ICF International Inc (ICFI) 2006 Q4 法說會逐字稿

Welcome to the ICF International Fourth Quarter and Year-End 2006 Conference Call.

[OPERATOR INSTRUCTIONS]

And now I would like to turn the program over to Judith Kassel, Executive Vice President and General Counsel with ICF International. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us to review ICF's fourth quarter and full year 2006 performance. With us today from ICF International are Sudhakar Kesavan, Chairman and CEO; Alan Stewart, CFO; and John Wasson, COO. During this conference call we will make forward-looking statements to assist you in understanding ICF's 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 to our March 20, 2007 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 we specifically disclaim any obligation to do so. During this call we refer you to non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures is available in the Investor Relations section of our website.

I will turn the call over to our CFO, Alan Stewart, to discuss fourth quarter and full year financial highlights. Alan?

Thank you, Judith, and good afternoon to all. Our revenue for the fourth quarter ended December 31, 2006 was $113.9 million, up 5.7% sequentially from the $107.8 million reported in this year's third quarter. This quarter, direct cost increased as a percentage of gross revenue to 68.6% from 67.9% in the prior quarter, primarily due to increased levels of subcontract and other direct costs associated with the Road Home contract. Gross profit margin for the quarter was 31.4%, slightly below the 32.1% reported in the prior quarter. This resulted in an increase in the third quarter in revenue, direct cost and gross margin of $6.1 million, $4.9 million and $1.2 million respectively.

The major quarter-over-quarter cost variance from the third to fourth quarter was in the indirect and selling expenses which were approximately $7.4 million in the fourth quarter below the third quarter levels. This primarily resulted from comparatively lower incentive compensation, for example, a $2.7 million one-time charge in the third quarter, and business development costs in the most recent period. Business development costs were higher in the 2006 third quarter by over $1 million compared to the fourth quarter due to the large number of recompetitions that took place during that period. Additionally we have the benefit of a reduction in companywide health benefit costs of approximately $1 million in the fourth quarter, and in addition, we expended less than anticipated on Sarbanes-Oxley and annual audit and tax costs as we supported the ramp up of the Road Home contract.

These factors along with an almost $1.3 million positive swing from interest expense to interest income for the quarter, and a 600 point sequential reduction in our effective tax rate from a 45.6% rate reported for the nine months ending September '06 to 40.9% for the calendar year ending 2006. This resulted in fourth quarter 2006 net income of $9.2 million or $0.65 per fully diluted share. This compares to net income of $3 million or $0.28 per fully diluted share in the third quarter, which included a non-recurring pre-tax charge of $2.7 million.

The fully diluted shares for the fourth quarter include 13,527,000 for basic weighted average shares and 652,000 common stock equivalents for a fully diluted total share count of 14,179,000. It should be noted that we issued approximately 330,000 restricted stock units and grants at the end of September and an additional 283,000 in the fourth quarter, which generally vest over a three-year period. Non-cash stock compensation expenses as required under FAS 123R were 512,000 in the 2006 fourth quarter compared to 284,000 in the third quarter.

Moving to full year 2006 results, revenue was $331.3 million which included approximately $116 million from the Louisiana contract. In 2006 we recorded one-time charges of $7 million, which included a $4.3 million abandoned facility charge recorded in the second quarter and a $2.7 million one-time bonus recorded in the third quarter of this year, as well as $1.1 million in charges for equity compensation under FAS 123R for the year. Net income and fully diluted earnings per share for the year were $11.9 million and $1.10 per fully diluted share respectively.

And reviewing our balance sheet at December 31, 2006 there are several points to note. Our net accounts receivable balance was $110.5 million, representing 87 days of sales outstanding at year-end compared to 59 days at September 30, 2006. If you deduct the amount of deferred revenue for these periods, the adjusted DSOs would be 73 and 47 days respectively. The increase in DSOs is primarily attributable to ICF billing delays due to the change over from Phase 1 to Phase 2 billing rates under the Road Home Program. But we do anticipate DSOs in the long term to follow our more traditional 75 to 85 day historical average.

End of fourth quarter after receipt of our IPO net proceeds of $46 million, we paid off our bank debt. This puts us in a debt free position at year-end which gives us significant capacity to pursue a solid pipeline of acquisition opportunities, given our strong EBITDA as we move into the first quarter of 2007.

