icfi-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number: 001-33045

 

ICF International, Inc.

(Exact name of Registrant as Specified in its Charter)

 

 

Delaware 

 

22-3661438 

(State or Other Jurisdiction of

Incorporation or Organization) 

 

(I.R.S. Employer

Identification No.) 

 

 

 

9300 Lee Highway, Fairfax, VA 

 

22031 

(Address of Principal Executive Offices) 

 

(Zip Code) 

 

Registrant’s telephone number, including area code: (703) 934-3000

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes       No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes       No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

 

 

 

Accelerated filer

 

Non-accelerated filer

 

 

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.        

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes       No

As of October 26, 2018, there were 18,847,336 shares outstanding of the registrant’s common stock.

 


ICF INTERNATIONAL, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q FOR THE

PERIOD ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Consolidated Balance Sheets at September 30, 2018 (Unaudited) and December 31, 2017

3

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Nine Months Ended September 30, 2018 and 2017

4

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2018 and 2017

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

PART II. OTHER INFORMATION

32

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 3.

Defaults Upon Senior Securities

32

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

Item 5.

Other Information

32

 

 

 

Item 6.

Exhibits

33

 

 

 

 


PART I. FINANCIAL INFORMATION

Item  1.

Financial Statements 

ICF International, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

  

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,804

 

 

$

11,809

 

Contract receivables, net

 

 

194,202

 

 

 

168,318

 

Contract assets

 

 

143,161

 

 

 

123,197

 

Prepaid expenses and other assets

 

 

16,608

 

 

 

11,327

 

Income tax receivable

 

 

10,275

 

 

 

5,596

 

Restricted cash - current

 

 

 

 

 

11,191

 

Total Current Assets

 

 

370,050

 

 

 

331,438

 

Property and Equipment, net

 

 

45,742

 

 

 

38,052

 

Other Assets:

 

 

 

 

 

 

 

 

Goodwill

 

 

702,585

 

 

 

686,108

 

Other intangible assets, net

 

 

33,234

 

 

 

35,304

 

Restricted cash - non-current

 

 

1,286

 

 

 

1,266

 

Other assets

 

 

23,147

 

 

 

18,087

 

Total Assets

 

$

1,176,044

 

 

$

1,110,255

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

69,168

 

 

$

75,074

 

Contract liabilities

 

 

26,489

 

 

 

38,571

 

Accrued salaries and benefits

 

 

58,802

 

 

 

45,645

 

Accrued subcontractors and other direct costs

 

 

40,347

 

 

 

47,508

 

Accrued expenses and other current liabilities

 

 

29,418

 

 

 

17,572

 

Total Current Liabilities

 

 

224,224

 

 

 

224,370

 

Long-term Liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

232,504

 

 

 

206,250

 

Deferred rent

 

 

14,335

 

 

 

15,119

 

Deferred income taxes

 

 

37,330

 

 

 

33,351

 

Other

 

 

16,978

 

 

 

15,135

 

Total Liabilities

 

 

525,371

 

 

 

494,225

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $.001; 5,000,000 shares authorized; none issued

 

 

 

 

 

 

Common stock, par value $.001; 70,000,000 shares authorized; 22,419,587 and 22,019,315 shares issued as of September 30, 2018 and December 31, 2017, respectively; 18,868,431 and 18,661,801 shares outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

22

 

 

 

22

 

Additional paid-in capital

 

 

322,600

 

 

 

307,821

 

Retained earnings

 

 

470,386

 

 

 

434,766

 

Treasury stock

 

 

(134,191

)

 

 

(121,540

)

Accumulated other comprehensive loss

 

 

(8,144

)

 

 

(5,039

)

Total Stockholders’ Equity

 

 

650,673

 

 

 

616,030

 

Total Liabilities and Stockholders’ Equity

 

$

1,176,044

 

 

$

1,110,255

 

The accompanying notes are an integral part of these consolidated financial statements.

