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Item 7. Management’s Discussion and Analysis

2025-02-28 compared with 2024-02-28 · 64 added, 70 removed, 298 unchanged (31% of the section changed)

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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 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

Discussions of 2022 items and year-to-year comparisons between 2022 and 2021 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, 2022, which was filed with the SEC on March 1, 2023, and is incorporated by reference into this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section of the Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023.

Discussions of 2023 items and year-to-year comparisons between 2023 and 2022 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, 2023, which was filed with the SEC on February 28, 2024, and is incorporated by reference into this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW AND OUTLOOK

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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:

Our services primarily support clients that operate in the following key markets:

• Energy, Environment, Infrastructure, and Disaster Recovery;

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federal government departments and agencies.

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

Our federal government clients include every cabinet-level department, most significantly HHS, EPA, and DoS.

Federal government clients generated approximately 54%, 55%, and 55% of our revenue in 2024, 2023, and 2022, respectively.

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and ongoing homeland security threats.

In the wake of the major hurricanes (Ian, Harvey, Ida, Idalia, 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.

In the wake of the major hurricanes that devastated communities in Texas, Florida, North Carolina, Louisiana, the U.S.

Virgin Islands, and Puerto Rico, and the impact of wildfires in Hawaii, Oregon, and southern California, the affected areas remain in various stages of evacuation, 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, and the wildfires in Oregon, 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.

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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 acquisitions of ESAC and Creative Systems in 2021, SemanticBits and Blanton in 2022, and CMY in 2023 that enhance our subject matter knowledge, broaden our service offerings, gain access to or expand customer relationships, and/or provide scale in specific geographies.

In doing so, we will continue to evaluate strategic acquisition opportunities that enhance our subject matter knowledge, broaden our service offerings, gain access to 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.

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• Variations in purchasing patterns under our contracts;

• Changes in priorities, especially with the federal government;

• Federal and state and local governments’ and other clients’ spending levels;

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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.

As with other federal contractors, we have experienced business impacts, of varying degrees, from the changing priorities of the Administration that could have an adverse impact on our results and, as these new priorities are implemented, it may be difficult for us to accurately predict the effect they will have on our results.

Subsequent to December 31, 2024, and through February 25, 2025, pursuant to the recent executive orders issued by the Administration or actions by DOGE, the Company received notices for termination-for-convenience of approximately $276 million and for stop-work orders of approximately $99 million.

The majority of the termination-for-convenience and stop-work orders notices are associated with our contracts with USAID.

The impact of these contract terminations and stop-work orders is not expected to be material, with such contracts contributing approximately 3.3% of our 2024 fiscal year revenue.

Presently, it is unknown if the stop-work orders notices will be lifted and the Company will resume work on these programs, or if the stop-work orders will result in a termination-for-convenience.

BUSINESS COMBINATIONS

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

During the previous three fiscal years, we completed five acquisitions summarized as follows:

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.

During the previous three fiscal years, we completed four acquisitions summarized as follows:

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

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CMY Solutions, LLC – In May 2023, we acquired CMY, an engineering and automation solutions provider to utilities and organizations.

Applied Energy Group – In December 2024, we acquired AEG, a leading energy technology and advisory services company.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

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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.

We estimate the most likely amount expected to be achieved 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

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The following table sets forth certain items from our consolidated statements of comprehensive income for the years ended December 31, 2024 and 2023 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, 2022 and 2021 can be found in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 1, 2023.

Our discussion of the items for the years ended December 31, 2023 and 2022 can be found in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on February 28, 2024.

Years Ended December 31, 2024 and 2023

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Direct Costs:

Direct labor & related fringe

Direct labor & related fringe costs

Subcontractors & other direct costs

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Interest, net

Other income (expense)

Income Before Income Taxes

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Year ended December 31, 2024 compared to year ended December 31, 2023

The growth in revenue of $183.3 million was driven by increases of $103.3 million from U.S.

federal government clients, $48.4 million from U.S.

state and local government clients, and $31.8 million from commercial clients, respectively, offset by a decrease of $0.2 million from international government clients.

Revenue from Health and Social Programs client market increased by $110.0 million, or 15.6%, driven by:

• Increases of $97.4 million from U.S.

federal government, $10.4 million from U.S.

state and local government, and $2.5 million from commercial client markets, respectively, offset by a

• Decrease of $0.3 million from international government client market.

The growth in revenue of $56.5 million was driven by increases of $39.3 million from commercial clients, $7.4 million from international government clients, $6.6 million from U.S.

state and local government clients, and $3.3 million from U.S.

federal government clients, respectively.

Revenue from Energy, Environment & Infrastructure and Disaster Recovery client market increased by $123.8 million, or 15.4%, due to:

• Increases of $88.0 million from commercial, $31.8 million from U.S.

state and local government, and $10.0 million from U.S.

federal government client markets, respectively, offset by a

• Decrease of $5.5 million from international government client market due, in part, to the wind-down of the ICF NEXT U.K.

federal government, $3.4 million from international government, and $0.5 million from U.S.

state and local government clients, respectively.

