Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEM SEPTEMBER 30, 2011 BER 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number: 001-33045

 

 

ICF International, Inc.

(Exact name of Registrant as Specified in its Charter)

 

 

 

Delaware   22-3661438

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

9300 Lee Highway, Fairfax, VA   22031
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (703) 934-3000

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

As of October 31, 2011, there were 19,766,104 shares outstanding of the registrant’s common stock.

 

 

 


Table of Contents

ICF INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE

PERIOD ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION      3   

Item 1.

  Financial Statements      3   
  Consolidated Balance Sheets at September 30, 2011 (Unaudited) and December 31, 2010      3   
 

Consolidated Statements of Earnings (Unaudited) for the Three Months and Nine Months Ended September 30, 2011 and 2010

     4   
  Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and 2010      5   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      10   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      20   

Item 4.

  Controls and Procedures      20   
PART II. OTHER INFORMATION      21   

Item 1.

  Legal Proceedings      21   

Item 1A.

  Risk Factors      21   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      21   

Item 3.

  Defaults Upon Senior Securities      21   

Item 4.

  Reserved      21   

Item 5.

  Other Information      21   

Item 6.

  Exhibits      22   

 


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ICF International, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

     September 30, 2011     December 31, 2010  
     (Unaudited)        

Current Assets:

    

Cash

   $ 2,010      $ 3,301   

Contract receivables, net

     187,168        176,963   

Prepaid expenses and other

     8,673        6,995   

Income tax receivable

     1,503        1,628   

Deferred income taxes

     5,752        4,973   
  

 

 

   

 

 

 

Total current assets

     205,106        193,860   
  

 

 

   

 

 

 

Total property and equipment, net

     16,843        18,887   

Other assets:

    

Goodwill

     327,032        323,467   

Other intangible assets, net

     20,817        26,148   

Restricted cash

     1,551        3,179   

Other assets

     6,846        7,278   
  

 

 

   

 

 

 

Total Assets

   $ 578,195      $ 572,819   
  

 

 

   

 

 

 

Current Liabilities:

    

Accounts payable

   $ 32,490      $ 29,866   

Accrued salaries and benefits

     44,235        40,750   

Accrued expenses

     26,695        25,522   

Deferred revenue

     20,887        20,034   
  

 

 

   

 

 

 

Total current liabilities

     124,307        116,172   
  

 

 

   

 

 

 

Long-term Liabilities:

    

Long-term debt

     50,000        85,000   

Deferred rent

     6,828        5,142   

Deferred income taxes

     8,379        10,068   

Other

     5,100        3,704   
  

 

 

   

 

 

 

Total Liabilities

     194,614        220,086   

Commitments and Contingencies

    

Stockholders’ Equity:

    

Preferred stock, par value $.001 per share; 5,000,000 shares authorized; none issued

     —          —     

Common stock, $.001 par value; 70,000,000 shares authorized; 19,871,832 and 19,618,659 issued; and 19,764,630 and 19,567,571 outstanding as of September 30, 2011, and December 31, 2010, respectively

     20        20   

Additional paid-in capital

     227,031        220,891   

Retained earnings

     159,660        133,637   

Treasury stock

     (2,595     (1,291

Accumulated other comprehensive loss

     (535     (524
  

 

 

   

 

 

 

Total Stockholders’ Equity

     383,581        352,733   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 578,195      $ 572,819   
  

 

 

   

 

 

 

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

 

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Table of Contents

ICF International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(in thousands, except per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Gross Revenue

   $ 218,691      $ 197,711      $ 626,828      $ 571,796   

Direct Costs

     137,343        124,060        389,086        356,750   

Operating costs and expenses:

        

Indirect and selling expenses

     60,341        55,348        177,537        162,508   

Depreciation and amortization

     2,544        2,716        8,083        8,027   

Amortization of intangible assets

     2,369        3,082        7,105        9,245   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     65,254        61,146        192,725        179,780   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     16,094        12,505        45,017        35,266   

Interest expense

     (539     (776     (1,732     (2,656

Other income

     —          99        89        197   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     15,555        11,828        43,374        32,807   

Provision for income taxes

     6,221        4,435        17,351        12,793   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 9,334      $ 7,393      $ 26,023      $ 20,014   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per Share:

        

Basic

   $ 0.47      $ 0.38      $ 1.32      $ 1.03   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.47      $ 0.38      $ 1.31      $ 1.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average Shares:

        

Basic

     19,728        19,413        19,666        19,349   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     19,860        19,630        19,888        19,579   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

ICF International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities

    

Net income

   $ 26,023      $ 20,014   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Deferred income taxes

     (2,525     (3,690

(Gain) loss on disposal of fixed assets

     (13     36   

Non-cash equity compensation

     4,786        6,242   

Depreciation and amortization

     15,188        17,272   

Deferred rent

     1,809        753   

Changes in operating assets and liabilities, net of the effect of acquisitions:

    

Contract receivables, net

     (8,537     4,715   

Prepaid expenses and other assets

     (1,745     (2,070

Accounts payable

     2,718        (5,301

Accrued salaries and benefits

     3,086        12,609   

Accrued expenses

     2,023        2,702   

Deferred revenue

     852        (2,874

Income tax receivable and payable

     118        5,278   

Restricted cash

     1,628        (1,041

Other liabilities

     1,395        (1,039
  

 

 

   

 

 

 

Net cash provided by operating activities

     46,806        53,606   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (6,889     (4,706

Capitalized software development costs

     (28     (306

Payments for business acquisitions, net of cash received

     (6,220     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (13,137 )      (5,012 ) 
  

 

 

   

 

 

 

Cash flows from financing activities

    

Advances from working capital facilities

     104,469        22,094   

Payments on working capital facilities

     (139,469     (67,094

Debt issue costs

     —          (21

Proceeds from exercise of options

     447        616   

Tax benefits of stock option exercises and award vesting

     815        784   

Net payments for stockholder issuances and buybacks

     (1,211     (595
  

 

 

   

 

 

 

Net cash used in financing activities

     (34,949 )      (44,216 ) 

Effect of exchange rate on cash

     (11     (233
  

 

 

   

 

 

 

Increase (decrease) in cash

     (1,291 )      4,145   

Cash, beginning of period

     3,301        2,353   
  

 

 

   

 

 

 

Cash, end of period

   $ 2,010      $ 6,498   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid during the period for:

    

Interest

   $ 1,694      $ 3,141   
  

 

 

   

 

 

 

Income taxes

   $ 19,174      $ 10,882   
  

 

 

   

 

 

 

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

 

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Notes to Consolidated Financial Statements

(Dollar amounts in tables in thousands, except per share amounts)

Note 1. Basis of Presentation and Nature of Operations

Interim Results

The unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These rules and regulations permit some of the information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) to be condensed or omitted. In management’s opinion, the unaudited consolidated financial statements contain all adjustments, that are of a normal recurring nature, necessary for a fair presentation of the results of ICF International, Inc. and its subsidiaries (collectively, the “Company”) for the three-month and nine-month periods ended September 30, 2011, and September 30, 2010. Operating results for the three-month and nine-month periods ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The Company believes the carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and other current liabilities approximate their estimated fair values at September 30, 2011, due to their short maturities. The Company believes the carrying value of the lines of credit payable approximate the estimated fair value for debt with similar terms, interest rates, and remaining maturities currently available to companies with similar credit ratings at September 30, 2011. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010, and the notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 4, 2011.

