Q3 2020 ICF International Inc Earnings Call
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Please note. This conference is being recorded on Thursday November five 2020 and cannot be reproduced or rebroadcast without permission from the company.
And now I would like to turn the program over to Lynn Morgan of Advisory partners.
Thank you Vanessa good afternoon, everyone and thank you for joining us to review third.
Third quarter 2020 performance.
With us today from my CFO, John Watson, President and Chief Executive Officer, Bettina, Welsh Chief Financial Officer, and joining down the docket cash events executive Chairman and James Morgan Chief of business operations.
During this conference call, we will make forward looking statements to assist you in understanding IC managements expectations about our future performance.
These statements are subject to a number of risks that could cause actual events and results to differ materially.
And I refer you to I November 5th 2020 press release, and our SEC filings for discussions of those risks in.
In addition, our statements during this call are based on our views as of today.
Until the end of the fourth quarter.
This performance is aligned with our historical track record of levering up to make strategic acquisitions, and and utilizing our strong cash flow to pay down debt in short order.
Year on year increase in service revenue, we achieved in the third quarter was led by programs for federal government clients and our energy advisory and implementation work for commercial clients primarily utilities.
The decline in total revenue for the period was primarily attributable to a $21 million reduction and pass through revenues on which we generally earn little or no margin.
We were pleased to report even higher growth and adjusted EBITDA. Thanks to a combination of favorable business mix higher utilization and lower SG and day costs.
And while SG&A costs will increase once we emerge from this pandemic.
Portion of the cost savings that we have achieved in the last two quarters will become permanent.
We continue to work towards optimizing our facility costs.
This will help us return to expanding are adjusted EBITDA to service revenue margins in 2021 and beyond.
Our third quarter revenue performance was led by strong growth in our federal government business, which was up 18% year on year, reflecting both organic growth and the ITG acquisition.
Itg's proving to be an excellent fit in the combination of their broad modernization capabilities with our deep domain expertise and client relationships has provided significant growth opportunities to us.
And the third quarter, we were awarded approximately $100 million and it modernization work, including a $35 million plus up on our Recompete with the department of Health and Human services Children's Bureau that expands the scope of our work to include operating and modernizing its child welfare systems.
Additionally, we received a new single award blanket purchase agreement with a $49 million feeling from the U S food and drug administration to provide IP platform advisory and development services or it's digital services center and the new $24 4 million dollar contract with Hhs's Children's Bureau for.
Engineering and architecture services develop a new cloud based national child Welfare data management system.
At the end of the third quarter, our business development pipeline and it modernization alone with a robust 1.5 billion.
The department of Health and human services is icf's largest client and including the modernization contracts I just mentioned represented almost 60% of our $792 million in third quarter contract wins.
The larger recompete contracts, new contracts and Bpa's that we rewarded in the third quarter are noted in today's release.
Additionally, ICF was chosen for another $12 million in Covid related work by several government agencies.
As we have mentioned on past calls, we see significant growth opportunities for ICF in the public health Arena.
We are still in the response phase with respect to COVID-19, and are active and information dissemination and surveillance and analytics work to better understand how the virus spreads.
The recovery Phase, which will come next is expected to require modernization of disease surveillance systems and associated analytics, and our expanded IP modernization capability capabilities together with our public health expertise will be very relevant to these programs.
Revenue some state and local clients were consistent with our expectations the <unk>.
Great majority of the work we do for state and local clients is either federally funded were funded by municipal bonds to support infrastructure projects, which makes all work more resilient to the vagaries of state budgets.
Zastrow management represents approximately one half of the revenues and this client category and remains on track to contribute approximately $110 million revenues this year.
Since the beginning of this year, we have one small, but strategic mitigation contracts and four states, Missouri, West, Virginia, Florida, and South Carolina, which represent many of the mitigation contracts that have been that to date and we are awaiting award decisions on larger contracts in other jurisdictions.
