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Item 5. Market for Registrant’s Common Equity

2024-02-28 compared with 2023-03-01 · 22 added, 460 removed, 25 unchanged (95% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOC KHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock trades on the NASDAQ Global Select Market under the symbol “ICFI.”

As of February 23, 2024, there were 26 registered holders of record of our common stock.

1 unchanged sentence

We currently expect to continue paying dividends comparable with our historic dividend payments.

The declaration and payment of any dividends is at the sole discretion of the board of directors and is not guaranteed.

Our amended credit facility contains certain restrictions related to the payment of cash dividends, requiring us to meet certain covenants prior to and after the declaration of any dividend.

The declaration and payment of any dividends is at the sole discretion of our Board and is not guaranteed.

Our Credit Facility contains certain restrictions related to the payment of cash dividends, requiring us to meet certain covenants prior to and after the declaration of any dividend.

Stock Performance Graph

The following graph compares the cumulative total stockholder return on our common stock from December 31, 2017 through December 31, 2022, with the cumulative total return on (i) the NASDAQ Composite, (ii) the Russell 2000 stock index, (iii) our previous peer group composed of other governmental and commercial service providers:

Booz Allen Hamilton Holding Corporation;

CACI International Inc.;

CRA International, Inc.;

Exponent Inc.;

FTI Consulting, Inc.;

Huron Consulting Group Inc.;

Maximus, Inc.;

Resources Connection, Inc.;

Science Applications International Corporation;

Tetra Tech, Inc.;

Unisys Corporation;

and VSE Corporation, and (iv) our index-based comparator that replaces our previous peer group.

We have elected to replace our peer group comparator with an index-based comparator (S&P 1500 companies having GICS Code 2020 Commercial & Professional Services), because (i) we believe this index is reflective of the markets we operate in and (ii) we expect the composition of the index to be less susceptible to year-over-year volatility due to acquisitions or divestitures by ICF or the component companies within the index.

In this transition year, in accordance with Item 201(e)(4) of Regulation S-K, the stock performance graph below includes both the new index and the peer group that we used in the immediately preceding year to assist our investors in understanding the impact of the transition.

The following graph compares the cumulative total stockholder return on our common stock from December 31, 2018 through December 31, 2023, with the cumulative total return on (i) the NASDAQ Composite, (ii) the Russell 2000 stock index, and (iii) the S&P 1500 companies having GICS Code 2020 Commercial & Professional Services.

The comparison below assumes an initial investment of $100.00 on December 31, 2018 in which all dividends (if any) are reinvested and all returns are market-cap weighted.

4 unchanged sentences

Russell 2000 Index

2021 Peer Group

2022 Peer Group

S&P Composite 1500 Commercial & Professional Services

Recent Sales of Unregistered Securities

Share Repurchase Program

In September 2017, the Board approved a share repurchase program that authorizes share repurchases in the aggregate up to $100.0 million.

In November 2021, the Board approved an increase to the share repurchase program to a new limit of $200.0 million, inclusive of the prior limit.

During the year ended December 31, 2023, we repurchased 180,000 shares under this program at an average price of $100.70 per share.

As of December 31, 2023, $93.7 million of authority remained available for share repurchases.

The objective of our share repurchase program is to offset dilution resulting from employee stock compensation.

Under the program, purchases can be made from time to time at prevailing market prices in open market purchases or in privately negotiated transactions pursuant to Rules 10b5-1 and 10b-18 under the Exchange Act, and in accordance with applicable insider trading and other securities laws and regulations.

The timing and extent to which we repurchase our shares will depend upon market conditions and other corporate considerations, as may be considered in our sole discretion.

The purchases will be funded from existing cash balances and/or borrowings and the repurchased shares will be held in treasury.

Our Credit Facility permits annual share repurchases of at least $25 million provided that the Company is not in default of its covenants, and higher amounts provided that our Consolidated Leverage Ratio, prior to and after giving effect to such repurchases, is 0.50 to 1.00 less than the then-applicable maximum Consolidated Leverage Ratio and subject to a net liquidity of $100.0 million after giving effect to such purchases.

Repurchases of Equity Securities

9 unchanged sentences

Under the Plans or

October 1 –

November 1 –

December 1 –

(a) The total number of shares purchased of 16,407 includes any shares repurchased pursuant to our share repurchase program described further in footnote (b) below, as well as shares purchased from employees to pay required withholding taxes related to the settlement of restricted stock units in accordance with our applicable long-term incentive plan.

October 1 – October 31

November 1 – November 30

December 1 – December 31

a) The total number of shares purchased includes any shares repurchased pursuant to our share repurchase program described further in footnote (b) below, as well as shares purchased from employees to pay required withholding taxes related to the settlement of restricted stock units in accordance with our applicable long-term incentive plan.

During the three months ended December 31, 2023, we repurchased 4,935 shares of common stock from employees in satisfaction of tax withholding obligations at an average price of $126.64 per share.

b) The current share repurchase program authorizes share repurchases in the aggregate up to $200.0 million.

The Restated Credit Agreement permits share repurchases, provided that our Consolidated Leverage Ratio, prior to and after giving effect to such repurchases, is 0.50 to 1.00 less than the then applicable maximum Consolidated Leverage Ratio and subject to a net liquidity of $100.00 million.

Additionally, we are permitted to make share repurchases up to $25.0 million per calendar year without triggering a default.

