ICF International Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 8 speakers on the call.

Operator

Welcome to the Q4 and Full Year 2023 ICF Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer 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 Morgan of AdvisIRy Partners.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us to review ICF's Q4 and full year 2023 performance. With us today from ICF are John Wasson, Chair and CEO and Barry Brodus, 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.

Speaker 1

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.

Speaker 1

I will now turn the call over to ICF's CEO, John Wasson, to discuss Q4 and full year 2023 performance. John?

Speaker 2

Thank you, Lynn, and thank you all for joining us this afternoon to review our Q4 results and discuss our outlook for 2024. Our solid 4th 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, ICF's considerable contract wins reaching over $2,300,000,000 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 $3,800,000,000 backlog, a book to bill ratio of 1.2 $9,700,000,000 business development pipeline, pointing to considerable growth opportunities for ICF over the next several years.

Speaker 2

Our investments in key growth markets continue 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. ICS performance in these growth areas is primarily captured in our 2 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 4th quarter and were up 13.4% for the full year, reflecting positive momentum across our portfolio of programs and services.

Speaker 2

Highlights included double digit revenue growth and 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 4th quarter with 45% of the dollar amount awarded to us representing new clients for expanded scopes of work. Our energy advisory work, which saw very strong growth in the Q4 and for the full year, benefiting from the addition of power engineering firm CMY in May last year, which compromises the core of our grid engineering and analytics capability or DEA team, as well as increased demand for our power and technical advisory services around renewable development and the impact 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 Q4 and full year, driven by ongoing work for renewable developers as well as increasing resilience work for utilities and undergrounding power lines.

Speaker 2

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 Maui, where we are providing technical and training assistance for HUD compliance. Lastly, our climate, environmental and infrastructure services is cut across all of our client categories, continued to show significant year on year growth in both the Q4 and full year. We saw expansion of climate programs for federal government agencies and increasing urgency at the federal level to disperse IRA and IIJA funding.

Speaker 2

ICF is currently working with a number of applicants on climate priority plans, which should provide additional opportunities for us as the years progresses. Today, ICF has been awarded just north of $110,000,000 in contracts related to the IIJA and IRA, primarily from federal and state government clients and our current pipeline is over $215,000,000 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 4th quarter and 15.9% for the full year. 4th quarter comparisons were impacted by the anticipated roll off of certain small business contracts held by companies we acquired, as well as a significant reduction in pass through revenues associated with the large international development public health contract. As you know, we had substantial federal government contract awards in the 3rd quarter followed by additional wins in the 4th quarter and our federal government pipeline was over $6,600,000,000 at the end of the year.

Speaker 2

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. Notable in the Q4 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 efforts 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 expanded work in the Q4, including at the Environmental Protection Agency to assess the risk of chemical exposure to human health at the Substance Abuse and Mental Health Services Administration to support mental health programs and at the Centers for Disease Control to support overdose prevention programs.

Speaker 2

In the IT Modernization Digital Transformation arena, we followed strong Q3 contract awards of over $150,000,000 with another $150,000,000 awards in the 4th quarter, including a $33,000,000 recompete win with the Centers for Medicare and Medicaid Services to continue our modernization of their system for kidney dialysis data, a $58,000,000 expanded recompete with the Western U. S. State lottery to support the operation of its cloud based website and new contracts on the FDIC and the Department of Treasury. Additionally, we continue to pursue new opportunities to drive synergies between semantic bits, strong footprint at CMS and ICS platform capabilities with ServiceNow. And we are increasingly showcasing Symantec Bits open source and cloud native capabilities to our long standing clients at the CDC, the NIH and the FDA.

Speaker 2

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, and we have particular expertise in the sustainable aviation fuels area. In fact, ICF proudly supported Virgin Atlantic Flight 100, 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.

Speaker 2

With that, I'll now turn the call over to our CFO, Barry Broadus for his financial review. Barry?

Speaker 3

Thank you, John. Good afternoon, everyone. I'm pleased to provide you with additional details on our 2023 Q4 and full year financial performance. Total revenues in the quarter were $478,400,000 comparable to the reported revenues for the Q4 of 2022. Adjusting for the divestiture of our commercial marketing business in 2023, total revenues increased 4.9% led by strong 8.8% growth from our commercial energy clients and 16.9% growth from our state and local and international government clients.

