BOWMAN CONSULTING GROUP LTD. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains "forward-looking statements" reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to several factors. Factors that could cause or contribute to such differences include, but are not limited to, economic and competitive conditions, regulatory changes, and other uncertainties, as well as those factors discussed in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 (the "Annual Report on Form 10-K") filed with theUS Securities and Exchange Commission and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Cautionary Statement about Forward-Looking Statements," all of which are difficult to predict. Considering these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements, except to the extent required by applicable laws or rules. Unless the context otherwise requires, references to "Bowman," the "company," the "Company," "we," "us," and "our" refer toBowman Consulting Group Ltd. , its wholly owned subsidiaries and combined entities under common control, or either or all of them as the context may require.
Overview
Bowman is a professional services firm delivering innovative engineering solutions to customers who own, develop and maintain the built environment. We provide planning, engineering, construction management, commissioning, environmental consulting, geomatics, survey, land procurement and other technical services to over 2,200 customers operating in a diverse set of end markets. We work as both a prime and sub-consultant for a broad base of public and private sector customers that generally operate in highly regulated environments. We have a diversified business that is not dependent on any one service line, geographic region, or end market. We are deliberate in our efforts to balance our sources of revenue and avoid reliance on any one significant customer, service line, geography or end market concentration. Our strategic focus is on penetrating and expanding our presence in markets which best afford us opportunities to secure assignments that provide reoccurring revenue and multi-year engagements thus resulting in dependable and predictable revenue streams and high employee utilization. We limit our exposure to risk by providing professional and related services exclusively. We do not engage in general contracting activities either directly, or through joint ventures, and therefore have no related exposure. We are not a partner in any design-build construction projects. We carry no heavy equipment inventory, and our risk of contract loss is generally limited to time associated with fixed fee professional services assignments. Gross contract revenue for the three months endedJune 30, 2022 and 2021 was$62.4 million and$36.5 million , respectively representing year over year growth of 71.0%. Gross contract revenue derived from our workforce represented 90.3% and 88.9% of gross contract revenue for the three months endedJune 30, 2022 and 2021, respectively (see Net service billing - non-GAAP below). Our adjusted EBITDA was$7.6 million on net loss of$0.3 million and$4.2 million on net loss of$0.4 million for the three months endedJune 30, 2022 and 2021, respectively. Gross contract revenue for the six months endedJune 30, 2022 and 2021 was$114.9 million and$68.3 million , respectively representing year over year growth of 68.2%. Gross contract revenue derived from our workforce represented 90.6% and 89.8% of gross contract revenue for the six months endedJune 30, 2022 and 2021, respectively (see Net service billing - non-GAAP below). Our adjusted EBITDA was$15.0 million on net income of$1.1 million and$8.3 million on net income of$0.5 million for the six months endedJune 30, 2022 and 2021, respectively. OnMay 4, 2022 , we completed the acquisition ofMcMahon Associates, Inc. pursuant to the Stock Purchase Agreement, datedMay 4, 2022 , among the Company, McMahon,McMahon Associates Holdings, Inc. ("McMahon Holdings ") and certain shareholders ofMcMahon Holdings . The aggregate consideration was approximately$18.3 million which consisted of (i)$7.0 million in cash, (ii) non-negotiable promissory notes in the aggregate amount of$3.4 million , subject to adjustment, and (iii) the issuance of 476,796 shares of restricted common stock which was priced at$16.64 per share onMay 4, 2022 . The restricted shares are subject to a six-month lock-up agreement. The transaction was structured as a stock purchase with a joint election to treat the acquisition as an asset sale pursuant to the Internal Revenue Code. As such, determination of the final acquisition cost is subject to adjustment based on customary post-closing purchase price accounting. The acquisition ofMcMahon Associates, Inc. allows Bowman to further enhance its transportation planning and engineering services to private and public sector clients thereby allowing us to broaden our offering and better serve our public and private sector customers. 22 --------------------------------------------------------------------------------
Subsequent Events
OnJuly 15, 2022 , we completed the acquisition ofProject Design Consultants, LLC pursuant to the Membership Interest Purchase Agreement, datedJuly 15, 2022 , among the Company,Project Design Consultants LLC ,Project Design Consultants Holdings, Inc. ("PDC Holdings ") and certain key shareholders ofPDC Holdings . The aggregate consideration was approximately$11.0 million which consisted of (i)$5.0 million in cash, (ii) non-negotiable promissory notes in the aggregate amount of$2.0 million , subject to adjustment, and (iii) a convertible promissory note (the "Convertible Note") in the principal amount of$4.0 million . The Convertible Note accrues interest at a fixed rate of 4.75% per annum and may be convertible in whole or in part at any time to Bowman common stock at a conversion price of$14.00 per share. For the period endingDecember 31, 2021 , the Company recorded an uncertain tax position of$1.9 million for being on an impermissible method in deducting stock-based compensation expense for income tax purposes consistent with the timing as recognized for book purposes. The Company filed Form 3115 with the Internal Revenue Service requesting to change from the impermissible method to a permissible method. OnJuly 27, 2022 the change in accounting method was approved by theIRS . In the third quarter of 2022, the Company will therefore record a reversal of the uncertain tax position, establishment of a deferred tax liability for the 481(a) amount and a reduction in tax expense for the related tax deductions in excess of book expenses.