Turning to our cash flow statement for the year, our cash flow from operations for 2006 generated $17.5 million, but the cash provided by operating activities for the year, accounts payable, accrued expenses and accrued salaries and benefits increased $12 million, $24 million and $8 million respectively, which is primarily attributable to the growth of the Road Home contract in the fourth quarter. The growth of receivables at 12/31/06 utilized $57.9 million in cash from operations. In addition our deferred revenue grew by $12 million with a substantial portion attributed to the Road Home Program. We had capital expenditures of $1.7 million for the year compared to $1.4 million for 2005.

And with that I'd like to turn the call over to Sudhakar.

Thank you, Alan. As you can see from today's news release, ICF turned in solid operating and financial results for the fourth quarter and full year, executing well on several fronts and starting 2007 in a strong competitive position. We ended the year with a strong balance sheet, we continued to build upon our recognized domain experience by serving a diversified group of clients. Let me start by giving you an -- update on our execution of the Road Home contract, which was awarded to ICF at the end of the second quarter of 2006.

As you know, this is a $756 million three-year contract with the Office of Community Development of the State of Louisiana to implement the Road Home Program which is aimed at compensating Louisiana homeowners and rental housing owners for losses suffered during Hurricanes Katrina and Rita. Gross revenues from the Road Home contract were $60.5 million in 2006 fourth quarter compared to $55 million in the prior quarter. The Road Home is a complex program that is governed by both Federal and State regulations. It is also a highly visible program that has the attention of many interest groups with varying opinions on how best to compensate homeowners and rebuild the storm ravaged areas. There is significant media interest both local and national in this project, which we expect will continue throughout the year.

We officially began the production phase of the contract in mid-October and since then have responded to our client's request to accelerate the work effort by increasing staff and expanding our team of subcontractors. As of March 18 we have delivered 15,985 files to the title company for closing and 3,031 closings have taken place. This past weekend, the US Department of Housing and Urban Development began discussions with the State of Louisiana on changes to the disbursement process for the Road Home Program. The State has confirmed that the implementation of the program will continue.

Now let me turn to our historical business. We've continued to see significant opportunities for growth in several of our key markets by leveraging our service capabilities across the full life cycle of client needs. These key markets include Climate Change and Energy, Homeland Security, Health and Human Services and parts of the Department of Defense. In the Climate Change and Energy market, areas of growth include policy and strategy consulting, analysis and implementation opportunities related to renewable energy, energy efficiency and carbon trading and opportunities related to adaptation to climate change. In the Homeland Security market, the areas of growth include disaster recovery and response, exercises, training and critical infrastructure protection. We also see many opportunities to provide similar services to State and local governments who are receiving Federal grant monies to address such issues.

In the Health and Human Services market, areas of growth include health communications, health education and health clearinghouses]for Federal clients, primarily the Department of Health and Human Services. On the Human Services front, with our Caliber practice having won all of their recompetes in 2006, we expect to continue to see robust organic growth in the areas of training and technical assistance for justice and child welfare programs and in clearinghouses for justice programs. In the Department of Defense and related markets we continue to see opportunities to grow our business by providing advisory and evaluations services in the areas of strategy and planning, human capital development and training, program management and performance management and evaluation.

In the 2006 fourth quarter, revenues from our historical business, that is excluding Road Home, were $53.4 million, up 3% year-over-year. Importantly backlog, excluding Road Home, increased for the third consecutive quarter and reached $329 million at year-end. This represented a 15% increase over $286 million at the end of the third quarter and an increase of 45% over June 30, 2006 levels. The majority of the senior ICF professionals who are assigned to Louisiana to lead the startup of the Road Home Program started returning to their prior responsibilities at the end of last month. This was a couple of months later than originally expected due to our accelerated work effort on the Road Home Program. We expect their return to support and accelerate the incremental revenue growth of our legacy business beginning in the third quarter of this year. We expect that this business will achieve an 8% to 10% organic growth run rate by the last quarter of 2007.

