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. At this time, all participants are in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. I will now turn the call over to Lynn Morgan of AdvisIRy Partners. Lynn, you may begin.

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?

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 in 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-month book-to-bill ratio to 1.45. Also, approximately two-thirds 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 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 five-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 five 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 one-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 half of the revenue base of this client category, continues 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 marketing contract in the fourth quarter of 2020, which mostly involved low-margin pass-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 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, where 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 two 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 achieving 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 services 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.

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-margin pass-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 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 one-time expenses associated with 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 the 2021 fourth quarter, which represents the completion of the major portion of our program to realign our real estate footprint with a 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, primarily related 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 the 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. The 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 the 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 Creating 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. I want to highlight that by the end of 2022, ICF will move to new headquarters. And throughout the year, there will be an incremental $7.6 million of non-cash rent expense on our P&L. The accounting rules require us to amortize the rent abatement that began in November 2021 over the life of the lease. This means that while we will not have cash outlay for rent, from a P&L perspective, we will accrue these expenses. We will exclude this from our adjusted metrics. As we move into 2023, ICF will no longer have this double rent, and we will have incremental savings in rent expense compared to what we paid in 2021. Looking at the cadence of 2022, we expect results to be largely balanced between the first and second half with year-on-year growth in each quarter. We expect double-digit service revenue growth beginning in the second quarter. I also want to share our expectations for certain 2022 financial metrics that will help with modeling. Depreciation and amortization expense is expected to be in the range of $20.7 million to $22.7 million for the full year 2022. Amortization of intangibles should be in the range of $18.5 million to $19 million. Full year interest expense will range from $10 million to $12 million. Full year tax rate will be approximately 28%. We expect fully diluted weighted average share count of approximately $19.1 million for 2022. And capital expenditures are anticipated to be between $33 million and $37 million, including approximately $15 million of expenses related to one-time leasehold improvement costs from the new headquarters. Our 2022 operating cash flow is forecasted to be approximately $130 million.

Thank you, Bettina. As you've seen in today's press release, we are expecting very strong performance for 2022, driven by high single-digit organic growth in service revenue and the benefit of our Creative acquisition, which together support our guidance of double-digit growth in both service revenue and total revenue. Specifically, we expect service revenue for the full year 2022 to range from $1.225 billion to $1.275 billion, representing year-on-year growth of over 12% at the midpoint. Pass-through revenues are anticipated at approximately 28% of total revenue in 2022, providing for total revenue of $1.7 billion to $1.76 billion. EBITDA is expected to range from $160 million to $172 million, inclusive of continued organic investments in business development, recruiting and retention, and technology and is equivalent to 16% growth at the midpoint. Adjusted EBITDA will reflect the non-cash rent expense that Bettina mentioned in her remarks, bringing adjusted EBITDA based on our current visibility to $168 million to $180 million. This would represent an adjusted EBITDA to service revenue margin of 13.9% at the midpoint, which represents a 50 basis point expansion from the 13.4% we reported pre-pandemic in 2019. We are confident in our ability to progressively increase EBITDA margins over the next several years through a combination of excellent execution of our programs, scale, lower facility costs and other operating efficiencies. GAAP EPS is projected at $4.15 to $4.45, and non-GAAP EPS is expected to range from $5.15 to $5.45, representing increases of approximately 15% and 10%, respectively, over 2021. Operating cash flow is expected to be approximately $130 million in 2022, up 18% year-on-year. As you know, the great majority of ICF work involves helping clients address issues that are critical to society's well-being. Thus, while we're very pleased with our financial accomplishments and outlook, we're also very proud of the positive impact that ICF professionals are making on the world we all live in. We're also pleased to announce that we will hold our Investor Day on Wednesday, May 25, in New York. The event will feature presentations and panels that will provide greater insight into the growth drivers ahead for ICF and give you the opportunity to engage with our subject matter experts and those leading our technology and digital engagement capabilities. Invitations will be sent out shortly. Please direct any questions to Lynn Morgan. We certainly hope to see you there. And with that, operator, we'll open it up for questions.

Our first question comes from Joseph Vafi from Canaccord.

Good results. Bettina, best of luck in your future endeavors. Welcome on board, Barry. Maybe we'll just start with just a high-level question here on growth opportunities and your IT modernization with the most recent acquisitions getting to be more material. You've got good growth there. You've got good growth opportunities in some of your other core government verticals, and then your energy efficiency business is also doing well. Can you kind of give us some thoughts on ROIs on investment dollars in those areas or other key strategic buckets and how they may vary and where you might prioritize one over another? And then I have a quick follow-up.

Yes. I would say, Joe, we certainly did a nice job of hitting our key growth drivers. I think we've talked at length about the five key growth drivers within ICF. As we've said consistently, we've seen north of 10% growth in each of those five key growth drivers this year, and we certainly expect that we can continue with that 10% growth. So I think we are making significant investments in each of those areas and believe that that double-digit growth is sustainable. And so I think the return on investments in, we're confident of significant returns on investments in each of those areas and are making significant investments given they're driving a double-digit growth. So it's a little difficult for me to kind of rank order the five. I mean, I think they are five significant markets for us. As we've said, they make up 65% of our total revenues in 2021. And so that's what the investment focus is. We do expect a significant growth, and they're all contributing materially to our earnings growth too.

Okay. That's great. And then just kind of drilling down a little more on IT modernization. And I know you've got acquisition-related growth in there this year, but do you expect that to continue to grow faster organically over time with potentially better margins than some of your other key areas of growth?