During the three months ended December 31, 2022, we did not repurchase any shares under the share repurchase program.

For additional information on the share repurchase program, see “Note 18 - Share Repurchase Program”

in our financial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS O F FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in Item 8.“Financial Statements and Supplementary Data”

in this Annual Report on Form 10-K.

This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions, such as statements of our plans, objectives, expectations, and intentions.

The cautionary statements made in this Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report on Form 10-K.

Our actual results could differ materially from those anticipated in the forward-looking statements.

Factors that could cause or contribute to our actual results differing materially from those anticipated include those discussed in “Risk Factors”

and elsewhere in this Annual Report on Form 10-K.

This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussions of 2021 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the SEC on February 25, 2022, and is incorporated by reference into this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW AND OUTLOOK

We provide professional services and technology-based solutions, including management, marketing, technology, and policy consulting and implementation services.

We help our clients conceive, develop, implement, and improve solutions that address complex business, natural resource, social, technological, and public safety issues.

Our services primarily support clients that operate in four key markets:

Energy, Environment, and Infrastructure;

Health, Education, and Social Programs;

Safety and Security;

Consumer and Financial.

We provide services to our diverse client base that deliver value 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;

Engagement Services.

Our clients utilize our services because we combine diverse institutional knowledge and experience with the deep subject matter expertise of our highly educated staff, which we deploy in multi-disciplinary teams.

We have successfully worked with many of our clients for decades, with the result that we have a thorough and nuanced perspective of their objectives and needs.

We serve both governmental and commercial clients.

Our government clients include those from departments and agencies of the federal government, state and local governments, and international governments.

Our government efforts include work performed under subcontract agreements to commercial clients whose ultimate customer is government agencies and departments.

Our largest clients are U.S.

federal government departments and agencies.

In fact, our federal government clients have included every cabinet-level department, most significantly HHS, DoD, and DoS.

Federal government clients generated approximately 55%, 47%, and 44% of our revenue in 2022, 2021, and 2020, respectively.

State and local government clients generated approximately 15% of our revenue in

each of 2022, 2021, and 2020, respectively.

International government clients generated approximately 6%, 9%, and 6% of our revenue in 2022, 2021, and 2020, respectively.

We also serve a variety of commercial clients worldwide, including:

airlines, airports, electric and gas utilities, health care companies, banks and other financial services companies, transportation, travel and hospitality firms, non-profits/associations, manufacturing firms, retail chains, and distribution companies.

Our commercial clients, which include clients outside the U.S., generated approximately 24%, 29%, and 35% of our revenue in 2022, 2021, and 2020, respectively.

We believe that our domain expertise and the program knowledge developed from our research and analytics, and assessment and advisory engagements further position us to provide a full suite of services.

We report operating results and financial data as a single segment based on the consolidated information used by our chief operating decision-maker in evaluating the financial performance of our business and allocating resources.

Our single segment represents our core business:

professional services to our broad array of clients.

Although we describe our multiple service offerings to clients that operate in four markets to provide a better understanding of the scope and scale of our business, we do not manage our business or allocate our resources based on those service offerings or client markets.

Rather, on a project-by-project basis, we assemble the best team from throughout the enterprise to deliver highly customized solutions that are tailored to meet the needs of each client.

We believe that, in the long-term, demand for our services will continue to grow as government, industry, and other stakeholders seek to address critical long-term societal and natural resource issues due to heightened concerns about the environment and use of clean energy and energy efficiency;

health promotion, treatment, and cost control;

the means by which healthcare can be delivered effectively on a cross-jurisdiction basis;

natural disaster relief and rebuild efforts;

and ongoing homeland security threats.

In the wake of the major hurricanes (Ian, Harvey, Ida, Irma, Maria, Laura and Michael) that devastated communities in Texas, Florida, North Carolina, Louisiana, the U.S.

Virgin Islands, and Puerto Rico, the affected areas remain in various stages of relief and recovery efforts.

We believe our prior and current experience with disaster relief and rebuild efforts, including after Hurricanes Katrina and Rita and Superstorm Sandy, put us in a favorable position to continue to provide recovery and housing assistance, and environmental and infrastructure solutions, including disaster mitigation, on behalf of federal departments and agencies, state, territorial and local jurisdictions, and regional agencies.

We also see significant opportunity to further leverage our digital and client engagement capabilities across our client base.

Our future results will depend on the success of our strategy to enhance our client relationships and seek larger engagements that span the entire program life cycle, and to complete and successfully integrate additional strategic acquisitions.

We will continue to focus on building scale in our vertical and horizontal domain expertise, developing business with our existing clients as well as new customers, and replicating our business model in selective geographies.

In doing so, we will continue to evaluate strategic acquisition opportunities, such as our recent acquisitions of ITG in 2020, ESAC and Creative Systems in 2021, and SemanticBits and Blanton in 2022, that enhance our subject matter knowledge, broaden our service offerings, gain access or expand customer relationships, and/or provide scale in specific geographies.

Although we continue to see favorable long-term market opportunities, there are certain business challenges facing all government service providers.

Administrative and legislative actions by the federal government to address changing priorities or in response to the budget deficit could have a negative impact on our business, which may result in a reduction to our revenue and profit and adversely affect cash flow.

Similarly, the very nature of opportunities arising out of disaster recovery means they can involve unusual challenges.

