ICF International : Q4 2021 ICF Earnings Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q4 and Full Year 2021 ICF International Inc Earnings Call

EVENT DATE/TIME: FEBRUARY 24, 2022 / 9:30PM GMT

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FEBRUARY 24, 2022 / 9:30PM GMT, Q4 and Full Year 2021 ICF International Inc Earnings Call

CORPORATE PARTICIPANTS

Bettina Welsh

John M. Wasson ICF International, Inc. - Chairman of the Board, President & CEO

CONFERENCE CALL PARTICIPANTS

Jasper James Bibb Truist Securities, Inc., Research Division - Associate

Joseph Anthony Vafi Canaccord Genuity Corp., Research Division - Analyst

Marc Frye Riddick Sidoti & Company, LLC - Business and Consumer Services Analyst

Lynn Morgen

PRESENTATION

Operator

Welcome to the Q4 and Full Year 2021 ICF Earnings Conference Call. My name is Cheryl, and I will be your operator for today's call. (Operator Instructions)

I will now turn the call over to Lynn Morgan of AdvisIRy Partners. Lynn, you may begin.

Lynn Morgen

Thank you, operator. Good afternoon, everyone, and thank you for joining us to review ICF's fourth quarter and full year 2021 performance. With us today from ICF are John Wasson, Chairman and CEO; and Bettina Welsh, CFO. Joining them is James Morgan, Chief of Business Operations; and Barry Broadus, who will assume the CFO role at the end of this month.

During the 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 24, 2022, 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 2021 performance. John?

John M. Wasson ICF International, Inc. - Chairman of the Board, President & CEO

Thank you, Lynn, and thank you all for participating in today's call to review our fourth quarter and full year results and discuss our business outlook for 2022. We capped the year of substantial growth in 2021 with strong fourth quarter operating results that aligned with our expectations and reflected the key growth drivers that we have identified in our markets.

Three key takeaways from our fourth quarter and full year performance are: First, we continued to show strong organic growth in service revenue, which was up 6.4% for the full year, a growth rate that was substantially higher than in 2020. Year-on-year service revenue growth was driven by our work in IT modernization and digitization, public health, disaster management, utility consulting and our climate, environment and infrastructure advisory services. Together, annual revenue from these growth markets increased more than 10% from 2020 levels and accounted for roughly 65% of full year 2021 service revenue, and we expect revenues from these areas in the aggregate to continue to grow by 10% or more in 2022 and beyond.

Second, this was ICF's second consecutive year of record contract awards. We were awarded $2.25 billion in contracts in 2021, up 15% year-on-year, bringing our 12-monthbook-to-bill ratio to 1.45. Also, approximately 2/3 of the value of these awards represented new business. We believe these excellent metrics illustrate how well aligned ICF's domain expertise and cross-cutting implementation skills are with market demand.

Lastly, in the fourth quarter, we executed on our strategy of complementing organic growth with acquisitions in our key growth markets

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FEBRUARY 24, 2022 / 9:30PM GMT, Q4 and Full Year 2021 ICF International Inc Earnings Call

that build upon our current capabilities and provide revenue synergies. The creative transaction has further expanded our IT modernization and digital transformation qualifications and, importantly, has brought substantial expertise in Salesforce and Microsoft platforms. This adds to our industry-leading capabilities in ServiceNow and Appian, thereby positioning ICF as a provider at scale of the most widely adopted low-code,no-code platforms in the federal government.

Taking a closer look at our performance by client category. We continue to see very strong results from our U.S. federal business, where organic growth was 9.8% in the fourth quarter and 10.2% for the full year. Additionally, our contract awards in this area were substantial, representing approximately 50% of our total full year awards, with wins across a broad universe of federal agencies.

One of the fourth quarter awards that I would like to highlight is a new 5-year contract with a value of more than $75 million with the U.S. Federal Agency to provide cybersecurity and resilience planning, partnership engagement and communication services. While we're not permitted to disclose the client's name, this new contract fits with our strategic objective of winning larger implementation contracts, and it brings together capabilities from across the firm. We believe that ICF's ability to deliver multidisciplinary solutions for clients has been a key element of our success in winning new business and will continue to be a differentiator for us going forward.

The passage of the Infrastructure Investment and Jobs Act, otherwise known as the Bipartisan Infrastructure Law creates significant opportunities for new work for ICF in providing advisory planning, management, technical assistance and environmental support to federal government clients as well as state and local and commercial clients.

The act calls for the federal government to spend more than $550 billion over the next 5 years on a variety of infrastructure projects related to roads, ports and airports, but also includes major investment in the clean energy transition, including transmission, clean energy sources and electrification of transport and buildings. ICF has contracts with all the federal agencies charged with dispensing these funds.