3


ICF International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands, except per share amounts)  

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

332,968

 

 

$

305,301

 

 

$

960,063

 

 

$

907,988

 

Direct costs

 

 

213,060

 

 

 

189,992

 

 

 

608,451

 

 

 

564,495

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect and selling expenses

 

 

88,960

 

 

 

84,558

 

 

 

269,029

 

 

 

259,600

 

Depreciation and amortization

 

 

4,210

 

 

 

4,613

 

 

 

12,724

 

 

 

13,431

 

Amortization of intangible assets

 

 

2,516

 

 

 

2,742

 

 

 

7,030

 

 

 

8,225

 

Total operating costs and expenses

 

 

95,686

 

 

 

91,913

 

 

 

288,783

 

 

 

281,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

24,222

 

 

 

23,396

 

 

 

62,829

 

 

 

62,237

 

Interest expense

 

 

(2,240

)

 

 

(2,175

)

 

 

(6,073

)

 

 

(6,663

)

Other (expense) income

 

 

(351

)

 

 

(311

)

 

 

(565

)

 

 

24

 

Income before income taxes

 

 

21,631

 

 

 

20,910

 

 

 

56,191

 

 

 

55,598

 

Provision for income taxes

 

 

4,960

 

 

 

7,218

 

 

 

13,486

 

 

 

19,792

 

Net income

 

$

16,671

 

 

$

13,692

 

 

$

42,705

 

 

$

35,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.88

 

 

$

0.73

 

 

$

2.27

 

 

$

1.90

 

Diluted

 

$

0.86

 

 

$

0.72

 

 

$

2.22

 

 

$

1.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,873

 

 

 

18,666

 

 

 

18,783

 

 

 

18,807

 

Diluted

 

 

19,306

 

 

 

19,024

 

 

 

19,256

 

 

 

19,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.14

 

 

$

 

 

$

0.42

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax

 

 

(568

)

 

 

558

 

 

 

(2,276

)

 

 

3,030

 

Comprehensive income, net of tax

 

$

16,103

 

 

$

14,250

 

 

$

40,429

 

 

$

38,836

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


ICF International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands) 

  

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

42,705

 

 

$

35,806

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Non-cash equity compensation

 

 

8,682

 

 

 

8,158

 

Depreciation and amortization

 

 

19,753

 

 

 

21,655

 

Facilities consolidation reserve

 

 

(193

)

 

 

1,351

 

Deferred taxes and other adjustments, net

 

 

5,262

 

 

 

7,473

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Net contract assets and liabilities

 

 

(32,158

)

 

 

(8,046

)

Contract receivables, net

 

 

(24,050

)

 

 

8,640

 

Prepaid expenses and other assets

 

 

(6,841

)

 

 

(2,835

)

Accounts payable

 

 

(5,882

)

 

 

(8,822

)

Accrued salaries and benefits

 

 

12,921

 

 

 

14,795

 

Accrued subcontractors and other direct costs

 

 

(7,897

)

 

 

(7,975

)

Accrued expenses and other current liabilities

 

 

3,602

 

 

 

(2,021

)

Income tax receivable and payable

 

 

(5,535

)

 

 

(1,710

)

Other liabilities

 

 

(16

)

 

 

3,815

 

Net Cash Provided by Operating Activities

 

 

10,353

 

 

 

70,284

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment and capitalized software

 

 

(15,593

)

 

 

(8,475

)

Payments for business acquisitions, net of cash received

 

 

(22,847

)

 

 

(92

)

Net Cash Used in Investing Activities

 

 

(38,440

)

 

 

(8,567

)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Advances from working capital facilities

 

 

444,637

 

 

 

460,875

 

Payments on working capital facilities

 

 

(418,383

)

 

 

(490,184

)

Payments on capital expenditure obligations

 

 

(3,243

)

 

 

(3,394

)

Debt issue costs

 

 

(21

)

 

 

(1,591

)

Proceeds from exercise of options

 

 

5,842

 

 

 

4,722

 

Dividends Paid

 

 

(5,269

)

 

 

 

Net payments for stockholder issuances and buybacks

 

 

(12,399

)

 

 

(32,934

)

Net Cash Provided by (Used in) Financing Activities

 

 

11,164

 

 

 

(62,506

)

Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash

 

 

(253

)

 

 

640

 

 

 

 

 

 

 

 

 

 

Decrease in Cash, Cash Equivalents, and Restricted Cash

 

 

(17,176

)

 

 

(149

)

Cash, Cash Equivalents, and Restricted Cash, Beginning of Period

 

 

24,266

 

 

 

7,885

 

Cash, Cash Equivalents, and Restricted Cash, End of Period

 

$

7,090

 

 

$

7,736

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

7,193

 

 

$

6,042

 

Income taxes

 

$

13,056

 

 

$

15,085

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

 

Capital expenditure obligations

 

$

6,121

 

 

$

 

The accompanying notes are an integral part of these consolidated financial statements.