Speaker 3

Subcontractor and other direct costs totaled $129,000,000 or 27% of total revenue as compared to 28.7 percent of total revenue in the Q4 of 2022. Excluding subcontractor and other direct costs, revenue from continuing operations increased 7.9% in the 4th quarter. Gross margin for the 4th quarter was 36.5% of total revenues, up 100 basis points from the Q3 of this year. Our 4th quarter indirect and selling expenses decreased 9.8% year over year to $123,400,000 On an adjusted basis, indirect and selling expenses were 24.4% of total revenues for the 4th quarter and 24.6% for the full year, representing a year over year decrease of 50 basis points 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. 4th quarter EBITDA was $53,900,000 an increase of 46% from the Q4 of 2022 due in part to non recurring expenses incurred during the Q4 of last year.

Speaker 3

Our adjusted EBITDA was $57,000,000 a 3.3% increase from the Q4 of 2022 as our year over year growth was impacted by the CMG divestiture, which occurred in the Q3 of 2023. Interest rate interest expense of $9,500,000 increased from $9,200,000 in the Q4 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 $22,200,000 or $1.16 per diluted share in the Q4 compared to net income of $8,900,000 or $0.47 per diluted share in the comparable period last year. 4th quarter net income included $4,400,000 or $0.18 per share in net tax affected 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.

Speaker 3

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 20 23. 4th quarter non GAAP EPS was $1.68 an increase of 7.7% compared to the $1.56 per share reported in last year's Q4. Our 4th quarter non GAAP EPS was also impacted by the divestiture of commercial marketing business. I will now briefly review our 2023 results. Total revenue was $1,960,000,000 representing an increase of 10.3% from the prior year and 12.3% from continuing operations.

Speaker 3

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 $534,700,000 or 27.2 percent of total revenue compared to 27.8% of total revenue in 2022. Adjusted EBITDA increased 11.2% to 213,000,000 compared to $192,000,000 reported in 2022.

Speaker 3

Full year GAAP EPS was $4.35 per diluted share, including $17,600,000 or $0.71 per share in net tax affected special charges, which primarily consisted of facility related severance and M and 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 multi year tax strategies that enabled us to realize a 14.4 percent tax rate in 2023.

Speaker 3

Going forward, we anticipate our tax strategies will allow us to maintain an annual tax rate of approximately 23.5 percent in 20242025. Shifting to cash flows and our balance sheet, our full year operating cash flow totaled $152,400,000 as compared to 162 point $2,000,000 in the prior year, which benefited from approximately $30,000,000 related to the timing of collections and disbursements. Our day of sales outstanding was 72 days as compared to 71 days in last year's Q4. Capital expenditures for 2023 totaled $22,300,000 down from $24,500,000 in the prior year. We made significant debt progress on our debt reduction paying down $104,000,000 in debt during the Q4.

Speaker 3

Paydown was primarily driven by our cash flow from operations. We reduced our total debt by nearly $130,000,000 since the end of last year, inclusive of the acquisition of CMY Solutions. Our adjusted net leverage ratio was 2.16 times at quarter end compared to 2.7 times 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 delever 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.

Speaker 3

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.

Speaker 3

Depreciation and amortization expense is expected to range from $24,000,000 to 26,000,000 Amortization of intangibles should be approximately $32,000,000 to $33,000,000 Interest expense will range from $32,000,000 to $34,000,000 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 19,000,000 dollars Operating cash flow is expected to be $155,000,000 and our capital expenditures are anticipated to be between $25,000,000 28,000,000 dollars And with that, I will turn the call back over to John for his closing remarks.

Speaker 2

Thanks, Barry. In 2023, we took several strategic actions to streamline ICA's business and strengthen our position in the key growth markets we have identified. These included the integration of the Symantec Bits 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 ICS profitable growth in 2024 and beyond.

