ICF INTERNATIONAL, INC. The following discussion and analysis should be read in conjunction with the "Selected Financial Data" and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions, such as statements of our plans, objectives, expectations, and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to our actual results differing materially from those anticipated include those discussed in "Risk Factors" and elsewhere in this Annual Report on Form 10-K. This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 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 endedDecember 31,2018 , which was filed with theSEC onFebruary 27, 2019 , and is incorporated by reference into this Management's Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW AND OUTLOOK
We provide professional services and technology-based solutions to government and commercial clients. Our services include management, marketing, technology, and policy consulting and implementation services. We help our clients conceive, develop, implement, and improve solutions that address complex business, natural resource, social, technological, and public safety issues. Our clients operate in four key markets: energy, environment, and infrastructure; health, education, and social programs; safety and security; and consumer and financial. Drawing from our domain knowledge and staff experience in working in multi-disciplinary teams for clients in a variety of markets, we provide services that deliver value throughout the entire life cycle of a policy, program, project, or initiative, from initial research, analysis, assessment and advice to design and implementation of programs and technology-based solutions, and the provision of engagement services and programs. Our clients utilize our services because we combine diverse institutional knowledge and experience with the deep subject matter expertise of our highly educated staff, which we deploy in multi-disciplinary teams. We have successfully worked with many of our clients for decades, with the result that we have a thorough and nuanced perspective of their objectives and needs. We serve both governmental and commercial clients. Our government clients include those from departments and agencies of the federal government, state (including territories) and local governments, and international governments. Our government efforts include work performed under subcontract agreements to commercial clients whose ultimate customer is government agencies and departments. Our largest clients areU.S. federal government departments and agencies. In fact, our federal government clients have included every cabinet-level department, most significantly HHS, DOS, andDoD . Federal government clients generated approximately 38%, 41%, and 45% of our revenue in 2019, 2018, and 2017, respectively. State and local government clients generated approximately 19%, 14%, and 10% of our revenue in 2019, 2018, and 2017, respectively. International government clients generated approximately 8%, 9%, and 7% of our revenue in 2019, 2018, and 2017, respectively. We also serve a variety of commercial clients worldwide, including: airlines, airports, electric and gas utilities, oil companies, hospitals, health insurers and other health-related companies, banks and other financial services companies, transportation, travel and hospitality firms, non-profits/associations, law firms, manufacturing firms, retail chains, and distribution companies. Our commercial clients, which include clients outside theU.S. , generated approximately 35%, 36%, and 38% of our revenue in 2019, 2018, and 2017, respectively. We report operating results and financial data as a single segment based on the consolidated information used by our chief operating decision-maker in evaluating the financial performance of our business and allocating resources. Our single segment represents our core business-professional services for government and commercial clients. Although we describe our multiple service offerings to clients that operate in four markets to provide a better understanding of the scope and scale of our business, we do not manage our business or allocate our resources based on those service offerings or client markets. Rather, on a project by project basis, we assemble the best team from throughout the enterprise to deliver highly customized solutions that are tailored to meet the needs of each client. We believe that demand for our services will continue to grow as government, industry, and other stakeholders seek 33
-------------------------------------------------------------------------------- to address critical long-term societal and natural resource issues due to heightened concerns about clean energy and energy efficiency; health promotion, treatment, and cost control; and ongoing homeland security threats. We also see significant opportunity to further leverage our digital and client engagement capabilities across our commercial and government client base. Our future results will depend on the success of our strategy to enhance our client relationships and seek larger engagements that span the entire program life cycle, and to complete and successfully integrate additional strategic acquisitions. We will continue to focus on broadening domain expertise and building scale in key client markets and geographies by developing business with existing and new government and commercial clients and replicating our business model in selective geographies. In doing so, we will continue to evaluate strategic acquisition opportunities, seeking acquisitions that promote the achievement of strategic objectives like enhancing our subject matter knowledge, broadening our service offerings, and/or providing scale in specific geographies, and from which we believe that we can earn an acceptable return. While we continue to see favorable long-term market opportunities, there are certain near-term challenges facing all government service providers, including top-line legislative constraints on federal government discretionary spending and actions byCongress or the Administration that could result in a delay or reduction to our current revenue, profit and cash flows, and have a negative impact on our on-going business and results of operations. However, we believe we are well positioned in budget areas that will continue to be priorities to the federal government. 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, potential acquisitions, customary capital expenditures, and other working capital requirements.
Our results of operations and cash flows may vary significantly from quarter to quarter depending on a number of factors, including, but not limited to:
• Progress of contract performance; • Extraordinary economic events and natural disasters; • Number of billable days in a quarter; • Timing of client orders; • Timing of award fee notices; • Changes in the scope of contracts; • Variations in purchasing patterns under our contracts;
• Federal and state and local governments' and other clients' spending levels;
• Federal government shutdowns; • Timing of billings to, and collection of payments from clients;
• Timing of receipt of invoices from, and payments to, employees and vendors;
• Commencement, completion, and termination of contracts;
• Strategic decisions, such as acquisitions, consolidations, divestments,
spin-offs, joint ventures, strategic investments, and changes in
business strategy;
• Timing of significant costs and investments (such as bid and proposal
costs and the costs involved in planning or making acquisitions);
• Timing of events related to discrete tax items;
• Our contract mix and use of subcontractors or the timing of other direct
costs for which we may earn lower contract margin;
• Changes in contract margin performance due to performance risks;
• Additions to, and departures of, staff;
• Changes in staff utilization;
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• Paid time off taken by our employees;
• Level and cost of our debt;
• Changes in accounting principles and policies; and/or
• General market and economic conditions.
Because a significant portion of our expenses (such as personnel, facilities,
and related costs) are fixed in the short term, contract performance and
variation in the volume of activity, as well as in the number and volume of
contracts commenced or completed during any year, may cause significant
variations in operating results from year to year. We generally have been able
to price our contracts in a manner that accommodates the rates of inflation
experienced in recent years, although we cannot ensure that we will be able to
do so in the future.
BUSINESS COMBINATIONS
A key element of our growth strategy is to pursue acquisitions. In 2018, we
acquired The Future Customer ("TFC"), DMS Disaster Consultants ("DMS"), and We
Are Vista Limited ("Vista"). In January 2020 , we completed the acquisition of
ITG. While providing capabilities and access to new clients in support of our
growth strategy, these acquisitions were not significant to our financial
statements taken as a whole.