Common Stock Offering
OnFebruary 8, 2022 , we priced an underwritten follow-on offering of 900,000 shares of our common stock (the "Firm Shares") at an offering price of$16.00 per share. The shares were sold pursuant to an effective registration statement on Form S-1 (Registration No. 333-262464). In addition,Gary Bowman , our President, Chairman and Chief Executive Officer, sold an aggregate of 150,000 shares of common stock in the offering. We granted the underwriters of the offering a 30-day option to purchase up to 157,500 shares of our common stock solely to cover over-allotments. OnFebruary 11, 2022 , we closed on the underwritten follow-on offering and received net proceeds of approximately$13.7 million after deducting the underwriting discount and estimated offering expenses payable by the Company, andMr. Bowman received aggregate proceeds of approximately$2.4 million . We did not receive any proceeds from the sale of shares of our common stock byMr. Bowman . OnFebruary 28, 2021 , the underwriters exercised their option to purchase an additional 157,500 shares of our common stock at an offering price of$16.00 per share, resulting in additional gross proceeds of approximately$2.5 million . After giving effect to this exercise of the overallotment option, the total number of shares sold by us in the follow-on offering increased to 1,057,500 shares with total gross proceeds of approximately$16.9 million . The exercise of the over-allotment option closed onMarch 2, 2022 , at which time we received net proceeds of approximately$2.4 million after underwriting discounts and commissions. COVID-19 Update As of the date of this Quarterly Report on Form 10-Q, we have not experienced any material financial distress resulting from the COVID-19 pandemic. Included in accounts payable and accrued liabilities and other non-current obligations in the consolidated balance sheet as ofJune 30, 2022 , is$1.2 million of deferred employer payroll taxes as afforded us under the CARES Act. We are evaluating, and will continue to evaluate, the impact of COVID-19 on projects and our operations.
Methods of Evaluation
We use a variety of financial and other information in monitoring the financial
condition and operating performance of our business. Some of the information we
use to evaluate our operations is financial information that is in accordance
with generally accepted accounting principles (GAAP), while other information
may be financial in nature and either built upon GAAP results or may not be in
accordance with GAAP (Non-GAAP). We use all this information together for
planning and monitoring our operations, as well as determining certain
management and employee compensation.
The Company operates as a single business segment represented by our core
business of providing multi-disciplinary professional engineering solutions to
customers. While we evaluate revenue and other key performance indicators
relating to various divisions of labor, our leadership neither manages the
business nor deliberately allocates resources by service line, geography, or end
market. Our financial statements present results as a single operating segment.
23
--------------------------------------------------------------------------------Components of Income and Expense
Revenue
We generate revenue from services performed by our employees, pass-through fees from sub-consultants, and reimbursable contract costs. On our consolidated financial statements, we report gross revenue, which represents total revenue billed to customers excluding taxes collected from customers. Gross revenue less revenue derived from pass-through sub-consultant fees, reimbursable expenses and other direct expenses represents our net service billing, or that portion of our gross revenue attributable to services performed by our employees. Our industry uses the calculation underlying net service billing to normalize peer performance assessments and provide meaningful insight into trends over time. Refer to - Other Financial Data, Non-GAAP measurements and Key Performance Indicators below for further discussion of the use of this non-GAAP financial measure. We generally do not make profit from the pass-through of sub-consultants and reimbursable expenses. As such, contract profitability is most heavy impacted by the mix of labor utilized to complete the tasks and the efficiency of those resources in completing the tasks. Our largest direct contract cost is consistently our labor. To grow our revenue and maximize overall profitability we carefully monitor and manage our fixed cost of labor and the utilization thereof. Maintaining an optimal level of utilization on a balanced pool of growing labor resources represents our greatest prospect for delivering increasing profitability.