Speaker 2

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 today. Based on our current strong backlog and visibility, together with the ongoing positive trends on our key growth markets, we expect 2024 organic revenues from continuing operations to range from 2,030,000,000 to $2,100,000,000 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 $220,000,000 to $230,000,000 reflecting year on year growth of 14.2 percent at midpoint. Our guidance range for GAAP EPS is $5.25 to $5.55 excluding special charges and for non GAAP EPS is $6.60 to 6.90 dollars 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% at the midpoint.

Speaker 2

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.

Operator

Thank you. At this time, we'll conduct a question and answer session. Our first question comes from the line of Joe Vache with Canaccord. Your line is now open.

Speaker 4

Hey, guys. Good afternoon. Hope everybody is doing well. Just we could kind of drill down on the organic federal outlook for this year. It sounds like there were a couple of moving parts here with some SBA business that is going away and then pass throughs.

Speaker 4

Just any of your thought process here on the cadence of that federal organic moving forward here through 2024? And then I'll follow-up.

Speaker 2

Well, sure. I mean, I think as we noted in our remarks and I think you did a nice job of summarizing, Joe. I mean, I think we are rolling off a few of the small business contracts that we acquired in 2022. And I think when we made those acquisitions, we indicated that we would roll off a certain contracts towards the end of 2023. And so we did that.

Speaker 2

We've done that certainly in the 3rd Q4 here at the end of the year. And so that has occurred. And then as we also noted, we had some reduction in pass throughs on some USAID work. I will say that as we go into next year, I don't think that we'll see as material roll offs on small business contracts. We're also winning synergistic work from those acquisitions on IT modernization.

Speaker 2

And so with the synergies that we're seeing, the strong pipeline, the strong awards, I mentioned we've I think we've discussed the last two quarters, we've had very strong awards in the federal arena, very strong pipeline in IT modernization, we won 150,000,000 in Q3, 150,000,000 in Q4. And so with that visibility and the momentum from that, I think we're looking at, I would say, low to mid single digit government growth in the first half of the year and low double digit growth in the second half of the year, which gets us to high single digit growth for the year. And I think we have clear visibility to that from a bottom up build up of that. And so we feel quite comfortable quite confident in it.

Speaker 4

Okay. That's helpful. Thanks, John. And then I know you mentioned a few puts and takes on IRA and IIJA opportunities. So is this at a high level, do you see some of this work kind of rolling out as you thought or is it at a high level, is it a little slower, a little faster or it's kind of the normal kind of puts and takes as this stuff evolves?

Speaker 2

Yes, I would say it's rolling out as we expected. I think we continue to see progress and we continue to see more opportunities on that front. As I said in the remarks, we've won $110,000,000 worth of work to date. The pipeline is $250,000,000 And I would say both on the IIJA and IRA, we continue to see acceleration in the opportunities and additional awards. As I mentioned in the remarks, we're seeing a lot of activity on the commercial side from the IRA driven by tax credits, around renewables and the clean energy transition.

Speaker 2

So I think that those are key drivers for the growth we expect to see in 2024 and the energy and climate arena. And I think that as I've talked about before, I think they continue to provide potentially additional upside, particularly as we get into 2025. As I said before, we're guiding the high single digit organic growth here for all in for 2024. I think if the IRA and IJA continue to accelerate, that's a path for us to potentially get to double digit organic growth in 2025 and beyond. And so as you can imagine, we're quite focused on identifying every single opportunity and pursuing everything that's out there.

Speaker 2

And that's a major focus for ICF right now.

Speaker 4

Great. Thanks for that outlook, John. Much appreciated.

Operator

Thank you. One moment for our next question. This question comes from the line of Tobey Sommer with Truist. Your line is now open.

Speaker 1

Thank you.

Speaker 5

With respect to the IIJA and IRA, investors recently have been asking if those could be defunded or somehow capitated as opportunities in a different political climate. How do you assess the risk and to what degree has state and local funds as well as private capital already been spent in anticipation of either federal funds or the tax credits of the IRA?