Revenue from Health and Social Programs client market decreased by $50.3 million, or 6.2%, due to:

• Decreases of $48.1 million from U.S.

federal government and $13.8 million from commercial clients, respectively, driven by lower pass-throughs from several U.S.

federal contracts and our exit from the commercial marketing business during 2023, offset by

• Increases of $6.3 million and $5.4 million from U.S.

state and local government and international government clients, respectively.

Revenue from Security and Other Civilian & Commercial client market saw a decrease of $16.9 million, or 4.9%, as a result of:

• Decreases of $20.4 million from commercial, driven by the divestiture of the commercial marketing business, and $4.0 million from U.S.

federal government client markets, respectively, offset by

• Increases of $5.5 million from international government and $0.3 million from U.S.

state and local government client markets, respectively.

• Decreases of $34.8 million from commercial clients, driven by the divestiture of the commercial marketing and events business during fiscal year 2023, $1.4 million from international government clients, and $0.3 million from U.S.

state and local government clients, respectively, offset by

• An increase of $19.6 million from U.S.

federal government clients.

Direct costs .

The increase in direct costs of $130.6 million was driven by additional direct labor and related fringe benefit costs of $90.5 million and subcontractors and other direct costs of $40.1 million to support new and existing revenue-generating contracts.

The increase in direct costs was driven by additional direct labor and related fringe benefit costs of $44.9 million which reflected growth in the ongoing business, offset by a decrease of subcontractors and other direct costs of $27.9 million primarily as a result of our exit from the commercial marketing and events business during 2023.

For the years ended December 31, 2024 and 2023, direct labor and related fringe benefit costs were 60.5% and 57.7% of total direct costs, respectively, and subcontractors and other direct costs were 39.5% and 42.3% of total direct costs, respectively.

The total direct costs as a percentage of revenue remained steady at 64.4% for the year ended December 31, 2023 compared to 63.7% for 2022.

The total direct costs as a percentage of revenue was 63.5% for the year ended December 31, 2024 compared to 64.4% for 2023.

Indirect and selling expenses.

The increase in indirect and selling expenses of $18.3 million for the year ended December 31, 2023 compared to 2022 was due to an additional $31.7 million in indirect labor and related fringe benefit costs offset by a decrease of $13.4 million in general and administrative costs.

The increase in indirect and selling expenses was due to additional $8.9 million in indirect labor and related fringe benefit costs and $4.4 million in general and administrative costs.

As a percentage of total indirect and selling expenses, indirect labor and associated fringe costs were 71.0% and 71.1%, respectively, and general and administrative costs were 29.0% and 28.9%, respectively, for the years ended December 31, 2024 and 2023.

The increase in indirect labor and associated fringe costs was a result of additional headcount from our recent acquisitions in 2022 and 2023 as well as additional labor resources to support our growth.

The decrease in our general and administrative costs was primarily from lower facilities expense that was, in part, attributed to our Fairfax lease ending at the end of the 2022 fiscal year.

As a percentage of revenue, indirect and selling expenses decreased to 25.7% for the year ended December 31, 2023 compared to 27.4% for the year ended December 31, 2022.

As a percentage of revenue, indirect and selling expenses was 25.7% for the years ended December 31, 2024 and 2023.

Depreciation and amortization .

The increase in depreciation and amortization of $3.8 million was driven by additional capital expenditure during 2023 and acceleration of depreciation of certain fixed assets associated with the exit of an office facility.

The transition is expected to be completed in 2024.

The decrease in depreciation and amortization was due to having fewer capital assets primarily as a result of the divestiture of our U.S.

commercial marketing business in 2023.

Amortization of intangible assets .

The increase in amortization of intangible assets was due to amortization of additional intangible assets acquired from our acquisitions in the third and fourth quarter of 2022 and the second quarter of 2023.

The decrease in amortization of intangible assets was due to having fewer intangible assets primarily as a result of the divestiture of our U.S.

commercial marketing business in 2023.

Interest, net .

The increase in interest, net was primarily due to higher average debt balance of $613.5 million in 2023 compared to $575.0 million in 2022, and higher average interest rate of 6.7% in 2023 compared to 3.3% in 2022.

The decrease in interest, net was primarily due to our lower average debt balance of $474.0 million in 2024 compared to $613.5 million in 2023.

The average interest rate was 6.6% in 2024 compared to 6.7% in 2023.

We utilize floating-to-fixed interest rate swap agreements to hedge the variable interest portion of our debt.

Our 2023 interest expense from our debt was reduced by $6.9 million from the swap agreements, compared to $0.5 million in additional interest expense added to 2022.

Our 2024 interest expense from our debt was reduced by $6.2 million from the swap agreements, compared to $6.9 million in 2023.

Our average interest rate inclusive of the impact of the swap agreements was 5.3% for 2024 compared to 5.6% for 2023.

Other income (expense) .

The increase in other income (expense) was primarily due to pre-tax gains of $2.5 million and $3.2 million from the divestiture of our U.S.

Other income .