Factors such as the overall stress on communities and people affected by disaster recovery situations, political complexities and challenges among involved government agencies, and a higher-than-normal risk of audits and investigations may result in a reduction to our revenue and profit and adversely affect cash flow.

However, we believe we are well positioned to provide a broad range of services in support of initiatives that will continue to be priorities to the federal government, as well as to state and local and international governments and commercial clients.

We believe that the combination of internally generated funds, available bank borrowings, and cash and cash equivalents on hand will provide the required liquidity and capital resources necessary to fund ongoing operations, potential acquisitions, customary capital expenditures, and other working capital requirements.

Our results of operations and cash flows may vary significantly from quarter to quarter depending on a number of factors, including, but not limited to:

Progress of contract performance;

Extraordinary economic events and natural disasters;

Number of billable days in a quarter;

Timing of client orders;

Timing of award fee notices;

Changes in the scope of contracts;

Variations in purchasing patterns under our contracts;

Federal and state and local governments’

and other clients’

spending levels;

Federal government shutdowns;

Timing of billings to, and collection of payments from, clients;

Timing of receipt of invoices from, and payments to, employees and vendors;

Commencement, completion, and termination of contracts;

Strategic decisions, such as acquisitions, consolidations, divestments, spin-offs, joint ventures, strategic investments, and changes in business strategy;

Timing of significant costs and investments (such as bid and proposal costs and the costs involved in planning or making acquisitions);

Timing of events related to discrete tax items;

Our contract mix and use of subcontractors or the timing of other direct costs for which we may earn lower contract margin;

Changes in contract margin performance due to performance risks;

Additions to, and departures of, staff;

Changes in staff utilization;

Paid time off taken by our employees;

Level and cost of our debt;

Changes in accounting principles and policies;

General market and economic conditions.

Because a significant portion of our expenses (such as personnel, facilities, and related costs) are fixed in the short-term, contract performance and variation in the volume of activity, as well as in the number and volume of contracts commenced or completed during any year, may cause significant variations in operating results from year to year.

We generally have been able to price our contracts in a manner that accommodates the rates of inflation experienced in recent years, although we cannot ensure that we will be able to do so in the future.

IMPACT OF THE COVID-19 PANDEMIC

On March 11, 2020, the World Health Organization characterized the novel strain of coronavirus disease COVID-19 as a global pandemic.

The pandemic disrupted global supply chains, created pressure on workforces, and added volatility to the financial markets.

We are primarily a service business and, to date, we have experienced continuity in the majority of our work for our government clients, which accounted for approximately 76%, 71%, and 65% of our

revenues for the years ended December 31, 2022, 2021, and 2020, respectively.

There were postponements of events and challenges around project work requiring travel and personal contact to perform services under the contracts, but overall, our government clients have continued to require our services.

Of the remaining 24%, 29%, and 35% of our total revenue for the years ended December 31, 2022, 2021, and 2020, respectively, the majority was generated from commercial energy markets and commercial marketing services.

In commercial energy, where we work primarily for utility clients, we have experienced trends similar to those with our government clients, although some aspects of energy efficiency programs have been altered to reduce direct interaction with consumers.

The commercial marketing services include public event management and marketing technology, which was impacted based on the deferral or cancellation of marketing events.

These two elements of commercial marketing services combined for 6%, 9% and 16% of our total company-wide revenues for the years ended December 31, 2022, 2021, and 2020 respectively.

During 2022, we completed our transition to in-person operations at all of our offices.

Effective November 21, 2022, we no longer require current and prospective U.S.-based employees to be vaccinated or have reasonable accommodation in place, but we will continue to follow the public health guidance from Centers for Disease Control and Prevention, the local government, and our clients.

BUSINESS COMBINATIONS

A key element of our growth strategy is to pursue acquisitions.

During the previous three fiscal years, we acquired a total of six companies summarized as follows:

Incentive Technology Group, LLC –

In January 2020, we completed the acquisition of ITG, one of the leading providers of cloud-based platform services to the federal government.

Eco-Tech Consultants, Inc.

In December 2020, we completed the acquisition of Eco-Tech Consultants, Inc., an ecological consulting firm located in Louisville, Kentucky that provides a range of ecological services across the Eastern United States.

ESAC –

In November 2021, we acquired ESAC, one of the leading specialized providers of advanced health analytics, research data management and bioinformatics solutions to U.S.

federal health agencies.

Creative Systems and Consulting –

In December 2021, we acquired Creative Systems, a premier provider of IT modernization and digital transformation solutions to U.S.

federal agencies.

SemanticBits, LLC –

In July 2022, we acquired SemanticBits, a premier partner to U.S.

federal health agencies for mission-critical digital modernization solutions.

Blanton & Associates –

In September 2022, we completed the acquisition of Blanton, an environmental consulting, planning, and project management firm headquartered in Austin, Texas.

CRITICAL ACCOUNTING ESTIMATES

Our discussion of financial condition and results of operations is based on our consolidated financial statements prepared in accordance with U.S.

generally accepted accounting principles ("U.S.

The preparation of these consolidated financial statements requires us to make certain estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses.

If any of these estimates, assumptions or judgments prove to be incorrect, our reported results could be materially affected.

Actual results may differ significantly from our estimates under different assumptions or conditions.

We believe that the estimates, assumptions and judgments involved in the accounting practices described below have the greatest potential impact on our financial statements and, therefore, consider them to be critical accounting policies.