5


Notes to Consolidated Financial Statements

(in thousands, except per share amounts)

NOTE 1 - BASIS OF PRESENTATION AND NATURE OF OPERATIONS

Basis of Presentation

The accompanying consolidated financial statements include the accounts of ICF International, Inc. and its subsidiaries (collectively, the “Company”), and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”). All significant intercompany transactions and balances have been eliminated.

Nature of Operations

The Company provides professional services and technology-based solutions to government and commercial clients, including management, marketing, technology, and policy consulting and implementation services in the areas of: energy, environment, and infrastructure; health, education and social programs; safety and security; and consumer and financial services. The Company offers a full range of services to these clients throughout the entire life cycle of a policy, program, project, or initiative, from research, analysis, assessment and advice to design and implementation of programs and technology-based solutions, as well as the provision of engagement services and programs.

The Company’s major clients are U.S. federal government departments and agencies, most significantly the Department of Health and Human Services, Department of State and Department of Defense. The Company also serves U.S. state and local government departments and agencies, international governments, and commercial clients worldwide. U.S. state and local governments include the governments of U.S. territories. Commercial clients include airlines, airports, electric and gas utilities, oil companies, banks and other financial services companies, transportation, travel and hospitality firms, non-profits/associations, law firms, manufacturing firms, retail chains, and distribution companies. The term “federal” or “federal government” refers to the U.S. federal government, and “state and local” or “state and local government” refers to U.S. state and local governments and U.S. territorial governments, unless otherwise indicated.

The Company, incorporated in Delaware, is headquartered in Fairfax, Virginia. It maintains offices throughout the world, including 55 or more offices in the U.S. and U.S. territories and 15 or more offices in key regions outside the U.S., including offices in the United Kingdom, Belgium, China, India, and Canada.

Interim Results

The unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These rules and regulations permit some of the information and footnote disclosures normally included in financial statements, prepared in accordance U.S. GAAP, to be condensed or omitted. In management’s opinion, the unaudited consolidated financial statements contain all adjustments that are of a normal recurring nature, necessary for a fair presentation of the results of operations and financial position of the Company for the interim periods presented. The Company reports operating results and financial data in one operating and reportable segment. Operating results for the three and nine month periods ended September 30, 2018 are not necessarily indicative of the results that may be expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2017 and the notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 28, 2018 (the “Annual Report”).

Reclassifications

Certain amounts in the 2017 consolidated financial statements have been reclassified to conform to the current year presentation. As a result of the adoption of Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), the Company presented balances, titled contract assets and contract liabilities, within the consolidated balance sheet as well as the net impact of changes in these balances within the consolidated statement of cash flows. The Company reclassified comparable balances within the December 31, 2017 consolidated balance sheet as well as the impact of changes in these balances within the consolidated statement of cash flows in order to enhance comparability. Any other reclassifications were immaterial to the financial statements taken as a whole.

6


Significant Accounting Policies

Revenue Recognition

The Company primarily provides services and technology-based solutions for clients that operate in a variety of markets and the solutions may span the entire program life cycle, from initial research and analysis to the design and implementation of solutions. The Company enters into agreements with clients that create enforceable rights and obligations and for which it is probable that the Company will collect the consideration to which it will be entitled as services and solutions are transferred to the client. Except in certain narrowly defined situations, the Company’s agreements with its clients are written and revenue is generally not recognized on oral or implied arrangements. The Company recognizes revenue based on the consideration specified in the agreement and excludes from revenue amounts collected on behalf of third parties. Accordingly, sales and similar taxes which are collected for third parties are excluded from the transaction price. The Company also evaluates whether two or more agreements should be accounted for as one single contract and whether combined or single agreements should be accounted for as more than one performance obligation.

For most contracts, the client requires the Company to perform a number of tasks in providing an integrated output and, hence, each of these contracts are tracked as having only one performance obligation. When contracts are separated into multiple performance obligations, the Company allocates the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised services underlying each performance obligation. The Company generally provides customized solutions in which the pricing is based on specific negotiations with each client, and, in these cases, the Company uses a cost plus margin approach to estimate the standalone selling price of each performance obligation. It is common for the Company’s long-term contracts to contain award fees, incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts are generally awarded at the completion of a prescribed measurement period based on the achievement of performance metrics, program milestones or cost targets, and the amount awarded may be subject to client discretion. The Company estimates variable consideration as the most likely amount to which the Company expects to be entitled.  