The decrease in other income was primarily due to higher pre-tax gains from the divestiture of our U.S.

commercial marketing and Canadian mobile aggregation businesses in 2023.

We recognized $5.7 million of pre-tax gains in 2023 fiscal year compared to $2.0 million in 2024 fiscal year.

Provision for income taxes .

The effective income tax rate for the years ended December 31, 2024 and 2023 was 20.2% and 14.4%, respectively.

The decrease in provision for income taxes in 2023 was primarily due to tax credits, restructuring of the ownership of a Canadian subsidiary, the wind-down of our U.K.

commercial marketing business, and U.S.

return-to-provision adjustments in connection with our federal income tax return filing, partially offset by provisions for uncertain tax positions, and additional valuation allowance on certain tax attributes generated during the period.

The increase in provision for income taxes in 2024 was primarily due to the favorable impact of one-time tax planning strategies implemented in 2023 which were not repeated in 2024.

NON-GAAP MEASURES

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Expenses related to the transfer to our new corporate headquarters (5)

Expenses related to retirement of Executive Chair (6)

Expenses related to our agreement for the sale of receivables (6)

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The transition to the new corporate headquarters was completed in the fourth quarter of 2022.

(6) 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.

(6) 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.

(8) Includes pre-tax gain of $2.5 million and of $3.2 million from the divestitures of our U.S.

(7) Includes pre-tax gain from the divestitures of our U.S.

commercial marketing and Canadian mobile text aggregation businesses.

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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

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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 on Form 10-K.

As of December 31, 2023, we had $591.9 million of unused borrowing capacity, or $575.5 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.

As of December 31, 2024, we had $541.1 million of unused borrowing capacity 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.

There are certain geo-political and macro-economic conditions, such as the ongoing wars in Ukraine and the the Middle East 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.

There are other conditions, such as the ongoing wars in Ukraine and the instability in the Middle East, 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.

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, 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.

We continuously monitor the state of the financial markets to assess the availability of borrowing capacity under the Credit Facility and the cost of additional capital from both debt and equity markets.

At present, we believe we will be able to continue to access these markets at commercially reasonable terms and conditions if we need additional capital in the near term.

Material Cash Requirements from Contractual Obligations .

As of December 31, 2023, 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, 2023, our outstanding Credit Facility balance was $430.4 million, net of unamortized debt issuance costs, of which the principal amounts of $26.0 million is due in 2024, $35.8 million in 2025, $39.0 million in 2026, and the remaining $333.3 million due upon maturity in 2027.

As of December 31, 2024, contractual obligations that require a material use of cash include payments of interest on our Credit Facility and operating lease obligations for facilities and equipment.

At December 31, 2024, our outstanding Credit Facility balance, net of unamortized debt issuance costs, was $411.7 million, which is due in 2027 upon maturity.

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, 2023, we anticipate our interest payments on the debt to be approximately $29.5 million in 2024, $27.5 million in 2025, $24.9 million in 2026, and $8.1 million in 2027 when our Credit Facility expires.

Assuming that our interest rate on the Credit Facility is the same as on December 31, 2024, we anticipate our interest payments on the debt to be approximately $23.6 million in 2025, $23.6 million in 2026, and $6.2 million in 2027 when our Credit Facility expires.

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

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October 11, 2024

November 2, 2023

October 31, 2024

December 6, 2024

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

Decrease in cash, cash equivalents, and restricted cash

Cash provided by operating activities for the year ended December 31, 2023 decreased by $9.8 million compared to 2022 primarily due to higher interest and tax payments and the timing of collections of our billed receivables and payments of our operating liabilities.

Cash used in investing activities for the year ended December 31, 2023 decreased by $255.2 million compared to 2022 primarily due to higher usage of cash to fund the acquisitions of SemanticBits and Blanton in 2022;

2023 was favorably impacted by the proceeds received from the divestiture of our U.S.

commercial marketing and Canadian mobile text aggregation businesses.

We used $152.6 million of cash in financing activities during the year ended December 31, 2023 compared to $90.4 million provided by financing activities during 2022, a change of $243.0 million.

The change was primarily due to higher net borrowings from our Credit Facility to fund the acquisitions of SemanticBits and Blanton during 2022, and repayments of our term loan debt of $81.0 million during 2023 which includes $66.0 million in early payment on the term loan principal balance.

Increase (decrease) in cash, cash equivalents, and restricted cash

Cash provided by operating activities for the year ended December 31, 2024 increased by $19.2 million compared to 2023 primarily due to the profitability of our contracts, our ability to invoice our customers and subsequent collection of cash, and the timing of vendor payments.

Cash used in investing activities for the year ended December 31, 2024 increased by $71.1 million compared to 2023 primarily due to our acquisition of AEG during fiscal year 2024.

We used $86.9 million of cash in financing activities during the year ended December 31, 2024 compared to $152.6 million during 2023.

The decrease in cash used in financing activities was primarily due to reduced net borrowings from our Credit Facility, partially offset by an increase in share repurchases during fiscal year 2024.

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 7. Management’s Discussion and Analysis