Nature of Operations

The Company provides management, technology, and policy professional services in the areas of energy, environment, and transportation; health, education, and social programs; and homeland security and defense. The Company’s major clients are United States (“U.S.”) government departments and agencies, especially the Department of Health and Human Services (“HHS”), Department of Defense (“DoD”), Department of State (“DOS”), Environmental Protection Agency (“EPA”), Department of Homeland Security (“DHS”), Department of Agriculture (“USDA”), Department of Housing and Urban Development (“HUD”), Department of Transportation (“DOT”), Department of Interior (“DOI”), Department of Justice (“DOJ”), Department of Energy (“DOE”), and Department of Education (“ED”); state and local government departments and agencies; commercial and international clients, primarily in the air transportation and energy sectors, including airlines, airports, electric and gas utilities, oil companies, and law firms; and other governmental organizations throughout the U.S. and the world. The Company offers a full range of services to these clients, including strategy, analysis, program management, and information technology solutions that combine experienced professional staff, industry and institutional knowledge, and analytical methods.

The Company, incorporated in Delaware, is headquartered in Fairfax, Virginia, with over 50 domestic regional offices and international offices in Beijing, New Delhi, Ottawa, Toronto, Brussels, London, Moscow, and Rio de Janeiro.

Note 2. Business Combinations

In September 2011, the Company hired the staff and purchased select assets and liabilities of AeroStrategy L.L.C., a Michigan limited liability company, and AeroStrategy Limited, a limited company organized under the laws of England (collectively, “AeroStrategy”), an international aviation and aerospace management consulting firm. The purchase was immaterial to the financial statements taken as a whole. The purchase strengthened ICF’s aviation consulting business with additional services and an expanded client base.

In January 2011, the Company completed the acquisition of Marbek Resource Consultants Ltd. (“Marbek”), a Canadian energy and environmental consulting firm. The acquisition was immaterial to the financial statements taken as a whole. The acquisition created an integrated energy, climate, and environmental consultancy with a strong presence in Canada.

Note 3. Contract Receivables

Contract receivables consisted of the following:

 

     September 30, 2011     December 31, 2010  

Billed

   $ 121,987      $ 127,452   

Unbilled

     66,175        51,433   

Allowance for doubtful accounts

     (994     (1,922
  

 

 

   

 

 

 

Contract receivables, net

   $ 187,168      $ 176,963   
  

 

 

   

 

 

 

Contract receivables, net of the established allowance, are amounts expected to be received in future periods. Unbilled receivables result from revenue that has been earned in advance of billing. The unbilled receivables can be invoiced at contractually defined

 

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intervals or milestones, or upon completion of the contract or U.S. federal government incurred-cost audits. The Company anticipates that the majority of unbilled receivables will be substantially billed and collected within one year. Contract receivables are classified as current assets in accordance with industry practice.

The allowance for doubtful accounts is determined based upon management’s best estimate of potentially uncollectible contract receivables. The factors that influence management’s estimate include historical experience and management’s expectations of future losses on a contract-by-contract basis. The Company writes off contract receivables when such amounts are determined to be uncollectible. Losses have historically been within management’s expectations.

Note 4. Commitments and Contingencies

Litigation and Claims

The Company is involved in various legal matters and proceedings arising in the ordinary course of business. While these matters and proceedings cause the Company to incur costs, including, but not limited to, attorneys’ fees, the Company currently believes that any ultimate liability arising out of these matters and proceedings will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Commitments

In April 2011, the Company entered into a new lease for operating space in Gaithersburg, Maryland, which will consolidate certain operations into a single location. Rent expense will be recognized on a straight line basis over the term of the lease beginning in the second quarter of 2012. Aggregate rent expense over the 12-year, 8-month period will be approximately $43.8 million.

Note 5. Debt

The Company entered into its Second Amended and Restated Business Loan and Security Agreement (“Credit Facility”) on February 20, 2008, with a syndication of nine commercial banks to allow for borrowings of up to $350.0 million for a period of five years (maturing February 20, 2013) under a revolving line of credit. The Credit Facility provides for borrowings of up to $275.0 million without a borrowing base requirement and also provides for an “accordion feature,” which permits additional revolving credit commitments of up to $75.0 million, subject to lenders’ approval. The Credit Facility provides for pre-approval by the lenders for acquisitions with individual purchase prices of up to $75.0 million, if certain conditions are met. The Credit Facility is collateralized by substantially all of the assets of the Company, and requires that the Company remain in compliance with certain financial and non-financial covenants. The financial covenants, as defined by the Credit Facility, require that the Company maintain, on a consolidated basis for each quarter, a fixed charge coverage ratio of not less than 1.25 to 1.00 and a leverage ratio of not more than 3.50 to 1.00. As of September 30, 2011, the Company was in compliance with the covenants under the Credit Facility.

On March 31, 2009, the Credit Facility was amended to allow for the acquisition of Macro International Inc. (“Macro”), for permission to sell capital stock in one or more offerings (provided that the proceeds are used to pay down the Credit Facility), and to increase the interest rate margins the Company pays to borrow funds under the Credit Facility. On September 22, 2011, the Credit Facility was amended to allow for increased spending on annual capital expenditures from 1.5% to 2.0% of gross annual revenue. The Company has the ability to borrow funds under its Credit Facility at interest rates based on both LIBOR and prime rates, at its discretion, plus their applicable margins. Interest rates on debt outstanding ranged from 1.97% to 2.09% during the third quarter of 2011.

As of September 30, 2011, the Company had $50.0 million in long-term debt outstanding, $1.7 million in outstanding letters of credit, and unused borrowing capacity of $223.3 million under the Credit Facility. During the third quarter ended September 30, 2011, the Company decreased its long-term debt outstanding by $13.4 million.

Note 6. Accounting for Stock-Based Compensation

The Company recognized stock-based compensation expense of $1.8 million and $4.8 million for the three months and nine months ended September 30, 2011, respectively, and $2.4 million and $6.2 million for the three months and nine months ended September 30, 2010, respectively. Unrecognized compensation expense of $18.4 million as of September 30, 2011, related to unvested stock-based compensation agreements, will be recognized over the next three years. For the nine months ended September 30, 2011, the Company granted approximately 0.6 million shares in the form of equity compensation. As of September 30, 2011, the Company had 1.8 million shares available to grant under its equity compensation plan.

