ICF International(ICFI) - 2020 Q4 - Annual Report

Part I Business ICF provides professional services and technology-based solutions to government and commercial clients across four key markets Key Financial Metrics | Financial Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | $1,506.9M | $1,478.5M | $1,338.0M | | Total Backlog | $2,897.6M | $2,402.7M | $2,377.7M | - The company's primary services include Advisory, Program Implementation, Analytics, Digital, and Engagement Services[19] - In January 2020, ICF acquired Incentive Technology Group, LLC (ITG) to strengthen its offerings in IT modernization and cloud-based platform services for the federal government[42][59] Revenue by Client Type | Client Type | 2020 Revenue % | 2019 Revenue % | 2018 Revenue % | | :--- | :--- | :--- | :--- | | Government | 65% | 65% | 64% | | Commercial | 35% | 35% | 36% | Key Markets and Services ICF operates across four key markets, providing energy, health, security, and consumer-focused professional services and solutions - In the Energy, Environment, and Infrastructure market, ICF assists with power market analysis, energy efficiency programs, and environmental compliance for infrastructure projects[29][30][31] - In Health, Education, and Social Programs, the company supports HHS, NIH, and CDC with data collection, program management, and IT applications, including extensive support for disaster recovery programs[37] - The Safety and Security market work includes supporting DoD with logistics and cybersecurity, and DHS with critical infrastructure protection and emergency preparedness[42][43] - In the Consumer and Financial market, ICF combines strategic communications and marketing with interactive technologies to help companies engage with customers, focusing on loyalty marketing and e-commerce[44] Client and Contract Mix In 2020, government clients represented 65% of revenue, with HHS being the largest, while prime contracts constituted 92% of total revenue Top Government Clients by Revenue Percentage | Top Government Client | 2020 Revenue % | 2019 Revenue % | 2018 Revenue % | | :--- | :--- | :--- | :--- | | Dept. of Health and Human Services | 17% | 16% | 17% | | Dept. of Defense | 6% | 6% | 5% | | Dept. of State | 5% | 4% | 6% | | Commonwealth of Puerto Rico | 4% | 8% | — | - Revenue from prime contracts accounted for approximately 92% of total revenue in 2020, 2019, and 2018[69] - International revenues decreased by $41.0 million to $153.5 million in 2020, a decline attributed to COVID-19 impacts on programs for clients in Europe and the U.K[71] Contract Backlog The company's total contract backlog increased to $2.9 billion at the end of 2020, driven by growth in both funded and unfunded components Contract Backlog Breakdown (in millions) | Backlog (in millions) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Funded | $1,522.3 | $1,268.4 | $1,140.1 | | Unfunded | $1,375.3 | $1,134.3 | $1,237.6 | | Total Backlog | $2,897.6 | $2,402.7 | $2,377.7 | - Total backlog is defined as the future revenue expected from contracts and other engagements, including priced but unexercised contract options[72] Human Capital ICF employed approximately 7,500 people with a low voluntary turnover rate and a strong commitment to diversity and inclusion - The company employs approximately 7,500 people, with a voluntary turnover rate of 11.7% in 2020, significantly below the industry benchmark[83] - In 2020, 56% of employees identified as female, and within the U.S., 21% classified as non-white, while 50% of managers are female[85] - The company promoted 11.2% of its employees in 2020 and its learning and development programs achieved a 93.1% satisfaction rating[84] Risk Factors The company faces material risks from its dependence on government contracts, the COVID-19 pandemic, cybersecurity threats, and acquisition integration - A majority of revenue is derived from government contracts, making the company vulnerable to budget delays, continuing resolutions, and government shutdowns[87][91] - The COVID-19 pandemic presents risks including reduced demand for services, slowdowns in client decision-making, and potential workforce disruptions[92][94] - The completed Road Home contract with the State of Louisiana continues to pose a risk, with a pending lawsuit seeking approximately $220.2 million in alleged overpayments[125][128] - Cybersecurity attacks are a constant risk, with heightened threats due to the company's status as a federal contractor handling sensitive data[135][136] - As of December 31, 2020, goodwill and purchased intangibles accounted for approximately 55% and 4% of total assets, respectively, creating a risk of impairment write-downs[147] Properties ICF leases all its office space, totaling approximately 1.3 million square feet, and has secured a new headquarters lease in Reston, Virginia - The company leases all its properties, with approximately 1.3 million square feet of office space in over 75 locations as of year-end 2020[160] - A new corporate headquarters lease in Reston, VA will commence on March 1, 2022, covering approximately 208,000 square feet with a term extending to April 2039[159] Legal Proceedings The