ICF International, Inc. (NASDAQ:ICFI) Q4 2023 Earnings Call Transcript
ICF International, Inc. (NASDAQ:ICFI) Q4 2023 Earnings Call Transcript February 27, 2024
ICF International, Inc. beats earnings expectations. Reported EPS is $1.68, expectations were $1.64. ICF International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Q4 and Full Year 2023 ICF Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Lynn Morgen of Advisory Partners. Please go ahead.
Lynn Morgen: Thank you, operator. Good afternoon, everyone and thank you for joining us to review ICF’s fourth quarter and full year 2023 performance. With us today from ICF are John Wasson, Chair and CEO; and Barry Broadus, CFO. Joining them is 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 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 our February 27, 2024 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. We may 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 Wasson, to discuss fourth quarter and full year 2023 performance. John?
John Wasson: T hank you, Lynn and thank you all for joining us this afternoon to review our fourth quarter results and discuss our outlook for 2024. Our solid fourth quarter results capped another record year for ICF. Key takeaways from 2023 include full year growth in revenues from continuing operations of 12%, further margin expansion driven by higher utilization, lower facility costs and the overall benefits of ICF’s increased scale, ICS considerable contract wins reaching over $2.3 billion for the year, of which 70% represented new business, indicating how well positioned we are in areas of increased spending, and lastly, the substantial runway ahead for ICF, as we ended the year with a $3.8 billion backlog, a book-to-bill ratio of 1.2 and a $9.7 billion business development pipeline, pointing to considerable growth opportunities for ICF over the next several years.
Our investments in key growth markets continued to yield positive results and returns in 2023. These markets, namely utility consulting, disaster management, climate environmental and infrastructure services, together with public health and IT modernization, digital transformation accounted for approximately 80% of our revenues from continuing operations in 2023, up from 75% on the same basis last year and approximately 55% in 2020, a clear indication of the successful implementation of our strategic intent with which we have built out our capabilities over the past several years. ICF’s performance in these growth areas is primarily captured in our two major market categories: Energy Environment, Infrastructure and Disaster Management and Health and Social Programs.
Revenues from continuing operations in our Energy Environment, Infrastructure and Disaster Management market, increased 10.3% in the fourth quarter and were up 13.4% for the full year, reflecting positive momentum across our portfolio of programs and services. Highlights included double-digit revenue growth in energy efficiency program revenue in 2023, thanks to continued expansion of existing programs and the capture of several new utility clients. As you can see from our earnings release, contract awards in this area were quite strong in the fourth quarter, with 45% of the dollar amount awarded to us representing new clients or expanded scopes of work. Our Energy Advisory work, which saw very strong growth in the fourth quarter and for the full year, benefiting from the addition of Power Engineering from CNY in May last year, which compromises the core of our grid engineering and analytics capability or GEA team, as well as increased demand for our power and technical advisory services around renewable development and the impacts of the IRA and the IIJA.
Also, we are pleased to note that we were recently selected as Engineer of Choice for a large East Coast utility and we are seeing a significant number of revenue synergy opportunities with our GEA team and our Disaster Management, Environmental and Electrification teams. And our environmental and planning work for commercial clients also was a strong performer in the fourth quarter and full year, driven by ongoing work for renewable developers as well as increasing resilience work for utilities and undergrounding power lines. IRI tax credits are supporting private development of renewables. And despite a few cancellations, we are seeing strong demand for our services in these areas, mostly for projects offshore in New York, New Jersey and Northern California and future lease auctions in additional geographies are scheduled for this year.
In Disaster Management, we continue to execute on our large multiyear contracts in Puerto Rico and Texas and are working on mitigation projects in over 15 states. We recently were awarded a small, but strategic project in Virginia and the County of Mali, where we are providing technical and training assistance for HUD compliance. Lastly, our Climate Environmental Infrastructure services, which cut across all of our client categories continued to show significant year-on-year growth in both the fourth quarter and full year. We saw expansion of climate programs for federal government agencies an increasing urgency at the federal level to disperse IRA and IIJA funding. ICF is currently working with a number of applicants on climate priority plans, which should provide additional opportunities for us as the years progresses.
To-date, ICF has been awarded just north of $110 million, in contracts related to the IIJA and IRA, primarily from federal and state government clients and our current pipeline is over $215 million. This does not include all the related work that we are doing for commercial clients, where it’s more difficult to associate our engagements with specific legislation. Turning to our health and social programs market, revenues from continuing operations were up 2.4% in the fourth quarter and 15.9% for the full year. Fourth quarter comparisons were impacted by the anticipated roll-off of certain small business contracts held by companies we acquired as well as the significant reduction in pass-through revenues, associated with the large international development of the health contract.