Significant accounting estimates are more fully described and discussed in “Note 2 - Summary of Significant Accounting Policies”

in the “Notes to Consolidated Financial Statements.”

Revenue Recognition

We generate our revenue by primarily providing services and technology-based solutions for clients.

We enter into agreements with clients that create enforceable rights and obligations and for which it is probable that we will collect the consideration to which we will be entitled as services and solutions are provided to the client.

Our contracts may be partially funded, often incrementally in annual amounts.

We determine the transaction price based on the history of funding, the client's need for the program, the length of time before funding is available, and the client's intent and ability to fund and include the unfunded portion of the contract if it is probable that it will be funded based on these criteria.

For contracts with multiple performance obligations and for customized solutions in which the pricing is based on specific negotiations with each client, we use a cost-plus margin approach to estimate the standalone selling price of each performance obligation.

We generally recognize revenue over time as services and performance obligations are transferred to the 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, among other things, is dependent on the contract type selected by the client during contract negotiation and the nature of the services and solutions to be provided.

For cost-based contracts, we recognize revenue as a single performance obligation based on contract costs incurred, as we become 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 the years ended December 31, 2022, 2021, and 2020, revenue from cost-based contracts totaled $263.6 million, $274.1 million, and $237.6 million, respectively.

For performance obligations requiring the delivery of a service for a fixed price, we use the ratio of actual costs incurred to total estimated costs at completion (“EAC”) provided that costs incurred (an input method) represents a reasonable measure of progress towards the satisfaction of a performance obligation, in order to estimate the portion of total revenue earned.

Contract costs that are not reflective of our progress toward satisfying a performance obligation are not included in the calculation of the measure of progress.

We estimate the EAC by making certain assumptions and judgments such as the level of efforts from internal staff and/or subcontractors and cost of materials needed to complete the tasks.

Our cost estimate is based on our prior experience and expertise in delivery of similar services, which allow us to make reasonable assumptions and estimates that are close to actual costs to complete the obligations.

However, changes in the scope or complexity of work, availability of materials needed, or performance could cause a change in the EAC.

We routinely review EACs for changes that could materially impact our measurement of progress toward completion of the performance obligations and adjust our revenue in the period that the changes occur.

When a contract EAC exceeds the contract value, we recognize the loss in the same period of determination.

For the years ended December 31, 2022, 2021, and 2020, our revenue from contracts in which we use EACs totaled $287.4 million, $253.6 million, and $199.2 million, respectively.

Our contracts may include variable considerations such as award fees and incentives that may increase or decrease the transaction price.

The actual amounts are typically determined and awarded at the end of a performance period and the final awarded amount is based on achieving certain performance metrics, program milestones, or cost targets at the customer’s discretion.

We estimate the most likely amount expected to achieve based on our prior history in providing the services to the customer or, if no history exists, we constrain the variable consideration until the initial determination by the customer.

Fair Value of Acquired Assets from Business Combinations

Our consolidated balance sheets as of December 31, 2022 and 2021 include $126.5 million and $79.6 million, respectively, of net intangible assets that were created through business acquisitions.

We allocate the purchase price of an acquired business to the tangible assets and separately identifiable intangible assets acquired, less liabilities assumed, based on their respective fair values (except for contract assets and contract liabilities after the adoption of Accounting Standards Update 2021-08, Business Combinations:

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers).

Such fair value assessment requires us to make assumptions, judgments, and estimates such as, but not limited to, future cash flows, revenue growth, customer retention rates, and discount rates based on information that exists at the date of the acquisition which may subsequently change.

We recognize any adjustments to the preliminary amounts that are identified during the measurement period which is twelve months or less from the date of the acquisition.

Accounting for Income Taxes

Our provisions for federal, state, and foreign income taxes are calculated from consolidated income based on current tax laws and any changes in tax rates from the rates used previously in determining the deferred tax assets and liabilities from temporary differences between financial statement carrying amounts and amounts on our tax returns.

We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

We evaluate our ability to benefit from all deferred tax assets and establish valuation allowances for amounts we believe are not more likely than not to be realized.

We use a more-likely-than-not recognition threshold based on the technical merits of the income tax position taken to evaluate uncertain tax positions.

Uncertain tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit recognized in the financial statements.

Recent Accounting Pronouncements

New accounting standards are discussed in “Note 2 - Summary of Significant Accounting Policies”

in the “Notes to Consolidated Financial Statements”.

SELECTED KEY METRICS

In order to evaluate operations, we track revenue by key metrics that provide useful information about the nature of our operations.

Client markets provide insight into the breadth of our expertise.

Client type is an indicator of the diversity of our client base.

Revenue by contract mix provides insight in terms of the degree of performance risk that we have assumed.

Significant variances in the key metrics tables that are provided below are discussed under the revenue section of the results of operations.

Client markets

The following table shows revenue generated from client markets as a percentage of total revenue for the periods indicated.

For each client, we have attributed all revenue from that client to the market we consider to be the client’s primary market, even if a portion of that revenue relates to a different market.

Certain minor revenue amounts reported in the prior years have been reclassified within key market categories based on our current view of the client’s primary market in order to increase the comparability of the current year to prior years.

December 31, 2022

December 31, 2021

December 31, 2020

Energy, environment, and infrastructure

Health, education, and social programs

Safety and security

Consumer and financial

Our primary clients within the client markets are the agencies and departments of the federal government and commercial clients.