Note 7. Income Taxes

The Company’s effective tax rate for both the three-month and nine-month periods ended September 30, 2011, was 40.0%. The gross unrecognized tax benefits were $1.1 million at September 30, 2011. The offsetting tax benefit at September 30, 2011, was $0.3 million. If recognized, $0.8 million of the net unrecognized tax benefits at September 30, 2011, would impact the effective tax rate.

 

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The Company files income tax returns with the U.S. federal government and various state and foreign jurisdictions. The 2008 through 2010 tax years remain subject to examination by the Internal Revenue Service, and the 2007 through 2010 tax years generally remain subject to examination by state authorities. The Company does not anticipate a significant increase or decrease in total unrecognized tax benefits during the next 12 months.

The Company reports penalties and interest related to unrecognized tax benefits in net income before tax. For the nine months ended September 30, 2011, the Company recognized less than $0.1 million of penalties and interest.

The Company has made no provision for deferred U.S. income taxes or additional foreign taxes on future unremitted earnings of its controlled foreign subsidiaries because the Company considers these earnings to be permanently invested.

Note 8. Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing reported net income by the weighted-average number of shares outstanding. Diluted EPS considers the potential dilution that could occur if common stock equivalents were exercised or converted into stock. The difference between the basic and diluted weighted-average equivalent shares with respect to the Company’s EPS calculation is due entirely to the assumed exercise of stock options, the vesting of restricted stock, and the settlement of restricted stock units (“RSUs”). The dilutive effect of stock options, restricted stock and RSUs exclude shares that would be anti-dilutive to the calculation of EPS if included. For the three-month and nine-month periods ended September 30, 2011, approximately 0.3 million anti-dilutive weighted-average shares have been excluded, and for the three-month and nine-month periods ended September 30, 2010, approximately 0.2 million and 0.1 million anti-dilutive weighted-average shares have been excluded, respectively. The dilutive effect of stock option, restricted stock and RSU awards for each period reported is summarized below:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Net Income

   $ 9,334       $ 7,393       $ 26,023       $ 20,014   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average number of basic shares outstanding during the period

     19,728         19,413         19,666         19,349   

Dilutive effect of stock options, restricted stock and RSUs

     132         217         222         230   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average number of diluted shares outstanding during the period

     19,860         19,630         19,888         19,579   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.47       $ 0.38       $ 1.32       $ 1.03   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.47       $ 0.38       $ 1.31       $ 1.02   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 9. Recent Pronouncements

ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. In September 2011, the Financial Accounting Standards Board (“FASB”) revised the guidance related to testing goodwill for impairment. The new guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, as a basis for determining whether it is necessary to perform the first step of the two-step goodwill impairment test required under existing guidance. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, upon assessing the qualitative factors in their totality, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if an entity determines that it is more likely than not, then it is required to perform the first step of the two-step impairment test. In addition, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted. Early adoption is permitted for annual and interim goodwill impairment tests and the Company has elected to do so. As a result of the adoption, the Company determined that it is not more likely than not that the fair value of its one reporting unit is less than its carrying value and therefore did not perform step one of the two-step impairment test.

ASU 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements. In October 2009, the FASB also revised the guidance related to software revenue and multiple-element arrangements with software components. The new guidance related to software revenue recognition excludes arrangements with tangible products containing software and non-software components that function together to deliver a product’s essential functionality. Prior to the new guidance, vendor-specific-objective-evidence (“VSOE”) of fair value was required for the undelivered elements in the arrangement in order for the Company to account for the elements separately. However, as a result of the new guidance noted below with respect to multiple-deliverable arrangements and the guidance related to software revenue recognition, VSOE may not be required if another topic of the accounting standards codification provides guidance on how to allocate the consideration for contract deliverables. Thus, if there are software and non-

 

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software components within the same contract and the software components fall within the scope of the Software Elements topic of the code, but that topic addresses solely separation and not allocation, one can now refer back to the Multiple Deliverables topic of the codification for guidance on consideration allocation. The Multiple Deliverables guidance allows consideration to be allocated based upon a relative fair value basis using the entity’s best estimate of fair value, which is no longer limited to VSOE or third-party evidence, but may entail management’s best estimate of selling price. The guidance was effective for the Company beginning January 1, 2011. The new guidance did not have a material impact on the Company’s financial condition or results of operations.

ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. In October 2009, the FASB revised the accounting guidance pertaining to revenue arrangements with multiple deliverables. Prior to this guidance, in order for deliverables within an arrangement to be separated, the items must have stand-alone value as defined by the statement and there must be objective and reliable evidence of fair value for all elements or at a minimum the undelivered elements within the arrangement. Objective and reliable evidence of fair value meant there was VSOE of fair value, which consisted of the price charged when the deliverable was sold separately or a price established by management with the authority to establish the price for the item before it was to be sold separately. If VSOE did not exist, third-party evidence was also acceptable. The new standard allows for the use of an estimated management selling price to determine the value of deliverables within an arrangement when VSOE or third-party evidence does not exist. The new guidance also eliminated the use of the residual method of allocation allowed in the previous guidance. The Company has multiple-deliverable arrangements. The guidance was effective for the Company beginning January 1, 2011. The new guidance did not have a material impact on the Company’s financial condition or results of operations.

Note 10. Subsequent Events

ICF’s Board of Directors has approved a share repurchase program, authorizing the Company to repurchase in the aggregate up to $35.0 million of its outstanding common stock. Purchases under this program may be made from time to time at prevailing market prices in open market purchases or in privately-negotiated transactions in accordance with applicable insider trading and other securities laws and regulations. The purchases will be funded from existing cash balances and/or borrowings, and the repurchased shares will be held in treasury and used for general corporate purposes. The timing and extent to which the Company repurchases its shares will depend upon market conditions and other corporate considerations as may be considered in the Company’s sole discretion.

 

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

FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “would,” or similar words. You should read statements that contain these words carefully. The risk factors described in our filings with the SEC, as well as any cautionary language in this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties, and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements, including, but not limited to:

 

   

our dependence on contracts with federal, state, and local government agencies and departments for the majority of our revenue;

 

   

changes in the economic and political climate that may affect spending patterns and priorities of our clients;

 

   

failure by Congress or other governmental bodies to approve budgets or other legislation in a timely fashion;

 

   

results of government audits and investigations;

 

   

failure to receive the full amount of our backlog;

 

   

loss of members of management;

 

   

difficulties implementing our acquisition strategy;

 

   

difficulties expanding our service offerings and client base; and

 

   

liabilities arising from our major contract with the State of Louisiana, which was completed in 2009.

The forward-looking statements are based on the beliefs and assumptions of our management and the information available to our management at the time these disclosures were prepared. Although we believe the expectations reflected in these statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update these forward-looking statements, even if our situation changes in the future.

The terms “we,” “our,” “us,” and “the Company,” as used throughout this Quarterly Report on Form 10-Q refer to ICF International, Inc. and its consolidated subsidiaries, unless otherwise indicated. The term “federal government” refers to the U.S. government, unless otherwise indicated.