Speaker 2

Yes. It's a good question and we're hearing those same questions, Tobey. I would say that first of all, I would say on the federal and state and local side, the money is certainly flowing and that we are seeing we have visibility to opportunities from IIJ and IRA on the federal and state and local fronts. And I think clients are quite focused leveraging those funds and pushing forward with their efforts on climate and renewable energy and clean energy transition. And so it's full speed ahead there.

Speaker 2

And I think the tax credits are certainly on the IRA side, on the commercial side have shifted the cost curves and are driving very significant investment in renewables and clean energy and we're seeing that on the commercial side of the house. And so there's a lot of focus on leveraging those funds and taking advantage of them both in the government and the private sector. The risk of the funds being impacted by a new administration, I mean, I'm obviously not a political prognosticator. I do think on the irate, the vast majority of the funds will flow through the tax credits. I think it's less likely you're going to see those tax credits cut.

Speaker 2

And politically, I think I haven't seen I mean, there would be a way of potentially raising taxes. Any event, I think that I guess I won't predict the political future. I will say that the IIJ funding is certainly moving and moving well and moving strongly and that was a bipartisan bill. So my own personal opinion is that's unlikely to be pulled back. In the IRA, as I say, I think the funding is state and federal business are federal businesses are focused on leveraging those funds and are making significant progress spending that money.

Speaker 2

And I think that the tax credits are driving a lot of change too.

Speaker 5

Thanks. If I heard you right, it sounds like your federal business, the cadence in 2024 will be more like mid single digit in the first half and then double digit in the back half. Is that right? I just want to verify that. And then are there specific contracts or agencies that are driving that acceleration in the back half that you could kind of call out?

Speaker 2

Well, I think the growth in the back half of the year, I think it's going to be it'll be driven primarily by our 2 major growth drivers in the federal arena. It will be driven by our IT modernization contract wins where we won $150,000,000 in the Q3, we won $150,000,000 in the Q4. We continue to have a significant pipeline there. I think we have pretty significant visibility where that's going to come from. That our largest client is HHS, so a key portion of that will come from HHS clients and then other key civilian clients that we support on the IT modernization front.

Speaker 2

And in a similar way, I think on the public health front, again, between CDC, NIH, administration for fertility and family, we have a good pipeline of opportunities and have had awards here at the end of the year that give us visibility for how that will play out and will drive that growth. And so I think we're just in this period where we are rolling off some of these small business contracts here in the 3rd Q4, which was expected and we talked about when we acquired Symantec BIDS and gave guidance for it. So we're rolling off of those and then also continuing to win and ramp up other federal programs, particularly in IT Modernization and public health. And so, we're just in that transition, but I think we have very clear visibility on how this will play out.

Speaker 5

Thanks. As far as the pipeline, the 2 $15,000,000 I think

Speaker 2

you said, could you describe

Speaker 5

what like the upper bounds of what a big project looks like in that pipeline? Just trying to juxtapose what we're used to seeing in federal and your existing commercial work with what may come from some of these other catalysts? Thanks.

Speaker 2

Yes. I would say, I mean, a big contract, a big straight and local contract in the IIJ IRA front would be, I don't know, dollars 5,000,000 to $10,000,000 $5,000,000 a year of revenue. So $15,000,000 $20,000,000 of total opportunities. I mean, you have to understand, like the rest of our business, I mean, there's a significant opportunities that are more advisory, doing planning studies, doing market studies, which are going to be smaller opportunities. And then there's a handful of larger implementation opportunities, whether it's implementing energy efficiency, electrification, decarbonization both between more implementation.

Speaker 2

And those would be at the upper bound. So $10,000,000 to $20,000,000 contracts over 3 to 4 years. But again, I think it's going to break up between advisory implementation like all of our business. Thank you. And over time, as you get more and deeper into the spend of that money, it will be more larger implementation.

Speaker 5

Good. Thank you very

Operator

much. Thank you. One moment for our next question. This question comes from the line of Tim Mulrooney with William Blair. Your line is now open.

Speaker 6

Yes. Thanks for taking my questions. The first one is, I appreciate the color you gave on expected organic growth in the federal business in 2024. I was hoping you could give us an idea of your expectations in the commercial business as well. There's a little noise here with the divestiture.

