ICF International(ICFI) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's total assets increased to $2.16 billion as of September 30, 2022, from $1.85 billion at year-end 2021, primarily driven by a significant increase in goodwill from acquisitions; total liabilities also rose, mainly due to increased long-term debt to fund these acquisitions; for the third quarter of 2022, revenue grew 18.7% year-over-year to $467.8 million, but net income decreased by 6.3% to $19.1 million, and diluted EPS fell to $1.01 from $1.07; the nine-month results showed a 12.0% revenue increase to $1.30 billion, while net income declined by 6.2% to $55.4 million; cash flow from operations significantly decreased to $6.6 million for the nine months ended September 30, 2022, from $64.8 million in the prior-year period Consolidated Balance Sheet Highlights (Unaudited) | (in thousands) | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $8,483 | $8,254 | | Contract receivables, net | $282,271 | $237,684 | | Goodwill | $1,190,450 | $1,046,760 | | Total Assets | $2,157,760 | $1,849,534 | | Liabilities & Equity | | | | Long-term debt | $681,197 | $411,605 | | Total Liabilities | $1,320,021 | $1,046,064 | | Total Stockholders' Equity | $837,739 | $803,470 | Consolidated Statements of Comprehensive Income Highlights (Unaudited) | (in thousands, except per share) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $467,777 | $394,060 | $1,304,355 | $1,165,063 | | Operating income | $28,234 | $32,265 | $85,713 | $92,348 | | Net income | $19,105 | $20,390 | $55,364 | $59,053 | | Diluted EPS | $1.01 | $1.07 | $2.91 | $3.10 | Consolidated Statements of Cash Flows Highlights (Unaudited) | (in thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $6,596 | $64,763 | | Net Cash Used in Investing Activities | ($253,403) | ($12,279) | | Net Cash Provided by (Used in) Financing Activities | $239,025 | ($91,668) | Notes to Consolidated Financial Statements The notes detail significant accounting policies and events during the period, including two Q3 2022 business combinations (SemanticBits for $220.0 million and Blanton & Associates) that significantly increased goodwill and intangible assets; the company also amended its credit facility in May 2022, increasing its term loan and adding a delayed draw term loan, resulting in total long-term debt of $701.7 million; revenue is disaggregated by market, client, and contract type, with U.S. federal government clients representing 58% of Q3 revenue; the company also detailed its use of interest rate swaps for hedging, its share repurchase program status, and a pending $220.2 million lawsuit from the State of Louisiana related to the Road Home Program, for which no liability has been recorded - On July 13, 2022, the Company acquired SemanticBits for a preliminary purchase price of $220.0 million in cash, funded by the existing Credit Facility, resulting in goodwill of $144.6 million and customer-related intangible assets of $63.0 million[65][66][68] - On September 1, 2022, the Company acquired Blanton & Associates, an environmental consulting firm, which added $5.8 million to goodwill and $11.4 million to intangible assets[64] - In May 2022, the company entered into a Restated Credit Agreement, increasing the term loan facility to $300 million, adding a new $400 million delayed draw term loan facility, and extending the maturity to May 2027[30][31] Revenue Disaggregation (Three Months Ended Sep 30, 2022) | Category | Revenue (in thousands) | Percent of Total | | :--- | :--- | :--- | | Client Type | | | | U.S. federal government | $271,255 | 58% | | U.S. state and local government | $65,613 | 14% | | International government | $23,075 | 5% | | Commercial | $107,834 | 23% | | Contract Mix | | | | Time-and-materials | $188,758 | 40% | | Fixed price | $210,810 | 45% | | Cost-based | $68,209 | 15% | - The company has $1.4 billion in unfulfilled performance obligations as of September 30, 2022, which it expects to satisfy over approximately two years[40] - The company is involved in a lawsuit with the State of Louisiana, which is seeking approximately $220.2 million in alleged overpayments from the Road Home contract; the company believes the claim has no merit and has not recorded a liability[87][88] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 18.7% Q3 revenue growth to increases from U.S. federal and state/local government clients, driven by the health, education, and social programs market, and contributions from recent acquisitions like SemanticBits; however, operating income