Incentive Technology Group, LLC (ICFI) Earnings Call Transcript & Summary

Hello, and welcome to the ICF conference call to discuss the acquisition of ITG. [Operator Instructions] Please note that this conference is being recorded on Monday, January 13, 2020, and cannot be reproduced or rebroadcast without permission from the company. And I would now like to turn the conference over to David Gold of AdvisIRy Partners.

Thank you, Sean. Good afternoon, everyone, and thank you for joining us to review ICF's acquisition of ITG. The call will be hosted by John Wasson, President and Chief Executive Officer, who's joined by Sudhakar Kesavan, Executive Chairman; and James Morgan, Chief Financial Officer. A slide presentation has been posted to the company's website under the Investor Relations tab. 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 today's press release and our SEC filings for discussions of those risks. In addition, our statements during the call are based on our views as of today. We anticipate the 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 President and CEO, John Wasson, to discuss the acquisition announced today. John?

Thank you, David, and thank you all for joining us this afternoon on such short notice. We are pleased to share further insight in today's announcement of our acquisition of ITG, which we see as significantly strengthening ICF's positioning to win large contracts in the federal government, IT modernization market. In addition to our press release announcing this acquisition, we've included a presentation that provides more detail on ITG. I intend to briefly review this presentation, and then we will take questions. Let's begin on Slide 3, which provides a snapshot of ITG. It was founded in 2010 as an IT consulting firm, delivering application, modernization and business transformation, primarily for civilian agency clients within the U.S. federal government. The key takeaway here is that ITG represents the best-in-class in federal IT modernization. The 350-plus person ITG team has driven IT monetization at the Department of Health and Human Resources, the Department of State, the Department of Homeland Security, the General Services Administration and the Department of Commerce, many of which, as you know, are long-standing ICF clients. ITG has an outstanding reputation as a builder of technology solutions to solve challenging problems and add significant value for federal agencies using open source, low code platforms and other next-generation technologies. ITG was named ServiceNow's 2019 U.S. Federal Partner of the Year. It's the second largest ServiceNow partner in the public sector and has the largest Appian federal practice in North America. In short, ITG's expertise and performance has driven substantial growth over the past 10 years and has enabled the company to compete effectively well above its weight class. ITG's revenues were approximately $90 million in 2019, and its annualized revenue run rate at the end of last year was over $100 million. This positive momentum also is evident in their backlog and business development metrics. Their EBITDA margin is above that of ICF's. Moving to Slide 4. We present the high level picture of why this acquisition is strategically compelling for our federal business. First, the IT modernization and cloud market is estimated at $21 billion. The federal government is still in the early innings of undertaking this modernization, and the typical project is quite large by ICF standards. Second, we believe sustaining ICF's long-term growth will require a broader technology offering beyond our existing engagement, cyber and software development capabilities. Finally, we believe we'll be able to create immediate revenue synergies by combining ICF's domain expertise and client relationships with ITG's IT modernization capabilities. Moving to Slide 5. We present the more detailed strategic elements that make this combination an important growth catalyst for our federal business. First, ITG's expertise and track record with agile systems and cloud-based platforms fills out our capabilities and gives us the qualifications to compete effectively for the larger $100 million IT modernization opportunities. Those of you who attended our December Investor Day or tuned in to the webcast will recall that we discussed the next-gen IT market as one in which we see significant growth potential for ICF. We have succeeded in building out our qualifications through various organic initiatives. By bringing on ITG with their track record and pairing this with ICF's deep domain expertise, client relationships and contract vehicles, we will establish a leadership position in IT modernization. Third, we are confident that the ITG model of embedding agile software teams at TSA will resonate across our federal agency client base and will even be relevant to certain parts of our private sector clients. To sum up, there are multiple ways in which the ITG acquisition represents a synergistic 1 plus 1 equals 3 transaction for us. On Slide 6, we have a broader look at the full life cycle solutions that ITG brings to clients and the leading technology platforms and capabilities that it utilizes to deliver transformative results. For example, at the Department of Health and Human Services, ICF's largest federal client, ITG used the ServiceNow platform to assist the Office of Inspector General to modernize their operations management, improve their stakeholders' user experience and enable efficient collaboration with existing contractors. As a combined entity, ICF and ITG will be uniquely positioned to architect and implement technology platforms that drive the kind of transformation that agencies need at the scale that they require. On