The Future Customer. - In
DMS Disaster Consultants - InAugust 2018 , we acquired DMS, a disaster management and recovery firm based inFlorida , to broaden our capabilities in support of assisting communities, businesses and individuals recover from man-made and nature disasters. DMS assists public sector clients with man-made and natural disaster planning and preparedness, and post-disaster response and recovery efforts by assisting clients in obtaining federal funding fromFederal Emergency Management Agency (FEMA), insurance companies, and other sources.We Are Vista Limited - InOctober 2018 , we acquired Vista, a communications company headquartered inLeeds, U.K. , with an additional presence inLondon . Vista provides advisory services and solutions to clients in the financial, retail, automobile, and energy industries and broadens our capabilities in the region.Incentive Technology Group, LLC - InJanuary 2020 , we completed the acquisition of ITG, one of the leading providers of cloud-based platform services to the federal government. ITG provides solutions through the adoption of next generation technologies for federal government agencies, many of which are among our long-standing clients. CRITICAL ACCOUNTING POLICIES Our discussion of our financial condition and results of operations is based on our consolidated financial statements prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make certain estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses during the reporting period and our application of critical accounting policies, including: revenue recognition, impairment of goodwill and other intangible assets, income taxes, and stock-based compensation. If any of these estimates or judgments prove to be incorrect, our reported results could be materially affected. Actual results may differ significantly from our estimates under different assumptions or conditions. We believe that the estimates, assumptions and judgments involved in the accounting practices described below have the greatest potential impact on our financial statements and, therefore, consider them to be critical accounting policies. Significant accounting policies, including the critical accounting policies listed below, are more fully described and discussed in "Note 2-Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements." 35
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Revenue Recognition
We periodically evaluate our critical accounting policies and estimates based on changes inU.S. GAAP that may have an effect on our consolidated financial statements. InMay 2014 , FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a single comprehensive revenue recognition framework and supersedes existing revenue recognition guidance. Included in the new principles-based revenue recognition model are changes to the basis for determining the timing for revenue recognition. In addition, the standard expands and improves revenue disclosures. We implemented ASU 2014-09 onJanuary 1, 2018 using the modified retrospective method. This method requires that we apply the requirements of the new standard in the year of adoption to new contracts and those that were not completed as of the adoption date, but not retroactively restate prior years. Management evaluated those contracts not completed as ofJanuary 1, 2018 (the adoption date) and concluded that the impact of adopting ASU 2014-09 did not have a material impact on our consolidated financial statements taken as a whole. Contract assets and contract liabilities were formerly reported as unbilled accounts receivable and deferred revenue, respectively. For further discussion see "Note 2 - Summary of Significant Accounting Policies - Revenue Recognition" in the "Notes to Consolidated Financial Statements." Under the modified retrospective method, we were required to maintain dual reporting during the year of adoption in order to present revenue under both the previous and new accounting for contracts initiated on or after the date of adoption and for those contracts having remaining obligations as of the adoption date. Revenue timing differences between the two methods resulted primarily from contracts with performance incentives. Under the new accounting, we have included in revenue the most likely amount of priced incentives earned as contract work was performed rather than, as under the old accounting, waiting to recognize revenue from incentives until specific quantitative goals were achieved, generally at the end of each contractually-stipulated performance assessment period. While there were differences in the amount of revenue recognized during each quarter of the year, the timing differences did not result in a material change to our annual revenue since most incentives have performance assessment periods which are aligned with our fiscal year. We primarily provide services and technology-based solutions for clients that operate in a variety of markets and the solutions may span the entire program life cycle, from initial research and analysis to the design and implementation of solutions. We enter into agreements with clients that create enforceable rights and obligations and for which it is probable that we will collect the consideration to which we will be entitled as services and solutions are transferred to the client. Except in certain narrowly defined situations, our agreements with our clients are written and revenue is generally not recognized on oral or implied arrangements. We recognize revenue based on the consideration specified in the applicable agreement and exclude from revenue amounts collected on behalf of third parties. Accordingly, sales and similar taxes which are collected for third parties are excluded from the transaction price. We also evaluate whether two or more agreements should be accounted for as one single contract and whether combined or single agreements should be accounted for as more than one performance obligation. For most contracts, the client requires that we perform a number of tasks in providing an integrated output and, hence, each of these contracts is tracked as having only one performance obligation. When contracts are separated into multiple performance obligations, we allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised services underlying each performance obligation. We generally provide customized solutions in which the pricing is based on specific negotiations with each client, and, in these cases, we use a cost-plus margin approach to estimate the standalone selling price of each performance obligation. It is common for our long-term contracts to contain award fees, incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts are generally awarded at the completion of a prescribed performance assessment period based on the achievement of performance metrics, program milestones or cost targets, and the amount awarded may be subject to client discretion. Variable consideration is estimated based on the most likely amount. Estimates of variable consideration will be constrained only to the extent that it is probable that significant reversal in the amount of cumulative revenue recognized will not occur. 36 -------------------------------------------------------------------------------- We evaluate contractual arrangements to determine whether revenue should be recognized on a gross versus net basis. Our assessment is based on the nature of the promise to the client. In most cases, we agree to provide specified services to the client as a principal and revenue is recognized on a gross basis. In certain instances, we act as an agent and merely arrange for another party to provide services to the client and revenue is recognized on a net basis in reflection of the fact that we do not control the goods or services provided to the client by the other party. Long-term contracts typically contain billing terms that provide for invoicing monthly or upon completion of milestones and payment on a net 30-day basis. Exceptions to monthly billing terms are to ensure that we perform satisfactorily rather than representing a significant financing component. For cost-based contracts, our performance is evaluated during a contractually stipulated performance period and, while contract costs may be billed on a monthly basis, we are generally permitted to bill for incentive or award fees only after the completion of the performance assessment period, which may occur quarterly, semi-annually or annually, and after the client completes the performance assessment. Fixed-price contracts may provide for milestone billings based on the attainment of specific project objectives and, since they are tied to our project performance, these type of billing terms do not represent a significant financing component. Moreover, contracts may require retentions or hold backs that are paid at the end of the contract to ensure that we perform in accordance with requirements which do not represent our providing financing to our clients but rather are a means to ensure that we meet contract requirements. We do not assess whether a contract contains a significant financing component if we expect, at contract inception, that the period between payment by the client and the transfer of promised services to the client will be one year or less. As a service provider, we generally recognize revenue over time as control is transferred to a client, based on the extent of progress towards satisfaction of the performance obligation. The selection of the method used to measure progress requires judgment and, among other things, is dependent on the contract type selected by the client during contract negotiation and the nature of the services and solutions to be provided. When a performance obligation is billed using a time-and-materials contract type, we use the right to invoice practical expedient output progress measures to estimate revenue earned based on hours worked in contract performance at negotiated billing rates. Fixed-price level-of-effort contracts are substantially similar to time-and-materials contracts except that we are required to deliver a specified level of effort over a stated period of time. For these contracts, we estimate revenue earned using contract hours worked at negotiated bill rates as we deliver the contractually