As you know, we had substantial federal government contract awards in the third quarter, followed by additional wins in the fourth quarter and our federal government pipeline was over $6.6 billion at the end of the year. Thus, we are confident that our federal government revenue comparisons will improve substantially in the second half of this year as new contracts ramp up. And we expect our federal government revenues to grow at a high single-digit rate for full year 2024. Notably in the fourth quarter was the receipt of the Excellence in Frontline Public Health award, given to the BioSense project, which we support at the Center for Disease Control. This project was recognized for its effort to collect data for more than 75% of the nation’s emergency rooms.
Additionally, we expanded our conventional AI capabilities and our federal health work to introduce new strategies for data collection and processing that enhance the speed and accuracy of health information monitoring and response systems. Also, we won several awards for new or expanded work in the fourth quarter, including at the Environmental Protection Agency to assess the risk of chemical exposure to human health at the substance of use at Mental Health Services Administration to support mental health programs and at the Centers for Disease Control to support overdose prevention programs. In the IT modernization digital transformation arena, we followed strong third quarter contract awards of over $150 million, with another $150 million awards in the fourth quarter, including a $33 million recompete win, the Centers for Medicare and Medicaid Services to continue our modernization of their system for kidney dialysis data, a $58 million expanded recompete with the Western U.S. State Lottery to support the operation of its cloud-based website and new contracts from the FDIC in the Department of Treasury.
Additionally, we continue to pursue new opportunities to drive synergies between SemanticBits, strong footprint at CMS and ICS platform capabilities with ServiceNow. And we are increasingly showcasing SemanticBits open source and cloud native capabilities to our longstanding clients at the CDC, the NIH and the FDA. Both public health and IT modernization are areas of bipartisan support and we believe ICF’s deep domain expertise in health and our broad technology capabilities across the key platforms of choice in the federal government position us for growth in 2024. Before ending my review of the 2023 business highlights, I want to mention a unique item. As you may know, we have an aviation consulting business that works with airlines, airports, and other aviation entities.
We have particular expertise in the sustainable aviation fuels area. In fact, ICF proudly supported Virgin Atlantic Flight100, the first commercial aircraft flown on 100% sustainable aviation fuel from London, Heathrow landing at New York’s JFK on November 29, 2023. And we had several team members on board that flight. With that, I’ll now turn the call over to our CFO, Barry Broadus, for his financial review. Barry?
Barry Broadus: Thank you, John. Good afternoon, everyone. I am pleased to provide you with additional details on our 2023 fourth quarter and full year financial performance. Total revenues in the quarter were $478.4 million comparable to the reported revenues for the fourth quarter of 2022. Adjusting for the divestiture of our commercial marketing business in 2023, total revenues increased 4.9%, led by a strong 8.8% growth from our commercial energy clients and 16.9% growth from our state and local and international government clients. Subcontracting and other direct costs totaled $129 million or 27% of total revenue as compared to 28.7% of total revenue in the fourth quarter of 2022. Excluding subcontractor and other direct costs, revenue from continuing operations increased 7.9% in the fourth quarter.
Gross margin for the fourth quarter was 36.5% of total revenues up 100 basis points from the third quarter of this year. Our fourth quarter indirect and selling expenses decreased 9.8% year-over-year to $123.4 million. On an adjusted basis, indirect and selling expenses were 24.4% of total revenues for the fourth quarter and 24.6% for the full year, representing a year-over-year decrease of 50 and 80 basis points respectively as we continue to benefit from reduced facility-related expenses, the increased efficiency and scale of the business and the sale of the commercial marketing business, Fourth quarter EBITDA was $53.9 million, an increase of 46% from the fourth quarter of 2022 due in part to non-recurring expenses incurred during the fourth quarter of last year.
Our adjusted EBITDA was $57 million, a 3.3% increase from the fourth quarter of 2022 as our year-over-year growth was impacted by the CMG divestiture, which occurred in the third quarter of 2023. Interest expense of $9.5 million increased from $9.2 million in the fourth quarter of 2022, reflecting higher interest rates and the impact of non-cash accounting charges. As we mentioned throughout 2023, we continue to successfully offset a significant portion of the bottom line impact of our higher interest expense through various cost reduction initiatives and tax efficiency strategies. Net income was $22.2 million or $1.16 per diluted share in the fourth quarter compared to net income of $8.9 million or $0.47 per diluted share in the comparable period last year.
Fourth quarter net income included $4.4 million or $0.18 per share in net tax-effected special charges related to facility reduction and severance costs partially offset by the net gain on the sale of a remaining portion of the commercial marketing business. Moving forward, we will continue to evaluate facilities as appropriate, but we would expect any facility-related charges to be considerably less than what we incurred in 2023. Fourth quarter non-GAAP EPS was $1.68, an increase of 7.7%, compared to the $1.56 per share recorded in last year’s fourth quarter. Our fourth quarter non-GAAP EPS was also impacted by the divestiture of the commercial marketing business. I will now briefly review our 2023 results. Total revenue was $1.96 billion, representing an increase of 10.3% from the prior year and 12.3% from continuing operations.