Slide 7, we have mapped the key milestones that ITG has achieved since its founding. As you can see, they consistently have made the requisite strategic investments to develop new technology platforms that have driven growth and have built out their client roster. As highlighted on the slide, we have a significant number of clients in common, which represents a key part of our combined growth strategy and underscores our confidence in getting revenue synergies over the near term. This segues well into Slide 8. First, keep in mind that ITG comes to us with a robust business development pipeline, which is at least 3 to 4x as great as the revenue run rate. This level of qualified new business opportunities, along with our backlog levels, gives us good visibility on their ability to generate double-digit growth in 2020 and 2021. Additionally, within the ICF pipeline, we have a significant number of opportunities representing over 10% of the total value of our pipeline where ITG significantly enhances our chances of winning. Third, we are confident that the combination of ICF's deep domain expertise and broad client base with ITG's IT modernization skills and past performance will allow us to identify large and new proposal opportunities that neither firm would have bid on their own. And lastly, there will be some revenue capture associated with our ability to bring in-house revenues that ITG has self-contracted out in the past. Slide 9 provides a summary of the financial details of this acquisition. First, the cash purchase price is $255 million, and the transaction will be accretive in 2020 on a non-GAAP EPS basis. The purchase price will be funded by our existing credit facility. Following the transaction, our leverage ratio will be less than 2.7. As you know, we have a strong track record of levering up to make acquisitions and then paying down debt relatively quickly given our strong free cash flow. Other data points to mention include ITG's EBITDA margin, which is in the mid-teens, and the NPV of the tax benefit associated with the transaction that amounts to approximately $33 million. Now to Slide 10, where we've included certain metrics designed to help you in modeling for 2020. As you will have seen in this afternoon's release, we have provided preliminary guidance on our revenue outlook for 2020 and other metrics. Please keep in mind that these are preliminary estimates and that we are not in the position to discuss Q4 or go beyond the figures we provided in the release. We still are in the early stages of our roll up of 2019 results and 2020 projections. We wanted to provide you with some insight to assist you in your modeling. With that as background, let me summarize Slide 10. First is our preliminary expectation for revenue growth of 10% this year compared to estimated revenues of about $1.48 billion in 2019. Providing this revenue guidance, we considered an 11-month contribution from the ITG acquisition and organic growth in our federal and commercial markets, which more than offsets our expectation of lower revenues from our FEMA-funded contract in Puerto Rico that we had in 2019. The latter is a function of our client's very recent initiative to progressively insource certain aspects of the contract throughout 2020. We are working closely with our client to achieve the best outcomes for the affected populations. The recovery in Puerto Rico is expected to last for 5 to 10 years, and as we are meeting all our deliverables, we believe we are well positioned to continue to win work there. Revenue guidance for 2020 does not include any additional disaster recovery contract wins or plus-ups relating to the 2017 or 2018 storms nor any material benefit from winning related mitigation contracts or energy efficiency contracts in California. While we will provide more detailed 2020 guidance on February 27, when we issue our full year 2019 results, we did want to note the following: interest expense will be higher in 2020 than in 2019, and the tax rate is expected to return to more normalized levels and be approximately 300 basis points above what it was in 2019. That said, our organic growth catalysts for 2020 remain in place and combined with the ITG acquisition, support our expectation for another year of strong growth in 2020. Slide 11 summarizes our thinking on the ITG acquisition. Again, we see it as a transformational for our IT modernization business as it gives ICF the scale, qualifications and expertise to significantly expand our business development opportunities in a fast-growing market. In addition, we have identified revenue synergies that we can pursue, thanks to this combination. Pairing ICF's strategic consulting, analytics and deep domain expertise with ITG's strong IT modernization capabilities will offer a robust portfolio of services that help our clients meet their new mandates. And equally important, ITG is an excellent cultural fit with ICF, which was the key element in their choosing to combine with us. There is an experienced leadership team in place, and we all are highly motivated to move ahead together. With that, and the caveat that there's not much more we could add on 2019 and 2020 financial metrics, operator, I would like to open the call for questions.

[Operator Instructions] Our first question will come from Joseph Vafi with Canaccord.

Congratulations here. I was wondering if you could kind of frame now that you're moving more deeply into the IT world, which is, obviously, a much bigger TAM than any of your other individual TAMS, how does ITG here compare to the core ICF IT business? And is it doubling the business? Is it more complementary? And how do you see your overall IT business integrating together? And then I'll have a follow-up.