Most of our revenue is from contracts on which we are the prime contractor, which we believe provides us with strong client relationships.

In 2022, 2021, and 2020, approximately 91%, 91%, and 92% of our revenue, respectively, was from prime contracts.

The table below shows our revenue by type of client as a percentage of total revenue for the periods indicated.

Certain immaterial revenue amounts in the prior years have been reclassified due to minor adjustments and reclassification within client type.

December 31, 2022

December 31, 2021

December 31, 2020

federal government

state and local government

International government

Contract mix varies from year to year due to numerous factors, including our business strategies and the procurement activities of our clients.

Unless the context requires otherwise, we use the term “contracts”

to refer to contracts and any task orders or delivery orders issued under a contract.

There are three main types of contracts:

time-and-materials contracts, fixed-price contracts, and cost-based contracts.

The following table shows the approximate percentage of our revenue for each of these types of contracts for the periods indicated.

Certain immaterial revenue amounts in the prior years have been reclassified due to minor adjustments and reclassification within contract type.

December 31, 2022

December 31, 2021

December 31, 2020

Time-and-materials

Payments we received on cost-based contracts with the federal government are provisional payments subject to adjustment upon audit by the government.

Such audits have been finalized through 2011 for NIH-cognizant indirect rates and through 2015 for USAID-cognizant indirect rates, and any adjustments have been immaterial.

Contract revenue for subsequent periods has been recorded in amounts that are expected to be realized on final audit and settlement of costs in those years.

RESULTS OF OPERATIONS

The following table sets forth certain items from our consolidated statements of comprehensive income for the years ended December 31, 2022 and 2021 and expresses these items as a percentage of revenue for the periods indicated and the period-over-period rate of change in each of them.

Our discussion

of the items for the years ended December 31, 2021 and 2020 can be found in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 25, 2022.

Years Ended December 31, 2022 and 2021

(dollars in thousands)

Year Ended December 31,

Year to Year Change

Operating Costs and Expenses

Indirect and selling expenses

Depreciation and amortization

Amortization of intangible assets

Total Operating Costs and Expenses

Operating Income

Interest, net

Other expense

Income Before Income Taxes

Provision for Income Taxes

Year ended December 31, 2022 compared to year ended December 31, 2021

Revenue for the year ended December 31, 2022, was $1,780.0 million, compared to $1,553.0 million for the year ended December 31, 2021, representing an increase of $226.9 million or 14.6%.

The growth in revenue was primarily from increases of $245.3 million from our U.S.

federal government and $25.2 million from our U.S.

state and local government client markets.

These gains were offset by decreases of $36.4 from our international government and $7.2 million from our commercial client markets.

As a percentage of total revenue, government revenues comprised 76% for the year ended December 31, 2022 and 71% for the prior year.

Commercial revenues were 24% of total revenue for the year ended December 31, 2022 and 29% for the prior year.

The increase in revenue from our U.S.

federal government client market was from increases of $221.3 million, $12.6 million, and $11.4 million from our health, education, and social programs, energy, environment, and infrastructure, and safety and security client markets, respectively.

The increase in revenue from our U.S.

state and local government client market was from increases of $12.8 million and $12.5 million from energy, environment, and infrastructure and health, education, and social programs client markets, respectively, offset by a decrease of $0.1 million from safety and security client market.

International government saw decreases of $35.7 million and $3.2 million from energy, environment, and infrastructure and health, education, and social programs client markets offset by an increase of $2.5 million from safety and security client market.

The decrease in commercial revenue was from $27.0 million, $2.3 million, and $0.1 million from our consumer and financial, health, education, and social programs, and safety and security client markets offset by an increase of $22.2 million from energy, environment, and infrastructure client market.

Direct costs .

Direct costs for the year ended December 31, 2022 were $1,134.4 million compared to $979.6 million for the year ended December 31, 2021, an increase of $154.9 million or 15.8%.

The increase in direct costs reflect the growth in business resulting in an increase in our headcount and direct labor and associated fringe benefits costs of $103.4 million and $51.5 million in subcontractor and other direct costs.

For the year ended December 31, 2022, direct labor and associated fringe benefits costs as a percentage of total direct costs was 56.4% compared to 54.8% for the same period in 2021, and subcontractor and other direct costs as a percentage of total direct costs was 43.6% compared to 45.2% in 2021.

Direct costs as a percent of revenue was 63.7% for the year ended December 31, 2022 compared to 63.1% for 2021.

Indirect and selling expenses.

Indirect and selling expenses generally include our management, facilities, and infrastructure costs for all employees and the salaries and wages related to indirect activities, including stock-based and cash-based incentive compensation provided to employees whose compensation and other benefit costs are included in indirect and selling expenses, plus associated fringe benefits not directly related to client engagements.

Indirect and selling expenses for the year ended December 31, 2022, were $486.9 million compared to $430.6 million for 2021, an increase of $56.3 million or 13.1%.

The increase in indirect and selling expenses was primarily due to an increase in indirect labor and associated fringe benefits costs and other compensation costs of $37.2 million, and in general and administrative costs of $19.1 million.

The increase in indirect labor, associated fringe benefits costs, and other compensation costs was due to higher headcounts for the year ended December 31, 2022 as compared to the same period in 2021.

Indirect labor as a percentage of total indirect and selling expenses was 67.2% for the year ended December 31, 2022 which is comparable to the 67.4% for the same period in 2021.