OVERVIEW

We provide management, technology, and policy consulting and implementation services to government, commercial, and international clients. We help our clients conceive, develop, implement, and improve solutions that address complex natural resource, social, and national security issues. Our services primarily address three key markets:

 

   

Energy, environment, and transportation;

 

   

Health, education, and social programs; and

 

   

Homeland security and defense.

We provide services across these three markets that deliver value throughout the entire life of a policy, program, project, or initiative, from concept analysis and design through implementation and improvement. Our primary services include:

 

   

Advisory Services. We provide policy, regulatory, technology, and other advice to our clients to help them address and respond to the challenges they face. Our advisory services include needs and market assessments, policy analysis, strategy and concept development, organizational assessment and strategy, enterprise architecture, and program design.

 

   

Implementation Services. We implement and manage technological, organizational, and management solutions for our clients, including information technology solutions, project and program management, project delivery, strategic communications, and training. These services often relate to the advisory services we provide.

 

   

Evaluation and Improvement Services. We provide evaluation and improvement services that help our clients increase the effectiveness and transparency of their programs. Our evaluation and improvement services include program evaluations, continuous improvement initiatives, performance management, benchmarking, and return-on-investment analyses.

 

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We serve federal, state, local, and foreign government clients, as well as major domestic and international corporations and multilateral institutions. Our clients utilize our advisory services because we offer a combination of deep subject-matter expertise and institutional experience in our market areas. We believe that our domain expertise and the program knowledge developed from our advisory engagements further position us to provide implementation and evaluation services.

We have more than 4,000 employees, including many recognized as thought leaders in their respective fields. The Company, incorporated in Delaware, is headquartered in Fairfax, Virginia, with over 50 domestic regional offices and international offices in Beijing, New Delhi, Ottawa, Toronto, Brussels, London, Moscow, and Rio de Janeiro.

OUTLOOK

Our future results will depend on the success of our strategy to enhance our client relationships and seek larger engagements across the program life cycle in our three key markets, and to complete additional acquisitions and to integrate them successfully. In our three markets, we will continue to focus on building scale in domain and horizontal expertise, developing our commercial, as well as our government, business and replicating our business model geographically throughout the United States and globally.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America requires that we make estimates and judgments that affect the reported amount of assets, liabilities, revenue, and expenses, as well as the disclosure of contingent assets and liabilities. If any of these estimates or judgments proves 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 we therefore consider them to be critical accounting policies.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable, and collectability is reasonably assured. We enter into contracts that are time-and-materials, cost-based, fixed-price, or a combination of these.

 

   

Time-and-Materials Contracts. Revenue for time-and-materials contracts is recorded on the basis of allowable labor hours worked multiplied by the contract-defined billing rates, plus the costs of other items used in the performance of the contract. Profits and losses on time-and-materials contracts result from the difference between the cost of services performed and the contract-defined billing rates for these services.

 

   

Cost-Based Contracts. Revenue under cost-based contracts is recognized as costs are incurred. Applicable estimated profit, if any, is included in earnings in the proportion that incurred costs bear to total estimated costs. Incentives, award fees, or penalties related to performance are also considered in estimating revenue and profit rates based on actual and anticipated awards.

 

   

Fixed-Price Contracts. Revenue for fixed-price contracts is recognized when earned, generally as work is performed. Services performed vary from contract to contract and are not always uniformly performed over the term of the arrangement. We recognize revenue in a number of different ways on fixed-price contracts, including:

 

   

Proportional Performance: Revenue on certain fixed-price contracts is recorded each period based upon certain contract performance measures (labor hours, labor costs, or total costs) incurred expressed as a proportion of a total project estimate. Thus, labor hours, labor costs, or total contract costs incurred to date are compared with the total estimate for these items at completion. Performance is based on the ratio of the incurred hours or costs to the total estimate. Progress on a contract is monitored regularly to ensure that revenue recognized reflects project status. When hours or costs incurred are used as the basis for revenue recognition, the hours or costs incurred represent a reasonable surrogate for output measures of contract performance, including the presentation of deliverables to the client. Clients are obligated to pay as services are performed, and in the event that a client cancels the contract, payment for services performed through the date of cancellation is negotiated with the client.

 

   

Contractual Outputs: Revenue on certain fixed-price contracts is recognized based upon outputs completed to date expressed as a percentage of total outputs required in the contract or based upon units delivered to the customer multiplied by the contract-defined unit price.

 

   

Straight-Line: When services are performed or are expected to be performed consistently throughout an arrangement, revenue on those fixed-price contracts is recognized ratably over the period benefited.

 

   

Completed Contract: Revenue on certain fixed-price contracts is recognized at completion if the final act is so significant to the arrangement that value is deemed to be transferred only at completion.

 

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Revenue recognition requires us to use judgment relative to assessing risks, estimating contract revenue and costs or other variables, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of revenue and estimates at completion can be complicated and are subject to many variables. Contract costs include labor, subcontracting costs, and other direct costs, as well as an allocation of allowable indirect costs. We must also make assumptions regarding the length of time to complete the contract because costs include expected increases in wages, prices for subcontractors, and other direct costs. From time to time, facts develop that require us to revise our estimated total costs or hours and thus the associated revenue on a contract. To the extent that a revised estimate affects contract profit or revenue previously recognized, we record the cumulative effect of the revision in the period in which the facts requiring the revision become known. Provision for the full amount of an anticipated loss on any type of contract is recognized in the period in which it becomes probable and can be reasonably estimated. As a result, operating results could be affected by revisions to prior accounting estimates.

We generate invoices to clients in accordance with the terms of the applicable contract, which may not be directly related to the performance of services. Unbilled receivables are invoiced based upon the achievement of specific events as defined by each contract, including deliverables, timetables, and incurrence of certain costs. Unbilled receivables are classified as a current asset. Advanced billings to clients in excess of revenue earned are recorded as deferred revenue until the revenue recognition criteria are met. Reimbursements of out-of-pocket expenses are included in revenue with corresponding costs incurred by us included in cost of revenue.

We may proceed with work based upon written client direction prior to the completion and signing of formal contract documents. We have a formal review process for approving any such work. Revenue associated with such work is recognized only when it can reliably be estimated and realization is probable. We base our estimates on a variety of factors, including previous experiences with the client, communications with the client regarding funding status, and our knowledge of available funding for the contract.

DIRECT COSTS

Direct costs consist primarily of costs incurred to provide services to clients, the most significant of which are subcontractors and employee salaries and wages, plus associated fringe benefits, relating to specific client engagements. Direct costs also include the costs of third-party materials and any other related direct costs, such as travel expenses.

We generally expect the ratio of direct costs as a percentage of revenue to decline when our own labor increases relative to subcontracted labor or outside consultants. Conversely, as our labor decreases relative to subcontracted labor or outside consultants, we expect the ratio to increase.