Sure, Joe. Thanks for the question. So ICF's IT businesses today, we're -- our focus is in a digital marketing and digital engagement front. We have scale and capability there. We certainly have scale and capability in cyber and in software development. And as we discussed in our Investor Day, we have been building out our capabilities in the IT modernization market from an organic perspective. I would say the ITG acquisition brings a whole another level of depth and breadth, capabilities and skills. Within the firm, which will really take us to the next level as I pointed out in the presentation, the IT modernization is quite a large and growing market with very large opportunities. There's opportunities -- robust opportunities out there north of $100 million in opportunities in this market. And so it's certainly a robust growth market. In terms of the overall scale of our IT business, I think it will take us north of $500 million. And so ITG and the IT modernization will be about 20% to 25% of our overall IT business. It will essentially become a stand-alone division within our U.S. public service business, given that this will become the platform for IT modernization. It will report in as a separate division in our IT -- in our U.S. public sector practice going forward.

Okay. That's helpful. And then just kind of a follow-up on your commentary on the agile software, TSA and some of the GSA schedule work. I was just wondering how you may be able to leverage some of the other federal clients and that GSA schedule to introduce them here to some of the work that ITG is doing.

Joe, as -- Sudhakar here. As we stated, the GSA, the work which we are doing, with ITG folks doing GSA is sort of the template, which we think the other federal agencies will use. The GSA clients are very sophisticated in their whole agile approach, and I think that we have been quite successful, the ITG folks, in working with them and expanding that business. So that's the template which we believe will be followed by other agencies as they do their IT modernization work. So that past performance qualification is very useful for us to win work in these other agencies as they take up their efforts to modernize.

Sure. Great. And then just maybe just one other quick one. I don't know if I saw it in the slides, if you look at the composition of clients here for ITG between civilian and DOD and how does that change kind of your -- perhaps some go-to-market strategy in some of these federal departments.

Well, I think that ITG's client base is primarily civilian, and so it's obviously aligned given our civilian focus. I think we have a much broader array of clients than they do, obviously, given our scale. And so I think we can certainly help take them into a broader set of civilian clients, and I'm sure they can take us into their clients. And the play here will be, again, as we've talked about quite regularly in terms of the strategic intent of ICF, obviously, we can bring our subject matter expertise, our broader set of clients, our contract vehicles, they can bring their world-class IT capabilities, their partnerships with leading companies like ServiceNow and Appian. And so I think we can work that white space between the subject matter expertise and the next-generation IT, and we've been quite successful in working that white space and making magic happen. I think we'll find significant synergistic revenues between our 2 companies.

And also, their past performance was very strong, so that will help us win work as that work comes up.

Our next question will come from Sam England with Berenberg.

Just a couple for me. First one, I just wondered how long you expect the integration to take of the acquisition and if there's any sort of heavy lifting that needs to be done or whether it's a relatively straightforward deal that you can just slot into the business.

Sure. I think -- well, we expect the deal to close, obviously, by the end of January. And I think this will be a straightforward and relatively quick integration. I would think it would be integrated within 6 months. As I say, I think we see ITG coming into ICF as a stand-alone division, reporting to our head of U.S. public sector. They will become the platform for our next-generation IT or IT modernization efforts. And so I think it can be integrated quickly and seamlessly, and we've obviously done quite a number of acquisitions and have a standard playbook for the integration. And so I think as things go, this will be a pretty straight -- this will be a straightforward acquisition integration.

In the accounting segment a lot of things are sort of federal government-oriented, I think the cost point. So I think that, that sort of makes it much easier for us to do that.

Great. And then the next one, I just wondered whether this is the start of an area where you could see yourselves doing more M&A in the future or whether this is really a stand-alone type of deal when you wouldn't look at further acquisitions in the same area.

Well, I would say that I think we feel -- we're very excited about this acquisition. It does give us scale. And I think it really takes us to the next level in terms of our IT modernization capabilities. Having said that, I mean we're regularly out in the market. These folks certainly bring the leading technology providers and partners, but that's not to say that if we found a company that brought complementary capabilities or unique value down the road, we wouldn't look at it. But I think we felt like we've made the investment we need to reach the level -- the breadth and depth of capabilities to kind of compete for the largest opportunities out there, which, as we continue to grow, given our size and scale, we have to be able to compete for those opportunities.

Our next question will come from Andrew Nicholas with William Blair.

I just wanted to follow up a little bit on some of the financial items. I'm just curious and I apologize if I missed this, but if you could provide a little bit more color on maybe what the revenue growth rates were for ITG. I know you said that it got to about $100 million run rate at the end of the year, but about how fast is it growing? And then any color on the size of the backlog. I think you made a comment about the business development pipeline, but any color on the size of the backlog would be helpful.