The bulk of the funds will be distributed in the form of grants to state and local governments and tribal entities and, in certain cases, to industry. At the grantee level, there will be substantial opportunities for ICF to perform environmental permitting and analysis, planning support and related services.

Additionally, we are encouraged by recent budget discussions and negotiations and are hopeful that Congress will pass a fiscal year '22 budget in March. Our strong positioning in key federal markets that have bipartisan support, namely IT modernization and digitization and public health, together with the opportunities from the Infrastructure Bill, give us confidence in the growth trajectory of our federal business, even if we have to endure a 1-year CR this fiscal year.

Revenues from state and local government clients increased 19.5% in the fourth quarter and 6.5% for the full year. Our disaster management work, which comprises 1/2 of revenue base of this client category, continue to pace in the fourth quarter. We executed on key disaster recovery contracts in Puerto Rico and Texas, and won a number of new contracts and extensions during the quarter related to Hurricane Ida as well as work connected to the Oregon wildfires and seasonal flooding in Louisiana.

With respect to mitigation, ICF is now working on mitigation efforts for over 25 clients in 13 states, and the fourth quarter saw new wins in Florida, North Carolina and New York. Additionally, we continue to support our state and local government clients with environmental services. These include a number of high-profile water, transportation and energy infrastructure projects. Also, we are seeing growing market demand for advisory and implementation services around clean energy projects, with funding, in part, coming from grants to the states as part of the Infrastructure and Jobs Act I mentioned earlier.

Revenues from international government clients increased 45% in 2021, reflecting the benefit of a large short-term project that was in a wind-down phase at the end of last year, resulting in a 9.4% decline in fourth quarter revenues. We won a significant number of contract awards in 2021, which leads us to expect growth in this client category in 2022, exclusive of this large project, and assuming we see an uptick in activation of the marketing and communications work we won last year.

Moving to the commercial client set. The decline in fourth quarter revenues was expected due to the completion of a large commercial

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FEBRUARY 24, 2022 / 9:30PM GMT, Q4 and Full Year 2021 ICF International Inc Earnings Call

marketing contract in the fourth quarter of 2020, which mostly involved low-marginpass-through revenues. In addition to this difficult comparison, our commercial marketing services business continues to be pressured by the pandemic's impact on clients in the travel and hospitality industries.

Within this challenging environment, our team is doing excellent work for clients and winning industry awards. We added several new health care service clients in 2021, and continue to successfully integrate the substantial engagement capabilities we have in this business into client programs across the company, which you will hear more about in a moment.

Our Commercial Aviation business continues to recover. Despite challenging conditions, we are winning new work and new clients and successfully combining our deep aviation expertise with sustainable travel and tourism. Together, commercial marketing and aviation consulting comprised approximately 10% of our total 2021 revenues.

The key growth area within our commercial market set is energy markets, which accounted for 62% of fourth quarter commercial revenues and 17% of total 2021 revenues. This business continued to be a strong performer, growing 8.1% in the quarter and 8.7% for the year. We had robust energy efficiency contract wins in 2021, and we see growing market demand for our energy efficiency program and implementation services.

One word I'd like to call out is a key marketing win with a Northeast utility, which we became their agency of record. Providing engagement and marketing services to utilities has been an area of strong growth for us each of the past 2 years, and our pipeline reflects growing opportunities as utilities consider how they communicate with customers and stakeholders to achieve their net zero commitments. These wins and opportunities demonstrate how well we are integrating marketing services into ICF's areas of deep domain expertise.

In addition, we continue to see growth in the electrification space as utilities focus on achievement of decarbonization commitments and as legislatures and public service commissions adopt increasingly supportive policies. Also, utilities are increasingly emphasizing equity, disadvantaged communities and workforce development, which allows ICF to bring together our substantial qualifications in the human services arena with our energy sector experience.

And of course, the Infrastructure Act provides a broader range of opportunities across our government and commercial client sets to provide advisory and planning support to assess climate risk and ensure that new infrastructure investments will improve climate resilience and achieve low carbon goals. The breadth of our commercial energy portfolio of service is a unique attribute of ICF, and we see this as an area of substantial growth for us in the years ahead.

To sum up, we are very pleased with our performance in 2021. As we exited the year, both our backlog and pipeline were at record year-end levels, supporting our expectations for a year of strong growth in 2022. Throughout the year, we continue to invest in people and technology, expanding our recruitment and retention activities to address industry-wide staffing challenges. We've also increased our business development investments so we can take full advantage of the opportunities we see on the horizon in our key growth markets, thereby allowing us to maximize organic growth over the next several years.