Long-term contracts typically contain billing terms that provide for invoicing once a month and payment on a net 30-day basis. Exceptions to monthly billing terms are to ensure that the Company performs satisfactorily rather than representing a significant financing component. For cost-based contracts, the Company’s performance is evaluated during a contractually stipulated performance period and, while contract costs may be billed on a monthly basis, the Company is generally permitted to bill for incentive or award fees only after the completion of the performance period, which may occur quarterly, semi-annually or annually, and after the client completes the performance assessment. Fixed-price contracts may provide for milestone billings based on the attainment of specific project objectives rather than for billing on a monthly basis. Moreover, contracts may require retentions or hold backs that are paid at the end of the contract to ensure that the Company performs in accordance with requirements. The Company does not assess whether a contract contains a significant financing component if the Company expects, at contract inception, that the period between payment by the client and the transfer of promised services to the client will be one year or less.

The Company generally recognizes revenue over time as control is transferred to a client, based on the extent of progress towards satisfaction of the performance obligation. The selection of the method used to measure progress requires judgment and is dependent on the contract type selected by the client during contract negotiation and the nature of the services and solutions to be provided.

When a performance obligation is billed using a time-and-materials contract type, the Company uses output progress measures to estimate revenue earned based on hours worked in contract performance at negotiated billing rates. Fixed-price level-of-effort contracts are substantially similar to time-and-materials contracts except that the Company is required to deliver a specified level of effort over a stated period of time. For these contracts, the Company estimates revenue earned using contract hours worked at negotiated bill rates as the Company delivers the contractually required workforce.

For cost-based contracts, the Company recognizes revenue based on contract costs incurred, as the Company becomes contractually entitled to reimbursement of the contract costs, plus a most likely estimate of award or incentive fees earned on those costs even though final determination of fees earned occurs after the contractually-stipulated performance assessment period ends.

For performance obligations requiring the delivery of a service for a fixed price, the Company uses the ratio of actual costs incurred to total estimated costs, provided that costs incurred (an input method) provides a reasonable measure of progress towards the satisfaction of a performance obligation, in order to estimate the portion of total revenue earned. When this method is used, changes in estimated costs to complete these obligations result in adjustments to revenue on a cumulative catch-up basis, which causes the effect of revised estimates for prior periods to be recognized in the current period. Changes in these estimates can routinely occur over contract performance for a variety of reasons, which include: changes in contract scope; changes in contract cost estimates due to unanticipated cost growth or reassessments of risks impacting costs; changes in estimated incentive or award fees; or performing better or worse than previously estimated.

In some fixed price service contracts, the Company performs services of a recurring nature, such as maintenance and other services of a “stand ready” nature. For these contracts, the Company has the right to consideration in an amount that corresponds directly with the value that the client has received. Therefore, the Company records revenue on a straight-line basis to reflect the transfer of control to the client throughout the contract.  

7


Contracts are often modified to reflect changes in contract specifications and requirements, and these changes may create new enforceable rights and obligations. Most modifications are for services that are not distinct from the existing agreement due to the significant integration service that the Company provides. Therefore, most modifications are accounted for as part of an existing performance obligation. The effect of these modifications on transaction price, and the Company’s measure of progress in fulfilling the performance obligation to which it relates, may be recognized as an adjustment to revenue on a cumulative catch-up basis. Revenue from modifications that create new, distinct performance obligations is recognized based on the Company’s progress in fulfilling the requirements of the new obligation.  

For contracts in which the estimated cost to perform exceeds the consideration to be received, the Company accrues for the entire estimated loss during the period in which the loss is determined by recording additional direct costs.

The Company recognizes the cost to fulfill contracts as incurred. The Company evaluates incremental costs of obtaining a contract and, if they are recoverable from the client and relate to a specific future contract, they are deferred and recognized over contract performance or the estimated life of the customer relationship if renewals are expected. The Company expenses these costs when incurred if the amortization period is one year or less.

Unfulfilled performance obligations represent amounts expected to be earned on contracts and do not include the value of negotiated, unexercised contract options, which are classified as marketing offers. Indefinite delivery/indefinite quantity and similar arrangements provide a framework for the client to issue specific tasks, delivery or purchase orders in the future and these arrangements are considered marketing offers until a specific order is executed.

Revenue recognition entails the use of significant judgment, including, but not limited to, the following: evaluating agreements in terms of the number and nature of performance obligations, determining the appropriate method for measuring progress to satisfaction of obligations, and preparing estimates in terms of the amount of progress that the Company has made. Most of the Company’s revenue is recognized over time and for many fixed-price contracts, in particular, the Company estimates the proportion of total revenue earned using the ratio of contract costs incurred to total estimated contract costs, which requires the Company to prepare estimates as work progresses of contract cost left to be incurred. Moreover, some of the Company’s contracts include variable consideration, which requires the Company to estimate the most likely amounts that will be earned over the respective performance periods. For these obligations, changes in estimates result in cumulative catch-up adjustments and may have a significant impact on earnings during a given period.  