General and administrative costs as a percentage to total indirect and selling expenses was 32.8% for the year ended December 31, 2022 compared to 32.6% for 2021.

Indirect and selling expenses as a percent of revenue decreased to 27.4% for the year ended December 31, 2022, compared to 27.7% for the year ended December 31, 2021.

Depreciation and amortization .

Depreciation and amortization was $21.5 million for the year ended December 31, 2022, compared to $19.5 million for the prior year, an increase of $2.0 million or 10.3%.

The increase was the result of additional capital expenditures for our newly occupied Reston, Virginia headquarters.

Amortization of intangible assets .

Amortization of intangible assets for the year ended December 31, 2022 was $28.4 million compared to $12.5 million for the prior year.

The increase was due to amortization of additional intangible assets acquired from our recent acquisitions of ESAC and Creative in the fourth quarter of 2021 and of SemanticBits and Blanton in 2022.

Operating income .

For the year ended December 31, 2022, operating income was $108.8 million compared to $110.9 million for the prior year, a decrease of $2.1 million or 2.0%.

The main drivers for the decrease were lower gross margins in 2022 compared to 2021, higher indirect and selling expenses to support our growing operations, and higher amortization expense from our recent acquisitions, offset by higher revenue.

Operating income as a percentage of revenue was 6.1% for the year ended December 31, 2022 compared to 7.1% for the prior year.

Interest, net .

For the year ended December 31, 2022, interest, net was $23.3 million, compared to $10.0 million for the prior year, an increase of $13.3 million or 133.2%.

The increase for the year ended December 31, 2022 was primarily due to our higher average debt balance of $575.0 million in 2022 compared to $335.5 million in 2021.

The higher average debt balance was due, in part, to the acquisition of SemanticBits and Blanton in 2022.

In addition, our average interest rate increased to 3.3% in 2022 compared to 1.6% in 2021.

Interest income was $0.2 million compared to $0.3 million for 2022 and 2021, respectively.

Other expense .

For the year ended December 31, 2022, other expense was $1.5 million compared to $0.9 million for the prior year.

The increase of $0.6 million was primarily due to losses from disposal of fixed assets as a result of moving from our prior headquarters.

Provision for income taxes .

The effective income tax rate for the years ended December 31, 2022 and December 31, 2021, was 23.5% and 28.9%, respectively.

Our effective tax rate, including state and foreign taxes net of federal benefit for the year ended December 31, 2022, was lower than the prior year primarily due to the impact of a tax loss incurred on a subsidiary investment, windfall tax benefits of equity-based compensation, and federal and state tax credits partially offset by non-deductible executive compensation, transaction costs, and losses on insurance investments recognized.

NON-GAAP MEASURES

The following tables provide reconciliations of financial measures that are not calculated in accordance with generally accepted accounting principles in the U.S.

to their most comparable U.S.

GAAP measures (“non-GAAP”).

While we believe that these non-GAAP financial measures may be useful in evaluating our financial information, they should be considered supplemental in nature and not as a substitute for financial information prepared in accordance with U.S.

Other companies may define similarly titled non-GAAP measures differently and, accordingly, care should be exercised in understanding how we define these measures as similarly named measures are unlikely to be comparable across different companies.

Service Revenue

We compute Service Revenue as U.S.

GAAP revenue less subcontractor and other direct costs (which include third-party materials and travel expenses).

We believe Service Revenue is a useful measure to investors as it represents services that we provide to clients through our own employees.

The table below presents a reconciliation of U.S.

GAAP revenue to Service Revenue for the periods indicated:

Year ended December 31,

Subcontractor and other direct costs

Service revenue

EBITDA and Adjusted EBITDA

Earnings before interest, tax, and depreciation and amortization (“EBITDA”) is a measure we use to evaluate operating performance.

We believe EBITDA is useful in assessing ongoing trends and, as a result, may provide greater visibility in understanding our operations.

Adjusted EBITDA is EBITDA further adjusted to eliminate the impact of certain items that we do not consider to be indicative of the performance of our ongoing operations.

We evaluate these adjustments on an individual basis based on both the quantitative and qualitative aspects of the item, including their size and nature, as well as whether or not we expect them to occur as part of our normal business on a regular basis.

We believe that the adjustments applied in calculating Adjusted EBITDA are reasonable and appropriate to provide additional information to investors.

EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use as these measures do not include certain cash requirements such as interest payments, tax payments, capital expenditures and debt service.

The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods indicated.

Year ended December 31,

Interest, net

Provision for income taxes

Depreciation and amortization

Impairment of long-lived assets (2)

Acquisition-related expenses (3)

Severance and other costs related to staff realignment (4)

Facilities consolidations and office closures (5)

Expenses related to the transfer to our new corporate headquarters (6)

Expenses related to retirement of Executive Chair (7)

Expenses related to our agreement for the sale of receivables (8)

Total Adjustments

Adjusted EBITDA

(1) The calculation of EBITDA for the years ended December 31, 2021 and 2020 has been revised to conform to the current period calculation of EBITDA.

Specifically, interest income of $0.3 million and $0.2 million was reclassified from "Other expense" to "Interest, net" on the consolidated statements of comprehensive income.

(2) Represents impairment of right-of-use lease assets associated with certain operating leases ceased to be used by us.

