Yahoo Finance ICF International, Inc. (NASDAQ:ICFI) Q1 2024 Earnings Call Transcript
ICF International, Inc. (NASDAQ:ICFI) Q1 2024 Earnings Call Transcript May 3, 2024
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: Welcome to the First Quarter 2024 ICF Earnings Conference Call. My name is Liz and I will be your operator for today's call. At this time, all participants are in listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. [Operator instructions] I will now turn the call over to Lynn Morgen of Advisory Partners. Lynn, you may begin.
Lynn Morgen: Thank you, operator. Good morning, everyone, and thank you for joining us to review ICF's first quarter 2024 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 May 02, 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 CEO, John Wasson to discuss first quarter 2024 performance. John?
John Wasson: Thank you, Lynn and thank you all for joining today's call to discuss our first quarter results and review our business outlook. First quarter results represented an excellent start to 2024 and demonstrated ICF's positioning in key growth areas and the strength of our diversified business model. There are several takeaways worth highlighting. First, revenue growth for the quarter was quite strong. Excluding divestitures, revenues increased by 8.7% from last year's levels. Second, our margin profile continues to strengthen. Drivers such as revenue mix, high utilization and reduced facility costs, continue to contribute to the consistent margin expansion that we have achieved over the last several years. And third, our forward-looking metrics point to continued growth for ICF.
At the end of the first quarter, our backlog was $3.6 billion, our trailing twelve month book-to-bill ratio was 1.23 and our business development pipeline was $9.7 billion. This speaks to how well aligned our capabilities are with the current spending priorities of our government and commercial clients. Taking a closer look at our first quarter revenue performance, ICF's work in the energy, environment, infrastructure and disaster recovery client market again was a meaningful contributor to our first quarter growth. Revenues in this client market increased 20% year-on-year to account for 45% of first quarter revenues. We are seeing very strong results across both our service offerings and our diversified client base. ICF brings together a complement of deep domain and implementation expertise across a broad platform of interconnected subject matter areas including energy efficiency, decarbonization, electrification, environmental and climate impacts and disaster recovery and mitigation.
We combine our expertise with proven implementation skills around program management, environmental monitoring and grid engineering services, supported by cutting edge analytic tools and proprietary energy models that have become the industry standard. Thus, we are offering unique and very customizable services and solutions, which are resonating with utility clients, renewable energy producers and others on the commercial side, while we continue to provide our government clients with research, policy and economic analysis, program design, analytics, grant management services, disaster recovery work and climate impact analysis. Highlights in this market in the first quarter were over 30% increase in revenues from utility programs, including energy efficiency work, reflecting continued expansion in both size and scope of programs, ICF is now serving over 75 utilities across the country.
Notable contract wins in the quarter included $85 million of expanded energy efficiency work with a large utility holding company, a new $18 million electrification project for a large Midwestern utility, and in conjunction with our disaster management team, ICF was tapped to support a western state's wildfire and Natural Disaster Resiliency rebuild program, which provides incentives to help homeowners impacted by natural disasters rebuild all electric homes. We also saw strong double-digit growth in energy advisory revenues, driven by increased demand for both our power and technical advisory work. First quarter contract awards included numerous grid engineering and analytics projects for utilities and developers. Additionally, revenues from our environment and planning services in the US continued to show solid growth, representing continued strong demand from renewable developers, increased resilience work for utilities, undergrounding power lines, and environmental infrastructure related work for state clients on projects funded under the IIJA.
Contract wins in the first quarter were from a combination of utilities, developers and government clients, for the full breadth of ICF's licensing, permitting and compliance services. IRA and IIJA funds are also starting to flow at scale, including the Department of Energy's Grid Resilience and Innovation Partnership Program and its National Electrical Vehicle Infrastructure program and EPA's Environmental Justice Awards. Funding for state energy offices is now in the process of being released, and states and other recipients are beginning to issue solicitations for planning and program support. We are actively monitoring opportunities to provide support at all levels, federal, state and local and commercial. Today, ICF has won contracts valued at approximately $125 million related to the IJA and IRA, primarily from federal and state government clients, and our pipeline is about $200 million.