ICF is very competitive when it comes to HUD funded mitigation opportunities the combination of our 30 plus years of climate resilience work.
<unk> <unk> 30, plus years of HUD technical assistance and experienced with large scale mitigation projects as given us key qualifications in this emerging market.
Also we have already been very active in the very early stages of the response to the weather events of 2020.
We have contracts from the Gulf States that have been expanded recently to incorporate initial response and recovery activities for Hurricanes, Laura in Delta for which are innovative drone technology and data management tools have been in high demand.
Revenue from International government clients came in as expected and consistent with the prior quarter.
Proximately two thirds of the negative year on year comparison reflected the fall off and pass through revenues and which we earn minimal profit.
Our strategy is to keep costs and check and pivot towards those areas the business that remain resilient in these challenging times.
For example in the third quarter, we secured a significant contract to support the implementation of the European government energy efficiency program.
Our commercial energy business, which mainly serves utility clients performed well in the third quarter that by the continued strength of our energy markets Advisory business.
This was largely due to strong demand for is his financial and technical advisory services to support considerable transaction activity driven by renewables storage and gas asset development.
Work on energy efficiency programs for utilities continued to pace and we are awaiting decisions on multiple submitted proposals in California with contracts awards expected by early in 2021 and start up in 2021 or 2022.
We're also waiting additional rfps, which we have been down selected.
Are distributed energy resources consulting practice also performed well in the third quarter as we advised utility clients on how to address the impact of distributed resources on the grid and developed and implemented pilot testing programs related to distribute energy technology.
Lastly, a commercial marketing services clients are experiencing the pandemic in different ways claw.
Clients in certain vehicles are expected to recovery curve to be longer and deep into 2021, all others are executing on their budgets.
We are effectively managing costs and a commercial marketing services business and continue to deploy our resources and growth areas, while ensuring that we're ready to scale programs when business conditions improve.
To a record third quarter of contract awards I am pleased to report that our business development pipeline was a robust six 8 billion at the end of the third quarter, representing a diversified set of opportunities across our clients that.
This pipeline together with a very strong backlog at 2.9 billion support our confidence in Ics future prospects.
I also would like to highlight the strong improvement in cash flow that we achieved in the third quarter.
Our ability to generate substantial operating cash helps us fund acquisitions to support our growth strategy.
Now I'll turn the call over to our CFO patina wells to review of our third quarter results the Tina.
Thank you John.
Afternoon, everyone I'm pleased to provide additional color on the company's strong financial performance and cash flow in the third quarter of 2020, which led to an increasing our full year guidance earnings and operating cash slab.
Total revenue for the third quarter of 2020 $363 million.
Three.
Central that'll last year's level, primarily as a result of lower pass through revenue.
Which accounted for 25% of total revenue this quarter.
Compared to 31, 2% in last year's third quarter.
Like a prior sequential quarter, we saw an increase in service revenue, which was up to 9% in the third quarter to 264 7 million.
On a year to date basis.
It was up for 1% compared to last year.
Our gross profit was $137 million.
And increased 0.9% from 135 $8 million and the year ago quarter.
Net income for the quarter was $17.9 million or 94 cents per diluted share.
This compares to $19.6 million or one dollar and two cents per diluted share in the third quarter of 2019.
This year's third quarter results reflected increased interest and amortization expense related to the ITC acquisition and the higher tax rate.
Non-GAAP diluted EPS.
Which excludes the impact of amortization of intangibles and special charges related to severance for staff realignment.
It was one dollar and 10 cents.
Compared to a one dollar and 12 cents reported in the third quarter of 2019.
We were very pleased with our cash flow generation in the third quarter, primarily as a result of continued strong collection activity.
Year to date operating cash flow was $95.2 million compared to $6.4 million for the comparable period a year ago.
Consequently, we now expect full year 2020, operating cash flow of approximately a $120 million.
31% ahead of 2019 and.