required workforce. For cost-based contracts, we recognize revenue as a single performance obligation based on contract costs incurred, as we become contractually entitled to reimbursement of the contract costs, plus a most likely estimate of award or incentive fees earned on those costs even though final determination of fees earned occurs after the contractually-stipulated performance assessment period ends. For performance obligations requiring the delivery of a service for a fixed price, we use the ratio of actual costs incurred to total estimated costs, provided that costs incurred (an input method) represents a reasonable measure of progress towards the satisfaction of a performance obligation, in order to estimate the portion of total revenue earned. This method provides a faithful depiction of the transfer of value to the client when we are satisfying a performance obligation that entails integration of tasks for a combined output, which requires us to coordinate the work of employees, subcontractors and delivery of other contract costs. Contract costs that are not reflective of our progress toward satisfying a performance obligation are not included in the calculation of the measure of progress. When this method is used, changes in estimated costs to complete these obligations result in adjustments to revenue on a cumulative catch-up basis, which causes the effect of revised estimates for prior periods to be recognized in the current period. Changes in these estimates can routinely occur over contract performance for a variety of reasons, which include: changes in contract scope; changes in contract cost estimates due to unanticipated cost growth or reassessments of risks impacting costs; changes in estimated incentive or award fees; or performing better or worse than previously estimated. In some fixed price service contracts, we perform services of a recurring nature, such as maintenance and other services of a "stand ready" nature. For these contracts, we have the right to consideration in an amount that corresponds directly with the value that the client has received. Therefore, we record revenue on a time-elapsed basis to reflect the transfer of control to the client throughout the contract. 37 -------------------------------------------------------------------------------- Our operating cycle for long-term contracts may be greater than one year and is measured by the average time intervening between the inception and the completion of those contracts. Contract-related assets and liabilities, as highlighted below, are classified as current assets and current liabilities. Significant balance sheet accounts related to the revenue recognition cycle are as follows: Contract receivables, net - This account includes amounts billed or billable under contract terms. The amounts due are stated at their net realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. We consider a number of factors in our estimate of the allowance, including knowledge of a client's financial condition, its historical collection experience, and other factors relevant to assessing the collectability of the receivables. Contract assets - This account includes unbilled amounts typically resulting from revenue recognized on long-term contracts when the amount of revenue recognized exceeds the amounts billed. It also includes contract retainages until we have met the contract-stipulated requirements for payment. Contract assets are reported in a net position on a contract by contract basis each period even though individual contracts may contain multiple performance obligations. On a contract by contract basis, amounts do not exceed their net realizable value. Contract liabilities - This account consists of advance payments received and billings in excess of revenue recognized on long-term contracts. Contact liabilities are reported in a net position on a contract by contract basis each period even though individual contracts may contain multiple performance obligations. Revenue recognition entails the use of significant judgment, including, but not limited to, the following: evaluating agreements in terms of the number and nature of performance obligations; determining the appropriate method for measuring progress of the satisfaction of obligations; and preparing estimates in terms of the amount of progress that we have made. Most of our revenue is recognized over time and for many fixed-price contracts, in particular, we estimate the proportion of total revenue earned using the ratio of contract costs incurred to total estimated contract costs, which requires us to prepare estimates as work progresses of contract cost left to be incurred. Moreover, some of our contracts include variable consideration, which requires us to estimate the most likely amounts that will be earned over the respective contractually stipulated performance assessment periods. For these obligations, changes in estimates result in cumulative catch-up adjustments and may have a significant impact on earnings during a given period. Payments on cost-based contracts with theU.S. federal government are provisional payments subject to audit and adjustment. Indirect costs applied to government contracts are also subject to audit and adjustment and such audits have been finalized only throughDecember 31, 2011 . Contract revenue has been recorded in amounts that are expected to be realized on final audit and settlement of costs. We prepare client invoices in accordance with the terms of the applicable contract, and billing terms may not be directly related to the performance of services. Contract assets are invoiced based on the achievement of specific events as defined by each contract, including deliverables, timetables, and incurrence of certain costs. Contract assets are classified as a current asset. Advanced billings to clients in excess of revenue earned are recorded as contract liabilities 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 the cost of revenue. We record revenue net of taxes collected from clients when the taxes are collected on behalf of the governmental authorities. We may proceed with work based on client direction prior to the completion and signing of formal contract documents. We have a review process for approving any such work. Revenue associated with such work is recognized only when it can be reliably 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.
The purchase price of an acquired business is allocated to the tangible assets and separately identifiable intangible assets acquired, less liabilities assumed, based on their respective fair values, with the excess recorded as goodwill.Goodwill represents the excess of costs over the fair value of net 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 are reviewed annually for impairment, or more frequently if impairment indicators arise. Intangible assets with estimable useful lives are amortized over such lives and reviewed for impairment if impairment indicators arise. As ofDecember 31, 2019 , goodwill and intangibles assets were$719.9 million and$25.8 million , respectively. 38 -------------------------------------------------------------------------------- For the purpose of performing the annual goodwill impairment review as ofOctober 1, 2019 , as our business is highly integrated and all of our components have similar economic characteristics, we have concluded we have one aggregated reporting unit at a consolidated entity level. We assess goodwill at the reporting level. For the goodwill impairment test, we opted to perform a qualitative assessment of whether it is more likely than not that the reporting unit's fair value is less than its carrying amount. If, after completing the qualitative assessment, we determine that it is more likely than not that the estimated fair value of the reporting unit exceeded the carrying amount, we may conclude that no impairment exists. If we conclude otherwise, a goodwill impairment test must be performed, which includes a comparison of the fair value of the reporting unit to its carrying amount and recognizing, as an impairment loss, the difference of the estimated fair value of the reporting unit over its carrying amount. Our qualitative analysis as ofOctober 1, 2019 included macroeconomic and industry and market-specific considerations, financial performance indicators and measurements, and other factors. Based on this qualitative assessment, we determined that it is more likely than not that the fair value of our one reporting unit exceeded its carrying amount, and thus the impairment test was not required to be performed. Therefore, based on management's review, no goodwill impairment charge was required as ofOctober 1, 2019 . Historically, we have not recorded any goodwill impairment charges. We are required to review other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Accounting for Income Taxes Our provisions for federal, state, and foreign income taxes are calculated from consolidated income based on current tax laws and any changes in tax rates from the rates used previously in determining the deferred tax assets and liabilities from temporary differences between financial statement carrying amounts and amounts on our tax returns. We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We evaluate our ability to benefit from all deferred tax assets and establish valuation allowances for amounts we believe are not more likely than not to be realized. We use a more-likely-than-not recognition threshold based on the technical merits of the income tax position taken to evaluate uncertain tax positions. Uncertain tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit recognized in the financial statements. Penalties, if probable and reasonably estimable, and interest expense related to uncertain tax positions are not recognized as a component of income tax expense but recorded separately in indirect expenses or interest expense, respectively. OnDecember 20, 2017 theUnited States House of Representatives and theSenate passed the Tax Act which was signed into law onDecember 22, 2017 and was generally effective beginningJanuary 1, 2018 . We were impacted in several ways as a result of the Tax Act including, but not limited to, provisions which include a permanent reduction in theU.S. federal