ICF International Inc (ICFI) 2013 Q4 法說會逐字稿

Welcome to the ICF International fourth-quarter and full-year 2013 results conference call. During the presentation, all participants will be in a listen-only mode. Afterward, you will be provided -- you will be invited to participate in a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded on Wednesday, February 26, 2014, and cannot be reproduced or rebroadcast without permission from the Company. Now I would like to turn the program over to Douglas Beck, Senior Vice President, Corporate Development. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to review ICF's fourth-quarter and full-year 2013 performance. With us today from ICF International is Sudhakar Kesavan, Chairman and CEO; John Wasson, President and COO; and James Morgan, CFO.

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 26, 2014 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 the future development 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 our CEO, Sudhakar Kesavan, to discuss the fourth-quarter and full-year 2013 performance. Sudhakar?

Thank you, Doug. And thank you all for joining us this afternoon to review ICF's 2013 performance and our outlook for 2014. In 2013, we succeeded in further diversifying our revenue sources and building upon our domain expertise to win larger implementation contracts, two key elements of our growth strategies.

This enabled us to report solid results for the year and has positioned us to achieve continued revenue growth and improved margins in 2014. With the addition of our two recently announced acquisitions, we expect this to be a year of double-digit growth in total revenues and net income while assuming that our federal government business remains relatively flat with 2013 levels.

Here are the key factors that underlie our confidence: first, we ended 2013 with our commercial and international government businesses accounting for 33% of revenue for the full year, up from 30% in 2012. The expected contributions of two acquisitions we announced in January should move that percentage up to nearly 40% in 2014.

Second, if we take a closer look at the performance of each of that client categories, the growth prospects are even more competitive. Our commercial business was up 7% and nearly 10%, if you exclude infrastructure projects that slowed down in 2013.

Energy efficiency revenues increased 18% and accounted for 39% of commercial revenues. After a slow start in the first half of the year due to the timing of contract wins, our digital interactive business picked up in the second half of the year, posting revenue growth of 19% compared to second half of 2012 and was up 20% in the fourth quarter.

Revenues from our commercial health business increased 41% in 2013 compared to 2012. Aviation consulting was down 5% from last year due to the winding down of a large airport contract, where our energy markets advisory were picked up, increasing 5% from last year and also having a strong showing in the fourth quarter. Our international government business increased 44% for the year and 22% in the fourth quarter to reflect our ability to leverage existing expertise and qualifications to expand the scope of [operating] and bidding activity and improve win rate.

We were awarded several strategically important contracts for the European Commission and the UK government. Third, our sales performance in 2013 was excellent. We had record contract awards of $1.2 billion, up 21% year on year and representing an impressive book-to-bill ratio of 1.23. Backlog at year end increased 10% to $1.7 billion.

With our wins in 2013 and so far this year, we believe we have roughly 70% of the midpoint of our guidance range for 2014 currently under contract. This is exclusive of the contributions from the Mostra and CITYTECH acquisitions. Fourth, our pipeline leading into 2014 remains very strong. Even after the impressive contract wins of 2013 the value of our pipeline was $3.5 billion at year end. Of that number, the value of our commercial and international government pipeline more than doubled in 2013 compared to 2012 levels.

Lastly, we announced two acquisitions that I expect to be accretive to earnings this year. Mostra has around a $40 million, an integrated communications firm based in Brussels, Belgium. They have 140 employees and a full-range of multi-channel communications solution to assist government and commercial clients and reaching out to their stakeholders and customers.

Mostra is an excellent fit for ICF, enabling us to replicate the success of our strategy in North America by providing a wide variety of services and also implementing that advice. Mostra provides significant implementation expertise for international operations and they also have the ability to cross-sell these implementation services to our advisory clients and the European Commission and to UK clients.

CITYTECH is a Chicago-based, digital interactive consulting firm, with revenues of approximately $16 million in 2013 and 100 employees. They will add important expertise to our digital interactive business, particularly in Adobe and proven managed cloud offering of Amazon Web Services.

Also, we will be able to offer ICF a full range of strategic communications, digital strategy and e-commerce solutions to CITYTECH's existing commercial clients. In fact, we already work for a major retail customer where CITYTECH provides some of the Adobe implementation expertise.

In addition to these revenue growth drivers, we expect EPS growth to outpace revenue growth in 2014, as our profitability benefits from the increasing contribution of our commercial business and additional scale internationally. We remain committed to our federal business and to state and local government work. We are allocating our resources in both areas that we expect to be continue to be resilient, which include health, energy and infrastructure.