decreased 12.5% in Q3, primarily due to higher direct costs, increased amortization of intangible assets from acquisitions, and higher interest expense; the company's liquidity remains strong, with $316.7 million available under its credit facility; long-term debt increased to $707.0 million to fund acquisitions; the company provides non-GAAP measures, including a Non-GAAP Diluted EPS of $1.61 for Q3 2022, up from $1.32 in Q3 2021, which adjusts for acquisition-related costs and amortization Overview and Outlook The company provides professional services and technology solutions across four key markets: Energy/Environment, Health/Education, Safety/Security, and Consumer/Financial; management sees long-term growth opportunities driven by societal needs in clean energy, healthcare, and disaster recovery; the strategy focuses on expanding client relationships, seeking larger engagements, and pursuing strategic acquisitions, such as the recent purchases of SemanticBits and Blanton; while the COVID-19 pandemic has presented challenges, particularly in commercial marketing services, the majority of the business, especially government contracts (77% of Q3 revenue), has shown continuity; the company has over 8,000 employees globally - The company's strategy is to enhance client relationships, seek larger engagements, and complete and integrate strategic acquisitions to build scale and broaden service offerings[98] - Recent acquisitions include ITG (2020), ESAC and Creative (2021), and SemanticBits and Blanton (Q3 2022)[98] - Government clients accounted for approximately 77% of revenues for the three months ended September 30, 2022, and this segment has experienced continuity despite the COVID-19 pandemic[102] - The company has over 8,000 full and part-time employees and serves clients from its D.C. area headquarters and more than 70 offices worldwide[107] Results of Operations For Q3 2022, revenue increased 18.7% to $467.8 million, driven by U.S. federal and state government clients, but operating income fell 12.5% to $28.2 million due to higher costs, including a 187.3% increase in amortization of intangible assets from recent acquisitions; for the nine months ended September 30, 2022, revenue grew 12.0% to $1.30 billion, while operating income decreased 7.2% to $85.7 million; the decline in operating margin was primarily attributed to increased amortization and higher interest expenses from debt used to fund acquisitions Q3 2022 vs Q3 2021 Performance | (dollars in thousands) | Q3 2022 | Q3 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $467,777 | $394,060 | 18.7% | | Direct Costs | $307,295 | $254,175 | 20.9% | | Operating Income | $28,234 | $32,265 | (12.5%) | | Net Income | $19,105 | $20,390 | (6.3%) | - The Q3 revenue increase of $73.7 million was primarily driven by a $76.1 million increase from U.S. federal government clients, particularly in the health, education, and social programs market[114] - Amortization of intangible assets increased by 187.3% in Q3 2022, primarily due to the acquisitions of SemanticBits, Blanton, ESAC, and Creative[118] - Q3 interest expense increased 193.1% to $7.5 million due to a higher average debt balance ($675.9M vs $341.0M) and a higher average interest rate (3.99% vs 1.60%)[120] Non-GAAP Measures The company provides non-GAAP metrics to supplement its GAAP results; Service Revenue, which excludes subcontractor costs, increased 21.7% to $335.4 million in Q3 2022; Adjusted EBITDA, which excludes special charges like acquisition costs and staff realignment, grew to $49.8 million in Q3 2022 from $43.8 million in the prior-year quarter; Non-GAAP Diluted EPS, which also adjusts for amortization of intangibles and related tax effects, was $1.61 for Q3 2022, a significant increase from $1.32 in Q3 2021 Reconciliation of Net Income to Adjusted EBITDA (Unaudited) | (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net income | $19,105 | $20,390 | | EBITDA | $42,192 | $39,945 | | Total special charges and adjustments | $7,580 | $3,885 | | Adjusted EBITDA | $49,772 | $43,830 | Reconciliation of U.S. GAAP Diluted EPS to Non-GAAP Diluted EPS (Unaudited) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | U.S. GAAP Diluted EPS | $1.01 | $1.07 | | Special charges & adjustments (acquisitions, realignment, etc.) | $0.40 | $0.20 | | Amortization of intangibles | $0.46 | $0.16 | | Income tax effects | ($0.26) | ($0.11) | | Non-GAAP Diluted EPS | $1.61 | $1.32 | Liquidity and Capital Resources The company maintains a solid liquidity position, with $316.7 million