corporate income tax rate from 35% to 21%, the revaluation of deferred tax assets and liabilities that was required as a result of the tax rate change and the application of a mandatory one-time "transition tax" on unremitted earnings of certain foreign subsidiaries that were previously tax deferred. We re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is now generally 26.3%. We completed our analysis of the Tax Act and finalized our provisional estimates, which affected the measurement of these balances. Pursuant toSEC Staff Accounting Bulletin 118 ("SAB 118"), the provisional amount recorded related to the re-measurement of the deferred tax balances was adjusted during the year endedDecember 31, 2018 as an increase in the provision for income taxes, including adjustments to valuation allowances, of approximately$1.1 million . The one-time "transition tax" imposed by the Tax Act is based on our total post-1986 earnings and profits ("E&P") which we had previously deferred fromU.S. income taxation. We have completed the calculation of the total post-1986 foreign E&P and related foreign tax pools for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount, as well as the related foreign tax credit utilization, changed as we finalized our calculation of post-1986 foreign E&P and related foreign tax pools that were previously deferred fromU.S. federal taxation and the amounts held in cash or other specified assets. Similarly, the cumulative foreign tax credit carryforward balance as ofDecember 31, 2019 increased by approximately$1.0 million and the valuation allowance required increased by approximately$1.0 million . No additional income taxes have been provided for on any remaining undistributed foreign earnings not subject to the transition tax. No additional deferred taxes have been provided for the$2.7 million of favorable outside basis differences inherent in these foreign entities because these amounts continue to be permanently reinvested in foreign operations. 39 -------------------------------------------------------------------------------- The Tax Act subjectsU.S. corporations to current tax on global intangible low-taxed income (or "GILTI") earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. We elected in the first quarter of fiscal year 2018 to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred, with no material effect on the consolidated financial statements. The current provision for 2019 and 2018 includes no tax expense for GILTI. Stock-based Compensation TheICF International, Inc. 2018 Omnibus Incentive Plan (the "2018 Omnibus Plan") provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance units, cash-based awards, and other stock-based awards to all officers, key employees, and non-employee directors. The 2018 Omnibus Plan replaced the previous 2010 Omnibus Incentive Plan (the "Prior Plan"). As ofDecember 31, 2019 , there were approximately 886,045 shares available for grant under the 2018 Omnibus Plan. We utilize cash-settled RSUs ("CSRSUs") which are settled only in cash payments. The cash payment is calculated by multiplying the number of CSRSUs vested by our closing stock price on the vesting date, subject to a maximum payment cap and a minimum payment floor. CSRSUs have no impact on the shares available for grant under the 2018 Omnibus Plan and have no impact on the calculated shares used in EPS calculations. We began granting awards of registered shares to our non-employee directors on an annual basis under the 2018 Omnibus Plan in the third quarter of 2018. Previously, under the Prior Plan, we granted awards of unregistered shares to the directors under the Annual Equity Election program. Those awards were issued from treasury stock and had no impact on the shares available for grant under the Prior Plan. We recognized total compensation expense relating to stock-based compensation of$26.0 million ,$19.6 million , and$17.5 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively. We recognize stock-based compensation expense for stock options, restricted stock awards, and RSUs on a straight-line basis over the requisite service period, which is generally the vesting period. We treat CSRSUs as liability-classified awards, and account for them at fair value based on the closing price of our stock at the balance sheet date. We recognize expense for performance-based share awards ("PSAs"), which are subject to a performance condition and a market condition, on a straight-line basis over the performance period. Non-employee director awards are expensed over the performance period. Stock-based compensation expense is based on the estimated fair value of these instruments and the estimated number of shares ultimately expected to vest. The calculation of the fair value of the awards requires certain inputs that are subjective and changes to the estimates used will cause the fair value of stock awards and related stock-based compensation expense to vary. The fair value of stock options, restricted stock awards, RSUs, PSAs and non-employee director awards is estimated based on the fair value of a share of common stock at the grant date. We have elected to use the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The fair value of a stock option award is affected by the price of our stock on the date of grant, as well as other assumptions used as inputs in the valuation model. These assumptions include the estimated volatility of the price of our stock over the term of the awards, the estimated period of time that we expect employees will hold stock options, and the risk-free interest rate. The fair value of PSAs is estimated using a Monte Carlo simulation model. We are required to adjust stock-based compensation expense for the effects of estimated forfeitures of awards over the expense recognition period. We estimate the rate of future forfeitures based on factors which include our historical experience, but the amount of actual forfeitures may differ from current estimates particularly if the rate of future forfeitures is different from previous experience. In addition, the estimation of PSAs that will ultimately vest requires judgment in terms of estimates of future performance. To the extent actual forfeitures differ from estimated forfeitures and actual performance or updated performance estimates differ from current estimates, such expense amounts are recorded as a cumulative adjustment in the period the estimates are revised. See "Note 15-Accounting for Stock-based Compensation" in the "Notes to Consolidated Financial Statements" for further discussion.
Recent Accounting Pronouncements
New accounting standards are discussed in "Note 2-Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements."
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SELECTED KEY METRICS
In order to evaluate operations, we track revenue by key metrics that provide useful information about the nature of our operations. Client markets provide insight into the breadth of our expertise. Client type is an indicator of the diversity of our client base. Revenue by contract mix provides insight in terms of the degree of performance risk that we have assumed. Significant variances in the key metrics tables that are provided below are discussed under the revenue section of the results of operations.
Client markets
The following table shows revenue generated from client markets as a percent of
total revenue for the periods indicated. For each client, we have attributed all
revenue from that client to the market we consider to be the client's primary
market, even if a portion of that revenue relates to a different market. Certain
minor revenue amounts reported in the prior years have been reclassified within
key market categories based on our current view of the client's primary market
in order to increase comparability of the current year to prior years.
Year ended Year ended Year ended
December 31, 2019 December 31, 2018 December 31, 2017
Dollars Percent Dollars Percent Dollars Percent
Energy, environment, and
infrastructure $ 665,185 45 % $ 564,736 42 % $ 487,001 40 %
Health, education, and 37 % 40 % 42 %
social programs 552,600 535,578 518,675
Safety and security 120,078 8 % 111,660 8 % 102,645 8 %
Consumer and financial 140,662 10 % 125,999 10 % 120,841 10 %
Total $ 1,478,525 100 % $ 1,337,973 100 % $ 1,229,162 100 %
Our primary clients are the agencies and departments of the federal government
and commercial clients. Most of our revenue is from contracts on which we are
the prime contractor, which we believe provides us strong client relationships.
In 2019, 2018, and 2017, approximately 92%, 92%, and 91% of our revenue,
respectively, was from prime contracts.
Client type
The table below shows our revenue by type of client as a percentage of total
revenue for the periods indicated. Certain immaterial revenue amounts in the
prior years have been reclassified due to minor adjustments and reclassification
within client type.
Year ended Year ended Year ended
December 31, 2019 December 31, 2018 December 31, 2017
Dollars Percent Dollars Percent Dollars Percent
U.S. federal government $ 561,022 38 % $ 546,050 41 % $ 550,794 45 %
U.S. state and local government 280,357 19 % 183,900 14 % 127,797 10 %
International government 122,307 8 % 122,186 9 % 91,318 7 %
Government 963,686 65 % 852,136 64 % 769,909 62 %
Commercial 514,839 35 % 485,837 36 % 459,253 38 %
Total $ 1,478,525 100 % $ 1,337,973 100 % $ 1,229,162 100 %
Contract mix
Contract mix varies from year to year due to numerous factors, including our
business strategies and the procurement activities of our clients. Unless the
context requires otherwise, we use the term "contracts" to refer to contracts
and any task orders or delivery orders issued under a contract. There are three
main types of contracts: time-and-materials contracts, fixed-price contracts,
and cost-based contracts. For a detailed discussion of contract types, see
"Critical Accounting Policies - Revenue Recognition" above.
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The following table shows the approximate percentage of our revenue for each of
these types of contracts for the periods indicated. Certain immaterial revenue
amounts in the prior years have been reclassified due to minor adjustments and
reclassification within contract type.
