Q3 2023 ICF International Inc Earnings Call
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Welcome to the third quarter 'twenty twenty-three ICF earnings Conference call. My name is hope and I will be your instructor for today's call at.
At this time all participants are in a listen only mode. After the speaker's presentation there'll 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 your hand is raised to withdraw your question. Please press star.
One one again please be advised that today's conference is being recorded I will now turn the call over to Lynn Morgen of Advisory partners Lynn you may begin.
Thank you hope the good afternoon, everyone and thank you for joining us to review Icf's third quarter 2023, performing well.
With us today from ICF are John Watson Chair, and CEO and Barry brightest CFO, joining Dennis James Morgan Chief operating Officer.
During this conference call, we will make forward looking statements to assist you in understanding ICF management's expectations about 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 our November 2nd 2003 press release.
And our SEC filings for discussions of those risks.
In addition, our statements. During this call are based on our views as of today, we anticipate that future developments will cause our views to change. Please consider the information presented in that light.
At some point elect to update the forward looking statements made today, but specifically disclaim any obligation to do so.
I will now turn the call over to Icf's CEO, John Russell to discuss third quarter 2023 performance John.
Thank you Lynn and thank you all for participating in today's call to review, our third quarter of 2022 results and discuss our business outlook. This was another strong quarter for ICF in which we achieved significant growth across all key financial and business metrics.
There are several key takeaways worth noting.
First we reported year on year revenue growth of seven 2% adjusting for the sale of our commercial marketing group in mid September and the closure of our commercial U K events business at the end of the second quarter third quarter revenue growth is estimated at eight 4%.
Second profitability metrics continued to be strong driven by higher utilization favorable mix lower facility costs and scale efficiencies.
This was a record quarter for both federal government contract awards, which totaled 700 million as well as overall contract awards, which reached $875 million.
In the third quarter book to Bill at one seven times on a trailing 12 month book to Bill of one three times. This supports our expectations for considerable growth and recurring revenues in 2024.
Looking at our year to date results, we continue to be very well positioned in the key growth markets. We have identified and have invested in over the last several years. These markets, namely utility consulting disaster management climate environment and infrastructure services public health it modernization digital attachment transformation.
Accounted for roughly 80% of our nine month revenues adjusting for the sale of CMG and our exit from the commercial UK events business.
Our performance in these growth markets is primarily captured in our two major market categories.
First energy environment infrastructure, and disaster recovery, and second health and social programs, which together accounted for 83% of our third quarter revenues.
Across these major markets there are several third quarter highlights worth noting.
Revenues in our energy environment, and infrastructure and disaster management market increased 14%.
Accounted for 41% of our third quarter revenues.
Commercial utility programs, which include our energy efficiency programs had an excellent quarter benefiting from expanded energy efficiency and electric rectification works for several of our utility clients.
Our energy Advisory services performed exceptionally well in the third quarter we.
We saw increased demand for our electrical engineering power and technical Advisory services.
In the increased impact of renewable development and the Iranian legislation.
So now we are working with 10 utilities and through state agencies and federal Grant applications. So grid resilience under these two pieces of legislation and we continue to see strong client interest in the integration of services such as renewable interconnection applications EV charging station design and load planning.
Taken together, our commercial energy business grew 17% in the quarter.
In the third quarter, we won contracts valued at over $30 million to assist in the planning and implementation.
Hi, Jay and IRI programs, bringing our accumulative JA and IRA related awards, primarily from federal and state government clients to approximately $100 million.
This does not include all the related work for many of our commercial clients, but it is more difficult to directly associated our engagements with specific legislation.
This is Ed.
Significant progress has been made in the flow of authorized federal dollars to recipients under these two acts.
Additional downstream opportunities for ICF.
As market analysis siding and environmental support services.
Immunity and stakeholder engagement support independent engineering services construction monitoring restoration services and the like to begin to materialize in greater volume in 2024, and 2025 is financially supported projects move to the permitting and construction monitoring faces.
And disaster management, we continue to execute effectively on existing contracts in Puerto Rico, and Texas, and we were awarded a $24 million Recompete contract with the government of Puerto Rico's public private partnership authority to provide disaster recovery project services.
Florida.
