ICF International Inc (ICFI) 2007 Q3 法說會逐字稿

Welcome to the ICF International Third Quarter 2007 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session.

(OPERATOR INSTRUCTIONS)

And now I would like to turn the program over to Doug Beck, Senior Vice President, Corporate Development. Please go ahead.

Thank you. Good evening everyone, and thank you for joining us to review ICF's third quarter 2007 performance. With us this evening 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' results to differ materially, and I refer you to our November 7, 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 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 we specifically disclaim any obligation to do so. During this call we refer you to non-GAAP financial measures such as backlog and EBITDA. Our reconciliation of these measures to the most directly comparable GAAP measures is available in the Investors Relations section of our website.

I will now turn the call over to our CFO, Alan Stewart, to discuss third quarter 2007 financial highlights. Alan.

Thank you, Doug, and good evening to all. Our revenue for the third quarter ending September 2007 was $198.8 million, up 4.5% sequentially from the $190.2 million reported in this year's second quarter. This quarter direct cost decreased slightly as a percentage gross revenue to 74.2% from 74.9% in the prior quarter.

Gross profit margin for the quarter was 25.8% slightly above the 25% reported in the prior quarter. This resulted in increase in the third quarter in revenue, direct cost to gross margin of $8.6 million, $4.8 million, and $3.8 million, respectively. Revenue from the Road Home contract was approximately $125.2 million for the third quarter.

Indirect and selling expenses increased slightly from the $27.7 million in the second quarter of 2007 to $29.6 million in the third quarter of 2007, primarily due to the indirect cost associated with the Z-Tech operations, which was acquired June 28, 2007. The charges for non-cash compensation attributable to equity were approximately the same, $800,000 from the second quarter '07 to the third quarter of this year.

Interest expense for the third quarter of 2007 was $654,000 compared to $414,000 for the second quarter of 2007. The effective tax rate for the third quarter was 42.3% compared to 39.2% in the second quarter. This increase in the tax rate was attributable to a one-time adjustment from the 2006 year-end tax provision estimates to the final filed tax returns that were filed in this quarter. I would anticipate a tax rate of approximately 40% to 41% for the remainder of the year in the near-term quarters.

These components result in third quarter 2007 net income of $11.1 million or $0.74 per fully diluted share. This compares to net income of $11.2 million or $0.75 per fully diluted share in the second quarter. The fully diluted shares for the third quarter included 14,299,000 for basic weighted average shares and 700,000 from stock equivalents for fully diluted total share count of 14, 999,000.

It should be noted that we issued 10,000 restricted stock units in the third quarter of 2007, non-cash stock compensation expenses, as are required under FAS 123R were $792,000 in the third quarter compared to $778,000 in the second quarter of 2007.

In reviewing our balance sheet as of September 30, 2007, there are several points to note. Our net accounts receivable balance was $157.2 million compared to the $144.3 million balance as of June 30. As of September 30, 2007, the day sales outstanding for accounts receivable was 71 days compared to 65 days and 92 days of June 30th and March 31st, respectively.

If you deduct the amount of deferred revenue for these periods, the adjusted DSO's would be 65 days, 60, and 83 days, respectively, for the periods ending September 30th, June 30th, and March 31st of this year. We continue to anticipate DSO's in the long-term to follow our more traditional 75 to 85 days historical average.

At the end of the third quarter we had no revolving bank debt outstanding compared to $5 million outstanding at the end of the second quarter of this year. We have increased our revolving line of credit capacity to $95 million with the -- in connection with the June 30th Z-Tech acquisition which gives us sufficient and significant capacity to pursue a solid pipeline of acquisition opportunities given our low level of debt as we move into the fourth quarter of 2007.

Turning to our cash flow for the nine months ending September 30, 2007, our cash flow from operations provided $356 million. This increase in accounts receivable of $37 million was offset by an increase in accounts payable and accrued expenses of $17.7 million and $20.8 million, respectively, which is primarily attributable to the growth of the Road Home contract significant increase in unit price activity in this nine month period.