Our guidance for 2014 assumes flat federal government revenues, which we think is prudent in light of the current environment. We are encouraged by the wins we had in 2013, the composition of our federal pipeline going into this year, and the stability of the government environment now that we have a two-year appropriations.

We are also encouraged by the potential to make additional accretive acquisitions in 2014 to build out our offerings and our geographic reach. We have a financial and professional resources to support an ambitious program in this area and continue to explore larger as well as tuck-in transactions that will add value. At this point, I would like to turn the call over to John Wasson, our Chief Operating Officer, to provide additional insight into our business.

Thank you, Sudhakar, and good afternoon. As Sudhakar noted, we were pleased with our strong sales performance in the fourth quarter. We're also pleased that the current quarter capped a record sales year for us. Total federal sales were up more than 25% in 2013 versus 2012, despite the government shutdown and the uncertainty leading up to it.

International government, which is benefiting significantly from our combining legacy ICF in Europe and Asia with GHK, more than doubled its sales over last year. Also on the government side, state and local sales grew by more than one-third over last year, as the fiscal picture in most state governments is improving. Finally, commercial sales just met last year's record for the full year while fourth quarter for commercial sales were up some 23% from the fourth quarter last year. And with a strong pipeline, we look forward to continued commercial strength in 2014.

As we delve a bit deeper into our sales performance, the federal space showed a number of strong wins across all of our major markets. In addition to the key wins at EPA and the National Science Foundation, for which we issued press releases, we also secured an important win at the Social Security Administration, valued at nearly $20 million to continue our support of SSA's identity and credential management systems according to the Homeland Security Presidential Directive 12, known as HSPD-12. This work complements the HSPD-12 support we provide to the Environmental Protection Agency based on a contract win we announced last fall.

On the international front, we are continuing to see larger sales wins, especially in the European Community, as we gain scale and combine resources across legacy ICF and now Mostra. During the fourth quarter, we won to contract in excess of $5 million to continue data and analytical support of the European Migration Network. This provides comparable information and statistics across the European Union on migration and asylum issues.

In addition, we recently announced another key new win in the first quarter of 2014. Specifically in late January, we won a EUR5 million contract with the European Commission to support the design and implementation of the greenhouse gas emissions trading system in China. Because the European Union has established emissions trading systems across all of its 28 member states, it wants to help China meet its emissions reduction goals by providing training and technical assistance on an emissions trading system.

We are pleased that we were chosen for this high-profile project based on our two decades of greenhouse gas emissions work in China and three decades of greenhouse gas leadership around the globe. In our commercial businesses, we had excellent sales in what is normally a slower sales quarter. Our commercial book-to-bill in the fourth quarter was 1.2 and sales were well-distributed across all of our key commercial business areas.

In energy efficiency, we won eight contracts, with it being $1 million for working both the residential and commercial and industrial space, including a $17 million package that includes a contract extension and a new pilot program for a large Midwestern utility. Outside of the energy efficiency area, sales were particularly strong in digital interactive, commercial health, and energy markets consulting.

In addition to a good sales quarter, as already noted, we announced the signing of a definitive agreement to purchase CITYTECH. The addition of CITYTECH creates value for ICF in several ways. First, as an Adobe Fast-Track Strategic Implementation Partner, CITYTECH adds significant depth to ICF's interactive capabilities with respect to the Adobe Platform, which is the market software leader for digital marketing.

In addition, when combined with ICF interactive digital strategy, user experience and multi-channel e-commerce information capabilities, we offer a powerful combination of full-service digital marketing solutions for our customers. CITYTECH has a commercial client base of well-known corporations also that's quite complementary to ours.

Finally, CITYTECH has a strong track record of offering managed cloud offerings and is certified on Amazon's Web Services market-leading cloud infrastructure. This adds another complementary service enhancement to ICF interactive through the emerging demand for managed cloud solutions that are growing an importance for our commercial and government customers.

I should also note that our pipeline is stronger than it has ever been despite a record sales year in 2013. ICF's total pipeline of $3.5 billion is significantly higher than the $2.9 billion a year ago. Our commercial pipeline has more than doubled in the same period. Our large contract pipeline has grown to 29 opportunities, greater than $25 million, and 61 greater than $10 million.