ICF had excellent recompete statistics in the 2006 fourth quarter, winning $35.2 million in recompetes or 95% of the potential recompetition revenue following a very strong third quarter where we won $147 million in recompetes or 98% of the potential revenue. Overall for the year, we won 97% of our recompetes. We are also very pleased with our personnel retention statistics, which we considered an important competitive advantage. In the fourth quarter turnover for associates and above was 2.7% or 10.9% annualized. [Corporate] turnover was slightly under 4% or 14% annualized, including research assistants who often go back to graduate school and recent Road Home hires.

In the 2006 fourth quarter, we negotiated two small yet strategic acquisitions that were completed in January of this year. EEA specializes in energy market analyses and environmental advisory services, especially natural gas markets which complement our existing commercial and governmental offerings in the energy area. APCG provides specialized value services in strategic planning that enhance our end-to-end solutions. This acquisition already has assisted ICF in positioning for some large future procurements in the Department of Defense.

As you can see in today's earnings release, we expect 2007 to be another of growth for ICF, our backlog is solid, we see significant business development opportunities in the markets we serve and we are on the lookout for additional strategically complementary acquisitions.

For the 2007 first quarter we anticipate the revenues will range from $125 million to $135 million, representing a significant sequential increase over fourth quarter 2006 levels that reflects the accelerated pace of our work on the Road Home contract. For the full year 2007 we expect the revenues to range from $480 million to $520 million. For both the quarter and the year we are targeting a net income margin of approximately 5%.

At this point, Operator, I'd like to open the call to questions.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Jason Kupferberg of UBS. Please proceed, sir.

Thanks and good afternoon, guys.

Good afternoon.

Good afternoon.

Thanks. I wonder if I could just get an idea of the -- obviously the '07 numbers that you guys have put out there are well above what's out there from a consensus standpoint. And if you can maybe walk us through your overall level of visibility on the numbers here and also give us a sense of how the '07 revenue mix might break down between Louisiana and the rest of the business?

Right. I'll start and then turn it over to Sudhakar. I think a couple of things have happened obviously since our last November 8 call. We've had really an acceleration of the Road Home Program so we have really seen a scaling up in the number of unit pricing and home inspections, title searches and closings in this process. We also have considered very prudently and conservatively looking at the risk in the later half of the year from potential reductions in both revenue and margins as a result of a number of numerous things. We had numerous audits with the State of Louisiana including State and legislative audits of the expense reports, we have another audit on our labor rates could result in renegotiated rates, we could wind up reducing or having a discount on both our revenue and/or our margins. So we've taken that into effect.

On the question of mix --.

Yes, on the question of mix I would say that my sense is sort of half and half would be a good estimate, Jason.

Okay that's helpful. And I just wanted to talk a little bit on the margin side of things as well, you guys talked about some of the moving parts, particularly on the OpEx side that drove the variance between 3Q and 4Q. How would you think about '07 in terms of kind of sustainable gross margin versus operating margin trends? Just so we have an idea of especially how Louisiana is impacting the picture there.

All right. I mean we do have a number of moving parts and we're very cautious about the risk. I would say that's how we came to look at sort of a 5% net income target in providing guidance. I think clearly we did have some unusual one-time events that impacted the fourth quarter. We will be ramping up spending in a number of areas over the next four quarters in a number of areas. And I think our tax provision in December was also affected by some tax credits that may not repeat in '07, so I would expect a tax provision of somewhere in the 43% rate and again looking at sort of a net income of 5% at this point.

Okay thanks. And the last question. Sudhakar, you made some reference to HUD's working with the State of Louisiana to potentially make some changes to the grant disbursement process, maybe you could give us a little bit more color there on what HUD might be proposing and what some of the different outcomes might be, how it could, if at all, impact the actual underlying contract that you hold with the State?

Yes, I think our understanding of the issue, which came up last Friday, was that what HUD was saying was that that State could do one of two things. Either give the monies in one lump sum to the homeowners as they go through the process or, if the State wants to give it to a disbursement account, which it currently does, jointly held by the mortgage bank and the homeowner, then that becomes what is called a rehabilitation program and the State might have to do environmental reviews and home inspections et cetera in that case. So you have two alternatives, one is if you want a rehabilitation program you have to do environmental reviews for every loan you give, every grant you give, and that would obviously be very time consuming, or the State could give an option to the homeowner if they want the monies to be held by a joint account. The homeowner needs to have the option to do that and not have to do that, was HUD's point of view. And currently I think the State is, in fact today, talking to HUD, they have a meeting at HUD today to figure out what the position should be going forward.