The Company’s operating cycle for long-term contracts may be greater than one year and is measured by the average time intervening between the inception and the completion of those contracts. Contract-related assets and liabilities, as highlighted below, are classified as current assets and current liabilities. Significant balance sheet accounts related to the revenue recognition cycle are as follows:

Contract receivables, net – This account includes amounts billed or billable under contract terms. The amounts due are stated at their net realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The Company considers a number of factors in its estimate of the allowance, including knowledge of a client’s financial condition, its historical collection experience, and other factors relevant to assessing the collectability of the receivables.

Contract assets – This account includes unbilled amounts typically resulting from revenue recognized on long-term contracts when the amount of revenue recognized exceeds the amounts billed. It also includes contract retainages until the Company has met the contract-stipulated requirements for payment. Contract assets are reported in a net position on a contract by contract basis each period even though individual contracts may contain multiple performance obligations. On a contract by contract basis, amounts do not exceed their net realizable value.

Contract liabilities – This account consists of advance payments received and billings in excess of revenue recognized on long-term contracts. Contact liabilities are reported in a net position on a contract by contract basis each period even though individual contracts may contain multiple performance obligations.

8


Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted

Accumulated Other Comprehensive Loss

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02: Income Statement – Reporting Comprehensive Income (Topic 220). In the past, certain transactions were recorded in accumulated other comprehensive income net of applicable taxes. The tax had been calculated based on the tax rates enacted at the time the transaction occurred with no provision, under previous accounting, for adjusting the balance for changes in the enacted tax rate. Due to the passage of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), those historical tax rates used for recording the transactions were higher than the Company’s current enacted rate. The new guidance allows the Company to reclassify these stranded tax effects directly to retained earnings. This update is effective for fiscal years beginning after December 15, 2018, including interim periods therein, and early adoption is permitted. During the first quarter of 2018, the Company elected to early adopt the update, which resulted in a one-time cumulative effect adjustment of $0.8 million from accumulated other comprehensive loss to retained earnings.

Revenue Recognition

The Company implemented ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018 using the modified retrospective method. This method requires that the Company apply the requirements of the new standard in the year of adoption to new contracts and those that were not completed as of the adoption date. Management evaluated those contracts not completed as of January 1, 2018 (the adoption date) and concluded that the impact of adopting ASC 606 did not have a material impact on the Company. Contract assets and contract liabilities were formerly reported as unbilled accounts receivable and deferred revenue, respectively. The titles have been changed in the table below to be consistent with accounts currently used under the new standard.

 

 

December 31, 2017

 

 

As Reported

 

 

As Adopted

 

Contract receivables, net

$

291,515

 

 

$

168,318

 

Contract assets

 

 

 

 

123,197

 

Deferred revenue

 

38,571

 

 

 

 

Contract liabilities

 

 

 

 

38,571

 

Retained earnings

 

434,766

 

 

 

434,766

 

Unfulfilled performance obligations for contracts in process as of the adoption date were $1.1 billion.

Under the modified retrospective method, the Company is required to maintain dual reporting during the year of adoption in order to present revenue under both the previous and new accounting for contracts initiated on or after the date of adoption and for those contracts having remaining obligations as of the adoption date. Revenue timing differences between the two methods resulted primarily from contracts with performance incentives. Under the new accounting, the Company has included in revenue the most likely amount of priced incentives earned as contract work was performed rather than, as under the old accounting, waiting to recognize revenue from incentives until specific quantitative goals were achieved, generally at the end of the measurement period. This timing difference is not expected to result in a material change to the Company’s annual revenue since most incentives have a one-year measurement period, which is aligned with the Company’s fiscal year. Revenue calculated under the old and new methods is as follows:

 

 

Three months ended

September 30, 2018

 

 

Nine months ended

September 30, 2018

 

 

Previous

Accounting

 

 

New

Accounting

 

 

Previous

Accounting

 

 

New

Accounting

 

Revenue

$

331,978

 

 

$

332,968

 

 

$

957,773

 

 

$

960,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract assets

 

141,391

 

 

 

143,161

 

 

 

141,391

 

 

 

143,161

 

Contract liabilities

 

27,009

 

 

 

26,489

 

 

 

27,009

 