Finally, our turnover continues to be low. For the full year 2013, it was 10.9% and for the quarter, it was 2.5%. Now I would like to turn the call over to our CFO, James Morgan. James?

Thanks, John. Good afternoon, everyone. Revenue for the 2013 fourth quarter was $229.8 million, a 1% decline as compared to the fourth quarter of last year, due to the 16-day government shutdown in October. As we've noted on last quarter's conference call, our commercial business faced difficult comparison in this year's fourth quarter due to a spike in media buys for energy efficiency clients in 2012's fourth quarter and a slowdown of the larger infrastructure contract.

Without those factors, commercial revenue growth would have moved up from a reported 1.9% to nearly 6%. For the full year, revenue was $949.3 million, up 1.3% over 2012. The increase was driven by growth in commercial revenues at 6.9% and growth in non-US government revenue of 43.6%, which reflects the revenue synergies of the GHK acquisition.

Gross profit margin was 37.7% for the fourth quarter, up from 36.7% from last year's fourth quarter and 37.7% for the full year of 2013 as compared to 37.8% in 2012. Excluding the effects of the government shutdown, we estimate that the gross profit margin for 2013's fourth quarter would have been approximately 38%. Indirect and selling expenses for the fourth quarter were up $4.6 million, or 7.2%, compared to the fourth quarter of 2012, and for the full year, were up $8.5 million, or 3.2%, compared to the prior year.

The increase for the year resulted from higher investments in business development, particularly on the commercial side, higher acquisition-related costs, and the impact of the government shutdown, which was all in the hiring and direct labor costs. EBITDA was $17.7 million in the fourth quarter, down from $20.8 million in last year's fourth quarter, due to the government shutdown.

For the full year, our EBITDA margin was 9%, down from 9.6% in the prior year, but within the previously provided guidance range. Depreciation and amortization expense was $2.9 million, up from $2.7 million in 2012's fourth quarter. Amortization of purchased intangibles was $2.3 million in the fourth quarter of 2013, down from $3.6 million in the 2012 fourth quarter, primarily due to the reduced amortization of intangible assets related to the acquisition of Ironworks and Macro.

The effective tax rate was 34.2%, as compared to 33.3% reported in the fourth quarter of 2012, and was 36.8% for the full year of 2013 as compared to 38.5% reported for the full year of 2012. The year-over-year tax rate reductions are primarily related to favorable returns, provision adjustments, state tax credits and settlements of certain state income tax audits during the year. Net income was $7.8 million for the fourth quarter of 2012 -- 2013, or $0.38 per diluted share, inclusive of $0.02 in acquisition-related costs.

For the full year 2013, net income was $39.3 million and diluted EPS was $1.95 inclusive of $0.03 in acquisition-related costs, a 2.1% increase over 2012. We paid down an additional $24.1 million of debt during Q4, resulting in long-term debt of $40 million at the end of the year. For the full year 2013, we paid down $65 million of debt.

Cash flow from operating activities for the quarter was $34.2 million and was $81 million for the full year of 2013, ahead of our guidance in November, as we did not experience the expected payment delays resulting from the federal government shutdown. Day sales outstanding for the quarter were 72 days compared to 71 days at December 31, 2012. As we have stated in the past, we expect our DSOs to be within the 70 to 75 day range, including the impact of deferred revenue.

Capital expenditures for the full year were $14.2 million, somewhat less than our guidance of $15.5 million to $16 million due to the timing of certain investments. In 2013, we repurchased approximately 160,000 shares. We intend to continue share repurchases in 2014 at a level to offset the dilution caused by employee incentive programs.

Now we will provide additional details on certain of our expectations for the full year 2014, which include the impact of our two recent acquisitions, Mostra, which closed on February 6, and CITYTECH, which is expected to close by the end of March.

We are currently forecasting full-year depreciation and amortization expense to be in the range of $12.5 million to $13 million, and amortization of intangibles of $8.5 million to $9.5 million. We're expecting full-year interest expense of $3 million to $3.5 million. Capital expenditures are anticipated to be in the $14 million to $15 million range.

And cash flow from operating activities is expected to range from $70 million to $80 million. We expect the full-year tax rate of no more than 38.5%. And we expect fully diluted weighted average shares of approximately 20.2 million for the year. With that, I would like to turn the call back to Sudhakar.

Thank you, James. Last year, at this time, we were trying to provide guidance with sequestration two days away and without knowing that there would be a 16-day government shutdown in the fourth quarter of the year. Today, the federal state is now settled and we are in a considerably better position to look ahead than we were last year.

As I mentioned earlier, we expect 2014 to be the year of both organic and acquisition growth and one where we see our profitability expand considerably. We're looking forward to seeing $1 billion revenue milestone in 2014 and generating EBITDA around $100 million.

Specifically, based our current portfolio business, which includes the acquisition of Mostra and assuming the completion of the CITYTECH acquisition, we are guiding to revenues in the range of $1.025 billion to $1.065 billion, and diluted earnings per share of $2.27 to $2.37. At the midpoint, this represents revenue growth of 10% and diluted EPS growth of 19%. Operator, we would now like to open the call for questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

First question, Tobey Sommer, SunTrust.

Hi, this is Frank in for Tobey. I wanted to ask about, in your prepared remarks, you talked about 70% of the midpoint of revenue was under contract. Where does that stand relative to last year and if you could just give us some color on visibility this year versus last year as you make your guidance?

This is James, Tobey -- or Frank. It's actually slightly better than where we were last year; it is fairly close but slightly better by somewhere between 3 to 4 percentage points.

Okay, great, and as we look at the pipeline, can you give us any color on the commercial breakdown in the pipeline?

Well, the commercial pipeline is lots of energy efficiency projects and consists of increased number of digital interactive work. So there is -- it's quite a varied sort of (inaudible) budget overwhelmingly because the energy efficiency is quite long term and has larger contracts, the implementation contracts, they sort of are awaiting a significant portion of the pipeline.

Okay, and as you look at areas to do acquisitions in, are there any particular areas of the portfolio that you'd like to strengthen or things that look especially attractive in this environment?

Yes I think that we have our acquisition strategy has not been quite a good year. We're looking to expand in areas of healthcare, we certainly want to continue to expand in the digital interactive arena. We would like to expand in energy and energy infrastructure. So those are areas which are important for us as we move forward.

We'll also look at very specific areas in the [title] business, where we think that the revenues are likely to grow, which again are focused on health and back on the fed. And so I think that's sort of the broad scope of our acquisition scenario. So those are the areas which we think we can continue to -- we'll continue to focus on where we think there's a number of opportunities which exists. It's just a question of when we can close them.

Great. Thank you very much.

Next, Bill Loomis, Stifel.

Hi, thank you. Good evening. Good results. Just looking at the revenue breakout by segment, just taking your percent -- your revenue percent you have in the release. It looks like the commercial business had a nice sequential improvement. I know it was only up 2% on adjusted, that is, but what -- is that sequential improvement from third to fourth quarter, is that seasonal or was that -- can we kind of extrapolate that going into 2014, excluding the impact of the two acquisitions?

Yes, hi Bill, it's John Watson. Yes, I think it's -- there is -- we did see greater strength on the commercial side in certain sectors in the fourth quarter. I think it's just a matter of digital interactive business and so not to mention, the history, more or less, is showing the robust growth in the second half of the year and certainly in the fourth quarter, I think was up 20% from the prior fourth quarter.

Commercial health remains quite strong for us, we had very little bit of a robust growth there and so I think there has been -- we have seen improvement and we expect that to continue in certainly next year.

Okay, but no one -- no unusual events happening seasonally in the fourth quarter?

No, I don't think there were any unusual events or any specific -- no specific event that grows out. I think it was kind of strength in certain markets I mentioned.

And then federal, it looks like it was down about roughly 6%. What -- how much of that was the shutdown? How much, if there was no shutdown, what might revenues have been?

Certainly, this is James, Bill. By far, the decrease is driven by the shutdown and I would say, if you're looking from a quarter-over-quarter perspective, I think we would have been somewhere in the neighborhood of roughly flat as opposed to where we were down 7%.

Okay. You had very strong book-to-bill in the September quarter on federal and it was pretty good in December, 0.9. When I back out your commercial, I think I saw it includes international government but it looks like it is still pretty good given the size of government. Why in 2014, if we do get a strong pickup on where it's in the back half given the two-year budget deal, why only flat?

Is that -- are you just being cautious after what happened in 2013 because it seems, given what you've won last year, the areas you were in plus the budget stability, I would think we'd be looking a little more than flat in 2014.

Bill, Sudhakar here. As I said in my remarks here, we're being prudent. I think by the time the agencies and the departments get the budget and break it down, et cetera, and it flows down to the folks who really deal with us, it's going to take awhile. And we don't really know how the pieces are going to move around, so we hope that you're right that things will improve and everything will be kosher and everything will be fine.