As far as we're concerned, our responsibility ends once we close and transfer the monies to that joint account or if we have to give a check in a lump sum to the homeowner. It doesn't really impact us that much. The only impact it might have is that homeowners who want compensation checks in one lump sum might decide to see how this thing shakes out before they move to scheduled closings, which is why the State is quite interesting in clarifying this very quickly and I think that will be done in the next few days. But I don't anticipate this change in process to have a significant impact on us other than perhaps some short-term confusion out there in terms of what the homeowner should do. And therefore is it better to sit and wait, or is it better to schedule a closing which we are obviously focused in doing. The State has told us to proceed with the current process until such time as they give us alternative instructions, so that's what we'll do.

Okay great. And thanks for the commentary.

And your next question comes from the line of Bill Loomis of Stifel Nicolaus. Please proceed, sir.

Hi, thank you. Can you talk about how this on the Road Home acceleration, as we look to '08, this is obviously a longer term over three-year program. How do you see this planning out as we look to '08 and beyond on Road Home? That's question one. And then a second one is an easy one on the share count, what are you looking for share count this year, Alan, for the full year? Especially if the stock moves higher like is being indicated, do you have any estimate of what the fully diluted count would be for the year?

While Alan gets the share count, let me answer your more difficult question, which is that the acceleration obviously means there is more revenue accrual in '07 and we'll just have to see how quickly we can do the closings. We intend to certainly have a vast majority of the closings done in '07. And there are other subsidiary programs which are also running. There is a rental program and there are other programs which are also running at the same time. There is a whole financial counseling program for homeowners who get the monies. So the program will continue, it's a little too early to say, Bill, as to what the impact would be on '08 revenues just yet. I think we'll know more by the pace of closings and perhaps in the next quarter or two.

Okay.

And on the question of share count, clearly we've got close to 14 million shares outstanding, I think we've got about 1.542 million of options, about another close to 580,000 RSU in stock grants. I think the calculation is then reduced a bit by virtue of the stock price. As we get to later in the year I would hope we would move closer to a 15 million weighted average share count as we move into the later part of the year.

Okay thanks.

And your next question comes from the line of [Ken McHugh] of William Blair & Company. Please proceed, sir.

Thanks. Hi guys, congratulations on the quarter.

Thank you.

Just following up on the last question, you had mentioned that you hope to get all the closings done in 2007. What portion of the program would be complete if that did happen? Or at the point -- when do you complete the closings, how much of the program is complete then?

I think just to step back a bit, we can only do closings if the homeowners schedule appointments and come in. There are 115,000 people who have applied, we have had appointments with about 75,000 or 80,000 and there are still another 30,000 who still have to come in and apply. So depending on the rate at which they come in and apply, obviously our intention is to try and see as quickly as they come in, we can do the closings. But I think that about 75% to 80% of the total monies which the Federal government gave the State are for the homeowner program, and the balance monies are for the other programs which are running.

So I think that if we can do the vast majority of the closings this year then to that extent that program will be complete. So our goal is to do as many closings as we can, it's just very hard for us to predict exactly how many closings there will be each month. We are geared up to do quite a few, we started in February, we're going to do more in March and we have projected we will do more in April and May and onwards. But I think that it is focused on making sure these people come in and they are ready to close. We think that they are and I think that we will get a substantial number of closings. So it's directly related to the number of closings we do, so if you --

And even after the closings the State had considered additional advisory services and consulting services from the housing experts at the housing center. So those facility costs for those people and that work would continue for some period of time post closing as people are going through the rebuilding process.

Okay. I guess turning towards that acquisition environment, you mentioned you're looking there, how large of an acquisition are you willing to look at this point? And how much leverage are you comfortable having the business at?

Having come from a leverage environment where we were fairly heavily leveraged for most of my 5.5 years, I would prefer not to go up to those levels. But I think if we're in the leveraging, with adequate reserve for working capital for both us and our target companies, being in the level of 3, 3.5 or maybe pushing a little more I think is feasible for us. But again we definitely want to make sure we have a reserve of adequate working capital on these acquisitions. In terms of size, I think something sub $100 million is definitely easily more integratable for us at our size company and our resources, and I think if we stretch too far beyond that that would be problematic. So I think we're looking more for strategic targets and I think size could be anything in the $20 million, $40 million up to $80 million or $100 million for the right target.