This does not include all the related work that we are doing for commercial clients, where it's more difficult to tie our engagements to specific legislation. In the first quarter, our revenues from federal government clients increased 2.4% in line with expectations, primarily reflecting the $5 million reduction in passive revenues associated with large international public health contracts, that we referred to last quarter. Revenues from federal government clients, excluding subcontractor and other direct costs, increased 5.4% in the quarter. Our two growth markets in the federal government client category are public health and IT modernization. With respect to public health, our contract wins at SAMHSA last year are now fully up and running and we expanded our clinical decision support work at the Veterans Administration.
Also, our business development pipeline and public health is quite strong. There is bipartisan support to address the nation's mental health crisis and with increased budgets, we see significant opportunities to expand our work for SAMHSA. Also, recent funding for NIH and CDC is in specific areas that are relevant to ICF subject matter expertise and experience, including funding to NHIV and for cancer and Alzheimer's research. We continue to see a strong pipeline for global health security in low middle income countries where we have historically worked, providing demographic and health surveys, nutrition surveys, and diagnostic testing. Global health security involves identifying and containing infectious disease threats wherever they occur in the world.
CDC's and USAID's work on Monkeypox and Ebola are two of the most current examples. Additionally, we continue to see strong, steady performance on our environmental health work at EPA with a BPA recompete win for EPA's Office of Research and Development and Task Order wins to support EPA's Office of Pollution prevention and toxics. As you know, the EPA issued the final national primary drinking water standards to protect Americans from exposure to PFAS substances in mid-April. ICF supported the scientific and regulatory analyses that informed development of the new rule setting maximum levels of these chemicals for the nation's drinking water supply. Our work continues as we staff EPA laboratory contracts through which samples are tested for PFAS substances.
IT modernization and digital transformation is another area of bipartisan support. In the first quarter, we continued to execute on programs to update workflows and infrastructure and optimize data usage across our civilian agency clients and we continue to ramp up work on the 300 million of contracts we won in the second half of 2023. Additionally, we completed several important projects within the Department of Health and Human Services that advanced research efforts and support public health, including the development of dashboards to support the Medicare Diabetes Prevention program, facilitate health equity data submission, and address vascular health. Notably, in the first quarter, we combined ICF's domain expertise in energy with cutting edge technology to stand up three unique grant management programs with varying complexity levels for the Department of Energy to support millions of dollars in new IIJA and IRA funding across multiple rebate programs.
This project, together with the coast tie in at our IT modernization capabilities have with our public health expertise, demonstrates ICF unique ability to combine subjects matter expertise with substantial IT capabilities to drive growth and positive outcomes for clients. We also have a strong active pipeline in this area, which includes a significant number of opportunities that reflect potential synergies between our open source capabilities and ICF's policy related experience. Sum up, this was another record quarter for ICF, which has set the stage for substantial organic growth for the company in 2024. Now I'll turn it over the call to our CFO, Barry Broadus for a financial review. Barry?
Barry Broadus: Thank you, John and good morning, everyone. I'm pleased to provide you with additional details on our 2024 first quarter financial performance. Total revenues were $494.4 million, up 2.3% compared to the first quarter of 2023. After adjusting for the divestiture of our commercial marketing business lines in 2023, revenues increased 8.7%, driven by robust growth from our commercial energy clients and solid growth from our government customers. Subcontractor and other direct costs totalled $120.5 million, or 24.4% of total revenue, down from 27.3% in the first quarter of 2023. The year-on-year decrease was due in part to the divestiture of the commercial marketing business lines and lower pass through revenues on certain US government contracts.