The amount for the year ended December 31, 2021 been revised to include $0.3 million in losses on disposal of fixed assets related to the leases to conform to the current presentation.

(3) These costs consist primarily of third-party costs and integration costs associated with our acquisitions and/or potential acquisitions and divestitures.

(4) These costs are mainly due to involuntary employee termination benefits for Company officers, groups of employees who have been terminated as part of a consolidation or reorganization or, to the extent that the costs are not included in the previous two categories, involuntary employee termination benefits for employees who were terminated as a result of COVID-19.

(5) These costs are exit costs associated with terminated leases or full office closures.

The exit costs include charges incurred under a contractual obligation that existed as of the date of the accrual and for which we will (i) continue to pay until the contractual obligation is satisfied but with no economic benefit to us or (ii) we contractually terminated the obligation and ceased utilizing the facilities.

The amount for the year ended December 31, 2020 been revised to include $0.2 million in losses on disposal of fixed assets related to the leases to conform to the current presentation.

(6) These costs are additional rent as a result of us taking possession of our new corporate headquarters in Reston, Virginia, during the fourth quarter of 2021 as well as losses from disposal of fixed assets that we recognized as a result of our transfer to Reston.

(7) These costs include severance, pro rata incentive bonus, welfare benefits, and acceleration of equity awards we incurred under the departing officer’s severance agreement during the fourth quarter of 2020.

As a result of the employment agreement, the departing officer was able to maintain certain equity awards beyond his retirement date, including performance-based awards that are subject to changes until they vest.

(8) These costs include legal and structuring fees related to our 2022 Master Receivables Purchase Agreement with MUFG Bank, Ltd.put in place for the sale of our receivables from time-to-time.

Non-GAAP Diluted Earnings per Share

Non-GAAP diluted earnings per share (“Non-GAAP Diluted EPS”) represents diluted U.S.

GAAP earnings per share (“U.S.

GAAP Diluted EPS”) excluding the impact of certain items noted above, as well as the impact of amortization of intangible assets related to our acquisitions and income tax effects of these exclusions.

While these adjustments may be recurring and not infrequent or unusual, we do not consider these adjustments to be indicative of the performance of our ongoing operations.

We believe that the supplemental adjustments applied in calculating Non-GAAP Diluted EPS are reasonable and appropriate to provide additional information to investors.

The following table presents a reconciliation of U.S.

GAAP Diluted EPS to Non-GAAP Diluted EPS for the periods indicated:

Year ended December 31,

GAAP Diluted EPS

Impairment of long-lived assets

Acquisition-related expenditures

Severance and other costs related to staff realignment

Facilities consolidations and office closures

Expenses related to the transfer to our new corporate headquarters

Expenses related to retirement of Executive Chair

Expenses related to our agreement for the sale of receivables

Amortization of intangibles

Income tax effects (1)

Non-GAAP Diluted EPS

(1) Income tax effects were calculated using the effective tax rate, adjusted for discrete items, if any, of 28.0%, 28.9% and 26.4% for the year ended December 31, 2022, 2021 and 2020, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Borrowing Capacity .

Short-term liquidity requirements are created by our use of funds for working capital, capital expenditures, debt service, dividends, and share repurchases.

We expect to meet these requirements through a combination of our cash and cash equivalents at hand, cash flow from operations and borrowings.

Our primary source of borrowings is from our Credit Facility, as described in “Note 10 - Long-Term Debt”

in the “Notes to Consolidated Financial Statements”

in this Annual Report.

As of December 31, 2022, we had $545.4 million of unused borrowing capacity, or $440.0 million after taking into account the financial and performance-based limitations, available under the Credit Facility to fund our ongoing operations, future acquisitions, dividend payments, and share repurchase program.

Should the need arise, we intend to further increase our borrowing capacity in the future to provide us with adequate working capital to continue our ongoing operations.

In March 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic.

Although we continue to face risks and uncertainties related to COVID-19 and its variants, to date we have not experienced any significant impact on our liquidity and capital resources which remain available to us.

There are other conditions, such as the ongoing war in Ukraine and the recent increase in inflation, both in the U.S.

and globally, that create uncertainty in the global economy, which in turn may impact, among other things, our ability to generate positive cash flows from operations and our ability to successfully execute and fund key initiatives in the near future.

However, our current belief is that the combination of internally generated funds, available bank borrowings, and cash and cash equivalents on hand will provide the required liquidity and capital resources necessary to fund ongoing operations, customary capital expenditures and acquisitions, quarterly cash dividends, share repurchases and organic growth.

Additionally, we continuously analyze our capital structure to ensure we have capital to fund future strategic acquisitions.

We continue to monitor the state of the financial markets on a regular basis to assess the availability and cost of additional capital resources from both debt and equity sources.

We believe that we will be able to access these markets at commercially reasonable terms and conditions if, in the future, we need additional borrowings or capital.

Material Cash Requirements from Contractual Obligations .

As of December 31, 2022, contractual obligations that require a material use of cash include repayments of our Credit Facility and operating lease obligations for facilities and equipment.

At December 31, 2022, our outstanding Credit Facility balance was $556.3 million, net of unamortized debt issuance costs, of which $23.3 million is due in 2023, $26.0 million in 2024, $35.8 million in 2025, $39.0 million in 2026, and the remaining $437.4 million due upon maturity in 2027.

We borrow funds under the Credit Facility at interest rates based on both the SOFR (i.e.