Okay great. And lastly just quickly, do you have the headcount in the quarter or at the end of the quarter?

Yes. I think we've got the total headcount of the company at 12/31/06 is 2,101 of which I guess full time equivalent staff is about 1,740 and 361 of variable part time.

Okay. thank you very much. Congratulations again.

And your next question comes from the line of Joseph Vafi of Jefferies & Company. Please proceed, sir.

Guys, good afternoon, great results here. I was wondering if we could maybe look at the guidance and how things have been laid out? First of all, we're basically a few days until the end of the March quarter, so obviously there should be a lot of visibility there. And so far I think the company's been very conservative this first two quarters out of the box relative to its performance. And given how late we are in the quarter how should we be looking at the guidance number maybe perhaps relative to what we've seen in the last couple of quarters?

Well, I think in looking at last quarter's guidance I kind of gave a range of $95 million to $110 million, we closed at $113 million. One of the challenges in Louisiana is we've got sort of second and third tier subs doing home inspections and other areas that it takes a while to filter as they invoice subs and those invoices come to us, so there is a little bit of a delay and sort of a risk factor in looking at that. But I think looking at the 125 to 135 range, I think the midpoint we think that's a very reasonable projection at this point based on the information we have.

Okay, fair enough. And just kind of thinking about the full year numbers then a little bit more, if I know I think Sudhakar or maybe it was you, Alan, was talking about 8% to 10% run rate growth in the core business, let's call it, by the end of the year. And given kind of where Road Home is now and if we annualize a Q1 number at that midpoint of the range, does that imply that Road Home is peaking out here in Q2 of '07 in terms of revenue contribution?

Right, I think it's a good point, but I think the dilemma is with the potential change in the program, a potential renegotiation of labor rates, potential performance criteria that could have positive or negative implications and then things like the State legislative audits of fixed price pieces. It's sort of difficult to determine the amount of risk of any reduction that could happen on renegotiation of the contract. So I think we try to be again conservative in projecting out the Louisiana revenue to allow for some protection and caution on those dollars.

Okay, that's helpful. And then maybe, Sudhakar, if you could comment a little bit more on -- I mean obviously ICF got a lot of press in the last few months here. And the tone that you're seeing coming out of the press and maybe even out of the Governor's office the last few weeks here as the number of checks being cut has ramped significantly?

I think that our sense is, and we have always believed that there is a great humanitarian need for the money to get out there. And as we get the money out there, the volume of the noise levels will come down and we've certainly that, and those of you I know who follow us very closely must have noticed that also. So the first day we didn't have any mention in the media we all sort of looked at ourselves many, many days after having been constantly bashed. So I think those number of days have increased in terms of no mention of us, especially after the February closings.

So I anticipate that it's really a very emotional situation there and really there is a great need to get the money out and we are trying very hard to get the money out, given the rules under which we operate. We operate under Federal rules which are Community Development Block Grant rules. We operate under the State design of the program which wants a program which is focused on rebuilding Southern Louisiana. So there are many, many rules which we operate under and I think the general public doesn't really want to know, they just want their money. Which is a reasonable reaction, given that they have been waiting for so long. So I think that as the number of closings goes up, I think that the volume will come down, and in fact we have regular meetings with the Governor's office and I think that they have told us the same thing. So they're certainly paying attention to the program and to the number of closings, just like everyone else is, and I think we are focused on making sure that happens. So I don't know whether I'm answering your question, but I think --.

Yes, that's helpful. And maybe a little bit, I know there was some chatter out there relative to the rental side of the contract of the rental homeowners and some chatter there. Has work begun work there? And have closings started on the rental side as well as the homeowner side yet?

There was some chatter there but I think that that was about five or six days before we launched the program. We launched the program, it was launched with a lot of support from the legislature, which the homeownership program initially did not have. And so I think that that program has been launched, the applications were due back to us on the 15 of March and then the awards are going to be made in the first round by some time in April. So yes the program has launched, we are working away on it and that program in fact is going quite smoothly, especially because there is significant involvement of a lot of the local leadership and local politicians et cetera.