But we've seen that it takes awhile for the government, which is a big entity, to move it all through the different departments and divisions. So we're just making sure that we just do -- take a cautious approach because it certainly is warranted, given what's happened over the last few years.

Okay, but it's not -- you're not seeing any specific buyers from contract issues like USAID dropping off or anything like that. It's just being more cautious on the macro environment?

Right; correct.

Okay, thank you.

Next, Edward Caso, Wells Fargo.

Hi, thank you. I just wanted to ask a little bit about the two acquisitions, how accretive were they? Can you help us out with that as far as earnings per share was concerned and how -- I assume you're going to pay with this with debt. Are there earnouts involved?

Ed, this is James. From an accretion perspective, when we are -- if you look at our kind of year-over-year increase in EPS, I would say that probably in the neighborhood of 25% of that is going to be due to the acquisitions that we are expecting accretion associated with that and do the math here roughly what that would be, or 20% to 25%.

And as far as how they're being paid for, you're correct. We will use our credit facility to pay for those and there is no earnout on either one of them. As far as timing, too, as far as when the accretion would occur, Mostra, we expect that acquisition to be accretive starting early in the Q2 timeframe and then with CITYTECH, that should start to show accretion in the Q3 timeframe.

And the EBITDA, I think if we did our math right, is 9.5%, 9.6%, maybe in that range implied in your guidance, the EBITDA margin. And I think we calculate 9.0% this year. How much of that 50, 60 basis point improvement is from the acquisitions?

I would say from an overall perspective, I think that our EBITDA margins will be a little bit higher than your 9.5% to 9.6% range. I think they will be closer to that middle or the upper end of the range of 9.5% to 10%. And as far as overall contributions from the acquisitions, as far as how they will impact that EBITDA margin, I think it will be somewhere between breakeven to slightly positive.

Great, thank you.

(Operator Instructions)

Next, Tim McHugh, William Blair & Company.

Thanks. First, I guess just to clarify on the comment that you said federal flat, I'm not sure if I'm positive; I missed this, but does that include the impact of the revenue shut -- or the government shutdown, which I assume creates an easy comp, at least for the fourth quarter.

Right -- it does for -- we are expecting with the impact of the revenue shutdown that we would be basically flat.

So the -- I guess I asked it in a confusing way, but just on reported basis, it will show flat or are you saying it will show up but it's really just up because of the government shutdown?

I would say that if we end up -- right now we are expecting flat revenues kind of a comparison of 2013 absolute numbers to 2014 absolute numbers. So that's what we kind of baked into our projections.

Okay.

Hopefully, we can do a little better.

And where are you at in terms of there's -- you've talked about large projects that created a headwind for you in 2013 and I think the expectation was, as you got to the last half of the year and into 2014, they wouldn't be a headwind any more, at least relative to 2013. Did -- is there any update to the outlook there? Do we still feel like that can at least not be a headwind or even add to growth as you into next year?

Sure, this is John Wasson. I think the two large projects we talked about are large state and local projects out in the West Coast and I think on that one, we do expect growth this year. And so I think most of the headwind challenges on that project should be behind us for 2014, pretty much on a sequential basis so we should see growth each quarter on a large state and local projects.

I think on the large commercial infrastructure project, we've talked about also out on the West Coast. I think for the year, we're expecting that to be essentially flat. I think for the first quarter of 2014, it will be down a bit but then through each of the following quarters, it will show an increase but for the year, it will be overall basically flat. So I would say, by and large, those comparable issues with those two contracts are behind us except for the -- a little bit in the first quarter on the large commercial project out West.

Okay. Can you give us a sense for how much the two acquisitions and maybe even if you don't want to say individually, in the aggregate, how much you spent? Trying to get a sense of the cash that you'll have or the balance sheet you'll have afterwards.

How much we spent -- we haven't --

When they close.

When they close. Why don't we give those -- we basically -- we haven't -- we did 6 to 8 times trailing 12 months EBITDA, and that is certainly true here, we -- and if you add the numbers up, they will be -- let's finally close them and then we'll be able to get the numbers in the 10-K, the combined numbers. So let's finalize those number and we'll give them to you.

Okay, thank you.

We have no further questions at this time. I will now turn the call back to management for closing comments.

Thank you very much for joining us today. We look forward to speaking with you again after the release of the first quarter results. Thanks again.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.