 

 

26,489

 

 

9


Recent Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard revises the accounting for leases and requires lessees to recognize, for all leases with terms of greater than one year, a right-of-use asset and lease liability which depicts the rights and obligations arising from a lease. The standard also requires qualitative and quantitative disclosures designed to provide information regarding the nature, amount and timing of lease expense. For lessees, the new guidance is not expected to significantly change the recognition and measurement of lease expense.  This standard is effective for the first interim and annual periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements permitting the recognition of a cumulative-effect adjustment to retained earnings on the date of adoption. The Company will adopt the standard beginning January 1, 2019. The Company intends to adopt the standard using the alternative transition method. The Company is currently evaluating its leases and designing new processes and controls that will aid in the implementation of and accounting for the new requirements. At this time, the Company cannot fully determine the effect of adopting the standard on the consolidated financial statements.  However, the Company currently anticipates that, on adoption, the Company will recognize right-of-use assets and lease liabilities that will each total from $100 to $200 million. The Company does not expect a material impact from adopting the new standard on the results of operations and cash flows.

Stock Compensation

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718).  The standard simplifies the accounting for share-based compensation to non-employees by aligning the guidance with share-based payments to employees.  It is effective for interim and annual reporting periods beginning after December 15, 2018 with early adoption permitted.  The Company is currently in the process of evaluating the impact of adoption, but does not anticipate a material impact on the consolidated financial statements.

Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is considered a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard also requires the entity to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement and present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting arrangement. The standard is effective for interim periods and fiscal years beginning after December 15, 2019 with early adoption permitted. The standard may be implemented using either the retrospective or prospective method. The Company is currently in the process of evaluating the impact of adoption and mode of adoption, but does not anticipate that there will be a material impact on the consolidated financial statements as a result of adopting the standard.

 

NOTE 2 – CONTRACT RECEIVABLES, NET

Contract receivables, net consisted of the following: 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Billed and billable

 

$

198,204

 

 

$

172,171

 

Allowance for doubtful accounts

 

 

(4,002

)

 

 

(3,853

)

Contract receivables, net

 

$

194,202

 

 

$

168,318

 

 

NOTE 3 – GOODWILL

The changes in the carrying amount of goodwill during the nine-months period ended September 30, 2018 were as follows:

 

Balance as of December 31, 2017

$

686,108

 

Goodwill resulting from The Future Customer business combination

 

7,597

 

Goodwill resulting from DMS Disaster Consultants business combination

 

10,254

 

Effect of foreign currency translation

 

(1,374

)

Balance as of September 30, 2018

$

702,585

 

 

10


NOTE 4 – LONG-TERM DEBT

On May 17, 2017, the Company entered into a Fifth Amended and Restated Business Loan and Security Agreement with a syndication of 11 commercial banks (the “Credit Facility”). The Credit Facility: (i) includes modifications to the Company’s Fourth Amended and Restated Business Loan and Security Agreement, (ii) matures on May 17, 2022, (iii) increases the borrowing ceiling up to $600.0 million without a borrowing base requirement, taking into account financial, performance-based limitations, and (iv) provides for an “accordion,” which permits additional revolving credit commitments of up to $300.0 million, subject to lenders’ approval. The Credit Facility provides for letters of credit aggregating up to $60.0 million, which reduce the funds available under the Credit Facility when issued.

The Company has the option to borrow funds under the Credit Facility at interest rates based on both LIBOR (1, 3, or 6 month rates) and the Base Rate, at its discretion, plus their applicable margins. Base Rates are fluctuating per annum rates of interest equal to the highest of (i) the Federal Funds Open Rate, plus 0.5%, (ii) the Prime Rate, and (iii) the daily LIBOR rate, plus a LIBOR Margin between 1.00% and 2.00% based on its Leverage Ratio (as defined under the Credit Facility). The interest accrued based on LIBOR rates is to be paid on the last business day of the interest period (1, 3, or 6 months), while interest accrued based on the Base Rates is to be paid in quarterly installments. The unused portion of the Credit Facility is subject to a commitment fee between 0.13% and 0.25% per annum based on the Leverage Ratio.

The Credit Facility is collateralized by substantially all of the assets of the Company and requires that the Company remain in compliance with certain financial and non-financial covenants. The financial covenants require, among other things, that the Company maintain at all times an Interest Coverage Ratio (as defined under the Credit Facility) of not less than 3.00 to 1.00 and a Leverage Ratio of not more than 3.75 to 1.00 (subject to adjustment, in certain circumstances) for each fiscal quarter. As of September 30, 2018, the Company was in compliance with its covenants under the Credit Facility.