Okay. And then maybe just one final question on the long-term growth strategy of the business. I think we're all kind of aware that the company is looking to do more of these implementation programs like Road Home, and I know that there were a couple of other large ones in your pipeline. Is there any update there relative to some more of these larger implementation opportunities that could take the growth for the company past '07 to a meaningful level? Thanks.

Sure. We have a large contract which we have bid on, we will see what happens there. We are planning, as I have said I think in meetings on the road show, that we hope to bid on two or three a year. Obviously we need to find the right ones because they are very expensive to bid on and position for, which is why we thought that some of the additional staff we have hired and some of the acquisitions we have done, especially the small ones, will help us on that front. So we have bid on one and we have identified a few others and we are making good progress on that front. But I don't have any results to show for it. I'm sure as soon as we hear on these we will let you know. But I can't tell you that we've won any large implementation job in the north of $100 million category yet.

All right. Thanks so much, guys.

[OPERATOR INSTRUCTIONS] And your next question next question comes from the line of Bill Loomis of Stifel Nicolaus. Please proceed, sir.

Hi, thanks. Sudhakar, I think you mentioned that backlog, excluding Road Home, was $329 million, did I get that right, in the fourth quarter?

Yes.

What was it in the third quarter? I know you had some initial components that are Road Home in the third quarter, what was the backlog without Road Home in the third quarter?

It was, without Road Home, $286.2 million.

Okay. And looking to this year, can you give us some idea kind of excluding Road Home, what the sales pipeline is for the business? I know you've given it by pursuit underway and various other categories, I don't know if you have that data in front of you, but I'm trying to understand what that is.

Yes, I have the data in front of me in terms of the pipeline. We report the, as of February 26, the size of the active pipeline was $861 million.

Okay, and that's without any Road Home benefit?

Yes, this is a pipeline which is projects -- Road Home is now in backlog, this is just the pipeline.

And so from that's up from $812 million sequentially, how do you see that tracking over the next year when you look out at opportunities? Obviously, we're in a continuing resolution on the civilian side and have some defense pressures, so what do you see on the Federal space and then separately on the commercial opportunities?

I think that we see -- our opportunities in the Federal space are slightly non-traditional from our peer group. Our peer groups is much more IT and DoD focused, we do some IT as you all know, but we are much more government advisory services and implementation ,program management and implementation. So I think that we do see opportunities in the Federal side of the space. I think we don't see lots of opportunities in the north of $100 million space very frequently but we do see them. And we are positioning to sort of go after them. So I think that our spending is much programmatic and much more focused on running programs, which have an IT component, but which don't necessarily have pure IT implementation.

So I think that on the continuing resolution side I know that I have gotten a number of questions on continuing resolutions, only approximately a third of our business is affected by the continuing resolution and we really haven't seen a very significant impact. So I know that goes contrary to all the -- what you hear from the others but we don't see that. So we think that the opportunity is in both. As I read out to you, the Homeland Security opportunities are very significant, we have some excellent people in Homeland Security whom we have hired over the last year and a half, they've been extremely successful, that's going quite well.

Climate change and energy, there's a lot of implementation growth which is going to come down the pike, especially on energy efficiency programs. There's a lot of commercial work in the energy arena as we move forward, because we think that in the next year or two there were certainly be a cap and trade system on greenhouse gas emissions. And we have historically done a lot of work on SOx and NOx trading, sulfur dioxide and nitrous oxide trading under the Clean Air Act. And there will be a lot of companies which will be interested in that. We currently are working with -- on clean air gas issues with all the big name firms, Yahoo!, Google, NewsCorp, there are a whole bunch of them we're working with. So I think that there's a lot of opportunity we see as this climate change energy issue becomes larger. And energy efficiency program implementation is back up, it used to be called demand side management in the 80s, it sort of disappeared in the 90s and now it's back in. We happen to be well positioned for it because we have done a lot of energy efficiency program management and implementation for the Federal government.

So I think that we are well positioned both in the commercial and in the public space in the markets we are in. It took us, perhaps over the last six or seven years these markets were not that exciting, but now they have certainly become much more exciting as you read about and as you move forward. So I think I'm quite bullish on all these markets we're in. I know people generally think the government business has downward pressure, it does, but we are not Lockheed Martin or some super large company where every dollar decline means some significant impact on our revenue. I always tell people that that's just an excuse, we need to get out there and sell more business.

Okay, thank you.