Florida recently expanded our current contracts to incorporate response and recovery activities for.
For Hurricane Italia, and we are positioning for longer term housing opportunities that may be on the horizon in Florida and in Hawaii.
In the third quarter, we were awarded a new $23 million contract with the Oregon housing and community services Department to provide disaster recovery and resilience program management services.
Under this structure at nearly 4300 homes.
Wildfires in 2020.
A comment environment and infrastructure services cut across all of our client categories.
Revenues from this business area continued to increase at a double digit rate in the third quarter.
Representing general growth across the portfolio as well as expanded work with wind developers.
Sales this quarter included contracts with utilities developers and federal agencies, and addressing the environmental impacts and permitting for a broad range of technologies, including solar storage wind hydrogen and transmission lines.
Our other major market health and social programs also did well in the third quarter, posting revenue growth of 7% and representing 42% of third quarter revenues.
Key growth drivers in this market, namely it modernization of public health as historically garnered bipartisan support and had been well funded and Ics expanded capabilities provide us with substantial run rate you saw market share.
These areas performed well in the third quarter and had new stellar contract wins.
And public health, we continue to deliver excellent results and are assisting our clients and driving positive outcomes.
As a result, we expanded our existing work and one new work across a broad swath of petrol.
And federal health agencies and clients, including the administration for children and families. The centers for disease control the centers for Medicare and Medicaid services, food and drug administration, and the National Institutes of health as well as environmental Protection agency in USA.
These wins as well as our several it modernization wins with public health agencies set us up very well for continued growth in this market in 2024.
In fact, I just have one over $150 million of new contract awards related to modernization and digital task formation services for federal agencies in the third quarter.
As you can see from our earnings release. This included a substantial contract expansions at two agencies within the department of health and human services.
We also won new it modernization work and other federal agencies, including a $55 million contract with the U S Forest service to modernize wildfire applications and services, which is a great tie in with our disaster management capabilities and new task orders amounting to $67 million from immigration and customer Horsemint within the department.
Homeland security.
And elsewhere in the federal Arena, we want $143 million Recompete with a significantly expanded scope to provide advanced data science and analysis services related to cyber security.
The record $700 million of total federal government contracts, we were awarded in the third quarter.
And both our growth prospects and our resilience heading into 2024.
Our backlog at the end of the third quarter was a substantial $3 8 billion and even after a strong quarter of contract wins, our business development pipeline stood at $9 8 billion, representing a large and diversified set of opportunities across our client set.
Metrics together with our performance to date underscores the confidence nic's ability to capture the significant growth opportunities on the horizon.
Now I will turn the call over to our CFO Barry bonus for our financial review Barry.
Thanks, John and good afternoon, everyone I'm pleased to provide additional details on our strong third quarter 2023 financial performance.
Total revenues grew seven 2% year over year to $501 5 million.
Adjusting for the prior year revenues related to the commercial marketing group, which was conducted in the third quarter.
And the UK commercial events business, which we exited in this year's second quarter. Our total revenues increased by an estimated eight 4%.
Our year on year growth was driven by strong performance in our energy environmental and infrastructure and disaster recovery and health and social programs market categories.
Subcontractor and other direct costs growth slowed in the third quarter and totaled $136 1 million, which represented 27, 1% of total revenue as compared to 28, 3% in last year's third quarter.
Third quarter gross margins of 35, 5% expanded by 120 basis points year over year, and 60 basis points sequentially in line with our expectations.
This improvement was a result of a more favorable mix, which is more heavily weighted toward ICF direct labor than last year.
We expect to see further improvement in gross margins in the fourth quarter.
Our indirect and selling expenses increased 11, 2% year on year to $131 6 million.
As a percentage of total revenues adjusted indirect expenses increased 100 basis points year over year to 24, 7%.
The timing of certain noncash charges.
On a year to date basis, adjusted indirect expenses decreased by 90 basis points and represented 24, 7% of total revenues.
We continue to rationalize our facility and other expenses as well as experience economies a scale business.
In the third quarter EBITDA increased 14, 3% to $49 2 million and adjusted EBITDA increased seven 3% to $54 3 million year over year.
Interest expense of $10 6 million increased from $7 4 million in the third quarter of 2022 due to higher interest rates. However, the interest rate impact was offset in part by our tax optimization strategies, which drove a decrease in our year over year tax expense of $2 2 million.