As of September 30, 2018, the Company had $232.5 million long-term debt outstanding, 10 outstanding letters of credit totaling $3.2 million, and unused borrowing capacity of $364.3 million under the Credit Facility (excluding the accordion). Taking into account the financial, performance-based limitations, available borrowing capacity (excluding the accordion) was $214.0 million as of September 30, 2018. The weighted-average interest rate on debt outstanding was 3.2% and 2.7% for the first nine months of 2018 and 2017, respectively.

 

NOTE 5 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

On August 8, 2018, the Company entered into two floating-to-fixed interest rate swap agreements (the “Swaps”) for an aggregate notional amount of $75.0 million in order to hedge a portion of the Company’s floating rate Credit Facility (which is discussed in Note 4 – Long-Term Debt.) The Company has designated the Swaps as cash flow hedges. Similar to the previous swap agreement that the Company entered into, these Swaps are intended to mitigate the risk of rising interest rates. The Swaps provide a fixed rate of 2.8530% per annum on the notional amount, plus the applicable margin pursuant to the Credit Facility. The cash flows from the Swaps began August 31, 2018 and end on  August 31, 2023, and the realized gains and losses in connection with each required interest payment will be reclassified from accumulated other comprehensive income (loss) (“AOCI”) to interest expense during the period of the cash flows. On a quarterly basis, management evaluates all swap agreements to determine each agreement’s effectiveness or ineffectiveness and records the change in fair value as an adjustment to other comprehensive income or loss.

 

 

11


NOTE 6 – OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE LOSS

Other comprehensive income (loss) includes foreign currency translation adjustments arising from the conversion of financial statements of foreign subsidiaries into U.S. dollars, the amortization of the gain on the sale of an interest rate hedge agreement, and the change in the fair value of current interest rate hedge agreements. Components of accumulated other comprehensive loss as of September 30, 2018 and 2017 are as follows:

 

 

Three Months Ended September 30, 2018

 

 

Foreign

Currency

Translation Adjustments

 

 

Gain on Sale

of Interest

Rate Hedge

Agreement (1)

 

 

Change in

Fair Value of

Interest Rate

Hedge

Agreements (2) (5)

 

 

Total

 

Accumulated other comprehensive (loss) income at June 30,

   2018

$

(11,074

)

 

$

2,431

 

 

$

1,067

 

 

$

(7,576

)

Current period other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income before

   reclassifications

 

(255

)

 

 

 

 

 

371

 

 

 

116

 

Amounts reclassified from accumulated other

   comprehensive income

 

 

 

 

(180

)

 

 

(41

)

 

 

(221

)

Effect of taxes (3)

 

(142

)

 

 

47

 

 

 

(368

)

 

 

(463

)

Total current period other comprehensive (loss) income

 

(397

)

 

 

(133

)

 

 

(38

)

 

 

(568

)

Accumulated other comprehensive (loss) income at

   September 30, 2018

$

(11,471

)

 

$

2,298

 

 

$

1,029

 

 

$

(8,144

)

 

 

Three Months Ended September 30, 2017

 

 

Foreign

Currency

Translation

Adjustments

 

 

Gain on Sale

of Interest

Rate Hedge

Agreement (1)

 

 

Change in

Fair Value of

Interest Rate

Hedge

Agreement (2)(5)

 

 

Total

 

Accumulated other comprehensive (loss) income at June 30,

   2017

$

(9,343

)

 

$

2,175

 

 

$

 

 

$

(7,168

)

Current period other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before reclassifications

 

943

 

 

 

 

 

 

228

 

 

 

1,171

 

Effect of taxes (3)

 

(613

)

 

 

 

 

 

 

 

 

(613

)

Total current period other comprehensive income

 

330

 

 

 

 

 

 

228

 

 

 

558

 

Accumulated other comprehensive (loss) income at

   September 30, 2017

$

(9,013

)

 

$

2,175

 

 

$

228

 

 

$

(6,610

)

12


 

 

Nine Months Ended September 30, 2018

 

 

Foreign

Currency

Translation

Adjustments

 

 

Gain on Sale

of Interest

Rate Hedge

Agreement (1)

 

 

Change in

Fair Value of

Interest Rate

Hedge

Agreements (2)(5)

 

 

Total

 

Accumulated other comprehensive (loss) income at

   January 1, 2018

$

(7,638

)

 

$

2,158

 

 

$

441

 