Year ended Year ended Year ended
December 31, 2019 December 31, 2018 December 31, 2017
Dollars Percent Dollars Percent Dollars PercentTime-and-materials$ 703,467 48 %$ 581,446 44 %$ 529,606 43 % Fixed-price 562,985 38 % 526,751 39 % 480,584 39 % Cost-based 212,073 14 % 229,776 17 % 218,972 18 % Total$ 1,478,525 100 %$ 1,337,973
100 %$ 1,229,162 100 % Payments to us on cost-based contracts with the federal government are provisional payments subject to adjustment upon audit by the government. Such audits have been finalized throughDecember 31, 2011 , and any adjustments have been immaterial. Contract revenue for subsequent periods has been recorded in amounts that are expected to be realized on final audit and settlement of costs in those years. RESULTS OF OPERATIONS The following table sets forth certain items from our consolidated statements of comprehensive income, expresses these items as a percentage of revenue for the periods indicated and the period-over-period rate of change in each of them. Years Ended December 31, 2019, 2018, and 2017 (dollars in thousands) Year Ended December 31, Year to Year Change 2019 2018 2017 2019 2018 2017 2018 to 2019 2017 to 2018 Dollars Percentages Dollars Percent Dollars Percent Revenue$ 1,478,525 $ 1,337,973 $ 1,229,162 100.0 % 100.0 % 100.0 %$ 140,552 10.5 %$ 108,811 8.9 % Direct Costs 953,187 857,508 771,725 64.5 % 64.1 % 62.8 % 95,679 11.2 % 85,783 11.1 % Operating Costs and Expenses Indirect and selling expenses 395,763 360,987 346,440
26.8 % 27.0 % 28.2 % 34,776 9.6 %
14,547 4.2 % Depreciation and amortization 20,099 17,163 17,691
1.4 % 1.3 % 1.4 % 2,936 17.1 %
(528 ) (3.0 )%
Amortization of intangible
assets 8,083 10,043 10,888 0.5 % 0.8 % 0.8 % (1,960 ) (19.5 )%
(845 ) (7.8 )%
Total Operating Costs and
Expenses 423,945 388,193 375,019 28.7 % 29.1 % 30.4 % 35,752 9.2 %
13,174 3.5 % Operating Income 101,393 92,272 82,418
6.9 % 6.9 % 6.7 % 9,121 9.9 %
9,854 12.0 %
Interest expense (10,719 ) (8,710 ) (8,553 ) (0.7 )% (0.7 )% (0.7 )% (2,009 ) 23.1 %
(157 ) 1.8 %
Other (expense) income (501 ) (735 ) 121 - (0.1 )% - 234 (31.8 )% (856 ) (707.4 )%
Income Before Income Taxes 90,173 82,827 73,986 6.2 % 6.1 % 6.0 % 7,346 8.9 %
8,841 11.9 %
Provision for Income Taxes 21,235 21,427 11,110 1.4 % 1.6 % 0.9 % (192 ) (0.9 )% 10,317 92.9 %
Net Income $ 68,938 $ 61,400 $ 62,876 4.7 % 4.6 % 5.1 % $ 7,538 12.3 % $ (1,476 ) (2.3 )%
Year ended
Revenue. Revenue for the year endedDecember 31, 2019 , was$1,478.5 million , compared to$1,338.0 million for the year endedDecember 31, 2018 , representing an increase of$140.6 million or 10.5%. The increase in revenue was attributable to an increase in governmental revenue of$111.5 million or 13.1% and an increase in commercial revenue of$29.0 million or 6.0%. The growth in governmental revenue by client markets was driven by increases in revenue from energy, environment, and infrastructure, health, education, and social program clients and safety and security clients compared to the prior year. The changes in government revenue by client type were driven by the increase in state and local government revenue, from our disaster recovery clients, an increase in federal government revenue, and flat international government revenue. The increase in our commercial revenue by client market was driven by increases in revenue from consumer and financial clients, energy, environments and infrastructure clients, and health, education, and social program clients, partially offset by a decrease in safety and security clients compared to the prior year. As a result of the larger growth in government revenues compared to the growth in commercial revenues, the governmental and commercial revenues as a percent of total revenue were 65% and 35% for the year endedDecember 31, 2019 compared with 64% and 36% for the prior year. 42 -------------------------------------------------------------------------------- Direct costs. Direct costs for the year endedDecember 31, 2019 , were$953.2 million compared to$857.5 million for the year endedDecember 31, 2018 , an increase of$95.7 million or 11.2%. The increase in direct costs year-over-year was attributable to an increase in subcontractor and other direct costs of$63.5 million and an increase in direct labor and related fringe costs of$32.2 million . Direct costs as a percent of revenue increased 0.4% to 64.5% for the year endedDecember 31, 2019 , compared to 64.1% for the prior year. The increase in both subcontractor and other direct costs and direct labor and related fringe costs is primarily due to an increase in revenue. As we have been successful in winning larger contracts, our own labor services as a percent of direct costs has generally decreased because large contracts typically are broader in scope and require more diverse capabilities, resulting in more subcontracted effort and additional direct costs. The increase in subcontractor and other direct costs was also due to a change in the mix of our services and other direct costs and an increased need for other direct costs to fulfill contract requirements. Indirect and selling expenses. Indirect and selling expenses for the year endedDecember 31, 2019 , were$395.8 million compared to$361.0 million for the prior year, an increase of$34.8 million or 9.6%. The increase was driven primarily by increased indirect labor and fringe costs to support revenue growth, increased costs to invest in our internal infrastructure and processes, increased professional fees associated with our acquisition activity, an increase in facilities costs due to our continued growth, and the impairment of intangible assets, partially offset by a reduction in bad debt expense due to a change in our estimate of the collectability of amounts due from a client that recently filed for bankruptcy. Indirect and selling expenses as a percent of revenue decreased to 26.8% for the year endedDecember 31, 2019 , compared to 27.0% for the year endedDecember 31, 2018 . The decrease in indirect and selling expenses as a percent of revenue is due to our leveraging our indirect and selling expenses and having a lower increase in indirect and selling expenses compared to the increase in revenues. Indirect and selling expenses generally include our management, facilities, and infrastructure costs for all employees and the salaries and wages related to indirect activities, including stock-based and cash-based incentive compensation provided to employees whose compensation and other benefit costs are included in indirect and selling expenses, plus associated fringe benefits not directly related to client engagements. Depreciation and amortization. Depreciation and amortization was$20.1 million for the year endedDecember 31, 2019 , compared to$17.2 million for the prior year, an increase of$2.9 million or 17.1%. The increase in depreciation and amortization is the result of increased depreciation in investments in infrastructure costs made by us over the last few years and accelerated depreciation of leasehold improvements on leases that terminated during the year. Amortization of intangible assets. Amortization of intangible assets for the year endedDecember 31, 2019 was$8.1 million compared to$10.0 million for the prior year. The$1.9 million decrease was primarily due to reduced levels of intangible asset amortization associated with prior acquisitions, partially offset by an increase in amortization from recent acquisitions. Operating income. For the year endedDecember 31, 2019 , operating income was$101.4 million compared to$92.3 million for the prior year, an increase of$9.1 million or 9.9%. The increase in operating income was largely due to the increase in gross profits of$44.8 million and the decrease in amortization of intangible assets of$1.9 million , offset by higher indirect and selling expenses of$34.8 million and an increase in depreciation and amortization expense of$2.9 million . Operating income as a percent of revenue was 6.9% for the year endedDecember 31, 2019 compared to 6.9% for the prior year. The consistent measure of operating income as a percent of revenue is due to the increase in revenue and the leveraging of our indirect and selling expenses and amortization of intangibles, partially offset by the increase in our direct costs and depreciation and amortization as a percentage of revenue. Interest expense. For the year endedDecember 31, 2019 , interest expense was$10.7 million , compared to$8.7 million for the prior year, an increase of$2.0 million or 23.1%. The higher interest expense was due to higher weighted average debt balances and higher average interest rates for the period endedDecember 31, 2019 compared to the period endedDecember 31, 2018 . Other (expense) income. For the year endedDecember 31, 2019 , other expense was$0.5 million compared to other expense of$0.7 million for the prior year. The change was primarily due to a gain in the value of foreign currency swaps and unrealized and realized foreign currency gains and losses for the year endedDecember 31, 2019 compared to the change in the value of foreign currency swaps and unrealized and realized foreign currency gains and losses for the year endedDecember 31, 2018 . 43
-------------------------------------------------------------------------------- Provision for income taxes. The effective income tax rate for the years endedDecember 31, 2019 andDecember 31, 2018 , was 23.6% and 25.9%, respectively. Our effective tax rate, including state and foreign taxes net of federal benefit for the year endedDecember 31, 2019 , was lower than the statutory tax rate for the year primarily due to tax benefits for stock-based compensation, permanently non-taxable income and state tax credits partially offset by the establishment of a valuation allowance on certain deferred tax assets, permanent differences related to compensation costs and other expenses not deductible for tax purposes. We account for the expected impact of discrete tax items once we determine that they are both reasonably quantified and we are confident they will be realized due to the associated event occurring (such as the filing of an amended tax return, enactment of tax legislation, or the closure of an audit examination).