First quarter gross margins expanded 190 basis points to 37.2% of total revenue, benefiting from the timing of several recently awarded energy efficiency contracts, which are estimated to have pulled forward approximately $0.15 to $0.20 of EPS in the first quarter, but typically these contracts tend to be more profitable during the start-up phase of the program. As costs ramp up over time, margins will level out over the period of performance. The second half of this year, we expect that margins from these contracts will be more closely in line with margins we typically see with our other energy efficiency programs. Indirect and selling expenses were $129.1 million, up 4.3% year-on-year, reflecting the expansion of the business and investments in our staff and various growth initiatives.
We continue to realize higher utilization and benefit from our increased scale and reduced facility costs. This, together with our favourable revenue mix and the quarter-specific upside from the energy efficiency contracts I mentioned earlier, drove a year-over-year 21.6% increase in EBITDA to $56.4 million and an 8.2% increase in adjusted EBITDA to $55.2 million. Interest expense of $8.2 million decreased from $9.5 million in the first quarter of 2023, reflecting our lower average debt balances year-to-year. Our tax rate was 20.4% as compared to 23.5% in the year ago quarter, primarily due to tax credits in the vesting of equity compensation, which largely occurs in the first quarter of each year. For the full year, our tax rate guidance remains unchanged at 23.5%.
Net income was $27.3 million, or $1.44 per diluted share in the first quarter, compared to $16.4 million, or $0.87 per diluted share reported in the comparable period last year. Non-GAAP EPS was $1.77, an increase of 24.6% from the $1.42 per share reported in last year's first quarter. First quarter EPS benefit from the margin expansion, including the profit pull forward from our energy efficiency programs I previously mentioned and the favourable impact of our lower year-on-year interest expense and tax rates, as well as greater efficiency in the business. Shifting to cash flows in our balance sheet, in the first quarter, we used $10 million of operating cash for working capital needs, an improvement of $6.8 million as compared to the first quarter of last year.
The use of operating cash flow is consistent with our typical first quarter seasonal working capital needs. Our day sales outstanding were 75 days compared to 71 days in last year's first quarter. Capital expenditures totalled $5.2 million, down from $6.4 million in last year's first quarter. At the end of March, our debt was $474.7 million above the $430.4 million reported at the end of 2023. The sequential increase primarily reflects first quarter seasonal use of cash for share repurchases and yearend bonuses. On a year-over-year basis. we reduced our debt by $123 million from $598 million at the end of last year's first quarter. Our adjusted net leverage ratio was 2.29 times at quarter end compared to 3.09 times at the end of last year's first quarter.
Approximately 58% of our debt is currently at a fixed rate. We remain committed to a balanced approach to capital allocation. We continue to prioritize investment in organic growth initiatives, acquisition, debt reduction, 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 July 12, 2024 to shareholders of record on June 07, 2024. Now, to help you with your financial models, our guidance from our last call remains unchanged. As a reminder, we expect to generate approximately 48% of our revenue guidance in the first half of the year. Our depreciation and 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. Our full year tax rate will be approximately 23.5%. We expect a fully diluted weighted average share count of approximately 19 million shares. Our 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'll turn the call back over to John for his closing remarks.
John Wasson: Thanks Barry. We are very pleased with our results to date and the opportunities we see on the horizon. Our first quarter performance, together with strong backlog, our book-to-bill and pipeline metrics, provide excellent visibility that supports our full year 2024 guidance. We're pleased to reaffirm our expectation that 2024 organic revenues from continuing operations will range from $2.03 billion to $2.1 billion, representing year-on-year growth of 5.2% at the midpoint when compared to reported 2023 and 8.5% at the midpoint on continuing operations. EBITDA is expected to range from $220 million to $230 million, reflecting year-on-year growth of 14.2% at the 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.
The work that I described in today's business review involves helping clients address many of the most challenging issues of the day. We are proud to participate in this work and to have attracted a likeminded group of professionals who are committed to making a positive impact on society. And with that operator, I would like to open the call to questions.
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