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spk06: Good afternoon, everyone. I will now share additional details of our financial performance in the second quarter of 2023. As John noted, we had strong second quarter revenue performance, which was a result of our 10% organic growth, coupled with the acquisition of SymantecBits July of last year, and drove our year-over-year revenue increase of 18.2% to $500.1 million. Revenue growth was broad-based, reflecting double-digit increases from federal, state, and local government and commercial energy clients, which together account for 88% of our second quarter revenue. Subcontractor and other direct costs of $137.7 million represented 27.6% of total revenue, which is in line with last year's second quarter. Gross margin for the second quarter was 34.9%, a decline of 150 basis points as compared to the same period last year. Several factors contributed to the decrease, including last year's acquisition of semantic bids, which generates a lower gross margin, but higher EBITDA margins, and the timing of certain projects and contract ramp-ups. We expect to see sequential progressive improvement in gross margins in the second half of this year. Year over year, adjusted indirect expenses declined 140 basis points to 24.6% of revenue due to greater scale and the effective management of our indirect expenses. As we continue to make investments in people and technology to support our long-term growth, our indirect and selling expenses increased 10.6% year on year to $126.5 million, which was at a significantly slower pace than our revenue growth. Second quarter EBITDA increased 19.2% to $47.5 million, and adjusted EBITDA increased 15.3% to $51 million year over year. Interest expense for the second quarter was $10.2 million, an increase of $6.1 million from last year's level. The second quarter acquisition of CMY, which was not embedded in our prior forecast, coupled with the increase in interest rate drove our interest expense to be higher than we anticipated. The second quarter EPS impact of the higher interest expense was more than offset by the benefit from our tax optimization strategies we implemented. This additional benefit from our tax optimization strategies to mitigate the forecasted year-over-year higher interest expense for the remainder of this year. Net income was 20.3 million or $1.7 per diluted share in the second quarter, inclusive of 3.5 million or 13 cents per share of tax-affected M&A and severance charges. Our second quarter net income and diluted EPS included a 21 cent per share incremental tax benefit beyond the full year estimated tax rate from which our year end ETR guidance was based upon. Second quarter of 2022 net income was 18.4 million or 97 cents per diluted share. Non-GAAP EPS increased 18.8% to $1.57 per share which also includes the benefit of the company's long-term tax strategies. We're very pleased with our second quarter and year-to-date cash flow generation. Our second quarter cash flow from operations was 36.7 million and 19.9 million on a year-to-date basis, significantly ahead of our results in the first half of 2022. Our ongoing cash management initiatives were a key driver of the favorable cash generation performance and also contributed to our improved day sales outstanding of 73 days as compared to the 82 days in last year's second quarter. Year-to-date capital expenditures primarily related to technology investments totaled $13.2 million as compared to $11 million in the first half of 2022. Our debt at the end of June was $601.8 million, similar to our debt balance at the end of the first quarter. Our second quarter debt is inclusive of the funding of the purchase of CMY solutions. The acquisition was largely executed through the cash flow generation from operations during Q2. Our adjusted net leverage ratio was 3.11 at quarter end compared to 3.09 at the end of the first quarter. Assuming no additional acquisitions this year, we expect our year end leverage ratio to be down approximately one turn. inclusive of the expected net proceeds from the divestiture of our commercial marketing group. In addition, during the second quarter, the company executed an additional $100 million of interest rate swaps, which increased our fixed rate debt to be approximately 60% of total debt. With the addition of these new swaps, our all-in average interest rate now stands at 5.25%. In addition to debt reduction, our capital allocation priorities include making investments to support organic growth, paying dividends, repurchasing shares to offset the impact of employee incentive programs, and continuing to consider strategic acquisitions. We used 18.1 million in the first half of this year to repurchase 180,000 shares. We have 93.7 million remaining under the current stock repurchase authorization plan. We also announced today a quarterly cash dividend of 14 cents per share, payable on October 13, 2023, to shareholders of record on September 8, 2023. Now, to help you with your financial models, I want to emphasize that our second half revenues will be essentially flat as compared to the first half due to the divestiture of our commercial marketing group, which is offset in part by the revenue generated from the CMY acquisition. The net effect of the divestiture and the acquisition in the second half of this year will lower our revenue by