icfi-10q_20200930.htm

View:

Download DOC

Download PDF

Download XLS

Download XBRL

icfi-10q_20200930.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, 2020

☐	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)

Securities registered pursuant to Section 12(b) of the Act.

Title of each class	Trading Symbols(s)	Name of each exchange on which registered
Common Stock	ICFI	NASDAQ

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.

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 30, 2020, there were 18,863,066 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, 2020

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at September 30, 2020 (Unaudited) and December 31, 2019	3

	Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Nine Months Ended September 30, 2020 and 2019	4

	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2020 and 2019	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

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	33

Item 4.	Mine Safety Disclosures	33

Item 5.	Other Information	33

Item 6.	Exhibits	34

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ICF International, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(in thousands, except share and per share amounts)	September 30, 2020			December 31, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	8,237		$	6,482
Contract receivables, net		230,277			261,176
Contract assets		139,860			142,337
Prepaid expenses and other assets		20,518			17,402
Income tax receivable		11,687			7,320
Total Current Assets		410,579			434,717
Property and Equipment, net		62,020			58,237
Other Assets:
Goodwill		906,999			719,934
Other intangible assets, net		63,200			25,829
Operating lease - right-of-use assets		138,582			133,965
Other assets		26,091			23,352
Total Assets	$	1,607,471		$	1,396,034

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt	$	10,000		$	-
Accounts payable		77,124			134,578
Contract liabilities		36,473			37,413
Operating lease liabilities - current		33,581			32,500
Accrued salaries and benefits		82,842			52,130
Accrued subcontractors and other direct costs		38,111			45,619
Accrued expenses and other current liabilities		27,616			35,742
Total Current Liabilities		305,747			337,982
Long-term Liabilities:
Long-term debt		362,280			164,261
Operating lease liabilities - non-current		123,974			119,250
Deferred income taxes		43,202			37,621
Other long-term liabilities		45,357			22,369
Total Liabilities		880,560			681,483

Contingencies (Note 18)

Stockholders’ Equity:
Preferred stock, par value $.001; 5,000,000 shares authorized; none issued		—			—
Common stock, par value $.001; 70,000,000 shares authorized; 23,150,496 and 22,846,374 shares issued at September 30, 2020 and December 31, 2019, respectively; 18,857,661 and 18,867,555 shares outstanding at September 30, 2020 and December 31, 2019, respectively		23			23
Additional paid-in capital		357,328			346,795
Retained earnings		578,554			544,840
Treasury stock, 4,292,835 and 3,978,819 shares at September 30, 2020 and December 31, 2019, respectively		(189,234	)		(164,963	)
Accumulated other comprehensive loss		(19,760	)		(12,144	)
Total Stockholders’ Equity		726,911			714,551
Total Liabilities and Stockholders’ Equity	$	1,607,471		$	1,396,034

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

ICF International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands, except per share amounts)	2020			2019			2020			2019
Revenue	$	360,315		$	373,918		$	1,072,540		$	1,081,889
Direct costs		223,288			238,158			677,311			689,160
Operating costs and expenses:
Indirect and selling expenses		100,123			100,130			302,649			298,099
Depreciation and amortization		5,143			5,035			15,386			15,392
Amortization of intangible assets		3,511			1,931			9,843			6,143
Total operating costs and expenses		108,777			107,096			327,878			319,634

Operating income		28,250			28,664			67,351			73,095
Interest expense		(3,488	)		(2,824	)		(10,921	)		(8,211	)
Other (expense) income		(223	)		(141	)		316			(367	)
Income before income taxes		24,539			25,699			56,746			64,517
Provision for income taxes		6,668			6,069			14,607			14,958
Net income	$	17,871		$	19,630		$	42,139		$	49,559

Earnings per Share:
Basic	$	0.95		$	1.04		$	2.24		$	2.63
Diluted	$	0.94		$	1.02		$	2.20		$	2.58

Weighted-average Shares:
Basic		18,853			18,799			18,841			18,810
Diluted		19,086			19,169			19,111			19,208

Cash dividends declared per common share	$	0.14		$	0.14		$	0.42		$	0.42

Other comprehensive income (loss), net of tax		3,671			(3,281	)		(7,616	)		(5,851	)
Comprehensive income, net of tax	$	21,542		$	16,349		$	34,523		$	43,708