Changes in the mix of services and other direct costs provided under our contracts can result in variability in our direct costs as a percentage of revenue. For example, when we perform work in the area of implementation, we expect that more of our services will be performed in client-provided facilities and/or with dedicated staff. Such work generally has a higher proportion of direct costs than much of our current advisory work, and we anticipate that higher utilization of such staff will decrease indirect expenses. In addition, to the extent we are successful in winning larger contracts, our own labor services component could decrease because larger contracts typically are broader in scope and require more diverse capabilities, potentially resulting in more subcontracted labor, more other direct costs, and lower margins. Although these factors could lead to a higher ratio of direct costs as a percentage of revenue, the economics of these larger jobs are nonetheless generally favorable because they increase income, broaden our revenue base, and have a favorable return on invested capital.

OPERATING EXPENSES

Our operating costs and expenses consist of indirect and selling expenses, including non-cash compensation, and depreciation and amortization.

Indirect and selling expenses

Indirect and selling expenses include our management, facilities, and infrastructure costs for all employees, as well as salaries and wages, plus associated fringe benefits, not directly related to client engagements. Among the functions covered by these expenses are marketing, business and corporate development, bids and proposals, facilities, information technology and systems, contracts administration, accounting, treasury, human resources, legal, corporate governance, and executive and senior management. We include all of our cash incentive compensation in this item, as well as all our non-cash compensation, such as stock-based compensation provided to employees, whose compensation and other benefit costs are included in both direct costs and indirect and selling expenses.

 

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Equity compensation

Incentive stock awards are measured at fair value. We have elected to use the Black-Scholes-Merton option pricing model to value any options granted and to amortize compensation expense relating to share-based payments on a straight-line basis over the requisite service period. The Company will reconsider its use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued in future periods have characteristics that prevent their value from being reasonably estimated using this model.

Property and equipment

Property and equipment are carried at cost and are depreciated using the straight-line method over their estimated useful lives, which range from two to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the economic life of the improvement or the related lease term. Assets acquired in acquisitions are recorded at fair value.

Goodwill and other intangible assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead reviewed annually (or more frequently if impairment indicators arise) for impairment. Intangible assets with estimable useful lives must be amortized over such lives and reviewed for impairment.

We have elected to perform our annual goodwill impairment review as of September 30 of each year. For the purposes of performing this review, we have concluded that the Company is one reporting unit. We have adopted the amended guidance under ASU 2011-08 issued in September 2011. We evaluated, on the basis of the weight of evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of our one reporting unit is less than its carrying amount. This evaluation included macroeconomic and industry and market specific considerations, financial performance indicators and measurements, and other factors. We have determined that it is not more likely than not that the fair value of our one reporting unit is less than its carrying amount and that the two-step impairment test is not required to be performed for 2011. Therefore, based upon management’s review, no goodwill impairment charge was required as of September 30, 2011.

We are required to review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell.

Recent pronouncements

New accounting standards are discussed in “Note 9 — Recent Pronouncements” of our “Notes to Consolidated Financial Statements” appearing in this Quarterly Report on Form 10-Q.

 

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RESULTS OF OPERATIONS

Three Months ended September 30, 2011, compared to Three Months ended September 30, 2010

The following table sets forth certain items from our unaudited consolidated statements of earnings and the period-over-period rate of change in each of them and expresses these items as a percentage of revenue for the periods indicated.

 

     Three Months Ended September 30,     Year-to-Year Change
Three Months Ended September 30,
2010 to 2011
 
     2011     2010     2011     2010    
     Dollars
(In Thousands)
    Percentages     Dollars
(In Thousands)
    Percent  

Gross Revenue

   $ 218,691      $ 197,711        100.0     100.0   $ 20,980        10.6

Direct Costs

     137,343        124,060        62.8     62.7     13,283        10.7

Operating Costs and Expenses

            

Indirect and selling expenses

     60,341        55,348        27.6     28.0     4,993        9.0

Depreciation and amortization

     2,544        2,716        1.1     1.4     (172     (6.3 )% 

Amortization of intangible assets

     2,369        3,082        1.1     1.6     (713     (23.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Costs and Expenses

     65,254        61,146        29.8     31.0     4,108        6.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     16,094        12,505        7.4     6.3     3,589        28.7

Other (Expense) Income

            

Interest expense

     (539     (776     (0.3 )%      (0.4 )%      237        (30.5 )% 

Other income

     —          99        —          —          (99     (100.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     15,555        11,828        7.1     5.9     3,727        31.5

Provision for Income Taxes

     6,221        4,435        2.8     2.2     1,786        40.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 9,334      $ 7,393        4.3     3.7   $ 1,941        26.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Revenue. Revenue for the three months ended September 30, 2011, was $218.7 million, compared to $197.7 million for the three months ended September 30, 2010, representing an increase of $21.0 million or 10.6%. The increase is primarily attributable to growth in the domestic commercial market of $15.7 million and growth in the state and local market of $3.3 million.

Direct costs. Direct costs for the three months ended September 30, 2011, were $137.3 million compared to $124.1 million for the three months ended September 30, 2010, an increase of $13.3 million or 10.7%. The increase in direct costs is primarily attributable to an increase in subcontractor expense and direct labor expense. Direct costs as a percent of revenue were 62.8% for the three months ended September 30, 2011, compared to 62.7% for the three months ended September 30, 2010.

Indirect and selling expenses. Indirect and selling expenses for the three months ended September 30, 2011 were $60.3 million compared to $55.3 million for the three months ended September 30, 2010, an increase of $5.0 million or 9.0%. The increase in indirect and selling expenses is primarily attributable to an increase in indirect labor. Indirect and selling expenses as a percent of revenue were 27.6% for the three months ended September 30, 2011, compared to 28.0% for the three months ended September 30, 2010.

Depreciation and amortization. Depreciation and amortization for the three months ended September 30, 2011, was $2.5 million compared to $2.7 million for the three months ended September 30, 2010.

Amortization of intangible assets. Amortization of intangible assets for the three months ended September 30, 2011, was $2.4 million compared to $3.1 million for the three months ended September 30, 2010. The 23.1% decrease resulted primarily from amortization related to intangible assets that were fully amortized prior to September 30, 2011, but were not fully amortized as of September 30, 2010.

Operating Income. For the three months ended September 30, 2011, operating income was $16.1 million compared to $12.5 million for the three months ended September 30, 2010, an increase of $3.6 million or 28.7%. Operating income as a percent of revenue increased to 7.4% for the three months ended September 30, 2011, from 6.3% for the three months ended September 30, 2010. Operating income and operating income as a percent of revenue increased primarily due to an increase in gross revenue of 10.6%, offset by an increase in direct costs of 10.7%, and an increase in operating costs and expenses of 6.7% for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010.

 

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Interest expense. For the three months ended September 30, 2011, interest expense was $0.5 million, compared to $0.8 million for the three months ended September 30, 2010. The 30.5% decrease was due primarily to a lower average debt balance during the third quarter of 2011, as compared to the average debt balance during the third quarter of 2010.