approximately $15 million, weighted toward the latter part of this year. As John previously stated, we are reaffirming our revenue and non-GAAP EPS guidance for 2023, which is inclusive of both the CMY acquisition and the pending divestiture of our commercial marketing group. In addition, any potential gain associated with a commercial marketing group divestiture and the one-time non-cash charge associated with stranded facilities will not impact our non-GAAP EPS guidance. Now we'll move on to other key guidance metrics. Our depreciation and amortization expenses is expected to be in the range of $23 to $25 million. Amortization of intangibles should be approximately $36 million. Interest expense is now expected to be in the range of 37 to 39 million compared to our previous forecast of 32 to 34 million, resulting from higher interest rates and higher average debt balances, as I previously mentioned. Our tax rate in the first half, based on our tax rate in the first half of the year, we now expect the tax rate for this year to be approximately 17%. As compared to the 23.5% we previously guided to, with the second half of this year to be in the range of 19% and more specifically with the third quarter projected to be at approximately 12% operating cash flows projected to be 150 million. We expect our fully delayed diluted weighted average share count to be approximately 19 million and our capital expenditures are anticipated to be between 26 and 28 million. On a final note, We have removed the non-GAAP financial measure of service revenue as it is not in line with recently stated SEC guidelines. Service revenue will no longer be included in our public filings, investor presentations, and other published reports and documents. The company will continue to provide information on our subcontractor and other direct costs. And with that, I will now turn the call back over to John for his closing remarks.
spk05: Thanks, Barry. We are pleased to reaffirm our full-year guidance. We expect 2023 total revenue of $1.93 billion to $2 billion, and we anticipate subcontractor and other direct costs will be approximately 27% of total revenue. EBITDA is estimated to range from $210 million to $220 million, and GAAP EPS is projected at $475 to $505, exclusive to special charges. Non-GAAP EPS is expected to range from 615 to 645. Operating cash flow is expected to be approximately 150 million in 2023. In the second quarter, we continue to invest in people and technology that enabled ICF to execute effectively on our existing contracts while positioning us to capture an even greater share of future growth opportunities. The sale of our commercial marketing group was a strategic decision to streamline our business and deploy our resources to support the key growth markets we have identified. And the acquisition of CMY fully aligns with the increased demand we anticipate from our commercial energy clients. Our industry-leading trailing 12-month book-to-bill ratio of 1.3, together with our record $10.3 billion business development pipeline, point to continued growth ahead. Additionally, we are proud of the impact that ICF and its people are having on society through the services we provide clients in support of energy saving, carbon reduction, and natural resource protection programs, as well as health, education, development, and social justice programs. I encourage all of you to review our recently released corporate citizenship report, which highlights our impacts in these areas.
spk04: With that, operator, we'll open it up for questions.
spk03: Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the question and answer roster. Our first question will be from Joseph from Con Accord Genuity.
spk02: Hey, everyone. Good afternoon, and once again, congratulations on the solid and steady results. I thought, John, I'll just circle back to some of your opening comments where you said that you expected a strong second half in bookings and I know there's a lot of tailwinds out there relative to the environment and IIJA and the like, but unless the deals are signed, it's a little bit unlike you to say it's going to be solid. So just any color there, maybe perhaps some solid bookings already happened in July, and then I'll have a follow-up.
spk05: Joe, appreciate the question. First of all, I'd say, obviously, as you saw and heard in the results, we have a very strong pipeline, a record pipeline. As you know, the fatality of our awards, Q3 is generally far and away our strongest quarter for awards. With the end of the government fiscal year, Q4, certainly last year and over the last couple of years, has also been quite strong. again, with some wins in federal, but also across commercial and state and local. And so, you know, I think given the size of the pipeline and the significant amount of the pipeline that is in, you know, proposals submitted awaiting award or is in, you know, final negotiation of the opportunity, I think we, you know, do have a high degree of confidence that the wins and the um, the sales for Q3 and Q4 will be quite strong, much like last year where Q3 and Q4, we, we were quite, quite strong and, and, um, you know, obviously give a very strong results. And so, um, you know, I think that's, what's, what's driving the confidence. Um, um, you know, again, I think we, we have, we have clear visibility of how those awards should play out.
spk02: Got it. And then, um, I know you kind of also mentioned about having the size and scale for bigger bids, but it kind of feels like I've had that size and scale for a while. I mean, you're kind of a scale player in a lot of verticals, so just wanted to drill down into those comments too, John, relative to your size and average deal size that you're seeing these days. And then I might sneak one more in.
spk05: Sure. I mean, I think the area where the size and scale, you know, over the last, you know, several years is really helping is just on the IT modernization and the technology front. I mean, as you know, Joe, we've come a long way there. We, you know, as I said in my remarks, we have 1,800 technologists. We have, you know, 500 million in round numbers of $500 million revenue, a technology business. And so I think that's, you know, that's an area where we are seeing larger opportunities and we are increasingly able to pursue and capture larger opportunities. I think as we also talked about with the semantic bits acquisition, that really has given a scale and a position within CMS to bid larger opportunities and combine the technology capabilities that legacy ICF has on a low code and no code with the open source and bring deeper ICF capabilities into CMS. And then we can also leverage the semantic bits open source capabilities into our broader civilian client base. And so, you know, I would emphasize the scale on certainly as a, you know, with respect to technology. You know, the only other thing I'd say is right now, I mean, I think as you saw in the second quarter results, I mean, our energy business is really coming to the fore here in terms of the growth. You know, we grew all in 22% in commercial energy. And, you know, I think we – so I think – and we obviously have scale there and see large opportunities, continue to see large opportunities on the energy efficiency area. And so I think that's what I would emphasize on the scale side.
spk02: Got it. And then just one more. I know that, you know, there's some puts and takes coming in the P&L here in the second half with M&A and divestitures. But – With EPS kind of reiterated, I just thought I'd drill down a little bit and ask if there was, because you're going to lose some EPS from, I guess, the sale of marketing, the acquisition of CMYs coming in. It could be a little accretive. Maybe the core business was doing a little better, and it would have been kind of upside to guidance you know, without any M&A, but just I thought I'd ask if there's any more color to add on how we get to kind of reiterated EPS with those moving parts. Thanks a lot. Yeah.
spk06: Yeah, Joe, thanks for the question. I think, as I stated, that, you know, we are, you know, strong on um reaffirming the the non-gap dps guidance for this year we think that you know given you know the vestures and all the different moving parts um you know including the tax strategies that we've implemented will certainly help, you know, offset any of the lost, you know, EPS that we would have from the divestiture. So we feel like, you know, that, you know, we're solidly there for this year.
spk05: Yeah, I just would add on the, well, I think Barry gave guidance on exactly how the revenues would shift given the divestiture of the commercial marketing and the CMY acquisition. On the revenue front, I would just say from a, And the bottom line, you know, earnings and EPS perspective that I would look at it is, you know, commercial marketing business, we divested that. You know, its margins were, you know, at the low to mid end of our federal business. And CMY, which is a smaller business than what we're divesting with CMG and why the revenues are coming down, we say $13 or $14 million. It is a it is a commercial energy business. The margins are at the high end of our kind of commercial energy, what we'd expect from commercial energy. So at the end of the day, from an EPS perspective, I would say they're kind of more or less a loss, you know, given the relative margins and the revenues. Right. Can I speak on the revenue?
spk02: Great. Thanks a lot, guys. Much appreciated.
spk03: And thank you so very much. One moment for our next question. We have Toby Thomer from Truist Securities. Please proceed with your question.
spk07: Thanks. If you look at your expectation for a pretty strong contract towards in the back half of this year, If you look at the composition source of those, are they related to the IIJA and or climate bill? Is that what makes them strong? Or from your vantage point, is it a regular way of budget spending by your customers?
spk05: I guess I'd say at a high level, Coby, I mean, I think we're seeing the growth in the pipeline and the awards, you know, I would expect to see them across the five growth areas. And so I would, and so, and the pipeline is expanding across federal, commercial, state, and local. And so it's, you know, it's broad-based across those five growth drivers. You know, having said that, I do think that, as I said in my remarks and I said in response to Joe's question, our commercial energy business you know, is showing acceleration here. I think that, you know, across, you know, in a broad way, across that business from advisory to utility programs to climate to environment and planning. And, you know, in the second quarter, our total pipeline, we have reported our pipeline for IIJ opportunities here and our awards. I think we're approaching about 270 million dollar pipeline for iija opportunities i think we're up to about 70 million awards here um and so we are seeing some positive momentum on the iija front which we said we thought we would see in the second half of the year i think the ira we're seeing a lot of interest and a lot of impact from that on the market particularly around the economics of you know solar wind and you know investment activities with utilities developers you know, which is a very positive sign for our pipeline. And so, you know, as I've said, I think we, there's not a significant amount of built-in to our guidance for 2023 from those areas. I just would say that the momentum we're seeing from IJ and IRA remains positive. And I think, you know, as I've said before, it's a positive indication that, you know, things are playing out in a positive way and I think it will potentially set this up for even further growth as we go into 2024.
spk07: Okay. What does your guidance assume from a fiscal federal 2024 budget or CR? I know you don't have a particular crystal ball and you can't predict it, but curious what sort of assumption you have as you get into the fourth calendar quarter.
spk05: I mean, I think we're, I mean, we haven't given guidance per se for 2024 yet. Obviously, we do have our long-term, you know, goal. We articulated it on Investor Day around high single-digit organic growth and, you know, the potential for double-digit growth with leveraging the balance sheet over time through 2024. You know, I think generally, you know, our assumption is that, you know, that we'll have a budget. You know, ideally we'll have a budget. Certainly, we would expect to have a continuing resolution. I think with either of those, I think given the momentum in our markets, on the federal side, the fact that public health and IT modernization has tended to be bipartisan has made it a very high priority that those areas will do better than the average budget increase in civilian. Frankly, given the strong momentum we have with contract awards and and backlog of work you know we have in place in those areas um you know we're that's what we're assuming to kind of you know to continue to deliver the results we've discussed through 2024. obviously if you know there's unexpected you know i mean obviously you know government shutdown or unexpected cuts you know are not what we're expecting but but generally i think um you know we're assuming there'll either be a budget or there'll be a continuing resolution
spk07: Thank you very much.
spk04: And thank you. We will have our next question.
spk03: From Kevin Stein, Barrington Research Associates.
spk08: Well, good afternoon. I just wanted to ask about, you know, with the divestiture of the commercial marketing group, you mentioned that they helped with the growth of some of your engagement and communication services that you provide to your government utility clients. Did you still retain some of those capabilities within the company? even after the divestiture that are going to serve you going forward to serve those key client bases?
spk05: Yeah, let me be very clear, Kevin. It's a good question. I mean, so within our government business, we have a separate – a group that provides the marketing and communication services to our federal clients. That's north of $100 million business. That business resides within our federal business, and that business is staying with ICF. That's going to remain a key part of ICF and our ICF Next sub-brand. We also have a core set of people that support our commercial energy business with communication and marketing, particularly our energy efficiency and other utility programs. Those people are embedded in our commercial energy business. They are all staying with ICF, and we'll continue to do that work. And then we have an international marketing communications business out of Brussels, and that's also remaining with us. So all of those businesses remain in the firm. They've been operating on a standalone basis. There's a little bit of interaction with the commercial marketing group, but it's de minimis. And so we'll keep all those capabilities and all those skills and, you know, and all that, all those people. The thing we're selling is kind of the core commercial marketing services business, which, you know, included the hospitality, innovative marketing, some business transformation consulting we do, you know, really for, you know, retail, hospitality, travel, the super packaging good clients, which, you know, which today are not a core part of our business, a core part of more broadly who we serve. And so that's what we're divesting with this transaction.
spk08: Okay, understood. That's helpful. Just also wanted to ask about service revenue, although you mentioned that it's not going to be part of your investor communications anymore. Is that going to be a metric you continue to look at internally to monitor the progress of the business and margins and just, you know, overall health of the business.
spk06: Yeah, Kevin, this is Barry. Thanks for the question. And the answer to that question is yes. We do think that it's an important metric, and we look at that as we think it's a very good representation of how the core business is performing. So we will continue to look at that. And we'll provide the street, you know, information on subcontractors and ODCs so that if you'd like to be able to calculate that number, you certainly will be able to. And you'll see that, you know, in the 10-Q when we file that. You'll see how we break that down in the MD&A section. So, yeah, I appreciate the question. And, yeah, we do think it's important.