Yes. This is James, Andrew. If you take a look at kind of the growth rates over the last 3 years, on average, you're looking at a CAGR that's around 15% or so, a little bit north of 15%. And with regard to backlog, if you look at the backlog and what -- running at a little bit north of $100 million next year certainly they have in backlog to support that, north of 90% is the backlog currently to support that.

Okay. And then in terms of the resource -- excuse me, the recent insourcing initiative in Puerto Rico, just kind of hoping you can give a little bit more information on kind of what drove that change. How much of a headwind do you expect that to be in 2020? And if there's anything from your guys' perspective that you could have done differently or if this was just something specific to Puerto Rico that was outside of your control.

Sure. So I'll start off, and I'll let others -- this is John. So I think the insourcing in Puerto Rico is being driven by the new governor. There's a new governor in Puerto Rico, who took over in -- late in the summer of last year. And I think she's expressed interest in seeing the Puerto Rican government play a greater role in undertaking the work related to the FEMA work we do, which is oriented around public infrastructure projects. The insourcing has nothing to do with our performance, and we're certainly not being singled out. This insourcing and interest in it will impact the other companies that are supporting our clients in Puerto Rico. I would say, the situation remains quite fluid and could change over the next month or so, but this certainly has been an area of focus very recently within Puerto Rico. And so I think that's what's driving it. I think as we look down the road, I think we still believe that the disaster recovery market, as we've talked about in our Investor Day, we think it's going to be more stable and long-term revenues over the next 5 or 10 years. I think we still believe that's the case. In Puerto Rico, we think we'll be there for the long run. And we continue to be -- certainly on the Puerto Rican housing side, we're doing well and see upside there. We've talked a lot about the mitigation funding that's coming. And so I think the long-term outlook for reference there is quite -- remains strong. There's just this focus on -- from the new governor on this insourcing.

Got it. And then if I could just sneak one more in. On Slide 8, or maybe, yes, Slide 8, you mentioned that ICF could have some opportunities in its pipeline, kind of enhanced by ITG or that ITG would enhance your win potential there. I was hoping you could just give an example or 2 of what that might look like, just so we can kind of get a sense of that part of the revenue synergy dynamic.

Sure. I mean I think they're -- I mean, as I said, we've been organically building our IT modernization capabilities. So we have a pipeline of opportunities in our pipeline that we've been in capture for our civilian clients. And I think we believe that if we -- with ITG's capabilities and partnerships that should materially improve our win probability on those opportunities. And so as we will improve the win probability and win them, it has upside on the revenue. I think that we've been reviewing our pipeline. I think there was about a dozen opportunities that we looked at in ICF's pipeline where ITG could improve our win probability in the future. And so -- which could be material.

Our next question will come from Tobey Sommer with SunTrust.

This is Jasper Bibb on for Tobey this afternoon. I wanted to ask about the client's decision to insource that FEMA contract and if you have any visibility into when the government might provide more clarity on the recovery strategy, and that's with the backdrop of those CBDG (sic) [ CDBG ] mitigation dollars in the pipeline.

Sure. I mean I think the focus on this insourcing has been on our FEMA-related work. We really haven't seen any indications or had any discussions around potentially insourcing on our housing-related contracts. And so there's been no discussion on that. It seems to be focused on the FEMA work. I think it's a fluid situation. I think there will be -- will -- I would expect we'll have greater clarity on this by the time of our Q4 earnings call, and we'll certainly provide an update. As I said, it's really being driven by the interest of the new governor, and I would say the situation remains fluid. I do think -- I would also note, I mean this year is a political election in Puerto Rico, and so there is broader political dynamics here.

And let me also add that I think that the part we -- what we've seen is as a part of the FEMA contract, which is being insourced, is not all of it. So just to clarify that. I think it's -- the movement is to keep us engaged but try and take some of it in-house. And I'm sure they're going to test to see whether that -- how feasible that is going forward. So I think that's what we are currently dealing with, which is why John says, it's a fluid situation. So that is this attempt to try and do it. And therefore, we are in the process of figuring out what they really want to do, what they want us to do, what they want to do, and that's something which is still fluid, and we are trying to figure that out.

Right. But I think our expectations will remain engaged in working on our FEMA contract at some level through the end of that contract, which is the June of 2021. And so this insourcing, it isn't complete insourcing. It's -- they're trying to sort through what aspects of that contract they intend to insource.

Sure. And then just kind of following up to that, would you say this insourcing kind of materially reduces the overall opportunity in Puerto Rico in your opinion?

No, I don't think I would say that. I mean I think this is just on our existing FEMA contract. I think, as I said, we haven't seen any indication of this on our CDBG housing, the existing work for housing recovery. And we certainly fully expect that the mitigation-related opportunities that still need to play out, both in Texas and Puerto Rico, later this year will -- are there, the funding is still there. And those are very significant opportunities. And we certainly expect to play on those as those opportunities come to light, it will come -- reach the RFP stage. I mean those are very large dollars and very large opportunities, which, again, I would just -- I would emphasize that those of you who've been with us through our prior disaster recovery contracts know there's always chance for change under these contracts, unexpected puts and takes. Client can modify their approach, and so it's not unusual for this to happen. But I think that long-term outlook remains strong, and the long-term growth drivers are still in place certainly in terms of the housing recovery and the mitigation dollars over the long run, over the next 5 to 10 years.

Our next question will come from Kevin Steinke with Barrington Research.

Congratulations. I just wanted to ask a little bit about the process by which this acquisition came together, maybe how competitive it was, and what ultimately made ITG a good fit from their perspective for you in terms of how they looked at, how combining with ICF benefited them.

Sure. So I mean, as you know, Kevin, at Investor Day, we talked about our M&A focus and our strategy. And obviously, I think we talked about IT modernization, and next-gen IT is an area within the technology space that ICF -- it's important for us to have greater scale and better breadth of capabilities given the significant funding in that market, the large contracts and that is a significant priority for the federal government to modernize their system. And so we've been out in the marketplace, looking at next-generation IT companies over the last 18 to 24 months. I think it's fair to say we've looked at a dozen or more companies. We know the market, we've seen the market. We knew ITG. We've -- I think we've met the management and ICF got to know them 5 years ago. And so we knew this company and knew they were very high-quality and always admired them as another company in our space. They did hire a banker, so it was a structured process and so we were part of that process. There was quite a lot of interest in ITG. I would say from our perspective, what was attractive? Well, first, I think is the cultural fit was quite good. And I think that's quite important to us, given our mission orientation and the strength of our culture. It's important to them. And so I think that was a real selling factor on both sides. And then for us, obviously, they bring the deep technology expertise, they have absolutely terrific people, they bring the key partnership, ServiceNow, Appian, Amazon Web Services. They bring the contract vehicles as Sudhakar said. So they were, I think, a very high-quality property kind of right in the sweet spot of what we thought we needed from a strategic perspective. For them, I think they looked at us and said, they were very excited by our subject -- our deep subject matter expertise and our core civilian markets. I think that they appreciate it. And I thought they could get leverage from our business development capabilities and investments around capture and proposal and other things, our vehicles, our client relationships. And so it just really -- it seemed like a great fit, and I think that's how we arrived at this deal. I was -- we couldn't be more excited about it. We think it's really the perfect fit for our portfolio at a time where this is a significant growth market, and I think we can make magic here on a synergistic front. We can make 1 plus 1 equals 3, leveraging each other's strengths given the opportunities in this market.

I would add that they have a choice. Obviously, it was, as John said, a very sought-after company, and they could make the decision and we are pleased that they made the decision to come with us because I think I'm speaking for them now because based on what I've heard from them that they really like culturally what we do, they like the domain focus of what we do. They thought that the culture and the mission orientation would help keep the employees they have in a way which would be very different from if they went into a sort of a generic government contractor type situation. So I think that for us, it was very pleasing that they chose us, and we are very pleased with the fact that we could do this based on their assessment also of the cultural fit.

Okay. That sounds great. That's very helpful. And I guess, revenue synergies, you've touched on those quite a bit, but anything more you can expand on there in terms of the synergies you see in terms of them being able to bring you into their client base? Is it just kind of across all of your offerings within the federal government space that you see those synergies materializing? Or is it may be certain agencies or areas of subject matter expertise that are obviously attractive for synergies, for ICF going into the ITG client base?

Yes. So Kevin, I'm looking at a list of our pipeline and the revenue synergies, and I can tell you that all of them are -- our pipeline and it's a combination of our partner and their pipeline. And all of them are in agencies where we have worked on the domain side. So you have HHS, FEMA, you have all the agencies in HHS. So I think that we feel that the fact that we would understand the mission of the agency that much better will add to our technical approach and would therefore be really quite helpful. I mean right now, these guys bring a pipeline and I'm giving you their numbers because of $640 million unweighted pipeline with 6 opportunities in excess of $50 million and all to be awarded prior to the end of 2021. So -- and we have $750 million pipeline of opportunities. So I think that when you add all this stuff up, the amount of opportunity is quite significant and the enhancement of the key wins will certainly help us sort of just accelerate their growth rate we feel. And I think that we are quite excited about that. So I think that based on this quite detailed assessment we did, we believe that it really is a really solid way to accelerate some of our growth in the [ solar ] arena.

