the point plainly: 'With a public market for the Company's common stock, cash will no longer be required for ESOP redemptions.'

You're in the owner's chair

It is the ESOP's thirty-fourth year. The company is profitable, the appraised share price keeps rising, which is the plan working, and every retiring employee has a legal right to be paid cash for their shares. You are the only buyer. Last year the bill was $125.8M against $206.4M of cash on hand, and the workforce is aging. What do you do?

• Take the company public and keep the ESOP as controlling holder
• Hold the appraised share price down so the redemption bill stops climbing
• Stretch the payouts — pay retiring employees over more years

Being your own stock exchange: Parsons at the end of 2018

• Cash and equivalents on hand: 206 US$ millions
• Net income earned, 2016–2018 combined: 307 US$ millions
• Cash paid to retiring employee-owners, 2016–2018: 386 US$ millions
• ESOP shares still owed a cash redemption: 1,876 US$ millions

Form S-1/A, April 29, 2019. The first three bars are three years of history; the fourth is the standing claim on December 31, 2018, more than six times what the company earned in those three years and nine times the cash it held. Nothing was wrong with the business. The buyer of last resort was simply the business itself.

Business model

Sell the time and clearances of 15,633 employees (engineers, scientists, programmers and other specialists, as of January 31, 2019) into long federal and infrastructure contracts. Fixed-price terms carried 33%, 35% and 32% of revenue in 2016, 2017 and 2018 respectively, with the rest cost-plus or time-and-materials. It is a people business whose only asset walks out at 6pm, which is exactly why handing the ownership to those people is not a sentimental idea.

Revenue model

Contract revenue across two segments, Federal Solutions and Critical Infrastructure. Ownership sits on top of this rather than inside it: because the company was an S corporation whose sole shareholder was a tax-exempt ESOP trust, its taxable income passed through to an owner that owed no federal income tax, so for thirty-five years Parsons paid essentially none. That is the ESOP's real subsidy, and it is not small.

Cost structure

Direct contract costs plus overhead, and then a line no ordinary company carries: the company itself is the only buyer of its own stock. Under the plan, on retirement, death, disability, hardship or a diversification election, participants' accounts are 'redeemable at the current price per share', in cash. That price is set annually by the ESOP Trustee with a third-party valuation. Accounting reflects the reality: every ESOP share sits outside permanent equity, at redemption value, which is why a profitable company reported a shareholders' deficit.

Strategic challenge

The repurchase obligation compounds against you when things go well. A rising appraised value is the plan working, and it simultaneously raises the price of every share you will have to buy back. In 2018 alone the share-price adjustment added $99.8M to the ESOP balance while the company was paying out $125.8M in cash. Across 2016–2018 Parsons spent $385.9M redeeming shares while earning $306.5M in net income. The internal market cost more than the business made.

Key decision

Stop being the market. The 2019 IPO was not a change of owner, since the ESOP still held 80.8% of the votes afterwards. It was a change of who writes the check when an employee-owner retires. Selling 18,518,500 new shares raised $500.0M gross, and it moved a permanent, growing, unfundable cash obligation off the company and onto a stock exchange that has no cash flow problem.

What worked

The ownership transfer itself, on the only test that matters: the company was still there thirty-five years later, still employing 15,633 people, still growing, with no founder's estate to buy out and no sponsor demanding an exit on a five-year clock. The tax structure quietly funded a great deal of that: an S corporation owned by a tax-exempt trust keeps money a competitor sends to the Treasury. And the appraisal discipline held: an independent trustee set the price, not management.

What failed

The plan had no exit valve, and nobody designed one for thirty-five years. Redemptions of $148.7M in 2016 landed in a year with an $85.1M impairment and a net loss. Revenue was flat from 2016 to 2017 while the buyback obligation kept accruing, and the growth that finally arrived in 2018 was bought with acquisitions and debt, not generated. By December 2018 the redeemable ESOP stock stood at $1.876B against $2.613B of total assets and $206.4M of cash. That is not a business with a liquidity plan; that is a business that needed an IPO.

Risk factors

A repurchase obligation that grows with your own success and is payable in cash regardless of the year you had. A share price set by appraisal rather than a market, so nobody can sell early and everybody's retirement is concentrated in one employer. Debt covenants that, as the S-1 discloses, restrict amending the ESOP's own plan documents. And post-IPO, the reverse problem: retiring participants can now sell into the open market, which is liquidity for them and supply pressure on the stock.

Lesson summary

An ESOP solves the succession problem, which is who buys the business when the owner leaves, by making the buyer permanent and internal. Then it hands you a second problem that takes twenty years to show up: you are now your own stock exchange, obliged to pay cash for every share every retiree hands back, at a price that rises when you do well. Parsons ran that internal market for thirty-five years and spent $385.9M on it in three years against $306.5M of profit. If you are considering an ESOP handover, model the repurchase obligation out twenty-five years before you sign anything, because the year it becomes unaffordable is not chosen by you.

Key data

• 1944 Operations commenced
• 1984 to 2019 — thirty-five years 100% employee-owned
• 15,633 (January 31, 2019) Employees at IPO
• $3.039B / $3.017B / $3.561B Revenue, 2016 / 2017 / 2018
• $385.9M Cash paid to redeem ESOP shares, 2016–2018
• $306.5M Net income over the same three years
• $1.876B (total assets $2.613B) Redeemable ESOP stock, end of 2018
• 18,518,500 shares at $27.00 = $500.0M gross IPO, May 9, 2019
• 80.8% ESOP voting power after the IPO

Sources & basis

The company here is real and named, and nothing about it was invented to make the story land. The list below is where each fact came from — public filings, court records, published reporting — so you can open a source and check it against the sentence that used it.

1. Parsons Corporation Form S-1/A, filed April 29, 2019 — 'In 1984, we became 100% owned by the Parsons Employee Stock Ownership Plan'; redemption spending of $148.7M (2016), $111.4M (2017) and $125.8M (2018); revenue of $3,039,191K / $3,017,011K / $3,560,508K; net income (loss) of $(13,147)K / $97,326K / $222,337K; redeemable common stock held by the ESOP of $1,876,309K; total assets $2,612,578K; shareholders' deficit $(921,076)K; 15,633 employees as of January 31, 2019 View source ↗
2. Parsons Corporation Form 424B4 prospectus, May 9, 2019 — initial public offering price of $27.00 per share, 18,518,500 shares, $499,999,500 gross, and the ESOP retaining 80.8% of total voting power (NYSE 'controlled company') View source ↗