 

$

(5,039

)

Reclassification of stranded tax effects due to adoption of

   accounting principle (4)

 

(1,307

)

 

 

478

 

 

 

 

 

 

(829

)

Adjusted beginning balance

 

(8,945

)

 

 

2,636

 

 

 

441

 

 

 

(5,868

)

Current period other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income before reclassifications

 

(2,530

)

 

 

 

 

 

997

 

 

 

(1,533

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

 

 

(480

)

 

 

(41

)

 

 

(521

)

Effect of taxes (3)

 

4

 

 

 

142

 

 

 

(368

)

 

 

(222

)

Total current period other comprehensive (loss) income

 

(2,526

)

 

 

(338

)

 

 

588

 

 

 

(2,276

)

Accumulated other comprehensive (loss) income at

  September 30, 2018

$

(11,471

)

 

$

2,298

 

 

$

1,029

 

 

$

(8,144

)

 

 

Nine Months Ended September 30, 2017

 

 

Foreign

Currency

Translation

Adjustments

 

 

Gain on Sale

of Interest

Rate Hedge

Agreement (1)

 

 

Change in

Fair Value of

Interest Rate

Hedge

Agreement (2)(5)

 

 

Total

 

Accumulated other comprehensive (loss) income at

   January 1, 2017

$

(11,815

)

 

$

2,175

 

 

$

 

 

$

(9,640

)

Current period other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before reclassifications

 

4,113

 

 

 

 

 

 

228

 

 

 

4,341

 

Effect of taxes (3)

 

(1,311

)

 

 

 

 

 

 

 

 

(1,311

)

Total current period other comprehensive income

 

2,802

 

 

 

 

 

 

228

 

 

 

3,030

 

Accumulated other comprehensive (loss) income at

   September 30, 2017

$

(9,013

)

 

$

2,175

 

 

$

228

 

 

$

(6,610

)

 

(1) - Represents the fair value of an interest rate hedge agreement, designated as a cash flow hedge, which was sold on December 1, 2016. The fair value of the interest rate hedge agreement was recorded in other comprehensive income, net of tax, and will be reclassified to interest expense when earnings are impacted by the hedged items and as interest payments are made on the Credit Facility from January 31, 2018 to January 31, 2023.

(2) - Represents the change in fair value of interest rate hedge agreements designated as a cash flow hedge.  The fair value of the interest rate hedge agreements were recorded in other comprehensive income and will be reclassified to interest expense when earnings are impacted by the hedged items and as interest payments are made on the Credit Facility from August 31, 2018 to August 31, 2023.  

(3) - The Company’s effective tax rate for the three and nine months ended September 30, 2018 and 2017 was 22.9% and 34.5% and 24.0% and 35.6%, respectively.

(4) - The Company has adjusted the balance at December 31, 2017 of accumulated other comprehensive loss for the stranded tax effects caused by the enactment of the Tax Act.

(5) - The fair value of the fixed interest rate swap asset is included in other assets on the consolidated balance sheet.

 

13


NOTE 7 – STOCKHOLDERS’ EQUITY

Changes in stockholders’ equity for the three and nine months ended September 30, 2018 and 2017 are as follows:

 

 

Three Months Ended September 30, 2018

 

 

Common Stock

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Additional Paid-in Capital

 

Retained Earnings

 

Shares

 

Amount

 

Accumulated Other Comprehensive Loss

 

Total

 

Balance at July 1, 2018

 

18,826

 

$

22

 

$

317,013

 

$

456,358

 

 

3,502

 

$

(130,446

)

$

(7,576

)

$

635,371

 

Net income

 

 

 

 

 

 

 

16,671

 

 

 

 

 

 

 

 

16,671

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(568

)

 

(568

)

Equity compensation

 

 

 

 

 

3,292

 

 

 

 

 

 

43

 

 

 

 

3,335

 

Exercise of stock options

 

85

 

 

 

 

2,309

 

 

 

 

 

 

 

 

 

 

2,309

 

Issuance of shares pursuant to vesting of

   restricted stock units

 

8

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

Net payments for stock issuances and buybacks

 

(51

)

 

 

 

(14

)

 

 

 

51

 

 

(3,788

)

 

 

 

(3,802

)

Reclassification of stranded tax effects due to

   adoption of accounting principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 

 

 

 

 

(2,643

)

 

 

 

 

 

 

 

(2,643

)

Balance at September 30, 2018

 

18,868

 

$

22

 

$

322,600

 

$

470,386

 

 

3,552

 

$