available under its Credit Facility as of September 30, 2022; total long-term debt increased significantly to $707.0 million from $423.6 million at year-end 2021, primarily to fund acquisitions; Days Sales Outstanding (DSO) increased to 87 days from 76 days in the prior-year quarter, partly due to slower payments related to Puerto Rico disaster relief work; operating cash flow for the first nine months of 2022 was $6.6 million, a sharp decrease from $64.8 million in the same period of 2021, mainly due to lower net income and timing of working capital items; the company continues its share repurchase program, with $111.9 million remaining available - As of September 30, 2022, the company had $402.3 million of unused borrowing capacity under its Credit Facility, with $316.7 million available after considering financial and performance-based limitations[145] - Long-term debt increased to $707.0 million at September 30, 2022, from $423.6 million at December 31, 2021, primarily due to a net advance of $283.4 million to fund acquisitions[157] - Days Sales Outstanding (DSO) was 87 days for the quarter ended September 30, 2022, compared to 76 days for the same quarter in 2021[152] - Net cash provided by operating activities decreased to $6.6 million for the nine months ended September 30, 2022, from $64.8 million in the prior-year period[167] - As of September 30, 2022, $111.9 million remained available for share repurchases under the company's $200.0 million program[81][164] Quantitative and Qualitative Disclosures About Market Risk The company reports that there have been no material changes in its market risk disclosures from those presented in its Annual Report on Form 10-K - There have been no material changes in the disclosures discussed in the section entitled "Quantitative and Qualitative Disclosures About Market Risk" in Part II, Item 7A of our Annual Report[171] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of the end of the period covered by this report; there were no significant changes in internal controls over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls - Based on an evaluation as of the period covered by the report, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[172] - There have been no significant changes in internal controls over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[172] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal matters arising in the ordinary course of business; management currently believes that the ultimate liability from these proceedings will not have a material adverse effect on its financial position, results of operations, or cash flows - The company is involved in various legal matters and proceedings arising in the ordinary course of business, which are not expected to have a material adverse effect on its financial position, results of operations, or cash flows[176] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes in the risk factors discussed in the section entitled "Risk Factors" disclosed in Part I, Item 1A of the company's Annual Report[177] Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter of 2022, the company repurchased 3,344 shares at an average price of $98.63 per share; these purchases were made from employees to cover withholding taxes related to the settlement of restricted stock units; no shares were repurchased under the publicly announced share repurchase program during the quarter; as of September 30, 2022, approximately $111.9 million remained available for repurchase under the program Share Repurchase Activity (Three Months Ended Sep 30, 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Program | | :--- | :--- | :--- | :--- | | July 1 - July 31 | — | $ — | — | | August 1 - August 31 | 3,344 | $98.63 | — | | September 1 - September 30 | — | $ — | — | | Total | 3,344 | $98.63 | — | - The 3,344 shares purchased were from employees to pay required withholding taxes related to the settlement of restricted stock units[178] - The maximum approximate dollar value of shares that may yet be purchased under the plan is $111,869,762[178] Defaults Upon Senior Securities None reported - None[179] Mine Safety Disclosures Not applicable - Not applicable[180] Other Information None reported - None[181] Exhibits The report lists several exhibits filed electronically, including CEO and CFO certifications pursuant to Exchange Act Rules and the Sarbanes-Oxley Act, as well as financial statements formatted in iXBRL - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and iXBRL data files (101, 104)[183]