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

ICF International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	September 30,
(in thousands)	2020			2019
Cash Flows from Operating Activities
Net income	$	42,139		$	49,559
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense		1,517			377
Deferred income taxes		7,838			1,089
Non-cash equity compensation		9,472			11,682
Depreciation and amortization		25,229			21,535
Facilities consolidation reserve		(214	)		(204	)
Amortization of debt issuance costs		557			380
Impairment of long-lived assets		—			1,728
Other adjustments, net		(2,278	)		(1,110	)
Changes in operating assets and liabilities, net of the effects of acquisitions:
Net contract assets and liabilities		2,842			(28,793	)
Contract receivables		49,428			(39,711	)
Prepaid expenses and other assets		1,084			(385	)
Accounts payable		(65,044	)		(5,052	)
Accrued salaries and benefits		29,418			23,227
Accrued subcontractors and other direct costs		(7,622	)		(16,895	)
Accrued expenses and other current liabilities		(9,107	)		(6,756	)
Income tax receivable and payable		(4,380	)		(4,134	)
Other liabilities		14,292			(173	)
Net Cash Provided by Operating Activities		95,171			6,364

Cash Flows from Investing Activities
Capital expenditures for property and equipment and capitalized software		(12,910	)		(20,686	)
Payments for business acquisitions, net of cash acquired		(253,090	)		(3,569	)
Net Cash Used in Investing Activities		(266,000	)		(24,255	)

Cash Flows from Financing Activities
Advances from working capital facilities		946,201			545,539
Payments on working capital facilities		(736,645	)		(500,963	)
Payments on capital expenditure obligations		(1,712	)		(1,621	)
Debt issue costs		(2,093	)		—
Proceeds from exercise of options		37			1,883
Dividends paid		(7,910	)		(7,906	)
Net payments for stock issuances and buybacks		(23,247	)		(24,301	)
Payments on business acquisition liabilities		(1,924	)		—
Net Cash Provided by Financing Activities		172,707			12,631
Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash		(123	)		(274	)

Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash		1,755			(5,534	)
Cash, Cash Equivalents, and Restricted Cash, Beginning of Period		6,482			12,986
Cash, Cash Equivalents, and Restricted Cash, End of Period	$	8,237		$	7,452

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest	$	11,331		$	7,581
Income taxes	$	11,138		$	18,061
Non-cash investing and financing transactions:
Tenant improvements funded by lessor	$	2,207		$	—

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

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 our four key client markets: 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. Our primary services include: advisory services, program implementation services, analytics services, digital services, and engagement services.

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 (including territories) and local government departments and agencies, international governments, and commercial clients worldwide. Commercial clients include airlines, airports, electric and gas utilities, oil companies, hospitals, health insurers and other health-related 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 (including territories) and local governments, unless otherwise indicated.

The Company, incorporated in Delaware, is headquartered in Fairfax, Virginia. It maintains offices throughout the world, including more than 75 offices in the U.S. and U.S. territories and 15 offices in key markets outside the U.S., including offices in the United Kingdom, Belgium, China, India, and Canada.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Areas of the consolidated financial statements where estimates may have the most significant effect include contractual and regulatory reserves, valuation and lives of tangible and intangible assets, contingent consideration related to business acquisitions, impairment of goodwill and long-lived assets, accrued liabilities, revenue recognition and costs to complete fixed-price contracts, bonus and other incentive compensation, stock-based compensation, reserves for tax benefits and valuation allowances on deferred tax assets, provisions for income taxes, collectability of receivables, and loss accruals for litigation. Actual results experienced by the Company may differ from management's estimates.

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 with 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 segment and reporting unit. Operating results for the three and nine month periods ended September 30, 2020 and 2019 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 fiscal year ended December 31, 2019 and the notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 28, 2020 (the “Annual Report”).

Reclassifications

As part of an amendment to the Credit Facility, as defined in Note 4 “Long-term Debt” below, the Company currently has both a term loan and a revolving debt facility within its Credit Facility. Previously, the unamortized debt issuance costs were included within Other assets in accordance with U.S. GAAP. The Company has reclassified unamortized debt issuance costs as of December 31, 2019 as Long-term debt for consistency of presentation.

Significant Accounting Policies

Goodwill

The Company tests for impairment, at a minimum, on an annual basis or earlier when certain events or changes in circumstances indicate that goodwill may more likely than not be impaired. If there are significant decreases in its stock price for a sustained period or other unfavorable factors, the Company may be required to perform a goodwill impairment assessment, which may result in a recognition of goodwill impairment that could be material to the consolidated financial statements.

Long-Lived Assets

The Company reviews its long-lived assets, including property and equipment and amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the long-lived asset being evaluated, a loss is recognized for any excess of the carrying amount over the fair value of the asset. The Company recognized impairment expense, included in indirect and selling expenses, of $1.7 million in the second quarter of 2019 related to intangible assets associated with a historical business acquisition. There was no impairment recognized during the period ended September 30, 2020.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities (current and non-current) on the consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments as of the commencement date. Since most lease agreements do not provide an implicit rate, the Company uses its incremental borrowing rate as of the commencement date in estimating the present value of future payments. The operating lease ROU asset is based on the present value of future lease payments and includes impacts from lease incentives and initial costs incurred to obtain the lease. Lease terms, for the purposes of determining each lease’s present value, include options to extend or terminate the lease if it is reasonably certain and economically reasonable that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company uses leases to obtain use of a variety of different resources, including those for the use of facilities or equipment. These agreements may contain both lease and non-lease components, which are generally accounted for separately. For equipment leases (including copier leases), the Company accounts for the lease component, as well as insignificant non-lease components, as a single lease component and does not recognize ROU assets and liabilities for leases with a term not greater than twelve months.

Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted

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

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company adopted the standard in the first quarter of 2020 and the standard was implemented using the prospective method. The Company’s adoption of ASU 2018-15 did not have a material impact on the consolidated financial statements.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. The standard, as amended, requires companies to measure credit losses by using a methodology that reflects the expected credit losses based on historical information, current economic conditions, and reasonable and supportable information. The Company adopted the standard in the first quarter of 2020 utilizing a modified-retrospective transition approach that required a cumulative-effect adjustment of $0.5 million to the opening retained earnings in the consolidated statement of stockholders’ equity as of the date of the adoption.

Recent Accounting Pronouncements Not Yet Adopted

Reference Rate Reform

In March 2020, FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The provisions of this ASU are elective and apply to all entities, subject to meeting certain criteria, that have debt or hedging contracts, among other contracts, that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The Company can elect to not apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. Also, the Company can elect various optional expedients that would allow for the Company to continue to apply hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements.

NOTE 2 – CONTRACT RECEIVABLES, NET

Contract receivables, net consisted of the following:

	September 30, 2020			December 31, 2019
Billed and billable	$	235,431		$	264,682
Allowance for doubtful accounts		(5,154	)		(3,506	)
Contract receivables, net	$	230,277		$	261,176

NOTE 3 – GOODWILL

The changes in the carrying amount of goodwill during the nine-months period ended September 30, 2020 were as follows:

Balance as of December 31, 2019	$	719,934
Goodwill resulting from business combination – ITG		188,253
Effect of foreign currency translation		(1,188	)
Balance as of September 30, 2020	$	906,999

NOTE 4 – LONG-TERM DEBT

At September 30, 2020 and December 31, 2019, debt consisted of:

	September 30, 2020				December 31, 2019
	Average Interest Rate	Outstanding Balance			Average Interest Rate	Outstanding Balance
Term Loan		$	195,000			$	—
Revolving Credit			180,000				165,444
Total before debt issuance costs	2.53%		375,000		3.59%		165,444
Unamortized debt issuance costs			(2,720	)			(1,183	)
		$	372,280			$	164,261

Current portion of long-term debt		$	10,000			$	—
Long-term debt - non-current			362,280				164,261
		$	372,280			$	164,261

On March 3, 2020, the Company entered into the First Amendment (the “First Amendment”) to the Fifth Amended and Restated Business Loan and Security Agreement with a group of ten commercial banks (the “Credit Facility”). The First Amendment amended the Fifth Amended and Restated Business Loan and Security Agreement to, among other things, (i) add a new term loan facility in the original principal amount of $200.0 million; (ii) increase the swing line commitment amount by $25.0 million to $75.0 million; (iii) extend the maturity date; and (iv) modify certain definitions and certain covenants. As a result, the Credit Facility now consists of (i) a term loan facility of $200.0 million; (ii) a revolving line of credit of up to $600.0 million with additional revolving credit commitments of up to $300.0 million, subject to lenders’ approval (the “Accordion”); and (iii) a sub-limit of $75.0 million for swing line loans. The Credit Facility matures on March 3, 2025.

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 (as defined herein), 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 (as defined under the Credit Facility) 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 Rate is to be paid in quarterly installments. The Credit Facility also provides for letters of credit aggregating up to $60.0 million, which reduce the funds available under the Credit Facility when issued. 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 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 4.00 to 1.00 (subject to a step-up to 4.25 to 1.0 for a four quarter period following permitted acquisitions as defined under the Credit Facility) for each fiscal quarter. As of September 30, 2020, the Company had elected to step-up its leverage ratio covenant and was in compliance with its covenants under the Credit Facility.

As of September 30, 2020, the Company had $375.0 million long-term debt outstanding from the Credit Facility (including the term loan, exclusive of unamortized debt issuance costs), outstanding letters of credit totaling $2.9 million, net derivative obligations of $10.4 million and unused borrowing capacity of $417.1 million under the Credit Facility (excluding the Accordion). Taking into account the financial, performance-based limitations, available borrowing capacity (excluding the Accordion and the term loan) was $245.1 million as of September 30, 2020.

Future scheduled repayments of debt principal are as follows:

	Payments due by September 30,
	2021		2022		2023		2024		2025		Thereafter		Total
Term Loan	$	10,000	$	10,000	$	12,500	$	15,000	$	147,500	$	—	$	195,000
Revolving Credit		—		—		—		—