Net income was $23 7 million or $1 25 per diluted share in the third quarter inclusive of a $5 1 million or <unk> 20 per share and tax effected special charges related to our facility reduction.
M&A and severance costs and the net gain on the sale of CMG.
This quarters net income also included a onetime tax benefit and contributions from other tax optimization strategies, which were above the previous estimate that we discussed during our second quarter call and equated to 13 <unk> per share.
The year over year, net income and diluted share comparisons reflect increases of $24 three and 23 eight respectively from our net income of $19 1 million or $1 one per diluted share in the third quarter of last year.
Third quarter, non-GAAP EPS increased 12, 4% to $1 81 per share compared to $1 61 per share reported in the third quarter of 2022.
Shifting to cash flows and our balance sheet, our year to date operating cash flow increased to $45 6 million significantly ahead of the $6 $6 million in the comparable period. In 2022. This improvement was a result of our continued cash management initiatives. Our days sales outstanding improved to 73 days as compared to 87 days.
In last year's third quarter.
Capital expenditures in the first nine months of this year totaled $17 7 million similar to the comparable period in 2022 reflects which reflects investments in innovative client facing technologies and improvements in the company's infrastructure.
We made significant progress on debt reduction paying down $67 9 million in debt during the third quarter that pay down was a combination of cash flows from operations as well as the proceeds from the sale of CMG.
As compared to the third quarter of last year, we have reduced our debt by $168 million inclusive of the acquisitions of Winton and <unk> solutions and the divestiture of CMG.
Our adjusted net leverage ratio was two seven times at quarter end compared to three one times at the end of the second quarter given the significant progress we are confident in our ability distribute reduce our leverage position by additional half a turn by year end.
Fixed rate debt was approximately 50% of our total debt at quarter end, which is consistent with our target as we continue to prioritize delevering, we expect our fixed rate debt position to be around 60% of our total debt at year end and.
In addition to debt reduction our balanced approach to capital allocations include organic growth initiatives acquisitions share repurchases to offset the dilution of our employee incentive programs and quarterly dividends today.
Today, we announced a quarterly dividend cash dividend of <unk> 14 per share payable on January 12, 2024 to shareholders on.
On December eight 2023.
Now to help you with your 2023 your financial models. Please note the following.
Our depreciation and amortization expense range has narrowed to 24% to $25 million.
Amortization of intangibles guidance remains at approximately $36 million.
<unk> expense is now expected to be in the range of $38 million to $39 million.
We now expect the tax rate for this year to be approximately 14% as compared to the 17%. We previously guided to with the fourth quarter of this year to be in the range of 23%.
Operating cash flow is still projected to be $150 million, we expect our fully diluted weighted average share count to be approximately $19 million and our capital expenditures are anticipated to be between 24 and $26 million down from our prior guidance of $26 million to $28 million.
For 2020 for modeling here are some preliminary indications.
Our record sales and robust business development pipeline will support high single digit organic growth and drive recurring revenues for 2024. This includes the impact of the divestiture of our commercial marketing group and the wind down of our commercial UK events business in 2023 together these businesses contributed.
2023 revenues of approximately $60 million on a year to date basis, and assuming similar margins to the rest of our business. These service lines are estimated to have contributed approximately <unk> 20 of EPS that will not recur in 2024 and.
In addition in the fourth quarter of 2022, the divested business lines contributed approximately $20 million of revenue.
And with that I will now turn the call back over to John for his closing remarks.
Thank you Barry our year to date performance reflects the benefits of decisions. We've made over the last few years to strengthen icf's positioning in key growth areas and to invest in our long term growth strategy, while simultaneously improving profitability.
Revenues from the key growth markets that we invest organically and through acquisitions represented approximately 80% of our total nine months revenue adjusted for the sale of CMG and the exit of our commercial U K marketing business up from 55% at the end of 2020.
And our year to date profitability metrics reflect actions that we've taken to deploy our resources to support these growth markets strengthening operating efficiency and streamlining our business.