And your next question comes from the line of Sam Hoffman of ADAR. Please proceed, sir.

Hi. Can you please provide more detail on the revenue, headcount and cost of your two acquisitions who were made in the quarter?

The two acquisitions had roughly 27 and 30 people apiece, fairly small acquisitions. Their prior numbers were not audited so I guess I always have some concern over whether the numbers are consistent with GAAP, I would say in combination I would say the revenue run rate of these two were slightly less than $10 million in revenue.

And how much did you pay for them in total roughly?

We've not yet gone through some of the [run outs] calculations, we'll do that as we close our first quarter.

Okay.

But they are not material in any sense of our numbers or position in the company.

Can you comment on the strategic rationale for each? And particularly, if either one of them positions you for a specific large engagement that you're looking at going forward?

Sure, let me do that. Let me start with APCG, APCG has very strong client relationships in the business transformation agency at DoD. And the business transformation agency at DoD we think is going to come out with some very significant procurements going forward and that we believe, given the relationships and given their tremendous track record and strong client relationships, that's just one of two or three major client relationships they have. We think that they were looking for a platform where they could potentially leverage that relationship and we believe that we provide that platform and it will help us go after some of the large procurements coming out of there.

On EEA, as you know, we have something called the IPM, which is a modeling framework which looks at the utility space, the electric utilities across the country, their generation and transmission. And we had for many years wanted a natural gas equivalent model which we could then link up to our electric modeling framework we have. We had attempted to build them but we hadn't been quite as successful on the electric side of the house. So EEA is a firm which has been around for a long time and they have a modeling framework in the gas side which is very well respected, well known and is used by a number of our clients. In fact, one of our Federal clients wanted us to link up the two models so that they could do their scenarios on various climate change regulations coming down the pike in Congress.

So that was sort of the impetus for us to go talk to them and see whether we could perhaps potentially bring them on board so that both electric and the gas side could be taken care of, because as you know gas is an important aspect of our business as we move forward because that's one of the major fuel sources. And as it becomes more tradable through these big tankers and as natural gas outflowing facilities are built, some in the United States some in the Caribbean, gas will become more and more important. So we thought that was a good rationale, and especially with the climate change issue taking off, need for a gas framework was very important. So those were the two rationale for these two acquisitions.

Okay. And then one follow-up, can you just help me better understand your cash and working capital? Because I see that you now have $110 million of receivables but yet your liabilities have also gone up. So should we expect significant cash to be generated or consumed over the course of the next year?

Yes, I would say December was a little unusual in that the change in billing rates wound up having a larger than expected amount of subcontractor accruals as well as money tied up in receivables in the Road Home Program. I would say that will start working through the process but I think the State is now -- is continuing on a track of paying within their 25-day contract period. So depending on the volume on the Road Home, that should help the DSO average from December to reduce a little bit as we go through the rest of the year. But I would say the Louisiana contract does have a significant amount of subcontractors so that will be running through payables. Clearly, our EBITDA looking at our fourth quarter run rate is fairly strong and I would expect that to generate a fair amount of cash over the next four quarters.

So looking at your balance sheet, how should I view the amount of cash that you kind of have right now or in the foreseeable future? Because it looks like right now there's not much on the balance sheet but yet I kind of feel like there's a lot more kind of flowing through.

Right, I mean I would say at December and probably looking back a day or two ago, we're roughly plus or minus $3 million or $4 million on any point in time. I either have $4 million of overnight investments or I have $4 million in debt on the revolver depending on the timing of payables and collection of receivables. So right now at least, from year-end to date, we're sort of at a [rough] stasis.

So when do you generate cash from your earnings? Because intuitively it seems like your business should over time generate cash roughly equal to earnings less a certain amount of growth in working capital.

Right. I would say again that to the extent that we can bring down our DSOs and get ahead of the curve, I would say we would probably, absent new acquisitions, should be able to build up some amount of overnight investments in cash based on our profits after taxes. Again, a lot depends on the collection and the DSOs and receivables.

Okay thank you.

At this time there are no further questions and I would like to turn the call back over to management for closing remarks.

Thank you very much, we appreciate your interest and participation and we look forward to speaking to you again when we report our first quarter 2007 results. Thank you again.

Thank you for your participation in today's presentation, you may now disconnect. Good day.