Before turning the call over to Bettina for a financial review, I want to wish Bettina the best in her future endeavors, and thank her for the contributions she has made to ICF. Bettina will remain with ICF through early April to ensure a smooth transition as Barry Broadus takes over as CFO at the end of February. Bettina?

Bettina Welsh

Thank you, John. It has been a great experience to work with the excellent team here at ICF, and it is a pleasure to report on our strong results for the fourth quarter and full year.

Fourth quarter total revenue amounted to $388 million compared to $434.3 million in the year ago quarter. As a reminder, the year ago figure included approximately $65 million of low-marginpass-through revenue associated with the completion of a contract for a single commercial marketing client. This also explains the variation in pass-through revenue, which was 29.5% of total revenue in this year's

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FEBRUARY 24, 2022 / 9:30PM GMT, Q4 and Full Year 2021 ICF International Inc Earnings Call

fourth quarter compared to 39.6% in last year's fourth quarter.

Sequentially, as expected, fourth quarter revenue was relatively stable, with a $394.1 million reported in the third quarter of 2021. Service revenue, which is more indicative of our business trends, was also similar to third quarter levels, and increased 4.3% year-on-year to $273.4 million in the fourth quarter of 2021.

Gross profit was $141.3 million in the fourth quarter, and up 1.5% year-over-year. Gross margin on service revenue was 51.7% compared to 53.1% in the year ago quarter. largely reflecting higher fringe costs as we emerge from the pandemic.

Indirect and selling expenses were $114.5 million, including $11.2 million in onetime expenses associated with the early lease terminations and other facility-related charges and M&A costs. The largest component was $9.8 million related to facility charges we incurred in 2021 fourth quarter, which represents the completion of the major portion of our program to realign our real estate footprint with the hybrid workplace environment we envision for the future. We will realize $4 million of incremental annual rent savings in 2022, which we will reinvest to drive and support future growth.

Adjusted EBITDA was $38 million in the fourth quarter. And adjusted EBITDA margin on service revenue was 13.9%, driven by a favorable business mix, high utilization and lower facility-related costs, together with certain continued pandemic-related savings. In last year's fourth quarter, adjusted EBITDA was $44.9 million, and adjusted EBITDA margin on service revenue was 17.1%, which reflected pandemic-related lower SG&A and fringe benefits, related primarily to health care and paid leave costs.

Operating income of $18.6 million was down from $21.8 million in the fourth quarter of 2020 for the same reasons as gross margin. Our tax rate was 24.4% compared to 28.5% in the fourth quarter of 2020 due to adjustments to our tax provisions.

In 2021, fourth quarter, net income was $12.1 million or $0.63 per diluted share and includes $0.43 in tax-effected special charges related to facilities and M&A costs. 2020 fourth quarter net income was $12.8 million or $0.67 per diluted share, inclusive of $0.56 of tax-affected special charges.

Non-GAAP EPS was $1.19 per share compared to $1.36 per share reported in fourth quarter of 2020. As I mentioned earlier, last year benefited from lower expenses associated with the pandemic.

Now to recap our record 2021 full year results. Service revenue increased 6.4% to $1.11 billion, and total revenue was up 3.1% to $1.55 billion. Adjusted EBITDA increased 11.5% to $159.6 million, and adjusted EBITDA margin on service revenue was 14.4%, which includes certain pandemic-related cost savings that are not sustainable. GAAP EPS was $3.72, up 29.6%. And non-GAAP EPS increased 15.6% to $4.82.

Shifting to our cash flow statement and the balance sheet. Our operating cash flow was $110 million, in line with our expectations compared to $173 million in 2020. As a reminder, last year's operating cash flow included approximately $50 million of accelerated collections. Also, under the CARES Act in 2020, we deferred $20 million of employer social security tax liabilities to 2021 and 2022.

DSOs were 76 days in the fourth quarter of 2021, compared to 67 days in the year ago quarter, but last year benefited from an 11-day reduction due to the accelerated collections.

Our long-term debt at year-end 2021 was $421.6 million, including the acquisition of Creative Systems and Consulting. And our net leverage ratio was 2.91. In 2021, our capital expenditures were $19.9 million compared to $19.4 million in the prior year.

We continue to focus our capital allocation on investing for future growth through organic initiatives and acquisitions as well as utilizing our substantial cash flow for debt reduction, share repurchases and dividend payments. In 2021, we repurchased 197,800 shares for a total outlay of $17.2 million to offset dilution of our employee incentive programs. Yesterday, we declared a quarterly cash dividend of $0.14 per share payable on April 13, 2022, to shareholders of record on March 25, 2022.

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