Okay. Great. And then just a couple of numbers-related questions here. I just wanted to confirm if I heard correctly that you think ITG's pipeline positions them to grow at a double-digit rate in 2020 and 2021? Is it -- I believe that's what you said earlier?

Yes. That's correct, Kevin.

Okay. And then when thinking about the net present value of the tax benefit, is that kind of something you factored in to your analysis as you thought about the purchase price?

Yes, we did. I mean, certainly, as we have mentioned that the tax benefit is fairly significant, to say the least. And so we did take into account the NPV value of the tax benefit when we took a look at what the purchase price was.

Okay. And then lastly, is it too early to kind of estimate what sort of intangible asset amortization will come out of the transaction and flow through the income statement?

Yes. Certainly, we'll give you more guidance on it later. But if you look at total intangibles, we're in the neighborhood of, call it, the $50 million, $60 million range, which will obviously be amortized over a period of -- ranging from 5 to 10 years.

Our next question will come from Marc Riddick with Sidoti.

Most of my questions have been answered. One thing I did want to touch on, so I think you did make a quick mention of this, I just want to make sure. When you look at the slides, there does seem to be some exposure in the past with commercial customers, and I was wondering if you could talk a little bit about that. It seems as though it's something that's been a growing area for them or at least compared to maybe the beginning of that particular slide. And maybe what percentage of revenue we're talking about there and what type of opportunities that may come from nongovernment contract.

Yes. ITG's commercial revenues are quite small. I think it's about 2%. And so I don't really think it's material. And so -- and obviously, if we -- as we look at their capabilities, if we see ways to take them into our commercial clients, we'll certainly look to do that. But I think they're primarily -- overwhelming majority of the revenue is focused on the federal market. And frankly, it's a very large and growing market with very large opportunities, and we think there's going to be incredible synergies there. So I think the short-term focus will be on the $21 billion federal IT modernization and cloud spend that's going on. And I think the federal government is still in the early innings of that modernization effort. So I don't -- I think ITG is not constrained by the number of opportunities. I mean there's plenty of opportunities out there for these folks.

Great. And then I guess the last thing for me. I was wondering if you could touch a little bit on maybe -- you talked about the large -- the size of the opportunities and contracts, is there a general way to think about general contract terms, renewals, as far as things like that, that we should sort of think about with the existing contracts with the [ company ].

Yes. I mean I think these are typically federal government and IT implementation contracts, so 3- to 5-year contracts. I think, as I recall, ITG's -- I think the largest portion of their portfolio contracts is TNM, followed by fixed price. I think cost plus is the smallest percentage. So it's -- the contracts used here are consistent with what we see across our civilian clients in the IT arena. I think it's -- there's nothing unusual or different about these types of contracts from that perspective.

[Operator Instructions] Our next question is a follow-up from Joseph Vafi with Canaccord.

Just a quick follow-up. I know there'll be more on guidance and the like here on the Q4 call, but it sounds like more or less that preliminary number includes no major go get new contracts. I was wondering if it's just from here to kind of achieve that rate of growth in 2020. What are we looking at in terms of new business awards? Or is that guidance kind of more or less close to kind of what you have in hand at this point?

I think it's more of the latter of what you said. I mean I think it's -- it reflects the backlog we started the year with, what is in our pipeline. And like any year, I mean we'll start with a significant portion of our work in backlog. I think we're generally comfortable that those growth rates are achievable. It does not, as we said in the initial -- the considerations for guidance, it does not include any new material awards on the plus-ups on our existing disaster recovery contracts or mitigation-related awards, which could happen in the second half, or material energy efficiency awards in the second half of the year. So I think we're pretty comfortable with that guidance for next year. And as has been the history of ICF, it includes both organic and obviously the inorganic growth from ITG. And we're pleased that the initial guidance is, I think for the third year, roughly double-digit growth. I think we grew a little over north of 9% in -- a year before last, we'll obviously be above 10% given the midpoint of our guidance for 2019. And so we're pleased to maintain that level of growth for 2020.

This will conclude today's question-and-answer session as well as today's conference. Thank you for attending today's presentation, and you may now disconnect.