company is involved in ordinary course legal matters and provides a specific update on the Road Home contract litigation - The company is involved in various legal matters, but does not believe they will have a material adverse effect on its financial position[161] - Litigation related to the Road Home contract is ongoing and discussed further in Note 20 of the financial statements[162] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ICF's stock trades on NASDAQ as 'ICFI', the company plans to continue dividends, and it repurchased 71,762 shares in Q4 2020 - The company's common stock trades on the NASDAQ Global Select Market under the symbol 'ICFI'[166] Q4 2020 Share Repurchase Activity | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Program | Approx. Dollar Value Remaining in Program | | :--- | :--- | :--- | :--- | :--- | | Q4 2020 Total | 102,437 | $73.33 | 71,762 | $46,097,458 | - The current share repurchase program, extended in November 2019, authorizes up to $100.0 million in repurchases[174] Selected Financial Data The company shows consistent five-year revenue growth to $1.51 billion in 2020, with fluctuating net income and steadily growing total assets Selected Financial Data | (in thousands, except per share) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | $1,506,875 | $1,478,525 | $1,337,973 | | Operating Income | $89,109 | $101,393 | $92,272 | | Net Income | $54,959 | $68,938 | $61,400 | | Diluted EPS | $2.87 | $3.59 | $3.18 | | Total Assets | $1,667,290 | $1,396,034 | $1,213,862 | | Total Stockholders' Equity | $746,961 | $714,551 | $660,417 | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 1.9% in 2020, but net income decreased 20.3% due to higher costs, while liquidity improved with strong cash from operations Key Performance Changes (2020 vs 2019) | Metric | 2020 vs 2019 Change | Reason | | :--- | :--- | :--- | | Revenue | +1.9% | Increase in federal government revenue (including ITG acquisition), offset by decreases in state/local and international government revenue | | Operating Income | -12.1% | Increase in indirect & selling expenses and amortization of intangible assets | | Net Income | -20.3% | Lower operating income and higher interest expense | | Cash from Operations | +$81.7M | Strong collections on disaster relief contracts and deferred employer social security taxes under the CARES Act | - The company completed the acquisition of Incentive Technology Group (ITG) in January 2020 for $255.0 million to enhance its IT modernization and cloud platform services for federal clients[197] - The COVID-19 pandemic negatively impacted commercial marketing services related to travel and events, but the majority of government work continued; the company deferred $20.9 million in employer Social Security taxes under the CARES Act[189][190] Results of Operations In 2020, revenue grew 1.9% to $1.51 billion, while operating income and net income fell 12.1% and 20.3% respectively due to higher costs Consolidated Results of Operations | (in thousands) | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $1,506,875 | $1,478,525 | 1.9% | | Direct Costs | $972,406 | $953,187 | 2.0% | | Indirect and selling expenses | $411,612 | $395,763 | 4.0% | | Amortization of intangible assets | $13,349 | $8,083 | 65.1% | | Operating Income | $89,109 | $101,393 | (12.1)% | | Net Income | $54,959 | $68,938 | (20.3)% | - The increase in indirect and selling expenses was driven by higher indirect labor and compensation costs, including $8.8 million related to the retiring Executive Chair's employment agreement, and $4.4 million in expenses for lease terminations[251] - The effective tax rate increased to 26.4% in 2020 from 23.6% in 2019[257] Non-GAAP Measures The company's non-GAAP metrics show a 4.1% growth in service revenue and a slight increase in Non-GAAP Diluted EPS to $4.17 Reconciliation of Revenue to Service Revenue | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $1,506,875 | $1,478,525 | | Subcontractor and other direct costs | $(463,364) | $(475,717) | | Service revenue | $1,043,511 | $1,002,808 | Reconciliation of Net Income to Adjusted EBITDA | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net income | $54,959 | $68,938 | | EBITDA | $122,857 | $129,575 | | Total special charges and adjustments | $20,305 | $5,208 | | Adjusted EBITDA | $143,162 | $134,783 | Reconciliation of GAAP EPS to Non-GAAP EPS | Per Share Data | 2020 | 2019 | | :--- | :--- | :--- | | Diluted EPS (GAAP) | $2.87 | $3.59 | | Total Adjustments | $1.30 | $0.56 | | Non-GAAP EPS | $4.17 | $4.15 | Liquidity and Capital Resources Liquidity strengthened with a significant increase in cash from operations to $173.1 million and an improved DSO of 67 days - In March 2020, the company amended its Credit Facility, adding a $200.0 million term loan and extending the maturity to March 2025[268] Summary of Cash Flows | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $173,145 | $91,440 | | Net cash used in investing activities | $(270,948) | $(30,470) | | Net cash provided by (used in) financing activities | $169,955 | $(67,640) | - Days-sales-outstanding (DSO) decreased from 83 days at year-end 2019 to 67 days at year-end 