Our strong top line performance for the full year was led by our growth markets, which drove double-digit revenue growth from both government and commercial clients, highlighted by a 15.7% growth in our commercial energy business and a 10.5% increase in our U.S. government revenues. Subcontractor and other direct costs were $534.7 million or 27.2% of total revenue, compared to 27.8% of total revenue in 2022. Adjusted EBITDA increased 11.2% to $213 million, compared to $192 million reported in 2022. Full year GAAP EPS was $4.35 per diluted share, including $17.6 million or $0.71 per share in net tax effective special charges, which primarily consisted of facility-related severance and M&A costs, which were partially offset by the gain on the sale of CMG.
In 2022, GAAP EPS was $3.38 per diluted share, including $1.31 of tax-affected special charges. For the full year, our non-GAAP EPS was $6.50, representing a 12.7% increase year-over-year. We’re very pleased with our success in optimizing profitability. In addition to the actions I mentioned earlier, we have implemented multiyear tax strategies that enabled us to realize a 14.4% tax rate in 2023. Going forward, we anticipate our tax strategies will allow us to maintain an annual tax rate of approximately 23.5% in 2024 and 2025. Shifting to cash flows and our balance sheet. Our full year operating cash flow totaled $152.4 million. This compares to $162.2 million in the prior year, which benefited from approximately $30 million related to the timing of collections and disbursements.
Our day sales outstanding was 72 days, as compared to 71 days in last year’s fourth quarter. Capital expenditures for 2023 totaled $22.3 million, down from $24.5 million in the prior year. We made significant progress on our debt reduction, paying down $104 million in debt during the fourth quarter. Pay-down was primarily driven by our cash flow from operations. We reduced our total debt by nearly $130 million, since the end of last year, inclusive of the acquisition of CMY Solutions. Our adjusted net leverage ratio was 2.16x at quarter end, compared to 2.7x at the end of the third quarter, ahead of the guidance we provided on our previous call. In 2024, we will continue to focus on debt reduction, asset and acquisition, we expect to de-lever in a similar manner as we did in 2023.
Our fixed debt was approximately 60% of our total debt at year-end, which is consistent with our target. Our average interest rate for 2023 was 5.6%. We remain committed to our balanced approach for capital allocation, which includes organic growth initiatives, acquisitions, debt reductions and share repurchases to offset the dilution of our employee incentive programs and quarterly dividends. Today, we announced a quarterly cash dividend of $0.14 per share, payable on April 12, 2024, to shareholders of record on March 22, 2024. I will conclude my remarks by providing additional guidance metrics for 2024, to assist you with your modeling. Looking at the cadence of 2024, we expect to generate approximately 48% of our revenue guidance in the first half of the year with the balance in the second half.
Depreciation, amortization expense is expected to range from $24 million to $26 million. Amortization of intangibles should be approximately $32 million to $33 million. Interest expense will range from $32 million to $34 million. And as I mentioned, our full year tax rate will be approximately 23.5%. We expect a fully diluted weighted average share count of approximately $19 million. Operating cash flow is expected to be $155 million and our capital expenditures are anticipated to be between $25 million and $28 million. And with that, I will turn the call back over to John for his closing remarks.
John Wasson: Thanks, Barry. In 2023, we took several strategic actions to streamline ICF business, and strengthen our positioning in the key growth markets we have identified. These included the integration of the SemanticBits acquisition, providing us with critical open source capability, the divestiture of our Commercial Marketing business lines and the addition of CMY, which brought us new competencies in the fast-growing areas of grid modernization and electrical engineering. In doing so, we further focused our portfolio towards high-growth verticals. This served us well in 2023 and will continue to drive ICF’s profitable growth in 2024 and beyond. And as Barry noted, we substantially reduced our net leverage ratio in 2023, providing ICF with additional financial flexibility to execute on our acquisition growth strategy, which has been a key element of our success to date.
Based on our current strong backlog and visibility, together with the ongoing positive trends in our key growth markets, we expect 2024 organic revenues from continuing operations to range from $2.03 billion to $2.1 billion, representing year-on-year growth of 8.5% at the midpoint and 5.2% growth at the midpoint, when compared to reported 2023 results. EBITDA is expected to range from $220 million to $230 million, reflecting year-on-year growth of 14.2% at midpoint. Our guidance range for GAAP EPS is $5.25 to $5.55 excluding special charges, and for non-GAAP EPS of $6.60 to $6.90. As a reminder, assuming similar margins to the rest of the business, our Commercial Marketing business lines are estimated to have contributed $0.20 of non-GAAP EPS in 2023, which will not recur in 2024.
Thus, on a continuing operations basis, estimated non-GAAP EPS growth in 2024 will be 7% on at the midpoint. In addition to this very positive outlook, we’re also encouraged by the many recognitions that ICF received in 2023, highlighting our commitment to a corporate culture predicated on investing in our people, minimizing our environmental footprint, supporting our communities and serving clients with integrity. And with that, operator, I would like to open the call to questions.
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