Speaker 6

So I was just hoping to get a little more color on how you're thinking about that business performing on a continuing operations basis in 2024?

Speaker 2

Yes. I think I would say the commercial business on a continuing operation standpoint will be in the neighborhood of 14% to 15% growth.

Speaker 6

Okay. And then pivoting to your disaster management, I was just hoping to dig into that business in a little more detail. I mean, are you seeing a notable increase in demand or additional opportunities in this business lately? I'm thinking about the contract you won in Oregon recently, the issues we're seeing in Hawaii and the recent flooding that we've seen across certain parts of the country? Curious how that how you're thinking about that business?

Speaker 2

Well, I'll start at the highest level, then I'll drop down and answer your question that way, Tim. So first, I mean, high level, obviously, disaster management is one that's been one of our key growth drivers over the last several years. Across all the across those 5 growth drivers we've been stating we've been growing north of 10%. I would say disaster recovery over the last many years has certainly achieved that level of growth. I think as we look forward, generally, I think we're taking high single digit for disaster recovery.

Speaker 2

Based on the book of business we have today, we're doing significant work in Texas and Puerto Rico. I do think to your point, there are material opportunities out there that potentially could play out here in 20 24 or going into 2025. Typically when there's significant hurricanes or significant natural disasters, the work we do is not typically not the immediate response, it's more the recovery work, rebuilding the public infrastructure, rebuilding homes, which typically begins about a year after the storm occurs, once Congress has got the funding in place. And so some of the opportunities you mentioned Hawaii, others I think are opportunities later this year, probably more material they played out for us as we go into 2025. But certainly the Oregon wildfires is a nice contract win for us and will drive some growth.

Speaker 2

We're still very busy in Puerto Rico and busy in Texas. So I think we remain bullish on disaster recovery and continue to see this important growth area.

Speaker 6

Got it. Appreciate the color. Thanks, John.

Operator

Thank you. One moment for our next question. This question comes from the line of Marc Riddick with Sidoti. Your line is now open.

Speaker 7

Hey, good evening. So I wanted to go over just sort of a maybe a few of the sort of cash flow type questions. I was sort of curious as you had a debt pay down a little faster with the pay down toward the end of the year getting you. So can you maybe give us a little reminder as to comfort level as to leverage range and whether any thoughts around timing of interest rates has an impact on that?

Speaker 3

Yes. Hey, Mark, thanks for the question. As we've done in the past, we do have a lot of seasonality in the pace where we pay down that most of debt reduction happens in the second half of the year. We saw that happen in spades this particular year with $68,000,000 of debt reduction in Q3 and $104,000,000 in Q4. So we expect that on a go forward basis.

Speaker 3

We did see some pickup on the debt reduction, which related to the sale of the commercial marketing business. That was offset and helped pay for the acquisition of our CMY Solutions deal that we did earlier in the year. So and we think that we've baked in for 2024 some reductions of our interest rates given what we've been hearing from our friends at the Fed. We'll see how that plays out. But we've been, I would say, more conservative on some of that and just to provide a good runway for what we think from a debt reduction perspective.

Speaker 3

But we feel like we can continue to produce the cash flows like we've done in the past and pay down debt and improve the leverage position even further in 2024, of course, barring any acquisitions. Yes.

Speaker 2

I just would add that from my perspective, as you know, I mean, over the years, there's been periods where I think it's levered up to do acquisitions and then pay down the debt. We obviously levered up given the ITG acquisition in 2020 and Symantec fits and Creative in 2022. I think we've done a good job over the last year and a half, two years paying down that debt, really focusing on that our leverage ratio is back down to 2.2 here in that leverage ratio. And so we're in a position now where I think we have capacity in the balance sheet. If the right acquisition opportunities come along, we can certainly take advantage of them.

Speaker 2

Obviously, we're quite disciplined on that as you know. I mean, we certainly want to find opportunities in our key growth markets, good cultural fit, good strategic fit that is accretive year 1, which is which gets to kind of what's the state of valuations right now. But I think we are in a position where we have paid down the debt and we have a strong balance sheet and acquisitions and then part of our strategy. So it's I think we've done a good job of paying down the debt and getting ourselves in a position where we can leverage the balance sheet again going forward.