We had capital expenditures of $2.6 million for the nine month period and payments for business acquisitions during this nine month period totaled $40.3 million, net of cash acquired for the three companies that were acquired during this nine months. I will now turn the call over to our CEO, Sudhakar Kesavan. Sudhakar.

Thank you, Alan. Good evening everyone. This was another strong quarter by ICF. We posted excellent growth in year-over-year in sequential quarterly comparisons of revenue and earnings. Excluding revenues from the Road Home contract, our core business of providing advising and implementation services to government and commercial clients was up 39.4% compared to last year's third quarter, an increase of 19.5% on a sequential basis.

Importantly this reflected a high level of activity in each of our key markets -- energy and climate change, environment, health/human services, and homeland security and defense. At the same time we're executing well on the Road Home contract, which has been moving at an accelerated pace since the beginning of this year.

Through Monday of this week, ICF and its team has completed nearly 68,000 closings worth some $4.5 billion in terms of payments to eligible applicants, and we are on track to reach our performance objectives of around 90,000 closings by the end of 2007. The original program anticipated 100,000 eligible applicants. At the present time the likely number of eligible applicants is around 160,000.

As most of you are aware, the state of Louisiana has been actively working with the Federal government to get the money they need to fund the remainder of the programs so as to compensate the additional eligible applicants, nearly 60,000 in number, who qualify for payments under the Road Home program.

Yesterday we learned that congressional negotiators have agreed to provide an additional $3 billion for Louisiana's Road Home program in the pending defense bill. The fiscal year 2008 defense appropriations conference report HR-3222 is a compromise between funding bills passed by the Senate and the House earlier this year.

This bill now returns to the floor to pass each chamber before going to the President for signature. If appropriated, this will provide the majority, but not all, of the required funding for eligible homeowner applicants.

This does reflect a strong desire of Federal and state parties to fund the program for all eligible grantees. In the meantime, we are continuing to implement the program based upon the scope and conditions of our current contract.

Exclusive of the Road Home contract, the backlog of $519 million at end of the third quarter, backlog including the Z-Tech acquisition that Alan referred to and was completed on June 29th, but excluding the Road Home contract increased year-over-year by 82%. If you exclude the backlog from the Z-Tech acquisition, the backlog then was 12% above second quarter 2007 levels and was 59% over last year's third quarter.

This is the sixth consecutive quarter of solid progressive increases in our traditional business backlog which is an indicator of the favorable trend in our markets, and ICF's strong competitive position.

The integration of Z-Tech is moving ahead very well. You may recall that Z-Tech is a 200 person firm specializing in implementation services of the Federal healthcare market with their software engineering web design and development and scientific computing. As a result of the Z-Tech acquisition, we have significantly increased our presence at the Food and Drug Administration and important HHS component agencies, such as NIH and the Centers for Disease Control.

ICF has also -- seeing an active flow of potential acquisitions. We have a differentiated acquisition strategy and the range of firms that we look for include many that traditional IT services providers in the government and commercial space would not seek out. Additionally, we have a strong track record of successful acquisitions which could make ICF a good consolidation platform for small and mid-size companies seeking to grow.

I would now like to ask John Wasson, our Chief Operating Officer, to review our new business and operating activities before I fill in. John--

Thank you, Sudhakar, and good evening. The total value of contract wins in the quarter was approximately $116 million. As noted in today's earnings release, late in the second quarter ICF won a $23.8 million contract from a state government to provide management and technical assistance for their underground storage tank claims program.

There was also a strategically important new contract win, valued at up to $15 million, from the Department of Homeland Security to implement the new chemical facilities and view terrorism standards. This continues our growth in the area of infrastructure protection for the first of 17 critical infrastructure sectors for which standards will be developed by DHS.

We continue to expand our information clearinghouse business with the win to manage HHS' child welfare information gateway for $6 million. We are also continuing to strengthen our market position in climate change and related environmental issues in Europe with a $6.3 million win from the European Union for work in Eastern Europe.

ICF's new business pipeline was $927 million at the end of October, which includes several opportunities with contract values of $50 million each. For comparison on July 31, 2007, our new business pipeline was $840 million.