NON-GAAP MEASURES
These following tables provide reconciliations of financial measures that are notU.S. GAAP ("non-GAAP") to the most applicableU.S. GAAP measures. While we believe that these non-GAAP financial measures may be useful in evaluating our financial information, they should be considered supplemental in nature and not as a substitute for financial information prepared in accordance withU.S. GAAP. Other companies may define similarly titled non-GAAP measures differently and, accordingly, care should be exercised in understanding how we define these measures.
Service Revenue
Service revenue represents revenue less subcontractor and other direct costs (which include third-party materials and travel expenses). Service revenue is not a recognized term underU.S. GAAP and should not be considered an alternative to revenue as a measure of operating performance. This presentation of service revenue may not be comparable to other similarly titled measures used by other companies because other companies may use different methods to prepare similarly titled measures. We believe service revenue is a useful measure to investors since, as a consulting firm, a key source of our profit is revenue obtained from the services that we provide to our clients through our employees. The table below presents a reconciliation of revenue to service revenue for the periods indicated: Year ended December 31, 2019 2018 2017 Revenue$ 1,478,525 $ 1,337,973 $ 1,229,162 Subcontractor and other direct costs (475,717 ) (412,216 ) (344,913 ) Service revenue$ 1,002,808 $ 925,757 $ 884,249 EBITDA and Adjusted EBITDA Earnings before interest and other income and/or expense, tax, and depreciation and amortization ("EBITDA") is a measure we use to evaluate operating performance. We believe EBITDA is useful in assessing ongoing trends and, as a result, may provide greater visibility in understanding our operations. Adjusted EBITDA is EBITDA further adjusted to eliminate the impact of certain items that we do not consider to be indicative of the performance of our ongoing operations. We evaluate these adjustments on an individual basis based on both the quantitative and qualitative aspects of the item, including their size and nature, as well as whether or not we expect them to occur as part of our normal business on a regular basis. We believe that the adjustments applied in calculating adjusted EBITDA are reasonable and appropriate to provide additional information to investors. EBITDA and Adjusted EBITDA are not recognized terms underU.S. GAAP and should not be used as alternatives to net income as a measure of operating performance. This presentation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures used by other companies because other companies may use different methods to prepare similarly titled measures. EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management's discretionary use as these measures do not include certain cash requirements such as interest payments, tax payments, capital expenditures and debt service. 44
--------------------------------------------------------------------------------
A reconciliation of net income to EBITDA and adjusted EBITDA follows:
Year ended December 31,
2019 2018 2017
Net income $ 68,938 $ 61,400 $ 62,876
Other expense (income) 501 735 (121 )
Interest expense 10,719 8,710 8,553
Provision for income taxes 21,235 21,427 11,110
Depreciation and amortization 28,182 27,206 28,579
EBITDA 129,575 119,478 110,997 Adjustment related to impairment of intangible assets (1)
1,728 - -
Special charges related to acquisitions (2) 1,771 1,361 239
Special charges related to severance for staff
realignment (3) 1,774 1,554 1,583
Special charges related to facilities consolidations,
and office closures, and our future corporate
headquarters (4) 717 115 2,060 Special charges due to additional cash bonus expense (5)
- - 3,000
Adjustments related to bad debt reserve (6) (782 ) 1,240 -
Total special charges and adjustments 5,208 4,270 6,882
Adjusted EBITDA $ 134,783 $ 123,748 $ 117,879
(1) Adjustment related to impairment of intangible assets: We recognized
impairment expense of
intangible assets associated with a historical business acquisition.
(2) Special charges related to acquisitions: These costs consist primarily of
consultants and other outside party costs, and an adjustment to the
contingent consideration liability from a previous acquisition.
(3) Special charges related to severance for staff realignment: These costs are
due to involuntary employee termination benefits for Company officers or
groups of employees who have been terminated as part of a consolidation or
reorganization.
(4) Special charges related to facilities consolidations, office closures, andour future corporate headquarters: These costs are exit costs associated
with terminated leases or full office closures. The exit costs include
charges incurred under a contractual obligation that existed as of the date
of the accrual and for which we will continue to pay until the contractual
obligation is satisfied but with no economic benefit to us. Additionally, we
incurred one-time charges with respect to the execution of a new lease
agreement for our corporate headquarters.
(5) Special charges due to additional cash bonus expense: In response to the Tax
Act, we increased the portion of bonuses that will be paid in cash, which
increased the amount that can be deducted for income tax purposes for 2017.
(6) Adjustments related to bad debt reserve: During 2018, we established a bad
debt reserve for amounts due from a utility client that had filed forbankruptcy and included the reserve as an adjustment due to its relative
size. The adjustment in 2019 reflects a favorable revision of our prior
estimate of collectability based on a third party acquiring the receivables.