Speaker 7

And then I was wondering if you could talk a little bit about the pricing environment and maybe what you're thinking about as far as rate increases during the course of the year? Are there any particular areas of concern as far as pushback or how are we thinking about the pricing environment generally?

Speaker 2

When you say well, I guess I would say from a pricing perspective for acquisitions, I would say that it's still a bit of a frosty market. I don't think pricing on acquisitions is fully come down given the ongoing interest rate environment. But having said that, we're starting to see some interesting deals and some interesting deal flow. And Bert, I don't know, you want to talk about interest rates and those types of issues? Yes.

Speaker 3

Yes. Second to that, I'm not sure that we've seen the real balance come through from a valuation perspective just yet with the interest rates at the levels that they are. But we are starting to see a little bit more deal flow, which is good. And we'll see how the Fed reacts to the economic data that we've seen. And hopefully, we'll see some light productions coming soon.

Speaker 3

Great.

Speaker 7

And then I would be remiss if I didn't sort of ask if how we should be thinking about any changes or what you're seeing from customers as they sort of make their adjustments or evolve their thoughts around AI and what they want to do? Can you get a little bit of a color as to maybe the progress that or any changes that you've seen over the last few months that might drive near term and longer term demand as far as AI driven opportunities? Thanks.

Speaker 2

I mean, I would say that we're certainly seeing increased interest on AI from our clients. And we have a number of clients have reached out and are interested in doing pilot projects or exploring various use cases with an AI focus to help support the mission of our federal agencies or our commercial clients. And so we're certainly seeing more interest there and doing more work, our domain experts, our technology experts in partnership with the client. On the AI front, as we've talked about before, certainly within ICF, we continue to take a hard look at approaches to use AI to improve the efficiency of our business development, our marketing, our proposal preparation and to improve the productivity of our coders in the IT modernization and our IT business. I think there's some real opportunities for productivity improvement there.

Speaker 2

And so I think in the long run, certainly, I think it's going to be a net positive for ICF. I think it's still very early, but we're pleased to see our clients reaching out and looking for help and assistance from us. And so we're watching it carefully and undertaking activities close for clients and internal evaluating internal approaches to leverage AI to improve productivity and add value for our clients. So certainly an area of focus for us.

Speaker 7

Great. Thank you very much.

Operator

Thank you.

Speaker 2

Thanks, Mark.

Operator

I'm showing no further questions at this time. I would now like to turn the call back to John Wasson for closing remarks.

Speaker 2

Well, thank you for participating in today's call. We look forward to connecting with you at upcoming conferences and events. Take care.

Operator

Okay. Again, thank you. This does conclude the program and you may now disconnect.

Powered by Quartr

Key Takeaways

  • ICF delivered a record 2023 with 12% growth in revenues from continuing operations, margin expansion, over $2.3 billion in contract awards (70% new business), and finished with a $3.8 billion backlog and 1.2 book-to-bill ratio.
  • Strategic investments in utility consulting, disaster management, climate & environmental services, public health, and digital transformation drove these markets to ≈80% of total revenues in 2023, up from 75% a year earlier.
  • Revenues in the Energy, Environment & Infrastructure segment rose 13.4% for the full year—fueled by energy efficiency program expansion, the May 2023 CMY acquisition for grid engineering, and growing IRA/IIJA-funded work.
  • Health & Social Programs grew 15.9% in 2023 with a $6.6 billion federal pipeline, highlighted by the CDC’s Biosense award and new EPA, SAMHSA and CDC contracts, while IT Modernization secured $300 million in Q3/Q4 awards including key wins at CMS, FDIC and Treasury.
  • Q4 non-GAAP EPS rose 7.7% to $1.68 and full-year adjusted EPS climbed 12.7% to $6.50, as ICF reduced net debt by $130 million; 2024 guidance calls for ~8.5% organic revenue growth and non-GAAP EPS of $6.60–6.90.
AI Generated. May Contain Errors.
Earnings Conference Call
ICF International Q4 2023
00:00 / 00:00