Based on our results to date and the recent sale of our commercial marketing group and the exit of our commercial <unk> business at the end of the second quarter. We are narrowing our guidance range for full year 2020, <unk> revenue to $1 95 billion to $1 98 billion and we anticipate subcontractor and other direct costs will be approximately.
<unk>, 27% total revenue.
Adjusted EBITDA is expected to range from $2 12 $218 million.
We are raising our guidance for GAAP EPS to $5 to $5 10 exclusive of special charges and non-GAAP EPS to $6 40 to $6 50 to slower than anticipated tax rate.
We are looking ahead to another year of substantial progress highlighted by high single digit recurring revenue growth in 2024 supported by the strong financial and operating metrics, we expect for this year.
We're also looking ahead to 2024 to be another year in which ICF and as people make a notable positive impact on society through our daily work.
Encourage you to read our latest corporate citizenship report, which we are pleased to report has won several industry leading awards and provides further insights into how our people working together to improve outcomes and serve our clients with integrity.
Operator, we'll now open the call to questions.
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 on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Standby, while we compile the Q&A roster.
Our first question comes from Tobey Sommer with tourists Securities Tobey. Please go ahead.
Hey, good afternoon. This is jasper bibb on for Tobey.
Can you get any early thoughts on what 24 might look like from a margin expansion perspective.
Is the 10 to 20 basis points annually that you outlined at last year's Investor Day still a good baseline to think about or are there. Other factors, we should consider there.
I think we've consistently guided that 10 to 20 bps of margin improvement.
And I would expect that.
That will that will continue I would expect to see 10 to 20 bps of margin improvement.
As we look forward for next year.
Okay.
Thanks for that really strong bookings quarter and you also highlighted the J and iron ore wins, there based on what Youre hearing from clients. How significant do you think the pickup in bookings activity related to those two bills could be next year.
Yes, I think it's I mean, it's hard to provide specific numbers on that I mean, I think as I said in our in.
In my remarks, I mean, I think we are seeing positive trends in the money.
The speed of the flow the money continues to increase.
I didn't know we $130 million of Jay and I are related work in the third quarter, where we're up to $100 million. We're certainly seeing the funds flowing to our federal and state local clients.
We're seeing greater flow of those funds and so I think as we've discussed I think that as we look to 'twenty four 'twenty five and beyond I think that those.
I will certainly represent growth opportunities for us and as we've said before I think that plays out well for us.
That is the path by which we could go from high single digit organic growth.
Hello double digit organic growth as we look forward.
Right.
Definitely makes sense.
Last question from me obviously.
Long term yields continue to move up just any color on what 24 could look like from a interest rate or interest expense perspective will be helpful. Thanks.
Yes.
I think that the priority of the company as we've stated previously is to de lever and.
Absent of any acquisition activity the expectation would be is that interest expense will.
Go down year over year as our debt goes down.
Thank you for taking our questions.
Thank you please standby for our next question.
Our next question comes from Joseph <unk> with Canaccord. Your line is open.
Hey, guys. Good afternoon really nice results once again.
As kind of a broken record.
Consistency, so congrats on that but.
I know you are preliminarily looking yes.
You are preliminarily looking at Mike.
Hi high single digit revenue growth looking at that is there.
Headcount growth is still going to be linear to revenue growth or is there any emerging.
Leverage too.
Growing revenue ahead of head count or how are you thinking about staffing for next year and then I'll have a follow up.
Yes, I think as we've talked about in the past till I would generally expect that head count.
We will track with revenue as you know and we've talked about we're always looking to.
Increasing.
Increased utilization as we grow.
And.
Squeezed and so but in general I think if we are growing 5%, let's pick a number for for growing 5%. We're looking at four 5%.
Head count increase I think thats, the nature of the business and it will generally track I don't see a shift in that.
As I look out the next year.
Fair enough.
And then my.
I have missed it did you call out.
Modernization growth rate I know you were talking about some segments and their growth I'm not sure if you called that out.
Modernization still be like a main area of acquisition activity for you at this point.
Thanks, a lot guys.
Yes.
<unk>.
Called out the federal organic growth rate.
The results, Joe, let's say that let's.
I'd say a couple of things I think what I would emphasize there as we went to $150 million.
Modernization work in the quarter, which we're very pleased with the.
A substantial portion of that.