Provision for Income Taxes. Our effective income tax rate for the three months ended September 30, 2011, was 40.0% compared to 37.5% for the three months ended September 30, 2010. The increase in the effective rate for the three months ended September 30, 2011, compared to the three months ended September 30, 2010, is primarily due to higher unfavorable current-year adjustments in 2011 compared to 2010, and a one-time decrease in 2010 in our unrecognized tax benefits, a previously recorded liability, due to the expiration of the applicable statute of limitations.

Nine Months ended September 30, 2011, compared to Nine Months ended September 30, 2010

The following table sets forth certain items from our unaudited consolidated statements of earnings and the period-over-period rate of change in each of them and expresses these items as a percentage of revenue for the periods indicated.

 

           Year-to-Year Change  
     Nine Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010     2010 to 2011  
     Dollars
(In Thousands)
    Percentages     Dollars
(In Thousands)
    Percent  

Gross Revenue

   $ 626,828      $ 571,796        100.0     100.0   $ 55,032        9.6

Direct Costs

     389,086        356,750        62.1     62.4     32,336        9.1

Operating Costs and Expenses

            

Indirect and selling expenses

     177,537        162,508        28.3     28.4     15,029        9.3

Depreciation and amortization

     8,083        8,027        1.3     1.4     56        0.7

Amortization of intangible assets

     7,105        9,245        1.1     1.6     (2,140     (23.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Costs and Expenses

     192,725        179,780        30.8     31.4     12,945        7.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     45,017        35,266        7.2     6.2     9,751        27.7

Other (Expense) Income

            

Interest expense

     (1,732     (2,656     (0.3 )%      (0.5 )%      924        (34.8 )% 

Other income

     89        197        —          —          (108     (54.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     43,374        32,807        6.9     5.7     10,567        32.2

Provision for Income Taxes

     17,351        12,793        2.7     2.2     4,558        35.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 26,023      $ 20,014        4.2     3.5   $ 6,009        30.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Revenue. Revenue for the nine months ended September 30, 2011, was $626.8 million, compared to $571.8 million for the nine months ended September 30, 2010, representing an increase of $55.0 million or 9.6%. The increase is primarily attributable to growth in the domestic commercial market of $40.0 million and growth in the U.S. government market of $11.8 million.

Direct costs. Direct costs for the nine months ended September 30, 2011, were $389.1 million compared to $356.8 million for the nine months ended September 30, 2010, an increase of $32.3 million or 9.1%. The increase in direct costs is primarily attributable to an increase in subcontractor expense and direct labor expense. Direct costs as a percent of revenue were 62.1% for the nine months ended September 30, 2011, compared to 62.4% for the nine months ended September 30, 2010.

Indirect and selling expenses. Indirect and selling expenses for the nine months ended September 30, 2011, were $177.5 million compared to $162.5 million for the nine months ended September 30, 2010, an increase of $15.0 million or 9.3%. The increase in indirect and selling expenses is primarily attributable to an increase in indirect labor and general and administrative expense. Indirect and selling expenses as a percent of revenue were 28.3% for the nine months ended September 30, 2011, compared to 28.4% for the nine months ended September 30, 2010.

Depreciation and Amortization. Depreciation and amortization for the nine months ended September 30, 2011, was $8.1 million compared to $8.0 million for the nine months ended September 30, 2010.

Amortization of intangible assets. Amortization of intangible assets for the nine months ended September 30, 2011, was $7.1 million compared to $9.2 million for the nine months ended September 30, 2010. The 23.2% decrease resulted primarily from amortization related to intangible assets that were fully amortized prior to September 30, 2011, but were not fully amortized as of September 30, 2010.

 

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Operating Income. For the nine months ended September 30, 2011, operating income was $45.0 million compared to $35.3 million for the nine months ended September 30, 2010, an increase of $9.8 million or 27.7%. Operating income as a percent of revenue increased to 7.2% for the nine months ended September 30, 2011, from 6.2% for the nine months ended September 30, 2010. Operating income and operating income as a percent of revenue increased primarily due to an increase in gross revenue of 9.6%, offset by an increase in direct costs of 9.1%, and an increase in operating costs and expenses of 7.2% for the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010.

Interest expense. For the nine months ended September 30, 2011, interest expense was $1.7 million, compared to $2.7 million for the nine months ended September 30, 2010. The 34.8% decrease was due primarily to a lower average debt balance during the first nine months of 2011, as compared to the average debt balance during the first nine months of 2010.

Provision for Income Taxes. Our effective income tax rate for the nine months ended September 30, 2011, was 40.0% compared to 39.0% for the nine months ended September 30, 2010. The increase in the effective rate for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010, is primarily due to higher unfavorable current-year adjustments in 2011 compared to 2010, and a one-time decrease in 2010 in our unrecognized tax benefits, a previously recorded liability, due to the expiration of the applicable statute of limitations.

SELECTED KEY METRICS

Revenue

We earn revenue from services that we provide to clients in three key markets:

 

   

Energy, environment, and transportation;

 

   

Health, education, and social programs; and

 

   

Homeland security and defense.

The following table shows our revenue from each of our three 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 amounts in the prior year have been reclassified to conform to current year presentation.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Energy, environment, and transportation

     43     41     43     40

Health, education, and social programs

     43     43     43     45

Homeland security and defense

     14     16     14     15
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

The increase in energy, environment, and transportation revenue for the three months and nine months ended September 30, 2011, compared to the three months and nine months ended September 30, 2010, is primarily attributable to revenue growth in domestic, energy-related clients.

Our primary clients are the agencies and departments of the U.S. federal and state governments. The following table shows our revenue by type of client as a percentage of total revenue for the periods indicated.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

U.S. federal government

     66     71     67     71

U.S. state and local government

     10     10     10     10

Domestic commercial

     20     14     19     14

International

     4     5     4     5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The decrease in U.S. federal government revenue and the increase in domestic commercial revenue as a percent of total revenue, for the three months and nine months ended September 30, 2011, compared to the three months and nine months ended September 30, 2010, is primarily attributable to revenue growth in domestic, energy-related clients.

Contract mix

Our contracts with clients include time-and-materials contracts, cost-based contracts (including cost-based fixed fee, cost-based award fee, and cost-based incentive fee, as well as grants and cooperative agreements), and fixed-price contracts. Our 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. The following table shows our revenue from each of these types of contracts as a percentage of total revenue for the periods indicated.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Time-and-materials

     48     50     50     49

Fixed-price

     28     27     27     28

Cost-based

     24     23     23     23
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Time-and-materials contracts. Under time-and-materials contracts, we are paid for labor at fixed hourly rates and generally reimbursed separately for allowable materials, other direct costs, and out-of-pocket expenses. Our actual labor costs may vary from the expected costs that formed the basis for our negotiated hourly rates if we utilize different employees than anticipated, need to hire additional employees at higher wages, increase the compensation paid to existing employees, or are able to hire employees at lower-than-expected rates. Our non-labor costs, such as fringe benefits, overhead, and general and administrative costs, also may be higher or lower than we anticipated. To the extent that our actual labor and non-labor costs under a time-and-materials contract vary significantly from our expected costs or the negotiated hourly rates, we can generate more or less than the targeted amount of profit or, perhaps, incur a loss.