Our contracts with customers generally contain multiple assignments based on two types of pricing characteristics:
Hourly, also referred to as time and materials, are common for professional and technical consulting assignments both short-term and multi-year in duration. Under these types of assignments, there is no predetermined maximum fee and as such, we generally experience no risk associated with our ability to bill for all hours expended. We negotiate billing rates and charge our customers based upon the actual hours expended toward a deliverable. These assignments may have not-to-exceed parameters requiring us to receive additional authorizations from our customer to continue working, but we likewise do not have to continue working without assurances of payment for such additional work. Hourly assignments represented approximately$3.9 million and$6.8 million or 6% and 6% of our gross contract revenue for the three and six months endedJune 30, 2022 , respectively. For the three and six months endedJune 30, 2021 , hourly assignments represented approximately$10.5 million and$20.0 million or 29% and 29% of our gross contract revenue, respectively. Lump sum, also referred to as fixed fee, typically require the performance of some, or all, of the obligations under the assignment for a specified amount, subject to price adjustments only if the scope of the project changes or unforeseen requirements arise. Our fixed fee assignments generally include a specific scope of work and defined deliverables. Most of our assignments are lump sum in nature representing approximately$57.8 million and$107.5 million or 94% and 94% of our gross contract revenue for the three and six months endedJune 30, 2022 , respectively. For the three and six months endedJune 30, 2021 , assignments that are lump sum in nature representing approximately$26.0 million and$48.3 million or 71% and 71% of our gross contract revenue, respectively. Recognizing revenue from lump sum assignments requires management estimates of both total contract value when there are contingent compensation elements of the fee arrangement and expected cost at completion. We closely monitor our progress to completion and adjust our estimates when necessary. We do not recognize revenue from work that is performed at risk with no documented customer commitment.
Contract Costs
Contract costs consists of direct payroll costs, sub-consultant costs and other direct expenses exclusive of depreciation and amortization.
Direct payroll costs represent the portion of salaries and wages incurred in
connection with the production of deliverables under customer assignments and
contracts. Direct payroll costs include allocated fringe costs (i.e. health
benefits, employer payroll taxes, and retirement plan contributions), paid leave
and incentive compensation.
Sub-consultants and direct expenses include both sub-consultants and other
outside costs associated with performance under our contracts. Sub-consultant
and direct costs are generally reimbursable by our customers under the terms of
our contracts.
Performance under our contracts does not involve significant machinery or other
long term depreciable assets. Most of the equipment we employ involves desktop
computers and other shared ordinary course IT equipment. We present direct costs
exclusive of depreciation and amortization and as such we do not present gross
profit on our consolidated financial statements.
24
--------------------------------------------------------------------------------Operating Expense
Operating expenses consists of selling, general and administrative costs, non-cash stock compensation, depreciation and amortization and settlements and other non-core expenses.
Selling, general and administrative expenses represent corporate and other general overhead expenses, salaries and wages not allocated to customer projects including management and administrative personnel costs, incentive compensation, personal leave, office lease and occupancy costs, legal, professional and accounting fees. Non-cash stock compensation represents the expenses incurred with respect to shares and options issued by the Company, both vested and unvested, to employees as long-term incentives. Non-cash stock compensation cost will be the grant date fair value of the awards, or the Black-Sholes-Merton value of stock options on the grant date, recognized ratably over the vesting periods of each award. Future non-cash stock compensation expense for unvested shares awarded prior toDecember 31, 2020 is based on a$12.80 per share fair value on the date of modification. Stock awards will continue to be an important part of our long-term retention and rewards philosophy.
Depreciation and amortization represent the depreciation and amortization expense of our property and general IT equipment, capital lease assets, tenant improvements and intangible assets.
(Gain) loss on sale represents gains or losses inclusive of foreign exchange and accumulated depreciation recapture resulting from the disposal of an asset upon the sale or retirement of such asset.
Other (Income) Expense
Other (income) expense consists of other non-operating and non-core expenses, including costs associated with acquisitions.