And ahead of the $110 million, we originally anticipated.
Days sales outstanding were 83 days.
Or 71 days, excluding the slower paying Puerto Rico contract compare.
Compared to 94 days and 77 days, respectively in the third quarter of 2019.
By year end, we anticipate dsos to be in the range of 70 to 83 days.
Our net leverage ratio at the end of September was 2.8 compared to 3.52 at the end of June 2020, reflecting our use of cash flow to pay down $79 million of our long term debt associated with the January acquisition of TG.
We expect our net leverage ratio to be approximately 2.6 at year end 2020.
Year to date capital expenditures were $14.6 million compared to 22.3 million a year ago.
As we continue to manage our costs due to the ongoing COVID-19 held prices.
We now anticipate our full year capital expenditures to range from $21 million to $23 million down $2 million from our previous guidance.
As for our capital allocation strategy, our priorities remain the same.
Grow our business organically fund acquisitions and pay down debt.
And we will continue to pay our dividend and we will repurchase shares under our current authorization to minimize dilution from our employee incentive programs.
Today, we declared a quarterly cash dividend of 14 cents per share.
Payable on January 12 of 2021 to shareholders of record on December 11th 2020.
For modeling purposes, our expectations for full year 2020 are as follows.
Depreciation and amortization expense.
And the range of 20.5 million to $21.5 million.
Amortization of intangibles of $13.3 million.
Interest expense between 14 million to $14.5 million.
1 million below our previous guidance given that reduction.
Tax rate of no more than 27%.
And fully diluted weighted average shares of approximately $19.1 million.
With that I will turn the call back to John for his closing remarks, thanks Bettina. Thanks.
Thanks to better than anticipated year to date performance, we are raising our guidance for full year 2020, EPS and cash flow the.
Specifically, we now expect GAAP diluted EPS to range from 315 to 330 exclusive special charges.
Up from the previous guidance midpoint of $3.
Non-GAAP diluted EPS of 392, four or five up from the previous guidance midpoint of 365.
Revenues are now expected to range from 1.46 billion to $1.5 billion.
Additionally, we are now guiding to operating cash flow of approximately $120 million for 2020 up from our previous guidance of $110 million and representing a 31% increase from 2019 them levels.
Looking ahead, we are confident in our sales growth prospects heading into 2021.
Yeah.
And we have our first question from Toby Summer with Trish Securities. Please go ahead.
Thanks.
Wondering if you could maybe characterize the contract awards.
Is sort.
Sort of a proportion that was new if you mentioned that I didn't catch it I apologize just trying to see it as a big number but want to see how it.
May flow through into organic growth sort of next year and the year after thanks.
Sure Toby I think in round numbers about 40, 45% was Recompete and 55 was new contract awards.
In terms of the the awards in the third quarter.
Fiscal and in Federal response.
To the pandemic over more medium and long term do you have any more refined way to think about the size of what that could look like.
Early in the.
Independent with there were some funds, but you know over the longer term those may look more like down payment then.
The net effort on the part of Congress to really address issue.
Yeah, I think it's hard for me to I think put in put up.
But we do think that we can.
Save that we can lock in a portion of those savings.
For the long run and struck.
Structurally.
Move our margins and improve our ability to invest further in business both on the travel.
And and indirect consultant front and then we're obviously looking hard at our facilities and the potential savings there obviously.
We've moved to a.
I'm working 100% remote I think again, we will with time want folks to return to the office, but I think we'll be able to also reduce our.
Office footprint and lock in long term savings there and we'll look at James Morgan here, our chief of business operates on if there's anything else you would add on that front James I think you've covered the key points for me at the end of the day I think we've learned quite well how to work in this virtual environment and I think that will we will continue to do that to some degree as we move forward.
That will drive savings in the areas that you talked about from a travel perspective as well as from a facility perspective.
So those are the two key areas.