Fixed-price contracts. Under fixed-price contracts, we perform specific tasks for a pre-determined price. Compared to time-and-materials and cost-based contracts, fixed-price contracts involve greater financial risk because we bear the full impact of labor and non-labor costs that exceed our estimates, in terms of costs per hour, number of hours, and all other costs of performance, in return for the full benefit of any cost savings. We therefore may generate more or less than the targeted amount of profit or, perhaps, incur a loss.

Cost-based contracts. Under cost-based contracts, we are paid based on the allowable costs we incur, and usually receive a fee. All of our cost-based contracts reimburse us for our direct labor and fringe-benefit costs that are allowable under the contract; however, certain contracts limit the amount of overhead and general and administrative costs we can recover, which may be less than our actual overhead and general and administrative costs. In addition, our fees are constrained by fee ceilings and, in certain cases, such as with grants and cooperative agreements, we may receive no fee. Because of these limitations, our cost-based contracts, on average, are our least profitable type of contract, and we may generate less than the expected profit, or perhaps, incur a loss. Cost-based fixed-fee contracts specify the fee to be paid. Cost-based incentive-fee and cost-based award-fee contracts provide for increases or decreases in the contract fee, within specified limits, based upon actual results as compared to contractual targets for factors such as cost, quality, schedule, and performance.

Contract backlog

We define total backlog as the future revenue we expect to receive from our contracts and other engagements. We generally include in backlog the estimated revenue represented by contract options that have been priced, but not exercised. We do not include any estimate of revenue relating to potential future delivery orders that might be awarded under our General Services Administration Multiple-Award Schedule (“GSA Schedule”) contracts, other Indefinite Delivery/Indefinite Quantity (“IDIQ”) contracts, or other contract vehicles that are also held by a large number of firms, and under which potential future delivery orders or task orders might be issued by any of a large number of different agencies and are likely to be subject to a competitive bidding process. We do, however, include potential future work expected to be awarded under IDIQ contracts that are available to be utilized by a limited number of potential clients and are held either by us alone or by a limited number of firms.

 

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We include expected revenue in funded backlog when we have been authorized by the client to proceed under a contract up to the dollar amount specified by our client, and this amount will be owed to us under the contract after we provide the services pursuant to the authorization. If we do not provide services authorized by a client prior to the expiration of the authorization, we remove amounts corresponding to the expired authorization from backlog. We do include expected revenue under an engagement in funded backlog when we do not have a signed contract if we have received client authorization to begin or continue working and we expect to sign a contract for the engagement. In this case, the amount of funded backlog is limited to the amount authorized. Our funded backlog does not represent the full revenue potential of our contracts because many government clients, and sometimes other clients, authorize work under a particular contract on a yearly or more frequent basis, even though the contract may extend over several years. Most of the services we provide to commercial clients are provided under contracts with relatively short durations. As a consequence, our backlog attributable to these clients is typically reflected in funded backlog and not in unfunded backlog.

We define unfunded backlog as the difference between total backlog and funded backlog. Our revenue estimates for purposes of determining unfunded backlog for a particular contract are based, to a large extent, on the amount of revenue we have recently recognized on that contract, our experience in utilizing contract capacity on similar types of contracts, and our professional judgment. Our revenue estimate for a contract included in backlog is sometimes lower than the revenue that would result from our client utilizing all remaining contract capacity.

Although we expect our contract backlog to result in revenue, the timing of revenue associated with both funded and unfunded backlog will vary based on a number of factors, and we may not recognize revenue associated with a particular component of backlog when anticipated, or at all. Our government clients generally have the right to cancel any contract, or ongoing or planned work under any contract, at any time. In addition, there can be no assurance that revenue from funded or unfunded backlog will have similar profitability to previous work or will be profitable at all. Generally speaking, we believe the risk that a particular component of backlog will not result in future revenue is higher for unfunded backlog than for funded backlog.

Our funded and estimates of unfunded and total backlog at the dates indicated were as follows:

 

     September 30,  
     2011      2010  
     (in millions)  

Funded

   $ 796.0       $ 663.6   

Unfunded

     918.2         743.0   
  

 

 

    

 

 

 

Total

   $ 1,714.2       $ 1,406.6   
  

 

 

    

 

 

 

Included in the total 2011 backlog is $88.1 million related to two new signed federal government contracts under protest. Management believes the federal government conducted a fair and objective source selection process and believes there is a high probability that the contract awards to us will be upheld.

CAPITAL RESOURCES, FINANCIAL CONDITION, AND LIQUIDITY

Credit Facility. We entered into the Second Amended and Restated Business Loan and Security Agreement (“Credit Facility”) on February 20, 2008, with a syndication of nine commercial banks to allow for borrowings of up to $350.0 million for a period of five years (maturing February 20, 2013) under a revolving line of credit. The Credit Facility provides for borrowings of up to $275.0 million without a borrowing base requirement and also provides for an “accordion feature,” which permits additional revolving credit commitments of up to $75.0 million, subject to lenders’ approval. The Credit Facility has provided pre-approval by the lenders for acquisitions with individual purchase prices of up to $75.0 million, if certain conditions are met. The Credit Facility is collateralized by substantially all of the assets of the Company, and requires that we remain in compliance with certain financial and non-financial covenants.

On March 31, 2009, the Credit Facility was amended to allow for the acquisition of Macro, for permission to sell capital stock in one or more offerings (provided that the proceeds are used to pay down the Credit Facility), and to increase the interest rate margins we pay to borrow funds under the Credit Facility. On September 22, 2011, the Credit Facility was amended to allow for increased spending on annual capital expenditures from 1.5% to 2.0% of gross annual revenue. We have the ability to borrow funds under the Credit Facility at interest rates based on both LIBOR and prime rates, at our discretion, plus their applicable margins. Interest rates on debt outstanding ranged from 1.97% to 2.09% during the third quarter of 2011.

Financial Condition. There were several changes in our balance sheet during the nine months ended September 30, 2011. Accounts receivable increased from $177.0 million on December 31, 2010, to $187.2 million on September 30, 2011. Days-sales-outstanding were 68 days at September 30, 2011, and were 73 days at December 31, 2010. Long-term debt decreased from $85.0 million on December 31, 2010, to $50.0 million on September 30, 2011, due to cash flow from operations and reductions in working capital requirements. Accounts payable and accrued salaries and benefits increased to $76.7 million on September 30, 2011, from $70.6 million on December 31, 2010, primarily due to the timing of payments. Days-payable-outstanding were 46 days at September 30, 2011, and were 49 days at December 31, 2010.

 

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Liquidity and Borrowing Capacity. Short-term liquidity requirements are created by our use of funds for working capital, capital expenditures, and the need to provide any debt service. We expect to meet these requirements through a combination of cash flow from operations and borrowings under our Credit Facility. As of September 30, 2011, we had $50.0 million borrowed under our revolving line of credit, outstanding letters of credit of $1.7 million, and unused borrowing capacity of $223.3 million which is available for our working capital needs.