2020, primarily due to strong collections from disaster relief contracts and accelerated collections for media placements[273][284] - During 2020, the company repurchased 278,582 shares at an average price of $78.66 per share; $46.1 million remained available for repurchases at year-end[281][489] Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to interest rate risk, managed via swaps, and foreign exchange risk from its international operations - A 1% increase in interest rates would have increased 2020 interest expense by approximately $4.3 million[294] - The company has four interest rate swap agreements with a total notional amount of $200.0 million to hedge against interest rate changes[294] - A 10% change in the value of the U.S. dollar against all currencies would have an estimated impact on revenue of approximately $11.7 million[294] Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls, procedures, and internal controls were effective - The Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were effective as of December 31, 2020[298] - Management concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[299] Part III Part III incorporates information by reference from the company's 2021 Proxy Statement for items 10 through 14 Directors, Executive Officers, and Corporate Governance Information required by this item is incorporated by reference from the company's 2021 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement[306] Executive Compensation Information required by this item is incorporated by reference from the company's 2021 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement[307] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference from the company's 2021 Proxy Statement - Information regarding security ownership is incorporated by reference from the 2021 Proxy Statement[308] Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated by reference from the company's 2021 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement[309] Principal Accountant Fees and Services Information required by this item is incorporated by reference from the company's 2021 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement[310] Part IV Exhibits and Financial Statement Schedules This section contains the consolidated financial statements, auditor's report, and exhibits, with revenue recognition on fixed-price contracts noted as a critical audit matter - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the financial statements and internal controls over financial reporting[324][325][338] - The auditor identified 'Revenue Recognition – Estimates-at-Completion' for fixed-price contracts as a critical audit matter due to the significant management judgments involved[329][330][331] Note 10 - Long-Term Debt Total long-term debt increased to $313.2 million due to a new $200 million term loan used to finance the ITG acquisition Long-Term Debt Composition | (in thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Term Loan | $192,500 | $— | | Revolving Credit | $123,281 | $165,444 | | Total before debt issuance costs | $315,781 | $165,444 | - In March 2020, the company amended its credit facility to add a $200 million term loan, increase the swing line to $75 million, and extend the maturity to March 3, 2025[424] - Financial covenants require an Interest Coverage Ratio of not less than 3.00 to 1.00 and a Leverage Ratio of not more than 4.00 to 1.00; the company was in compliance as of year-end[426] Note 15 - Accounting for Stock-Based Compensation The company recognized $24.6 million in stock-based compensation expense in 2020, with $22.1 million in unrecognized expense remaining Stock-Based Compensation Expense | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Stock-Based Comp. Expense | $24,570 | $26,031 | $19,581 | - As of December 31, 2020, there were 305,399 non-vested RSUs and 241,481 non-vested CSRSUs outstanding[466][469] - Performance Share Awards (PSAs) vest based on two goals: compounded annual growth in EPS and relative Total Shareholder Return (rTSR) over a three-year period[473] Note 16 - Business Combinations The company acquired ITG for $255.0 million, resulting in $188.3 million of goodwill, and also acquired Eco-Tech Consultants, Inc - The company acquired ITG on January 31, 2020, for $255.0 million to augment its federal government business with cloud-based platform services[480] - The ITG acquisition resulted in preliminary allocations of $188.3 million to goodwill and $47.3 million to other intangible assets, with the goodwill expected to be deductible for tax purposes[481] Note 20 - Commitment and Contingencies The company faces a $220.2 million claim from the State of Louisiana regarding the Road Home Program, which it believes is without merit - The State of Louisiana is seeking approximately $220.2 million from an ICF subsidiary related to the administration of the Road Home Program, which ended in 2009; the company believes the claim is without merit[496][498] - Executive Chair Sudhakar Kesavan retired on December 31, 2020, triggering compensation under his employment agreement, including $1.8 million in severance and a $0.9 million pro rata bonus[499]