Okay, great. Thanks, and maybe just one more I just wondered what you're seeing on the commercial side of the business in terms of actual project cancellations not just lower levels of revenues on existing contracts that you're working on.
Yes, so I mean again on the commercial energy side I mean, our businesses continues apace, we haven't seen any cancellations were growing there and so.
That business.
It really does continue a pace on the commercial marketing services I would say that.
The market remains consistent with with how Weve described in the past we've seen no further deterioration or no additional challenges in that business.
From where we've where we've been in the last quarter. We obviously saw reductions at the end of Q1 into Q2.
I think we've we've addressed that.
By properly sizing the business.
And we're we're managing it to the backlog, we have and so I think it's I.
I think we've got our arms around that and.
To be honest.
The utilization and the profit epic businesses, generally where we'd like it.
So I think we have done a good job of managing through this and I'm as I said, we are seeing any any further deterioration I think that really the issue now going forward.
Given given where we are is just when some of those businesses improve them and when they will see the ramp back up and I think that depends on the verticals that but in terms of.
How were managing the business I think we're we're where we need to be.
Okay.
Great. Thanks, a lot guys I'll leave at that.
Thank you we have our next question from Joseph Vafi with Canaccord.
Hey, guys. Good afternoon just.
Just a couple of quick ones on on the on the bookings number being pretty strong here. This quarter is there.
I think I've asked this in the past John but I think it's not something that I think it's important on on deal sizes and deal pipeline.
And I TMX I. I may be a little bit like the call today I apologize if some of that was covered but you know its device you have to get bigger you know.
I'd love to see bigger size deals and you know pursuits of larger deals for an update there would be appreciated and then a quick follow up after that.
Sure Joe So you know I think obviously on the IP monetization front.
As you can see in our third quarter sales results just gotten off.
It's as you said I think at times, we've been.
Given the nature of our social work that would be stronger under a.
Well.
You know obviously, our commercial energy business is driven by.
By factors outside of the federal budget disaster recovery I mean, I think it's I think we could all agree that storms are becoming more severe and I'm in more frequent and again I'd say, it's been bipartisan that.
How it performed in reacted in March and April just just trying to get to.
A sense or think through the puts and takes to a second way both in terms of your ability to convert on the pipeline and also generate new business.
Yes, I mean, I would generally come back to.
90% of our businesses that's seen you know.
See no impact since continue to pace up.
With Covidien.
And you know.
And so I wouldn't expect you.
To see material impacts of with additional Lockdowns on me I think we continue to pace we worked.
We work through the prior Lockdowns.
You know in areas that have been impacted I mean, I think we've.
I think it's difficult to predict I mean, I think it really yeah, it's difficult to predict.
You know.
And so.
So the the past wish to ratio there can be again 40, 45%.
That is an area, where given the impacts nickel that we've we've seen it just a disproportionate.
As the revenue so come down two thirds of those revenue second due to pass throughs and so.
I think that is an area, where there's a much higher pastor ratio.
Submitted through round two.
And we expect awards as we go into two next year.
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Yeah, and so we've been active on that front I think we're also expense.
Expecting to continue as we go into next year continue to see.
Additional opportunities release that.
It will be at the front end of that two step process. So.
So, California is very busy were busy writing proposals, we again, we expect to see awards.
Beginning in 2021, and I think we'll be busy on proposals.
Mmm with ice from ITG in their past performance with our.
Civilian client listen ships in the domain expertise.
That we could uniquely positioned ourselves and help accelerate.
There are pipeline and accelerate growth.
And achieve.
Significant synergistic.
Wins and revenues and I think our feeling is that we're executing quite well on that.
We've.
As we've reported over the.
Since that acquisition clothes at the end of January we have one north of $200 million of.
Modernization contracts and we have a robust pipeline 1.5 billion I think were highly confident we can grow this business north of <unk>.
15% now.
The long run and given its priority and how.
Federal government is in and.
Okay.
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