As new work I think it is going to really set us up nicely as we go into next year for continued strong growth there and so we're we feel very good about that.
In terms of of acquisitions I think as we've talked about we have I think we have the.
The core business that we need to.
Provide those services and be a leader in that market.
From the low code no code capabilities to the open source.
Native capabilities were.
We're also looking at the data analytics platforms.
And building our capabilities there. So I think we have the core of what we need I think to the extent that we are looking for acquisitions. There is more likely to be tuck in niche acquisitions that fill specific.
Skills and capabilities.
And so I think that's how we're thinking about that market I think.
<unk>.
I think thats the story with IP monetization.
Got it maybe I'll just sneak one more in on it modernization what our client.
Thinking or saying right now about all of that to generative AI going on do they want to use it it feels like in the health business.
So much data there could be some opportunities just wondering like how fast do you think clients federal climate may move forward with the kind of technology.
I would now let me tell you.
I mean, we're certainly seeing increased interest from our clients, particularly in the federal sector.
Honestly.
<unk> been doing AI for some time.
Obviously on Canada.
But we're certainly seeing interest from our clients I think are.
We have 1800 technologists, so certainly are.
Have taken advantage of AI capabilities that are.
And these platforms are.
Certainly.
In discussions with clients on generative AI.
And so.
There's a lot of interest I think it's we are working with clients on it. We're also looking for how we can use it internally.
No I wouldn't say, it's a material portion of our growth in it modernization, but we're seeing a lot of interest within and are engaged with clients on it.
Great. Thanks, guys.
Thank you.
A reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Our next question comes from Sam <unk> with William Blair. Your line is open.
Okay.
We will go ahead and take our next question. Please standby.
Okay.
Our next question comes from Marc Riddick with Sidoti Your line is open.
Hey, good afternoon, I was wondering if you could touch a little bit on sort of a client activity levels and maybe you could talk a little bit about if there are any.
Market that you've seen accelerate more recently and if there are any that that youre seeing clients kind of pullback in delay action or projects.
I would say that I don't think we've seen any.
Significant change and our clients.
Activities.
In terms of leaning forward in new areas or pulling back I mean I think.
As we've talked about Mark.
We have the five key growth drivers I think we continue to see a lot of opportunity there I think.
The pipeline is good sales are good we have the backlog.
We haven't seen any shifts in our clients.
Client activities in the last quarter.
And I would say in the federal space.
It's business as usual I mean I think.
And we were quite pleased with our sales coming in quite strong at the end of the third quarter.
So we haven't seen any shift in that in that space. So so no I wouldn't highlight any significant shifts here in the last quarter with our clients in the areas of focus around the business.
Okay, and then I noticed a couple of days ago, you had the announcement of the disaster recovery.
When I believe it was Oregon I was wondering if you talk a little bit about maybe what you might be seeing pipeline wise with disaster related opportunities and whether or not there was any any anything that we should be aware of that might be on the horizon in the near term.
Okay.
Zinc ore.
While we were pleased we've picked up additional working in Florida in the last quarter.
And from Hurricane down here, we were pleased with that I think we are tracking some opportunities in Hawaii that are still in the early stage.
Related to the fires there and.
I think we are.
We're taking a hard look at that.
And so I think the pipeline for our disaster recovery is respectable.
As we.
We're looking at hard I think theirs.
As I say I think.
The new the newer opportunities that we're focused on I would say are in Florida and potentially Hawaii.
Okay.
Okay, Great and then last one for me this might be a little odd, but I was wondering if there were any particular.
Ballot initiatives coming up that we should be aware of or anything that you guys are kind of tracking that might.
Lead to some some opportunities down the road. Thank you.
I'm, sorry, Mark I missed what kind of initiatives.
Broke up there from any ballot initiatives coming up coming up with election day are there any areas or any.
That might create some opportunities for you.
Yes.
Nothing comes to mind for me.
I don't know if James or Barry do you have any.
Yes.
There is no no valid initiatives.
<unk> come to mind immediately mark that I think would be material for us.
Okay. Thank you very much.
Thank you.
At this time Im showing no further questions I would now like to turn it back to John for closing remarks.
Yes.
Okay. Thank you and we appreciate you participating in today's call and we'll see you in our Q4 call.
Thank you.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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