Yes, certainly. As you know, we've seen significant growth in the IT modernization and digitalization sectors, consistently reporting more than 15% organic growth in that market. With the ITG modernization, we have achieved substantial revenue synergies, and we are very confident that we will also realize significant revenue synergies from the Creative acquisition, particularly due to their expertise in sales. We view this market as one of our highest growth areas and are committed to maintaining over 15% growth there. Additionally, the margins in IT modernization are among the highest in the federal sector, which enhances our overall mix. We are pleased and confident about our trajectory in IT monetization and expect to sustain that growth. Across all five key growth areas, we continue to invest in business development, as we believe this is the right time to position ourselves for strong organic growth in the coming years. We are focused on making and executing these investments in these five areas.

Great. Congrats on a good '21.

Yes.

Our next question comes from Tobey Sommer from Truist Securities.

This is Jasper Bibb on for Tobey. I wanted to ask about the margin guide and how we should think about the cadence of margins through the year. I know historically, Q1 is seasonally low. That wasn't the case last year, but you might have some pass-through costs that might impact just the slope of margins in any given quarter. So any color there would be great.

Well, Jasper, thanks. This is Bettina. Thanks for your question. We don't normally give specific quarterly guidance. But as we said, and I appreciate that while, in general, we see the back half of the year being slightly more positive than the front half of the year, that we will have balanced margins, as you will, from a perspective throughout the year, quarter-over-quarter.

Yes. I mean, I think we've guided to 13.9% adjusted EBITDA to service revenue. I would expect that will be pretty consistent throughout the year. I wouldn't see a lot of variability there quarter-by-quarter.

That's fair enough. And then you announced some pretty sizable recompetes in the commercial energy space this month. Just given some of the ambitious targets that states have put out, are you getting increased scope on this round of recompetes? Or is there any opportunity to do so going forward?

In general, with our energy efficiency recompetes, we usually see increased scope and opportunities to grow our revenues with those recompetes. This has been a trend in the past, and I expect it to continue as we grow the work when we win recompetes.

Okay. Got it. Last question for me. You mentioned the lease savings in the prepared remarks. Could you provide a bit more color on how you intend to manage the indirect cost structure going forward, maybe given the learnings from COVID and what that might mean for your margins over time?

Yes, we have been actively working over the past couple of years to adjust our lease footprint to align with the hybrid work model we expect to adopt after the pandemic. We are carefully considering the necessary investments in our facilities and are utilizing the savings from reduced facility costs to reinvest in business development, particularly as we pursue growth opportunities. Additionally, we are making substantial investments in recruitment and capital amidst the current labor market dynamics. Moving forward, we've committed to increasing our adjusted EBITDA to service revenue by 10 to 20 basis points annually, and the facility rationalization will support that goal. Furthermore, we anticipate reducing our travel and entertainment expenses by approximately 25% in the long term by leveraging virtual technologies and managing our travel more effectively. This is another element of our strategic cost management aimed at enhancing our margins and enabling future investments.

Our next question comes from Marc Riddick from Sidoti.

And Bettina, thank you very much for everything. I certainly wish you the best going forward. I wanted to revisit some of the questions you've already addressed, which is great. However, I would like to know your perspective on disaster-related opportunities and whether you have a general timeframe for what we might see in 2022. I have a quick follow-up after that.

I believe that disaster management is one of our primary growth markets. As mentioned earlier, we are witnessing significant growth in that sector and anticipate double-digit growth exceeding 10% in the disaster recovery markets for 2022. We are actively engaged in Puerto Rico, focusing on traditional disaster recovery, and in Texas as well. Looking ahead, the increasing severity and frequency of storms will create ongoing opportunities in this area. Additionally, mitigation is becoming a crucial source of funding for disaster recovery. We've secured projects in numerous states, establishing ourselves as a market leader. This market presents considerable prospects for us, although timing is contingent on when disasters happen. The introduction of mitigation funding offers a substantial long-term funding source aimed at building resilience and reducing damage from future storms, contributing to a more stable revenue stream for us rather than one that is solely episodic.

Great. I was wondering if you could provide some insights on the overall acquisition landscape, specifically regarding the pipeline. With Creative, I know that you generally focus on debt reduction after an acquisition. Can you share what the pipeline looks like and what the near-term appetite might be?

From a capital allocation standpoint, our main focus has been and will continue to be on investing in organic growth. We are also looking for acquisitions that align well strategically and culturally, allowing us to generate significant revenue synergies by combining with ICF. The M&A market remains active with a lot of deal flow, although pricing is still elevated. We have not observed significant changes in pricing recently and maintain a disciplined approach. Our focus areas for M&A continue to be in federal services, IT modernization, health IT, as well as in the commercial sector related to energy efficiency and distributed energy. We will be selective and ensure that any potential acquisition is a good cultural and strategic fit, concentrating on revenue synergies and avoiding turnarounds or fixer-uppers. Our net leverage ratio stands at approximately 2.91 after the Creative acquisition, and we anticipate strong cash flow again in 2022, which gives us the capacity to pursue the right deal if it arises, while remaining disciplined in our approach.

Thank you. We have no further questions in queue. I will turn the call back to management for closing comments.

Okay. Well, thanks for participating in today's call. We look forward to engaging with you at upcoming virtual conferences and meetings. I hope to see you all in New York for our Investor Day. Thank you.

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