Non-GAAP Diluted Earnings per Share
Non-GAAP diluted EPS represents diluted EPS excluding the impact of certain items such as impairment of intangible assets, acquisition expenses, severance for staff realignment, facility consolidations and office closures, and certain adjustments to the bad debt reserve (which are also excluded from Adjusted EBITDA, as described further above), as well as the impact of amortization of intangible assets related to our acquisitions and income tax effects. While these adjustments may be recurring and not infrequent or unusual, we do not consider these adjustments to be indicative of the performance of our ongoing operations. Non-GAAP diluted EPS is not a recognized term underU.S. GAAP and is not an alternative to basic or diluted EPS as a measure of performance. This presentation of non-GAAP diluted EPS may not be comparable to other similarly titled measures used by other companies because other companies may use different methods to prepare similarly titled measures. We believe that the supplemental adjustments applied in calculating non-GAAP diluted EPS are reasonable and appropriate to provide additional information to investors. 45
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The following table presents a reconciliation of diluted EPS to non-GAAP diluted EPS for the periods indicated:
Year ended December 31,
2019 2018 2017
Diluted EPS $ 3.59 $
3.18
-
Special charges related to acquisitions 0.10 0.07 0.01
Special charges related to severance for staff
realignment 0.09 0.08 0.08
Special charges related to facilities consolidations
and office closures, and our future corporate
headquarters 0.08 0.01 0.12
Special charges due to additional cash bonus expense - - 0.16
Adjustments related to bad debt reserve (0.04 ) 0.06 -
Amortization of intangibles 0.42 0.52 0.57 Income tax effects on amortization, special charges, and adjustments
(0.18 ) (0.19 ) (0.35 )
Adjustments for changes in the tax rate under new Tax
Act - - (0.84 )
Non-GAAP EPS $ 4.15 $ 3.73 $ 3.02 (1) Income tax effects were calculated using an effective
23.6%, 25.9% and 15.0% (or 37.0% effective tax rate for the period prior to
any adjustments for the new Tax Act) for the year ended
2018 and 2017, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Borrowing Capacity. Short-term liquidity requirements are created by our use of funds for working capital, capital expenditures, and the need to provide any debt service. We expect to meet these requirements through a combination of cash flow from operations and borrowings. Our primary source of borrowings is from our Fifth Amended and Restated Business Loan and Security Agreement with a syndicate of 11 commercial banks (the "Credit Facility"), as described in "Note 9-Long-Term Debt" in the "Notes to Consolidated Financial Statements." We believe that the combination of internally generated funds, cash and cash equivalents on hand and available bank borrowings will provide the required liquidity and capital resources necessary to fund on-going operations, capital expenditures and acquisitions, quarterly cash dividends and organic growth. Additionally, we continuously analyze our capital structure to ensure we have sufficient capital to fund future significant, strategic acquisitions. We monitor the state of the financial markets on a regular basis to assess the availability and cost of additional capital resources. We believe that we will be able to access these markets at commercially reasonable terms and conditions if we need additional borrowings or capital. InJanuary 2020 , the Company borrowed on the Credit Facility to provide the initial financing of our$255 million acquisition of ITG. During the year we drew upon our Credit Facility due to temporary declines in our cash flows from operations. The decline in cash flow from operations had been primarily driven by the extended timing of client billings and collections associated with a contract for which we support disaster relief and rebuilding efforts. Due to factors such as the overall stress of such situations, political complexities and challenges among involved government agencies, the timing of cash flow from such operations is more uncertain than others. Moreover, the billing processes for such contracts have complex reporting requirements and the funding processes have been slow to distribute funds once billed. Management continues to address the cash flows from the disaster relief and rebuild effort to bring the collections to a more current basis and reduce our need to draw upon our Credit Facility to fund operations. Financial Condition. There were several changes in our balance sheet during the year endedDecember 31, 2019 compared to the balance sheet as ofDecember 31, 2018 . Cash and cash equivalents decreased to$6.5 million onDecember 31, 2019 , from$11.7 million onDecember 31, 2018 . Restricted cash (current and non-current) decreased$1.3 million . These changes are further discussed in "Cash Flow" below. 46 -------------------------------------------------------------------------------- Contract receivables, net of allowance for doubtful accounts, increased to$261.2 million compared to$231.0 million onDecember 31, 2018 primarily due to extended timing of billings and collections associated with a contract for which we support disaster relief and rebuilding efforts. Contract receivables are a significant component of our working capital and generally increase due to revenue growth and may be favorably or unfavorably impacted by our collection efforts, including timing from new contract startups, and other short-term fluctuations related to the payment practices of our clients. Contract assets and contract liabilities, on a contract by contract basis, represent revenue in excess of billings, and billings in excess of revenue, respectively, both of which generally arise from revenue timing and contractually stipulated billing schedules or billing complexity. AtDecember 31, 2019 , contract assets and contract liabilities were$142.3 million and$37.4 million , respectively, compared to$126.7 million and$33.5 million , respectively, atDecember 31, 2018 . We evaluate our collections efforts using the days-sales-outstanding ratio, or DSO, which we calculate by dividing total accounts receivable (contract receivables, net and contract assets, less contract liabilities) by revenue per day for the three months endedDecember 31, 2019 . Days-sales-outstanding increased to 83 days compared to 77 days during the prior year primarily due to timing differences in client billings and collections driven largely by disaster relief and rebuilding efforts, which have complex reporting and billing requirements and have been slow to pay our invoices. The DSO, excluding disaster relief and rebuilding efforts, was 71 days for the year endedDecember 31, 2019 , same as 71 days for the year endedDecember 31, 2018 . Property and equipment, net of depreciation and amortization, increased due to capital expenditures primarily related to increases in leasehold improvements, capitalized software, and computer equipment as we invest in our infrastructure.Goodwill , as discussed in "Note 5-Goodwill and Other Intangible Assets" in the "Notes to Consolidated Financial Statements", increased due to an immaterial correction of an error from a prior acquisition, settlement of contingent or extended commitments under certain purchase agreements, and the impact of foreign currency translation. The goodwill and other intangible assets and related amortization of other intangible assets are expected to increase with our recent acquisition of ITG. EffectiveJanuary 1, 2019 , the Company implemented ASU 2016-02 (as defined and described in "Note 2 - Summary of Significant Accounting Policies - Recent Accounting Pronouncements Adopted - Leases"). The standard, among other changes, requires lessees to recognize, for all leases with terms of greater than one year, an operating lease right-of-use asset and a corresponding operating lease liability (current and non-current), which depicts the rights and obligations arising from an operating lease agreement. As a result, the Company has reflected an operating lease right-of-use asset totaling$134.0 million related to its operating leases and$32.5 million and$119.3 million of current and non-current operating lease liabilities as ofDecember 31, 2019 , respectively. The adoption of the new standard is discussed in "Note 2-Summary of Significant Accounting Policies - Recent Accounting Pronouncements Adopted - Leases " in the "Notes to Consolidated Financial Statements." Total current liabilities, exclusive of the current portion of operating lease liabilities and contract liabilities (both of which are discussed above), consists of: accounts payable, accrued salaries and benefits, accrued subcontractors and other direct costs and accrued expenses and other current liabilities. These operating liabilities were$268.1 million atDecember 31, 2019 , an increase of$23.5 million from$244.6 million atDecember 31, 2018 . The net increase in these liabilities was due primarily to timing of payments during 2019. Long-term debt decreased to$165.4 million onDecember 31, 2019 from$200.4 million onDecember 31, 2018 , primarily due to net payments on our Credit Facility of$35.0 . The average debt balance on the Credit Facility for the years endedDecember 31, 2019 and 2018 was$268.6 million and$237.0 million , respectively. The average interest rate on the Credit Facility, excluding any fees and unamortized debt issuance costs, for the year endedDecember 