spk08: Okay, great. Thanks for taking my questions.
spk00: Thank you. And I show our next question comes from the line of Mark Riddick from Sideli. Please go ahead.
spk01: Good evening, everyone. So I wanted to jump in onto one of the things I wanted to circle back on in the prepared remarks that you made regarding some of the commentary around AI and some of those those capabilities and some of the progress that you're making there, which is actually somewhat refreshing this season as a lot of folks are kind of, you know, it's a little too early for a lot of folks, but certainly it's encouraging to see that it's an area that you're encouraged by. I was wondering if you could spend a little time sort of discussing some of the opportunities there, as well as any talent needs that may arise, not just specifically within AI, but overall for the entire enterprise as well. Thanks.
spk05: Sure, so I think as I said in the prepared remarks, obviously we have a significant technology business on IT modernization. I think with that business, honestly that business has been doing machine learning and various forms of AI for years as part of their work for clients in the federal sector. And as I also indicated, are looking and experimenting with generative AI for clients as we go forward. It's certainly our expectation that AI has been embedded in these platforms for many years, and that generative AI will become part of what is embedded and used in these platforms. We continue to look at that, take a hard look at that, work with our clients and expand and evaluate, you know, how internally how to best utilize those products and those capabilities to meet client needs and to, you know, improve productivity. You know, and we've also used, you know, more broadly our domain client staff over the years have used machine learning and predictive AI to support clients and things like literature searches and looking for patterns and data that, you know, to understand what might causes of diseases, how to avoid waste, fraud, and abuse based on patterns and data. And so that's certainly been part of what we've done on the domain side. We're also looking at how we can use generative AI to improve our product internally in our corporate services and have created sandboxes to test and experiment with use cases to try to improve how do we do our marketing, our business development, you know, review of contracts, and then things of that nature. In terms of talent, you know, I think, you know, certainly we, you know, obviously finding the talent in our technology business is quite important. As I say, we'll, you know, it's been part of our business, and we'll continue to look for that talent. That is an area of where it's highly competitive and, you know, challenging to find that talent. But, you know, I think we, you know, we've generally made significant investments in recruiting. I think we'll be able to find the talent we need to support our business.
spk01: Great. And then the last one for me, I was sort of wondering if you could talk a little bit about the pricing environment as far as, you know, putting through price increases when rules come up and, you know, are there any areas that are, you know, a little more price sensitive due to you know, economic changes or, you know, given the funding environment that, you know, most areas where you play that you're not really running into that. Thank you.
spk05: Yeah, I wouldn't say there's been a significant change in the pricing environment. I mean, all of our business is competitive. And, you know, with the federal business and with regulated utilities, you know, you're writing proposals, you have to compete for the business. But I wouldn't say there's been a change. You know, and I think as we've talked about generally in the past, certainly in our clients, civilian client um areas um you know we've we've not seen over the years the kind of you know all those price technically acceptable type concepts um price is important but you know the quality of your capabilities your past performance um your people is is most important um in terms of passing costs on i would say that you know like many companies you know we've given significant increases in salaries and paid attention that we stayed at market on the compensation side i think And we give those raises in March each year. So we did give material increases and raises in March. I think as we've talked about, with cost plus, you can more or less pass those on quickly. Only about 15% of our work is cost plus. 40% is T&M, 45% is fixed price. Now, the T&M, we can raise those rates on a yearly basis. We can move people up categories when they you know with with more experience and so those are things we do to you know address the cost challenges and with fixed price we have built-in escalators they're not always enough to cover the raises and there are their strategies you can use over time to to you know make sure that the you know that you pass those along as best you can we're deploying all those strategies you know I think it's And they're tried and true strategies. They don't happen overnight, depending on the type of contract. But we're, you know, we remain focused on that and managing that, I think, generally well.
spk01: I appreciate all the comments. Thank you.
spk00: Thank you. I'm sure no further questions in the queue. At this time, I'd like to turn the call back over to John for closing remarks.
spk05: Okay, well, thank you for participating in today's call, and we look forward to connecting with you at future conferences and events. Have a good rest of the summer. Take care.
spk00: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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