1, 3, or 6-month rates) and a fluctuating Base Rate (see “Note 10 - Long-Term Debt”

in the “Notes to Consolidated Financial Statements”

in this Annual Report).

Assuming that our interest rate on the Credit Facility is the same as on December 31, 2022, we anticipate our interest payments on the debt to be approximately $32.5 million in 2023, $31.0 million in 2024, $29.2 million in 2025, $26.8 million in 2026, and $6.7 million in 2027 when our Credit Facility expires.

The estimates do not take into accounts future drawdowns and repayments on the debt or changes in the variable interest rate, and actual interest may be different.

As of December 31, 2022, we have operating leases for facilities and equipment with remaining terms ranging from 1 to 16 years.

Our current and long-term operating lease liabilities of $201.6 million at December 31, 2022 represent the present value of the minimum payments required under the non-cancellable leases, and the actual cash payments total $248.7 million.

The operating lease payment obligations by year are further discussed in “Note 7 - Leases”

in the “Notes to Consolidated Financial Statements”.

As of December 31, 2022, we also have a finance lease for our Reston headquarters equipment and furniture with lease payment obligations through 2029 as discussed in “Note 7 - Leases”

in the “Notes to Consolidated Financial Statements”.

The current and long-term finance lease liabilities at December 31, 2022 of $18.5 million represent the present value of the minimum payments.

Our business and results of operations have not been materially affected by inflation and changing prices during the period presented and we do not expect to be materially affected in the future due

to the nature of our business as a provider of professional services with contracts that can be negotiated with new prices.

Share Repurchase Program.

The objective of our share repurchase program has been to offset dilution resulting from employee stock compensation.

Under the program, purchases can be made from time to time at prevailing market prices in open market purchases or in privately negotiated transactions pursuant to Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance with applicable insider trading and other securities laws and regulations.

The timing and extent to which we repurchase our shares will depend upon market conditions and other corporate considerations, as may be considered in our sole discretion.

The purchases will be funded from existing cash balances and/or borrowings and the repurchased shares will be held in treasury.

Our Credit Facility permits share repurchases, provided that our Consolidated Leverage Ratio, prior to and after giving effect to such repurchases, is 0.50 to 1.00 less than the then-applicable maximum Consolidated Leverage Ratio and subject to a net liquidity of $100.00 million.

Notwithstanding the formula-based limit, we are permitted to make share repurchases up to $25 million per calendar year provided that we are not in default.

In September 2017, the Company’s board of directors (the “board”) approved a share repurchase program that authorizes share repurchases in the aggregate up to $100.0 million.

In November 2021, the board approved an increase to the share repurchase program to a new limit of $200.0 million, inclusive of the prior limit.

During the year ended December 31, 2022, we repurchased 176,375 shares under this program at an average price of $96.18 per share.

As of December 31, 2022, $111.9 million remained available for share repurchase.

Cash dividends declared in 2022 were as follows:

Dividend Declaration Date

Dividend Per Share

February 23, 2022

March 25, 2022

April 13, 2022

June 10, 2022

July 14, 2022

August 3, 2022

September 9, 2022

October 13, 2022

November 3, 2022

December 9, 2022

January 12, 2023

We consider cash on deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.

The following table sets forth our sources and uses of cash for the following years.

Year ended December 31,

(in thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Effect of exchange rate changes on cash, cash equivalents and restricted cash

(Decrease) increase in cash, cash equivalents and restricted cash

Our operating cash flows are primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and the timing of vendor and subcontractor payments in accordance with negotiated payment terms.

We bill most of our clients on a monthly basis after services are rendered.

In the fourth quarter of 2022, we entered into a Master Receivables Purchase Agreement with MUFG Bank, Ltd.

that allows us to sell certain billed receivables (see “Note 4 - Contract Receivables, Net”

in the “Notes to Consolidated Financial Statements”

in this Annual Report) and sold $10.0 million of billed receivables under this arrangement.

Operating activities provided $162.2 million in cash for the year ended December 31, 2022 compared to $110.2 million for 2021, an increase of $52.0 million.

The increase was primarily due to an increase of cash resulting from higher collections of our billed receivables, sale of certain billed receivables, timing of vendor payments, and lower income tax payments, offset by higher interest payments.

Investing activities used cash of $258.8 million for the year ended December 31, 2022, compared to $194.5 million for, 2021 as a result of higher usage of cash for acquisitions and for purchases of property, equipment, and software.

During the year ended December 31, 2022 we used $237.3 million to acquire SemanticBits and Blanton.

During the year ended December 31, 2021, we used $174.5 million for payments to acquire ESAC and Creative Systems.

Our cash flows from financing activities provided $90.4 million for the year ended December 31, 2022 compared to $23.2 million for 2021.

The increase was primarily due to additional net borrowings against our Credit Facility of $30.1 million and lower net payments of restricted contract funds of $45.5 million partially offset by higher debt issuance costs of $4.9 million.

Our Credit Facility permits annual share repurchases of at least $25 million provided that the Company is not in default of its covenants, and higher amounts provided that our Consolidated Leverage Ratio prior to and after giving effect to such repurchases, is 0.50 to 1.00 less than the then-applicable maximum Consolidated Leverage Ratio and subject to a net liquidity of $100.00 million.

For additional information on the share repurchase program, see “Note 18 - Share Repurchase Program” in our financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity