Q3 2022 ICF International Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Good day, and thank you for standing by welcome to the Q3 2022.
<unk> earnings Conference call at this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
Good question during the session you will need to press star one one on your telephone you will then hear an automated message advising that your hand is raised.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Lynn Morgen Advisory partner. Please go ahead.
Thank you Carrie and good afternoon, everyone.
Thank you for joining us to review.
Yes, Gary.
Yeah.
Yes.
John .
Hi.
Got it.
Joining that James Morgan Chief.
During this time.
Any forward looking statements.
Yes.
Managed.
These statements are subject to the numbers.
The results to differ materially.
Thank you.
Turning to the press release.
Yes.
In addition, our statements during this call.
Thank you.
Cause change.
The information presented in that light.
Kevin.
Right.
Thank you David.
Wait and see.
Thank you.
Yes.
Right.
John .
Third quarter 2020 Q1.
Thank you Lynn and thank you all for participating in today's call to review our third quarter results.
Our business outlook. This was another strong quarter for ICL P. J.
These include our 22% year on year growth in service revenue.
A 7% organic growth and the contribution from our recent acquisitions.
15, 5% year on year growth in revenues from commercial energy clients.
A 14, 8% adjusted EBITDA as a service revenue margin and record third quarter contract wins totaling $865 million, resulting in a book to Bill of 185 times for the quarter.
These metrics clearly demonstrate icf's enhanced growth trajectory.
Well by adding acquisitions that a strong cultural said an offer revenue and earnings synergies.
And by the end of 2024 increase EBITDA by roughly $100 million for the $143 million reported in 2021, which applies the category of approximately 19%.
Icf's third quarter revenue growth, which led by our federal and state and local government clients and no commercial energy work, which taken together accounted for over 87% of the company's total revenues for the period.
Client categories, we continue to see positive year on you a comparison in all of our key growth areas, including icy modernization digital transformation public health disaster management utility consulting and our climate environment and infrastructure work.
The other accounted for over 70% of our year to date revenues.
The fastest growing client category by far was the federal government, where revenues increased 39% in the third quarter.
Over 29% USAID.
The agency contract spending continues to grow in line with the eight 9% increase in federal civilian agency appropriations.
2022, according to Bloomberg data.
Modernization and cloud of migration initiatives have been among the fastest growing spending areas.
Recent organic investments and acquisitions has positioned as well to capitalize on these trends.
Innovation of the semantic this acquisition, which we completed in July of this year is going very well.
They've already contributed to several I stay up late bids.
Also learning Newark enrolling existing contracts at CMS.
With an annual revenue renovated approximately 500 million icf's.
<unk> business of semantic fifth at the leadership position and provide a low code open source and cloud data solutions.
Well positioned to continue to grow our I T modernization revenue at a double digit rate for the coming years.
This is also a strong quarter for a public health business, which is the double digit rate.
We're pleased to have been selected for a $1.2 billion.
You buy the substance abuse and mental health services administration.
ICF, it's eligible to compete at the time contractor and four of the five large contract with domains to support the agency's mission of reducing the impact of substance abuse and mental illness on America's communities.
Additionally, Samsung recently awarded ICF, multiple new and Recompete contracts and subcontracts that is over $30 million to provide a wide range of services to support suicide prevention substance use disorder and other behavioral health programs.
We believe there will be additional funding and federal health markets for Ics employ is recognized domain expertise and cross cutting icke skills, specifically, a mental health and at the intersection of climate.
Federal government agencies are also currently very active insulting the detailed formulas and procedures for implementing the infrastructure and jobs that are I I J a.
ICF has already been task under existing federal agency contracts to support <unk>.
<unk> and this task 80 today as a valued at approximately a $40 million.
We are providing the remains of support the agencies, including technical assistance the system States and communications and management support for IHA a programs.
<unk> you are staying initial into some states and other potential <unk> for a range of planning analytical and environmental support services.
At the end of the third quarter, our federal government business development pipeline was close to $6 billion, representing a diversified but increasingly larger opportunities primarily and our key growth areas.
Revenues from state and local government clients increased 11.6% in the third quarter and around 12.
12.2% year to date.
Disaster management represents approximately one half a percent of our revenues and we continue to execute effectively on television coverage contracts in Puerto Rico and Texas.
Puerto Rico with somebody from the 27 Hurricanes and Libya has been complicated by the follow on earthquakes photo pandemic and now Hurricane Fiona.
Part of our success there.
<unk> has been responsible for the rebuilding and repair of more houses on the island and any other service provider. So much more work remains to be done.
Our Puerto Rican Department of housing contract, that's been expanded by another $10 million.
Digital add ons and other opportunities interfered with the head.
Collections from Puerto Rico has been slow in the late frozen by the impact of Hurricane <unk> September .
Caused major blackouts and damage from flooding.
We will cover this in his remarks, but from a business perspective, we are confident in our ability to manage this situation appropriately.
Because then you also see governments at all levels increased spending on mitigation. Currently ICF is 14 unlimited negation efforts over 30 clients and 14 states with recent wins in Florida.
This New York, Virginia, and Washington State further expanding our footprint.
This area is expected to become a more meaningful contributor revenue growth over the next several years.
All of our capabilities on the line with significant opportunities stemming from the I J a to address the consequences of climate change, including extreme weather events and rising sea levels throughout the U S.
The third quarter and year to date revenue comparisons and our international government business.
Packet by several factors.
First there was the completion of the large vessel project, which we called out as a major contributor to 2021 revenue growth and this client category.
Second currency translations, especially related to the euro and British pound as negatively impacted per quarter revenues.
If you normalize for the impact of foreign currency translation and the wind down the large special project in the UK.
Quarter over quarter revenue find some international clients with roughly 5% compared to 29% reported decline.
Robinette category I'd also been hampered by the difficult political and economic situations in Europe , and the U K.
Several of our programs to move to the right.
<unk> is that we continue to win multiyear contracts across the variety of subject matters, including energy climate sustainable investment.
An education and we have a substantial business development pipeline.
Similar situations the one we experienced in 2016.
Tiffany unlimited contracts was postponed due to the minded prices in Europe and breakfast.
We are cautiously optimistic efficient transfer was approved in 2023.
Moving to commercial we took steps in the third quarter to streamline commercial marketing services.
Activate our traditional advertising and platform technology business lines, because not seeing the material and finding Samantha pandemic, which we lack sufficient scale.
By focusing on the poor services business transformation loyalty and integrated communications across several keyboard with those who will be able to better serve clients and leverage the possible that we've experienced new account wins this year.
We continued to posting and as part of our business, which accounted for roughly five per cent of our third quarter revenues and 6% a year to date revenues.
Aviation consulting revenues continue to grow increasing in a high single digit right in the third quarter and up within 25% year to date.
That is in large part by our sustainable aviation offerings.
Iran, and Investor planets are seeking out icf's unique marketing sites around the policy technologies and finances required to drive <unk> meaningful G. Carbonization in this sector.
Energy markets by the <unk>, the largest area no commercial business.
Very well in the third quarter with revenue up 15.5% year on year we.
We saw strong demand across all three parts of its business, including energy efficiency energy markets advisory and our environmental and infrastructure services, which rebounded consistently in the period.
These metrics reflect the strong demand for our services before any material benefits from recently enacted legislation, which we believe will be substantial the future here.
For example, with the I J a this is a big old funding to support utilities in developing and implementing flexible <unk> bands at the <unk>.
<unk> technology is the answer with flexibility this'll boost demand for us is expertise and flexible those management 100 meters storage manage manage easy charged savings and other programs.
Also demand for energy Advisory services.
Already a strong.
With a significant inflation reduction as incentives for noodles and clean energy.
Environmental services are positioned to benefit from increasingly for project related services.
New infrastructure development.
Because of your senses are capable of the subsidiary with the acquisition of plans and associates in the third quarter.
Work with Clinton's highly specialized administrative staff.
On several projects and you'll get a transplant there filming expertise of environmental regulatory compliance and permitting and the transportation.
Energy water and resource management sectors.
Also as one of the most trusted partners to Texas State and local agency plant and associates say since our presence in the state that is set to receive significant federal investment dollars under the IHA.
Hey.
A commercial energy business with all the pipeline was certainly 1.3 billion at the end of the third quarter of a strong indication of the substantial opportunities on the horizon.
Lastly, you don't seem continued growth in our climate services and everything which we are a market leader with the ability to leverage the knowledge and experiences over 2000 in house climate energy and environment experts.
J and the inflation would answer that.
Drive significant demand for a climate related services across our federal and state and local government clients as well as from utilities development, various banks and other market participants and 2023 and beyond.
As we noted at our Investor Day this past may.
See that AIG has been expanded is expanded icf's investment market.
Possibly one to 2 million a year beginning in 2023.
Early to assess the potential of the irna. They will certainly be a boost for US is about 25% of our business is in climate and clean energy related areas that will be considerable funding from this legislation.
In summary are you the date results demonstrate how well.
Line Digest domain expertise and extended implementation capabilities are with market trend.
After record quarter of contract wins, our business development pipelines to design billion dollars the price of an increasingly large opportunities in keeping with greater scale.
Now I'll turn the call over to very products foreseeable for financial review here.
John and good afternoon, everyone. Our third quarter total revenue you've reached 18, 70%.
$467.8 million and service revenue was up 21.7% to $335 4 million inclusive of foreign currency exchange impacts, which reduced our gross revenues by approximately $4.2 million. These positive comparison to prevent by double digit growth in our government and commercial energy client categories.
Revenues from third quarter accounted for 28.3% of total revenue, which is within the range. We expect for the full year 2022.
Gross margin on total revenue was 34.3% as compared to 35.5% in the third quarter last year gross margin on our service revenue was up 47.8% compared to 58 in the third quarter of last year.
Both matrix.
Primarily reflect the impact of acquisitions that have a lower gross margin, but higher margins and the timing of fort fees and revenue recognition on fixed price contracts.
We expect our gross margins to increase to about 50% and this year's fourth quarter.
As we have discussed on previous calls.
We are seeing the benefit of our increased scale, we achieved 190 basis point improvement.
Indirect expenses as a percentage of service revenues, which adjusted basis with 33%, which is down from $34 nine in the same period last year in absolute dollars indirect and selling your expenses increased 18.4% year over year to $118 $3 million.
Our third quarter interest expense for $7.5 million, an increase of $4.9 million as compared to the same period last year, reflecting higher debt balances related to a recent acquisitions and higher interest rates approximately 30% of our debt as hedge against higher rates and as I mentioned in our last call you are able to offset a significant portion.
Have a higher interest expense through various cost efficiency initiatives.
Third quarter evident was $42 2 million five 6% about $39 $9 million in the third quarter of 2021 <unk>.
Excluding special charges adjusted EBITDA was 49 $8 million 13, six above the comparable quarter last year.
Justin given up margin on service revenue was $14 eight in line with our expectations on your 2022 and reflects continued high utilization unfavorable business mix and the benefit of our increased scale. This compares to $15 nine reported third quarter of 2021.
They become totaled $19.1 billion and diluted EPS was dollar one per share inclusive of 28 cents and tax effected staff your alignment facility.
Facility related and M&A special charges third quarter of 2022 net income and diluted EPS included a one time tax benefit of approximately $3.8 million or 20 cents per share.
Net income in last year's third quarter was $24 million in it.
P. S was one dollar per share.
Now non-GAAP EPS.
One dollar and 61 cents.
Per share reflects the 22% increase from $1 32 per share in the third quarter of 2021 and is inclusive of the one time 20 cents per share tax benefits.
Now I'm turning to cash flow and year to date operating cash flows $6 6 million and reflects the impact of various timing factors, which occurred during the third quarter for specifically our third quarter cash flows reduced by an additional payrolls cycle. According to approximately 25 million that occurred in the third quarter of 2022.
Which will benefit us in the fourth quarter as well as a temporary delays in billing and collections associated with recent acquisitions due to the timing of integration activities, which equated to about approximately 28 million.
Additional unbilled pay our which has since been billed and collected in Q4.
We have revised our full year of cash flow guidance from a point estimate of $140 million to a range of 120 $240 million due to temporary billing and collection items.
Which include potential payment delays from a Puerto Rico customer and the impact of contracts with milestone billing terms associated with our recent acquisitions.
Details outstanding for the third quarter were 87 days compared to 76 days and last year's third quarter, we expect our dsos to return to the mid to high seventies by year end.
<unk>. Your date capital expenditures are question, our year to date capital expenditures totaled $17.3 million, which includes capital expenses associated with our recent acquisition activities.
Net debt was $701.7 million at the end of September which reflects our recent acquisitions and the temporary impacts to third quarter operating cash flow that I previously mentioned.
Our net leverage ratio at the end of September was 3.81 on a pro forma basis.
Based on our revised cash for guidance, we expect to Delever, approximately 70 basis points by the end of 2022.
As for our capital allocation priorities, we will pay down debt by returning value to shareholders by repurchasing shares and issuing quarterly dividends.
During the nine months ended September 30th 2022, we repurchased 176375 shares at an average price of $96, an 18 cents per share.
September 30th 2022.
$111.9 million remains available for share repurchases under our approved share plan <unk>.
In addition, today, we declared a quarterly cash dividend 14 cents per share stable.
<unk> on January 12th 2023, two shareholders on record.
On December 9th 2022.
Following purposes here are a full year 2022 expectations are depreciation and amortization expense is now expected to be in the range of 20 21 million amortization of the intangible should be approximately $28 million.
For the full year 2022, we expect interest expense to now range from $22 million to $23 million or full year tax rate will be approximately 24% <unk>.
Expected fully diluted weighted average share count of approximately $19.1 million.
And our capital expenditures are now anticipated to be between 24 and $26 million $10 million below the midpoint our previous guidance.
And with that I'll turn the call back over to John for his closing remarks.
Thank you very.
<unk>, we have made revisions to a full year guidance.
Reflect on current expectations as well as the special charges, we've encouraged ear to date.
He narrowed our service rather indicted and brought down the midpoint by $12.5 million a year to date currency impact and of course.
Alright have several projects and our international government business as long as they are setting a certain coming from marketing service lines of business in Q3.
We have reaffirmed our guidance for 2022, adjusted EBITDA service at the margin of 14.8%.
The gap EPS range to include the severance M&A facility related charges, including today and the impact of this quarter's that's benefit and and.
Creased, the viewpoint of our non-GAAP EPS sites.
Based on these three points for now expecting 2000, 2002 service revenue growth of 16% adjusted EBITDA growth of 19.4% and non-GAAP EPS growth of 23% so.
We believe are the top end of sector performance.
And with a backlog of $3.7 billion is the <unk>.
Proximately, 50% funded expectations for significant and expectations for significantly awards in the fourth quarter.
With a robust business development pipeline.
Confidence in 2023 will be another year, a strong performance pricilla.
As we noted the earnings release Ikea prescribed by falls in 2022, that's one of the best management consulting firms.
Employers for diversity and what are the best in place for women.
This recognition as Ics like most companies is facing challenges and tried to determine what we need.
With extra cheese on a growth strategy.
I am pleased to report that our head count and police over 8% of the third quarter.
40% of new hires and organically.
72 acquisitions.
Appearance, saying a record setting hiring pace and the results of a recent employee survey indicated deep connection.
Strong values based culture and flexibility.
On our part we continue to make sure that communication is willing to the organization at all levels that are beneficial lineup and 40 priorities and that our leadership development program provides both opportunities across or does it diversified business disciplines.
I'll go ahead with that are now open the call for questions.
Thank you.
At this time, we will conduct our question and answer session. As a reminder to ask a question you will need to press star one one.
Star plus 211.
Star one one on your telephone and wait for your name to be announced please stand by while we compile the Q&A.
Our first question comes from Toby Summer with tourists Securities. Your line is open.
Thank you.
What do you think the.
Impact on growth over the next three or four years will be of the.
Climate Bill.
Also notice IRA.
So.
Hi, Thanks, I'll visit as you know as part of our Investor Day in day, we did lay out our long term.
Financial goals based on the <unk> fibers and thought of as soon as I noticed my remarks tablets.
Those were included high single digit organic growth.
The expectation of double digit 12 11 12.
With acquisitions and at higher EBITDA growth and the level of our revenue growth.
And so I think that was his background I think as you also know that inflation reduction act passed out of those after our Investor day.
Does provide a settlement ross potential significant opportunity for us in energy.
Climate fronts.
And I think those opportunities will develop.
In 2023 and should become a trivial at 2024 beyond so it's.
It's hard to.
Fully characterize those those opportunities but I.
That has shown it can provide outside of the high single digit both we didn't hit it indicated that are Investor day, you know.
It has the potential to.
Potentially take his team to double digit organic revenue.
To see how it plays out.
<unk> it does impact roughly about 25% of our business tabulations about some access that.
Funding within it so it is.
Certainly a material opportunity price yet.
Thanks, how much of the contract awards in the quarter represented new work to the company.
Do you have an expectation only color on.
What you expect for ramps of that business.
Yep.
I'll have the breakdown of.
<unk> <unk> was the first thing I would expect the majority.
Majority would be new contract wins.
The state of both in the pipeline is broken.
<unk> bye.
The opportunities in our five growth areas.
And so I think that certainly the majority I would expect about 65% to 70% of the.
On track.
Our new business.
Thanks.
What's the outlook for the.
Low growth parts of the company, including commercial marketing International Aerospace.
Could you also in the context of that answer what you talk about the outlook.
Talk about what changed to cause you to lower and narrow the top line guidance range.
Yeah, I think he said.
It will cost us.
Narrow the guidance range for the remainder of this year was as I.
I mean it was.
The impact of the European business.
But.
The currency issues.
Due to the move out of the right of projects given what's going on at your place.
The orange traded at.
And the overall economy.
You produced advice about 12.5 million I think about 10 of escalated to adjust.
<unk> and our European business in about two to escalate.
It's related to.
Revenues associated with shutting down.
A specific service lines.
And so much marketing services, so that I think that's what drove the.
<unk> I think in terms of your.
Your question on the remainder of the business of January I think was discussed.
Remainder of the business, we see is.
Those single digit growth, but obviously, we haven't been achieving that an equal Muslim or a service and that is not be founded.
Rebounded.
Pre pandemic levels, but setting that aside I think the rest of the business, we generally see as well.
<unk>, most most low single digit growth opportunities.
Going forward.
Okay, I'll take one more and if I could how old are you thinking about interest expense with a headwind twenty-three.
Their steps that you can take to mitigate that kind of expense growth beyond simply paying down debt.
Yeah.
Thanks for the question.
Number of things that.
We'd like to look at what one would be.
Heche a more of the debt when.
The timing is your best for the company and will will execute on that.
And then.
I think.
Hanging down with that is is a critical component of that so we will look to continue to improve.
Cash flows.
Use those cash flows.
Delever.
Reduce that that amount.
I would just add told me that I think is we've talked about I mean.
We've been using we've been leaning forward and managing.
Facilities for sprint and reducing our spending their given that will be operating at a hybrid a plan with better data.
The office.
And that has.
And in doing so.
So we've reproduced the investment and spend there and we producing those savings to invest back into business and to offset some of the interest related.
We've seen.
And I expect will continue to do that to be able to do.
Staff going forward.
I just would also I think we do.
Heche I think about 30% is very sensual losses, his head and attached it less of a 4% district. So we have.
<unk> landed on the edge of crutches.
Thank you.
Thank you for your questions.
And our next question comes from.
Mr. Mark Riddick of <unk> and your line is open go ahead. Please.
Good evening.
[noise] Hello.
Yep Oh.
Oh, okay.
So I wanted to just sort of touch on the state and local spending and so the activity that we're seeing there maybe some of the levers and Bob those what do you think talk a little bit about the you know given the strength that we're seeing in federal and certainly there's infrastructure splinter to be done on the state and local level. Eventually just wonder if you can.
Talk a little bit about the the time frame that you're looking at for some of those projects, if you're getting sort of any sort of feedback from state local customers too.
The timing of putting putting the projects to work and moving forward there as well as maybe you could give us a bit of a an update on maybe some of the [noise] disaster work that you're doing thank you.
I think as you know.
Business has successfully two major components.
Split down the middle of our environmental monitoring.
Preventing work about large infrastructure projects that are disaster management.
I think that is.
<unk> noted not remodel if that's available business I think it's been dumped growing double digit paychecks double digit growth of it.
I think the.
J a funding.
As we said does it provide a billions of <unk> addressable market for here for Ikea.
A lot of that opportunity will be at the state and local level and will be around traditional infrastructure projects.
Bridges and roads and rail.
Two energy.
Related infrastructure and so.
I think that is a.
Importantly.
Source of future opportunity for us I think as we've discussed.
The real estate that ramping up in that opportunity coming to to begin to conduct a lesson in the second half of 2023.
And then help to drive our growth in 2004 beyond that money will be spent over the survey.
Five plus years and so.
So.
So that's what I <unk> the opportunity I would look to us to believe because.
Material and.
For the company and the second half of 2023, we are saying, we do have a robust pipeline.
J a front.
And overall stable.
Except $1.1 billion.
On the disaster recovery for US again, I think we have very strong both the business and are executing well in Puerto Rico in Texas.
I think it will be additional opportunities for us over time.
Puerto Rico.
<unk> 41 received a $10 million plus up to support or the results of the immediate response activities.
The way down there.
And I expect that will be opportunities.
From the Hurricanes and that will play out here in the next six to nine months.
That won't be tracking very carefully.
Potentially be.
Material in the second half of 2023 and beyond.
Remains quite bullish on.
Both both of those markets are part of our secret driver said, we shouldn't expect to have strong growth in state level of our participants.
And then if I could just add one more question I just wanted to touch maybe you could bring us up to speed on your thoughts on on views on acquisition pipeline and following some <unk>. The the acquisition appetite seems to it seems to be quite healthy still but as long as you get social talk a little bit about maybe what the pipeline might.
Right now and maybe if it's changed over the last six months given the.
Recessionary concerns.
Yeah, I think so I think our focus.
Right now is.
Integration and integrate acquisitions, we can.
Completed.
Here in the third quarter semantic base was a significant acquisition for us.
And certainly helped.
<unk> bar positioning in the modernization front land and associated with the small talk in on the environmental front.
And my expectation is we're going to be a laser focus on integration.
Acquisitions here through the first half of next year.
And an associate that with that we were going to be laser focused on.
Pay down debt and carefully managing our cash flow. So I don't see I don't see us.
Leaning in or.
Or making any significant investments on the M&A front.
At least into.
The end of this year and in the first half of next year I think it will be quite.
Quite focused on successful successfully on successfully integrating the deals will be done in paying down our debt.
The market I mean, I would say that there are still opportunities and essentials federal government services market, there's still activity in energy markets.
I think they're still quality companies out there.
No, we and and so we obviously.
Are out in the market, we have a pipeline.
This will stay close to the market.
Honestly, we haven't seen a significant change the evaluations and the market.
But as I say I think our focus Peter for the next to the first half of next year will be on.
Yep.
We've done it.
So I'll make that note that here.
Through the first half of next year.
Well, thank you very much.
Thank you Mr Riddick with Sidoti.
That was our last call.
I would now like to turn it back to John Washington.
Closing remarks.
Well thanks.
For all of your participation today, we should I look forward to meeting you at upcoming events. Thank you.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
The conference will begin shortly.
<unk> you can dial 911.
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The conference will begin shortly.
<unk> you can dial 911.
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[music].
Good day, and thank you for standing by welcome to the Q3 2022.
ICF earnings Conference call at this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising that your hand is raised.
Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Lynn Morgen Advisory partner. Please go ahead.
Thank you Gary Good afternoon, everyone and thank you for joining us to review Icf's third according to that.
With us today.
John <unk> CEO .
One is yes.
Joining that James Morgan Chief.
During this conference call will be forward looking statements.
<unk> management.
Amit.
Statements are subject to risks and <unk>.
Actual events and results to differ materially and I refer you twice.
Turning to the press release.
Yes.
Sure.
Our statements during this call.
As of today.
Thank you.
Cause our views to change.
The information presented in that light you.
We may at some point.
The statements made today.
Typically when G H.
I will now turn the call points.
Right.
Yes, John Martin to discuss third quarter 2020 Q1.
Thank you Lynn and thank you all for participating in today's call to review, our third quarter results and discuss our business outlook.
Our strong quarter for ICF.
<unk> included our 22% year on year growth in service revenue.
A 7% organic growth and the contribution from our recent acquisitions.
15, 5% year on year growth in revenues from commercial energy clients of <unk>.
14, 8% adjusted EBITDA at the service revenue margin and record third quarter contract wins totaling $865 million, resulting in a book to Bill of 185 times for the quarter.
These metrics clearly demonstrate icf's enhanced growth trajectory.
Further with our significantly increased backlog and robust business development pipeline support our confidence in continued strong growth in 2023 and beyond.
Year to date results also underscore our ability to reach the long term financial goals, we laid out in our May 2022 of the Investor day, namely to achieve high single digit organic service revenue growth through 2024, driven by our five key growth areas.
Double digit total revenue growth by adding acquisitions that are a strong cultural fit and offer revenue and earning synergies and by the end of 2024 increased EBITDA by roughly $100 million from the 143 million, we reported in 2021, which implies a CAGR of approximately 19%.
Icf's third quarter revenue growth was led by our federal and state and local government clients and unconventional energy work, which taken together accounted for over 87% of the company's total revenues for the period.
Within those client category, we continued to see positive year on year comparison in all of our key growth areas, including it modernization digital transformation.
Disaster management utility consulting and our climate environment and infrastructure work, which together accounted for over 70% of our year to date revenues.
The fastest growing client category by far was the federal government, where revenues increased 39% in the third quarter and are up over 29% year to date.
Similarly, the NOC contracts spending continues to grow in line with the eight 9% increase in federal civilian agency appropriations for fiscal year 2022.
Bloomberg data modernization and cloud migration initiatives have been among the fastest growing spending areas.
Our recent organic investments and acquisitions have positioned us well to capitalize on these trends.
In addition, the submitted this acquisition, which we completed in July of this year is going very well Dave.
Dave will be contributed to several ICF Ma bids.
Also lending Europe and building existing contracts at CMS.
On an annual revenue run rate of approximately $500 million Ics it modernization business inclusive of semantic bids at the leadership position and provide a well code open source and cloud native solutions.
It's well positioned to continue to grow our it modernization revenue at a double digit rate over the coming years.
This is also a strong quarter for our public health business, which is growing at a double digit rate.
Pleased to have been selected for a $1 2 billion.
You buy the substance abuse and mental health services administration.
ICF is eligible to compete at a time factor in four of the five large contract with domains to support the agency's mission of reducing the impact of substance abuse and mental illness on America's communities.
Additionally, Samsung recently awarded ICF, multiple new and Recompete contract and sub contract valued at over $30 million to provide a wide range of services to support suicide prevention substance use disorder and other behavioral health programs, we see there.
There will be additional funding and federal health market slightly up employee is recognized domain expertise and cross selling IQ skills, specifically in mental health and at the intersection of climate.
Yes.
Let me start with agencies are also currently very active in developing the detailed formulas and procedures.
The infrastructure and jobs that our Iga Ics.
ICF has already been test under existing federal agency contracts to support these active.
Antibodies and this past season to date is valued at approximately $40 million.
We are providing a range of support the agencies, including technical assistance resistant state and communications and management support for Iga aid programs.
In addition, we are seeing initial into some states and other potential.
Mississippi is for a range of planning analytical and environmental support services.
At the end of the third quarter, our federal government business development pipeline was close to 6 billion, representing a diversified set of interest in these larger opportunities primarily in our key growth areas.
Revenues from state and local government clients increased 11, 6% in the third quarter and were up 12, 2% year to date.
This asset management represents approximately one half of our state and local revenues and to continue to execute effectively on key recovery contract in Puerto Rico and Texas.
Puerto Rico with somebody from the 27 gene Hurricanes Irma and EMEA has been complicated by the follow on earthquakes Covid pandemic and now Hurricane Fiona.
Part of our success. There is Ics has been responsible for the rebuilding and repair of more houses on the island than any other service provider, but much more work remains to be done.
Our Puerto Rican permanent housing contract has been extended by another $10 million and we.
Digital add ons and other opportunities in the periods ahead.
Collections from Puerto Rico have been slow in the late <unk>.
Hurricane feeling that in September , which caused major blackouts and damage from flooding.
Barry will cover this initial remarks, but from a business perspective, we are confident in our ability to manage this situation appropriately.
We continue to also see governments at all levels increased spending on mitigation. Currently ICF is working on Densification efforts over 30 clients in 14 States with recent wins in Florida, Texas, New York, Virginia, and Washington State further expanding our footprint.
This area is that.
Become a more meaningful contributor to revenue growth over the next several years given how low our capabilities are aligned with significant opportunity stemming from the <unk> to address the consequences of climate change, including extreme weather events and rising sea levels throughout the U S.
The third quarter and year to date revenue comparisons in our international government business.
Acted by several factors.
First there was the completion of a large special project, which we called out as a major contributor to 2021 revenue growth and as client category.
Currency translations, especially related to the euro and British pound negatively impacted third quarter revenues.
Normalized for the impact of foreign currency translation and the wind down of the large special project in the UK and quarter over quarter revenue decline from international clients was roughly 5% compared to 29% reported decline.
Growth in this category has also been hampered by the difficult political and economic situation in Europe , and the U K, which has caused several of our programs to move to the right.
<unk> is that we continue to win multiyear contracts across a variety of subject matters, including energy climate of sustainable investment.
It's an education and we have a substantial business development pipeline.
This is a similar situations that we experienced in 2016 and our activity on the awarded contracts was postponed due to the module prices in Europe and Brexit.
Thus, we are cautiously optimistic that business trends will improve in 2023.
Turning to commercial we took steps in the third quarter to streamline of Whatsapp marketing services, specifically, we exited our traditional advertising and platform technology business lines, we have not seen a material pick up in client demand post pandemic.
We lack sufficient scale.
Focusing on the core services business transformation loyalty and innovative communications across several key verticals, we will be able to better serve clients and leverage the positive momentum that we've experienced in new account wins this year.
Continue to closely manage as part of our business, which accounted for roughly 5% of our third quarter revenues and 6% of year to date revenues.
Aviation consulting revenues continued to grow increasing at a high single digit rate in the third quarter.
More than 25% year to date.
And in large part by our sustainable aviation offerings.
Airline and Investor clients are seeking out icf's unique market insights around the policy technologies and finances required to drive meaningful meaningful de carbonization in this sector.
Energy markets by far the largest area in our commercial business performed very well in the third quarter with revenue up 15, 5% year on year.
We saw strong demand across all key parts of this business, including energy efficiency energy markets advisory and our environmental and infrastructure services between considerably in the period.
These metrics reflect strong demand for our services before any material benefits from recently enacted legislation, which we believe will be substantial in the future either for example.
This is a big old funding to support utilities in developing and implementing flexible load management programs that deploy technologies to answer we have flexibility. This will boost demand for Ics expertise and flexible load management behind the meter storage management managed EV charging and other programs.
Also demand for our energy Advisory services.
Already a strong will increase with the significant inflation reduction as incentives for renewables and clean energy and environmental services are positioned to benefit from the PC for project related services tied to new infrastructure development.
With respect to our capability subsidiary with the acquisition of blended and associates in the third quarter.
We have worked with <unk> highly specialized administrative staff on several projects and have been impressed by their domain expertise and environmental regulatory compliance and permitting and the transportation renewable energy water and resource management sectors.
So that's one of the most trusted partners to Texas State and local agency plant and associates safe and solid presence in the state that is set to receive significant federal investment under the <unk>.
Our commercial energy business development pipeline was $71 3 billion at the end of the third quarter, a strong indication of the substantial opportunities on the horizon.
Lastly, we are seeing continued growth in our climate services, an area, which we are a market leader with the ability to leverage the knowledge and expenses over 2000 in house climate energy and environment experts.
Jay and the inflation will answer that.
Both drive significant demand for our climate related services.
The federal and state and local government clients as well as from utilities developers banks and other market participants in 2023 and beyond.
As we noted at our Investor Day. This past May we view that the IGT has an extended as expanded icf's industrial market.
Approximately one to 2 million a year beginning in 2023.
While it's still early to assess the potential of the IRS.
We'll certainly be a boost for us is about 25% of our business is in climate and clean energy related areas that will be considerable funding from this legislation.
In summary, our year to date results demonstrate how well aligned icf's domain expertise and extended implementation capabilities are with market trends after a record quarter of contract wins, our business development pipeline stood at 9 billion comprised an increasingly larger opportunities and keeping with our greater scale.
Now I'll turn the call over to Barry <unk>, our CFO for financial review.
Thank you John and good afternoon, everyone. Our third quarter total revenue increased 18, 7% to $467 8 million and service revenue was up 21, 7% to $335 4 million inclusive of foreign currency exchange impacts, which reduced our gross revenues by approximately $4 2 million.
These positive comparisons were led by double digit growth in our government and commercial energy client categories.
Revenues from third quarter accounted for 28, 3% of total revenue, which is within the range. We expect for full year 2022.
Gross margin on total revenue was 34, 3% as compared to 35, 5% in the third quarter last year gross margin on our service revenue was up 47, 8% compared to $50 eight in the third quarter of last year both metrics.
Primarily reflect the impact of acquisitions that have a lower gross margin, but higher EBITDA margins and the timing of award fees and revenue recognition on fixed price contracts.
We expect our gross margins to increase to about 50% in this year's fourth quarter.
As we have discussed on previous calls we are seeing the benefit of our increased scale, we achieved 190 basis point improvement in <unk>.
Indirect expenses as a percentage of service revenue, which on an adjusted basis were 33%, which is down from $34 nine in the same period last year in absolute dollars indirect and selling expenses increased 18, 4% year over year to $118 3 million.
Our third quarter interest expense was $7 5 million, an increase of $4 9 million as compared to the same period last year, reflecting higher debt balances related to our recent acquisition and higher interest rates approximately 30% of our debt is hedged against higher rates and as I mentioned on our last call we were able to offset a significant portion.
Our higher interest expense through various cost efficiency initiatives.
Third quarter, EBITDA was $42 2 million $5, 6% above $39 9 million in the third quarter 2021 <unk>.
Excluding special charges adjusted EBITDA was $49 8 million 13, six above the comparable quarter last year.
Adjusted EBITDA margin on service revenue was $14 eight in line with our expectations for full year 2022, and reflects continued high utilization a favorable business mix and the benefit of our increased scale. This compares to $15 nine reported third quarter of 2021.
Net income totaled $19 1 million and diluted EPS was $1 one per share inclusive of <unk> 28, and tax effected statutory alignment.
Facility related and M&A special charges third quarter 2022, net income and diluted EPS included a onetime tax benefit of approximately $3 8 million or <unk> 20 per share.
Net income in last year's third quarter was $20 4 million and EPS was $1 seven per share.
Now non-GAAP EPS.
The $1 61.
Per share reflects a 22% increase from $1 32 per share in the third quarter of 2021 and is inclusive of the onetime <unk> <unk> per share tax benefit.
Now turning to cash flow our year to date operating cash flow was $6 6 million and reflects the impact of various timing factors, which occurred during the third quarter more specifically, our third quarter cash flow was reduced by an additional payroll cycle equating to approximately $25 million that occurred in the third quarter of 2022.
Which will benefit us in the fourth quarter as well as temporary delays in billing and collections associated with recent acquisition due to the timing of integration activities, which equated to about approximately 28 million.
Additional unbilled PR, which has since been billed and collected in Q4.
We have revised our full year cash flow guidance from a point estimate of $140 million to a range of $120 million to $140 million due to temporary billing and collection items.
Which include potential payment delays from a particular customer and the impact of contracts with milestone billing terms associated with our recent acquisitions.
Days sales outstanding for the third quarter were 87 days compared to 76 days in last year's third quarter, we expect our dsos to return to the mid to high 70 by year end are expected year to date capital expenditures, our price and our year to date capital expenditures totaled $17 3 million, which includes capital expenses, especially.
With our recent acquisition activity.
Net debt was $701 7 million at the end of September which reflects our recent acquisitions and the temporary impact to third quarter operating cash flow that I previously mentioned.
Our net leverage ratio at the end of September was 381 on a pro forma basis.
Based on our revised cash flow guidance, we expect to Delever, approximately 70 basis points by the end of 2022.
As for our capital allocation priorities, we will pay down debt, while returning value to shareholders by repurchasing shares and issuing quarterly dividends.
During the nine months ended September 32022, we repurchased 176375 shares at an average price of $96 19 per share.
As of September 32022.
$111 $9 million remained available for share repurchases under our approved share plan and.
In addition, today, we declared a quarterly cash dividend of <unk> 14 per share payable.
Payable on January 12, 2023 to shareholders on record.
On December nine 2022.
Modeling purposes here, our full year 2022 expectations, our depreciation and amortization expense is now expected to be in the range of 20 to 21 million amortization of intangibles should be approximately $28 million.
For the full year 2022, we expect interest expense to now range from $22 million to $23 million, our full year tax rate will be approximately 24%. We expect a fully diluted weighted average share count of approximately $19 1 million.
And our capital expenditures are now anticipated to be between 24 and $26 million $10 million below the midpoint of our previous guidance and with that I'll turn the call back over to John for his closing remarks.
Thank you Barry.
Noted from our earnings release, we have made revisions to our full year guidance.
Reflect our current expectation as well as the special charges, we have incurred year to date.
Narrowed our service revenue guidance and brought down the midpoint by $12 5 million, reflecting year to date currency impact and the postpone the postponement of several projects.
Our international government business as long as the exiting of certain commercial marketing service lines of business in Q3.
We reaffirmed our guidance for 2022 adjusted EBIT at the server segment margin of 14, 8% food up the GAAP EPS range to include the severance M&A at the Sony related charges incurred to date and the impact of this quarter's tax benefit and increased the midpoint of our non-GAAP EPS guidance.
I'll make three points, we're now expecting 2022 service revenue growth of 16%.
Justice EBITDA growth of 19, 4% and non-GAAP EPS growth of 23%.
So we believe are the top end of sector performance.
And with a backlog of $3 7 billion is approximately 50% funded expectations for significant expectations for significant new awards in the fourth quarter.
And with a robust business development pipeline.
And that 2023 will be another year of strong performance for ICF.
As we noted in our earnings release ICF is led by <unk> in 2022, that's one of the best management consulting firms one of the best employers for diversity and one of the best employers for women. We appreciate this recognition is Ics like most companies is facing challenges in attracting the talent we need.
We execute on our growth strategy.
I'm pleased to report that our head count at least over 8% of our third quarter.
40% of new hires and organically.
Turning to acquisitions.
Guaranteeing a record setting hiring pace as a result of our recent employee survey indicated a deep connection to icf's strong values based culture and flexibility.
On our part we continue to make sure that communication is fully into the organization at all levels and our benefits are in line with <unk> priorities and that our leadership development programs to provide growth opportunities across our diversified business discipline.
Operator with that I will now open the call for questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one.
As star plus 211.
Star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A.
Our first question comes from Tobey Sommer with tourists Securities. Your line is open.
Thank you.
What do you think the.
Impact on growth over the next three or four years will be up.
Climate Bill.
Also notice the IRA.
Yes.
So.
Thanks, a lot bye thanks, Tobey that as you know as part of our Investor day in May.
We did lay out our long term.
Our financial goals based on the five key growth drivers in front of us and as I noted in my remarks tablet.
Included high single digit organic growth.
The expectation of double digit total revenue growth.
With acquisitions and at the higher EBITDA growth and the level of our revenue growth.
And so I think that with this background I think as you also know.
Without shaq asked Applebee's after our Investor Day, I think does provide as I said in my Ross potential significant opportunity for us in energy.
And climate fronts.
And I think those opportunities will develop.
In 2020 and should become the turbulent 2024 and beyond.
It's hard to.
Let me characterize those those opportunities, but I think that has sort of could provide upside on top of the high single digit growth, we indicated at our Investor day.
It has the potential to.
Potentially take us to double digit organic growth, but we'll have to see how that plays out.
Overtime as I also note it does impact roughly 20 about 25% of our business and places that some access.
The funding within it.
It's certainly a material opportunity for ICF.
Thanks.
Much of the contract awards in the quarter represented new work for the company and do you have an expectation or any color on.
What you expect for ramps of that business.
Yes.
Don't have the breakdown of.
And burst recompete wins that bucket I would expect the majority significant majority would be new contract wins.
The growth in the pipeline and the growth in our classified as exhibit by.
The opportunities in our five growth areas.
And so I think that certainly the majority I would expect about 65% to 70% of the.
Contract lengths are.
<unk>.
Our new business.
Thanks.
And whats the outlook for the.
Low growth parts of the company, including commercial marketing International Aerospace.
Yes, it could.
Also in the context of that answer what you talk about the outlook.
Talk about what changed to cause you to lower and narrow the topline guidance range.
Yes, I think.
What caused us to lower our narrowed the guidance range for the remainder of this year was.
In my remarks, I mean it was.
The impact of the European business.