We anticipate that our long-term liquidity requirements, including any future acquisitions, will be funded through a combination of cash flow from operations, borrowings under our Credit Facility, additional secured or unsecured debt, or the issuance of common or preferred stock, each of which may be initially funded through borrowings under our Credit Facility.

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 on-going operations, customary capital expenditures, and other current working capital requirements. We are continuously analyzing our capital structure to ensure we have sufficient capital to fund future acquisitions and internal growth. We monitor the state of the financial markets on a regular basis to assess the availability and cost of additional capital resources both from debt and equity sources. We believe that we will be able to access these markets at commercially reasonable terms and conditions if we need additional borrowings or capital.

Cash. We consider cash on deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Cash was $2.0 million and $3.3 million on September 30, 2011, and December 31, 2010, respectively.

Cash Flow. The following table sets forth our sources and uses of cash for the nine months ended September 30, 2011, and September 30, 2010:

 

     Nine Months Ended
September 30,
 
     2011     2010  
     (in thousands)  

Net cash provided by operating activities

   $ 46,806      $ 53,606   

Net cash used in investing activities

     (13,137     (5,012

Net cash used in financing activities

     (34,949     (44,216

Effect of exchange rate on cash

     (11     (233
  

 

 

   

 

 

 

Net increase (decrease) in cash

   $ (1,291   $ 4,145   
  

 

 

   

 

 

 

Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments. We bill most of our clients monthly after services are rendered. Operating activities provided cash of $46.8 million in the nine months ended September 30, 2011, and $53.6 million in the nine months ended September 30, 2010. Cash flows from operating activities for the first nine months of 2011 were positively impacted by accrued salaries and benefits, accounts payable, and accrued expenses, and were negatively impacted by contract receivables and prepaid expenses. Cash flows from operating activities for the first nine months of 2010 were positively impacted by accrued salaries and benefits, the timing of tax payments, and contract receivable payments, and were negatively impacted by accounts payable, a net decrease in deferred revenue, and prepaid expenses.

Investing activities used cash of $13.1 million for the nine months ended September 30, 2011, compared to $5.0 million for the nine months ended September 30, 2010. The cash used in investing activities for the first nine months of 2011 was primarily for our business combinations of AeroStrategy and Marbek, as well as the purchase of property and equipment. The cash used in investing activities for the first nine months of 2010 was primarily related to the purchase of property and equipment.

For the nine months ended September 30, 2011, cash flow used in financing activities of $34.9 million was attributable primarily to $35.0 million in net repayments to our revolving line of credit. For the nine months ended September 30, 2010, cash flow used in financing activities of $44.2 million was attributable primarily to $35.0 million in net repayments to our revolving line of credit.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We use off-balance sheet arrangements to finance the lease of facilities. We have financed the use of all of our office and storage facilities through operating leases. Operating leases are also used from time to time to finance the use of computers, servers, copiers, telephone systems, and to a lesser extent, other fixed assets, such as furnishings, and we also obtain operating leases in connection with business acquisitions. We generally assume the lease rights and obligations of companies acquired in business combinations and continue financing facilities and equipment under operating leases until the end of the lease term following the acquisition date.

 

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The Credit Facility provides for stand-by letters of credit aggregating up to $5.0 million that reduce the funds available under the revolving line of credit when issued. As of September 30, 2011, we had 8 outstanding letters of credit with a total value of $1.7 million.

The following table summarizes our contractual obligations as of September 30, 2011 that require us to make future cash payments. For contractual obligations, we included payments that we have an unconditional obligation to make.

 

            Payments due by Period
(In thousands)
 
     Total      Less than
1 year
     1 to 3
years
     3 to 5
years
     More than
5 years
 

Rent of facilities

   $ 250,292       $ 27,872       $ 48,668       $ 41,140       $ 132,612   

Operating lease obligations

     3,235         1,739         1,237         259         —     

Long-term debt obligation

     50,000         —           50,000         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 303,527       $ 29,611       $ 99,905       $ 41,399       $ 132,612   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the disclosures discussed in the section entitled “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures and Internal Controls Over Financial Reporting. As of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in our reports filed with the SEC under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including the Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There have been no significant changes in our internal controls over financial reporting during the period covered by this Quarterly Report on Form 10-Q or, to our knowledge, in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the Effectiveness of Controls. Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are involved in various legal matters and proceedings arising in the ordinary course of business. While these matters and proceedings cause us to incur costs, including, but not limited to, attorneys’ fees, we currently believe that any ultimate liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations, or cash flows.

 

Item 1A. Risk Factors

Investing in our common stock involves risk. There are numerous and varied risks, known and unknown, that may affect us and prevent us from achieving our goals. There have been no material changes in those risk factors discussed in the section entitled “Risk Factors” disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.

The risks described in our Annual Report on Form 10-K are not the only risks that we encounter. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuances of Common Stock. For the three months ended September 30, 2011, a total of 1,082 shares of unregistered common stock, valued at an aggregate of $27,732, were issued to two directors of the Company in lieu of cash for director fee compensation on July 1, 2011. The issuance of these shares is exempt under Section 4(2) of the Securities Act of 1933, as amended.

Purchase of Equity. During the three months ended September 30, 2011, the Company purchased 11,193 shares of common stock for an aggregate of $272,933 from employees to pay required withholding taxes and the exercise price due upon the exercise of options and the settlement of RSU’s, in accordance with the applicable long-term incentive plan. The average fair value of the common stock purchased was $24.38 per share.

The following table summarizes stock repurchases for the three months ended September 30, 2011:

 

Period

   (a) Total
Number of
Shares
Purchased
     (b) Average
Price Paid
per Share
     (c) Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
     (d) Maximum Number
(or Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs
 

July 1 – July 31

     122       $ 25.63         None         None   

August 1 – August 31

     10,197       $ 24.73         None         None   

September 1 – September 30

     874       $ 20.14         None         None   
  

 

 

    

 

 

       

Total

     11,193       $ 24.38         None         None   

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Reserved

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit

Number

  

Exhibit

  10.1    Second Modification to Second Amended and Restated Business Loan and Security Agreement and other loan documents, dated as of September 22, 2011 by and among Citizens Bank of Pennsylvania, as a Lender and Administrative Agent, ICF.
  10.2    Severance Letter Agreement between ICF International, Inc. and Sandra B. Murray.
  31.1    Certificate of the Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a).
  31.2    Certificate of the Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a).
  32.1    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of the Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from the ICF International, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Earnings, (iii) Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.*

 

* Submitted electronically herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    ICF INTERNATIONAL, INC.
November 3, 2011     By:  

/s/ Sudhakar Kesavan

      Sudhakar Kesavan
      Chairman and Chief Executive Officer
      (Principal Executive Officer)
November 3, 2011     By:  

/s/ Sandra B. Murray

      Sandra B. Murray
      Interim Chief Financial Officer
      (Principal Financial Officer)

 

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