Tax Expense
Income tax (benefit) expense, current and deferred, includes estimated federal, state and local tax expense associated with our net income, as apportioned to the states in which we operate. Estimates of our tax expense include both current and deferred tax expense along with all available tax incentives and credits.
Other Financial Data, Non-GAAP Measurements and Key Performance Indicators
Backlog
We measure the value of our undelivered gross revenue in real time to calculate our backlog and predict future revenue. Backlog includes awarded, contracted, and otherwise secured commitments along with revenue we expect to realize over time for predictable long-term and reoccurring assignments. We report backlog quarterly as of the end of the last day of the reporting period. We use backlog to predict revenue growth and anticipate appropriate future staffing needs. Backlog definitions and methods of calculation vary within our industry. As such, backlog is not a reliable metric on which to evaluate us relative to our peers. Backlog neither derives from, nor connects to, any GAAP results.
Net Service Billing
In the normal course of providing services to our customers, we routinely subcontract services and incur direct third-party contract expenses that may or may not be reimbursable and may or may not be billed to customers with mark-up. Gross revenue less revenue derived from pass-through sub-consultant fees and reimbursable expenses represents our net service billing, which is a non-GAAP financial measure, or that portion of our gross contract revenue attributable to services performed by our employees. Because the ratio of sub-contractor and direct expense costs to gross billing varies between contracts, gross revenue is not necessarily indicative of trends in our business. As a professional services company, we believe that metrics derived from net service billings more accurately demonstrate the productivity and profitability of our workforce. Our industry uses the calculation of net service billing to normalize peer performance assessments and provide meaningful insight into trends over time.
Adjusted EBITDA
We view Adjusted EBITDA, which is a non-GAAP financial measure, as an important
indicator of normalized performance. We define Adjusted EBITDA as net income
before interest expense, income taxes and depreciation and amortization, plus
discontinued expenses, non-core legal settlements and other costs not in the
ordinary course of business, non-cash stock-based compensation
25
--------------------------------------------------------------------------------(inclusive of expenses associated with the adjustment of our liability for common shares subject to redemption), and other adjustments such as costs associated with preparing for our IPO. Our peers may define Adjusted EBITDA differently.
Adjusted EBITDA Margin, net
Adjusted EBITDA Margin, net, which is a non-GAAP financial measure, represents Adjusted EBITDA, as defined above, as a percentage of net service billings, as defined above. Results of Operations
Combined results of operations
The following represents our condensed consolidated results of operations for periods indicated (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,
2022 2021 2022 2021
Gross contract revenue $ 62,399 $ 36,524 $ 114,860 $ 68,326
Contract costs (exclusive of
depreciation and amortization) 31,054 18,188 56,489 34,344
Operating expense 30,861 18,657 56,049 32,808
Income (loss) from operations 484 (321 ) 2,322 1,174
Other (income) expense 994 187 1,491 392
Income tax expense (benefit) (190 ) (69 ) (306 ) 240
Net income (loss) $ (320 ) $ (439 ) $ 1,137 $ 542
Net margin (0.5 %) (1.2 %) 1.0 % 0.8 %
Other financial information 1
Net service billing $ 56,416 $ 32,459 $ 104,117 $ 61,327
Adjusted EBITDA 7,576 4,185 14,983 8,271
Adjusted EBITA margin, net 13.4 % 12.9 % 14.4 % 13.5 %
1 Represents non-GAAP financial measures. See Other Financial Information and
Non-GAAP key performance indicators below in results of operations.
Three months ended
Gross Contract Revenue Gross contract revenue for the three months endedJune 30, 2022 , increased$25.9 million or 71.0% to$62.4 million as compared to$36.5 million for the three months endedJune 30, 2021 . For the three months endedJune 30, 2022 , gross contract revenue attributable to work performed by our workforce increased$23.9 million , or 73.5% to$56.4 million or 90.4% of gross contract revenue as compared to$32.5 million or 88.9% for the three months endedJune 30, 2021 (see Net service billing - non-GAAP). Of the$25.9 million increase in gross contract revenue during the three months endedJune 30, 2022 , acquisitions represented$16.1 million or 62.1% of the increase. Revenue from acquisitions is treated as acquired for a period of twelve months post-closing. 26 --------------------------------------------------------------------------------
Changes in GCR disaggregated between our core and emerging end markets were as follows (in thousands other than percentages):
© Edgar Online, source