The currency initiatives related to the movement of the rider projects, given what's going on in Europe with.
The warranty trade.
And the overall economy, so we reduced our guidance by about $12 5 million as I think about 10 of that was related to adjustments in our European business in about two and a half.
Let's split too.
Revenues associated with shutting down the specific service lines.
And so much marketing services, so that I think thats what drove the specific wind assets I think in terms of your.
Your question on the remainder of the business is generally I think we've discussed.
The business, we see it.
Low single digit growth.
Obviously, we haven't been achieving that in commercial marketing services has not rebounded.
Rebounded on.
So pre pandemic levels.
Setting that aside I think the rest of the business, we generally see it.
Low to mid single digit.
Low single digit growth opportunities.
As we move forward.
Okay I'll sneak one more in if I could how are you thinking about interest expense as a headwind in 'twenty three and are there steps you can take to mitigate that kind of expense growth beyond simply paying down debt.
Yes.
Thanks for the question.
There's a number of things that.
We'd like to look at what one would be.
Hedging more of the debt.
When.
The timing is the best for the company then we'll execute on that.
And then.
I think Luke.
Paying down the debt.
As a component of that so we'll look to continue to.
Our cash flows.
Introduce those cash flows.
De lever.
Okay.
Reduce that debt amount.
I'll just add Tobey that I think as we've talked about I mean.
We've been using we've been leaning forward and managing our facilities footprint and reducing our spending there given that we'll be operating in a hybrid environment benefit working full time in the office.
And that has.
In doing so.
So we reduced the investment spend there and we've been using those savings post to invest back in the business and to offset some of the interest related piece.
Pieces, we've seen.
And I expect we will continue to do that.
Be able to do.
At going forward.
I just would also as Barry said I think we do.
We do hedge I think about 30% is very sensitive losses.
And it's hedged at less than a 4% interest rate. So we have.
We've also leaned in on the hedging front too.
Thank you.
Thank you for your questions.
Okay.
And our next question comes from.
Mr. Marc Riddick of Sidoti and your line is open go ahead. Please.
Hey, good evening.
Hello.
Yes.
Okay.
So I wanted to just wanted to touch on the.
State and local spend.
Spend and so the activity that we're seeing there and maybe some of the levers and ball does wondering if you could talk a little bit about the.
Given the strength that we're seeing in federal and certainly there is infrastructure spend to be.
We've done on the state and local level eventually I Wonder if you could talk a little bit about.
The timeframe that Youre looking at for some of those projects that you are getting sort of any sort of feedback from the state and local customers too.
The timing of putting putting projects to work and moving forward there as well as maybe you could give us a bit of an update on maybe some of the.
Disaster.
The work that you're doing thank you.
So I think as you know.
Our state and local business has essentially two major components.
Split down the middle.
Our environmental monitoring.
Permitting work about large infrastructure projects that are disaster management work.
I think that.
As we noted in our remarks that favorable business I think it's been growing double digit we achieved double digit growth in the quarter.
Yes, I think.
J a funding.
As we said does provide the 1 billion to $2 billion of addressable market for <unk>.
A lot of that opportunity will be at the state and local level and we'll be around traditional infrastructure projects.
And roads and rail to energy.
In water related infrastructure and so on.
I think that is.
Sure.
Importantly.
Source of future opportunity for us I think as we've discussed.
Do you see that ramping up and that opportunity coming to to begin to come to lessen in the second half of 2023.
And then helped to drive our growth in 2004 beyond that money will be spent over the.
Five plus years and so.
So.
So that's sort of an important opportunity I would look to it severely.
Material and.
For the company in the second half of 2023, and we are seeing we do have a robust pipeline.
Nate.
JA front.
And our overall state and local or pipeline is up $1 1 billion.
On the disaster recovery.
I think we have very strong book of business and are executing well in both Puerto Rico and Texas.
I think there will be additional opportunities for us over time.
While the Rico as I said in my remarks was <unk> 41, who received a $10 million plus.
The support for the rebuild of the immediate response activities.
On the way down there.
And I expect there will be opportunities.
Okay.
That will play out here in the next six to nine months.
That will be tracking very carefully.
FCB.
The material in the second half of 2023 and beyond.
We remain quite bullish on.
Both both of those markets there are part of our key growth drivers.
We certainly expect to have strong growth in state and local markets.
Great and then if I could just add one more question I just wanted to touch on maybe if you could bring us up to speed on your thoughts on on views on acquisition pipeline and following some method.
The acquisition appetite seems to it seems to be quite healthy still but I wonder if you could sort of talk a little bit about maybe what the pipeline might look like now and maybe if it's changed over the last six months given the risk.
Recessionary concerns that are out there. Thanks.
Yes, I think.
Well I think our focus right now is.
Integration and integrating the acquisitions we.
We've completed.
Here in the third quarter domestic based with a significant acquisition for us and certainly helped with the improve our positioning in the it modernization front.
And as such it was a small tuck in on the environmental front.
My expectation is we're going to be laser focused on integration of those acquisitions here through the first half of next year.
And associated with that we're going to be laser focused on.
<unk>.
Paying down debt and carefully managing our cash flow so I don't see that.
I don't see us.
Sure.
Leaning in or.
The board, making any significant investments on the M&A front.
At least into through the end of this year and in the first half of next year I think will be.
Quite focused on successful successfully successfully integrating the deals we've done.
Paying down our debt in terms of the market I mean, I would say that there is still opportunities in the.
Federal government services market Theres still activity in energy markets.
I think there's still quality companies out there.
No.
And so we obviously.
Are out in the market, we have a pipeline.
We'll stay close to the market.
Honestly, we haven't seen a significant change in valuations in the market.
But as I say I think our focus here for the next through the first half of next year will be on.
Anybody.
Deals we've done it.
So I'll take down our debt.
Through the first half of next year.
Very helpful. Thank you very much.
Thank you Mr Riddick with Sidoti.
Last call I would now like to turn it back to John Watson for closing remarks.
Okay.
For all of your participation today, we say I look forward to meeting you at upcoming events. Thank you.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.