Ross Wilkers


ICF eyes civilian growth thanks to budget deal

Plans to pay first dividend with tax break funds

Prospects of higher defense spending from the bipartisan two-year budget agreement struck in February are being widely welcomed by contractors but the civilian side of the equation is also being cheered by at least one firm: global consulting outfit ICF.

Congress still has a deadline of March 23 to get this current fiscal year’s appropriations done. And even if they meet that deadline, agencies first have to develop internal operating plans before funds flow out to contract obligations.

That means revenue on contracts ICF wins will likely not be available until the fourth quarter of this calendar year, CEO Sudhakar Kesavan said on the company’s fourth quarter and year-end earnings call with investors Tuesday.

It also means Fairfax, Virginia-based ICF did not factor higher civilian spending into its outlook for this calendar year, although Kesavan said they do expect government revenue growth based on its current backlog and pipeline.

The budget deal “will be more of a needle mover for ICF in 2019,” Kesavan told analysts. And he said the budget is “closely aligned with ICF capabilities and business development focus areas, particularly around public health and infrastructure spending.”

Federal government revenue last year totaled $550.3 million to represent 45 percent of ICF’s overall $1.23 billion in sales, according to its annual regulatory filing. And one-fifth of ICF’s total sales last year came from the Department of Health and Human Services -- one of several civilian agencies that have been eyed for cuts under the Trump administration.

But HHS’ Centers for Disease Control and Prevention is getting $6 billion in the bipartisan budget deal to combat the opioid epidemic. ICF has worked with CDC on related campaigns over the past year. And ICF has “already heard (CDC) plans to expand this campaign,” Kesavan said.

The budget deal also includes $22 billion in infrastructure spending -- a priority area for the Trump White House -- and the current continuing resolution sets aside $89 billion in disaster relief aid in response to last summer’s active hurricane season.

ICF Chief Operating Officer John Wasson said the firm expects much of that relief funding to be appropriated later in the summer. And they expect “the majority of the (requests for proposals) coming by mid-summer and we would expect to see awards later in the summer,” Wasson said.

That does not factor in the $7 billion-$7.5 billion in funding for the Community Development Block Grant program run by the Housing and Urban Development Department. That distributes aid to local governments for debris removal and housing recovery, among other immediate post-disaster functions.

“That money has been allocated to the states and Puerto Rico and so we are just beginning to see some RFPs related to that,” Wasson said.

Overall revenue for ICF last year rose 4.2 percent to $1.23 billion and the firm’s guidance for this year shows 2.5-percent sales growth at the midpoint, or around $1.26 billion -- right in line with the analyst consensus.

ICF also saw a 3.5-percent increase to $117.9 million in adjusted earnings before interest, taxes, depreciation and amortization expenses.

That translates to an approximate 10.4-percent adjusted EBITDA margin on revenue. Analysts watch adjusted EBITDA as a key metric to track profitability of government services contractors.

ICF does face one headwind this year when it rebids the Demographics and Health Surveys contract with the U.S. Agency for International Development. This will be the eighth iteration of the DHS contract, which ICF has won every time dating back the program’s start in 1984.

The current contract was awarded in 2013 and carries a $189 million ceiling over five years. Deltek data indicates the next iteration called “DHS-8” will have an approximate $223 million ceiling value over five years. An award is anticipated in August.

In addition, ICF also disclosed what it plans to do with its benefit from the December tax reform legislation and it’s a first for them since they became a public company in 2006. The firm will start to pay dividends on its stock to the tune of 14 cents per share.

That leaves CACI International and Engility Corp. as the only two publicly-held government services companies that do not pay dividends on their stock. CACI has never paid a dividend since it went public in 1968 and Engility is not allowed to under debt covenant agreements for credit facilities.

Instead of dividends, CACI is using the tax reform windfall to invest more in employee development programs.

ICF is also forecasting a 26.5-percent effective tax rate for this year versus the 38-percent rate from last year. And Chief Financial Officer James Morgan told analysts the company expects “somewhere between $100 million to $105 million” this year for cash flow, which investors use to evaluate return-on-investment.

“Paying the dividend will not hinder our ability at all to do acquisitions,” Morgan added.

The company does have the firepower for deals. Its debt-to-EBITDA ratio at the end of last year came in at around 1.74-to-1, while the company had $11.8 million in cash on hand. ICF also has access to $900 million through its credit facility.

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