31, 2019 and 2018 was 3.6% and 3.3%, respectively. We generally utilize cash flow from operations as our primary source of funding and turn to our Credit Facility to fund any temporary fluctuations such as increases in contract receivables, reductions in accounts payable and accrued expenses, purchase of treasury stock, payment of declared dividends, additional capital expenditures, and to meet funding requirements for new acquisitions. InJanuary 2020 , the Company borrowed on the Credit Facility to provide the initial financing of our$255 million acquisition of ITG. 47 -------------------------------------------------------------------------------- OnAugust 8, 2018 , we entered into two floating-to-fixed interest rate hedging agreements for an aggregate notional amount of$75.0 million to hedge a portion of our Credit Facility to help manage the risk related to interest rate volatility and designated the swap as a cash flow hedge. The cash flows from the hedges began onAugust 31, 2018 and the swap maturesAugust 31, 2023 . These hedging agreements add to the agreement that we had entered into in 2017. AtDecember 31, 2019 , the aggregate notional amount hedged totaled$100.0 million , excluding the hedge sold onDecember 1, 2016 , and were valued at an unrealized loss of$3.8 million , before tax, and are included in other liabilities and accumulated other comprehensive loss. See "Note 11-Derivative Instruments and Hedging Activities" in the "Notes to Consolidated Financial Statements." OnFebruary 20, 2020 , the Company entered into a floating-to-fixed interest rate swap agreement (the "Swap") for a notional amount of$100.0 million in order to hedge a portion of the Company's floating rate Credit Facility (which is discussed in Note 11 - Derivative Instruments and Hedging Activities.) Similar to the previous swap agreements that the Company has entered into, this Swap is intended to mitigate the risk of rising interest rates. The Swaps provide a fixed rate of 1.2940% per annum on the notional amount. The cash flows from the Swap beganFebruary 28, 2020 and end onFebruary 28, 2025 . The decrease in accumulated other comprehensive loss of$0.4 million was driven by$3.2 million of comprehensive income from the change in the value of certain foreign currencies relative to theU.S. dollar (primarily the British Pound, Euro and Canadian dollar), offset by a comprehensive loss from a change of$2.2 million in the fair value of the interest rate hedging instruments as described above. See "Note 13-Accumulated Other Comprehensive Loss" in the "Notes to Consolidated Financial Statements." We have explored various options of mitigating the risk associated with potential fluctuations in the foreign currencies in which we conduct transactions. We currently have hedges in an amount proportionate to work anticipated to be performed under certain contracts inEurope . We recognize changes in the fair-value of the hedges in our results of operations. We may increase the number, size and scope of our hedges as we analyze options for mitigating our foreign exchange and interest rate risk. The current impact of the foreign currency hedges to the consolidated financial statements is immaterial. Share Repurchase Program. InSeptember 2017 the board of directors approved a share repurchase program that authorizes share repurchases in the aggregate up to$100.0 million . Our total repurchases are also limited by the Credit Facility as described in "Note 18-Share Repurchase Program" in the "Notes to Consolidated Financial Statements". Our overall repurchase limit is the lower of the amount imposed by our board of directors and by the Credit Facility. Purchases under the repurchase program may be made from time to time at prevailing market prices in open market purchases or in privately negotiated transactions pursuant to Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance with applicable insider trading and other securities laws and regulations. The 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 we repurchase our shares will depend upon market conditions and other corporate considerations, as may be considered in our sole discretion. During the year endedDecember 31, 2019 , we repurchased 248,000 shares under this program at an average price of$72.79 per share. As ofDecember 31, 2019 ,$68.0 million remained available for share repurchases under the share repurchase program.
Dividends. Cash dividends declared in 2019 were as follows:
Dividend Declaration Date Dividend Per Share Record Date Payment Date
February 26, 2019 $ 0.14 March 29, 2019 April 16, 2019
May 2, 2019 $ 0.14 June 14, 2019 July 16, 2019
August 1, 2019 $ 0.14 September 13, 2019 October 15, 2019
November 6, 2019 $ 0.14 December 13, 2019 January 14, 2020
48
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Cash Flows. We consider cash on deposit and all highly liquid investments with
original maturities of three months or less when purchased to be cash and cash
equivalents. The following table sets forth our sources and uses of cash for the
following years.
Year ended December 31,
(in thousands) 2019 2018 2017
Net cash provided by operating activities
$ 117,191 Net cash used in investing activities (30,470 ) (56,387 ) (14,604 ) Net cash used in financing activities (67,640 ) (28,771 ) (87,300 ) Effect of exchange rate changes on cash 166 (792 ) 1,094 (Decrease) increase in cash, cash equivalents and restricted cash$ (6,504 ) $ (11,280 ) $ 16,381 Our operating cash flows are primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and the timing of vendor and subcontractor payments in accordance with negotiated payment terms. We bill most of our clients on a monthly basis after services are rendered. Operating activities provided$91.4 million in cash for the year endedDecember 31, 2019 compared to cash provided by operating activities of$74.7 million for the year endedDecember 31, 2018 . The increase in cash flows provided by operations for the year endedDecember 31, 2019 compared to the prior year was primarily due to the improvement in net income, a slower growth rate in the contract receivables and net contract assets and liabilities, and continued increase in the use of equity compensation, partially offset by the use of cash to decrease our operating liabilities. While the growth rate of our contract receivables has declined, we still experienced an increase in contract receivables primarily due to the slower collection from our disaster relief and rebuild client, as evidenced by the increase in DSO from 77 days for the year endedDecember 31, 2018 to 83 days for the year endedDecember 31, 2019 . The increase in our operating liabilities is a result of our timing of payments through the fourth quarter of 2019. Investing activities used cash of$30.4 million for the year endedDecember 31, 2019 , compared to$56.4 million for the year endedDecember 31, 2018 . Our cash flows used in investing activities consists primarily of capital expenditures and acquisitions. The cash used in investing activities for the year endedDecember 31, 2019 included$26.9 million for capital expenditures and acquisitions of$3.6 million . The cash used in investing activities for the year endedDecember 31, 2018 included business acquisitions cost of$34.6 million and$21.8 million of capital expenditures. Our cash flows used in financing activities consists primarily of debt and equity transactions. For the year ended 2019, cash flows used in financing activities were primarily due to net payments on our Credit Facility of$35.0 million , dividends paid of$10.5 million , and share repurchases under our share repurchase plan and shares purchased from employees to pay required withholding taxes related to settlement of restricted stock units of$23.4 million . For the year ended 2018, cash flows used in financing activities were primarily due to net payments on our Credit Facility of$5.8 million , dividends paid of$7.9 million , and share repurchases under our share repurchase plan and shares purchased from employees to pay required withholding taxes related to settlement of restricted stock units of$17.1 million .
OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations
We had nine outstanding letters of credit provided for under our Credit Facility with a total value of$3.0 million , primarily related to deposits to support our facility leases. 49
-------------------------------------------------------------------------------- The following table summarizes our contractual obligations as ofDecember 31, 2019 that require us to make future cash payments. Our summary of contractual obligations includes payments that we have an unconditional obligation to make. Payments due by Period Less than 1 to 3 3 to 5 More than (in thousands) Total 1 year years years 5 years Long-term debt obligation (1)$ 178,834 $ 5,642 $ 173,192 $ - $ - Operating lease obligations (2) 322,657 38,214 73,226 37,758 173,459 Other obligations related to acquisitions 3,923 2,703 1,220 - - Total$ 505,414 $ 46,559 $ 247,638 $ 37,758 $ 173,459 (1) Represents the obligation for principal and variable interest payments
related to the Credit Facility assuming the principal amount outstanding and
interest rates at
assumptions are subject to change in future periods.
(2) Operating lease obligations include leases of facilities and equipment. See
"Note 6-Leases" in the "Notes to Consolidated Financial Statements." The
operating lease obligations includes the contractual obligations related to
our new HQ lease in
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