Our personnel retention rate for the third quarter continues to be good. Total turnover for the second quarter was 4%, excluding the Road Home program, and 7% when the Road Home is factored in. Also ICF continues to attract top talent. During the third quarter, we hired a number of new officers who are nationally recognized experts in climate change, health communications, family and youth services and environmental management.

Finally, I would like to highlight a few aspects of our ongoing work that underscores how we are continuing to work on some of the most significant issues in our markets. Just this week ICF was named the 2007 Outstanding Contractor by the Administration for Children and Families at HHS. This is an important award in recognition of the firms work on the child abuse prevention initiative managed by ICF as part of the child welfare information gateway, one of our information clearinghouse projects.

In climate change we continue to see significant opportunities to provide strategic and implementation services to major global firms. In the third quarter we were retained by three Fortune 500 companies to assist them in their climate strategy. In addition, we released the most comprehensive study today on green financial products and services at the United Nations Environment Program financed initiative global round table in Melbourne, Australia.

In Homeland Security, in addition to the new work, we have one in California supporting the urban area initiative and critical infrastructure protection. We are working with the Department of Homeland Security on TOPOFF 4, the fourth in its series of critical important national terrorism preparedness exercises involving TOPOFF officials from every level of government.

These are just some examples of our critical work to help our clients with knowledge-driven advisory and implementation services. Now I would like to turn the call back over to Sudhakar to conclude.

Thanks, John. Before ending our formal remarks, I would like to go over our outlook for the fourth quarter. The strength of our historical core business and the pace of Road Home contract will result in revenues of $170 million to $180 million in the fourth quarter. We expect net income at approximately 5% of revenues.

We also reaffirming our full year 2008 guidance of approximately $500 million in revenues and a net income margin of about 5% based on our current portfolio business. And now, operator, I would like to open the call to questions.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Jason Kupferberg with UBS. Please proceed.

Thanks and good evening, guys. A question for you on Louisiana Road Home. Sudhakar, as you pointed out with the $3 billion potentially coming through, assuming the Senate appropriations bill makes its way through Congress and to the President, hypothetically speaking, once that process is completed how long might it take you to then sit down with state officials and, I don't know if this would be a renegotiation to an existing contract or an amendment to it or an extension of it, in terms of going beyond the $756 million of TCV that was contemplated in the original award?

I think our contract goes through June of '09, so there will not be any need for an extension, Jason. I think the focus would be as soon as we -- as soon as this appropriation process takes place, we are in constant discussions with them, and we are also trying to assess -- as you know there is a December 1st deadline for making appointments, so that we know the exact numbers of people who will be applying. If you don't get an appointment before December 1, then you will be considered ineligible. That will firm up the 160,000 or 165,000 or 150,000 -- whatever the number is in terms of individual applicants.

And, that is the basis on which we will go forward and assess what the additional needs are and come to conclusion with the state. There was uncertainty as to what the appropriations will be attached to, which bill. Yesterday that appeared to go away. So now there is more certainty. We just need to wait for the appropriations process to go forward wait for it, and then start the discussion process with. So we will start the discussions immediately because we are in constant contact with our client.

So, is there anyway we can draw a line between this $3 billion and what that could potentially mean in terms of incremental Louisiana revenues, again beyond the $756 that was originally contemplated?

Unfortunately, I wish I could be more certain but I can't tell you the exact assessment because we don't know the exact number of applicants. There is a range of applicants right now between 140,000 and 165,000, depending on who you speak to. So that could be made certain by December 1 and soon after that we should have a pretty good sense of what the number would be.

Okay, and just a follow up on the Q4 guidance. How much of the revenues are expected to be from Road Home?

Road Home would be around $190 million. Oh, sorry, Road Home would be $100 million.

$100 million in Q4, okay. And, just one last one, organic growth in the core business. If you can give that specific to the third quarter. I know you gave total core including Z-Tech. What would have been the organic portion?

Organic portion, year-on-year?

Yes.

The Q3 '06 versus Q3 '07, without Road Home and without Z-Tech, would be around -- between 20% and 25%.

Okay. Thank you.

Your next question comes from the line of Joseph Vafi with Jefferies & Company. Please proceed.

Hi, guys, a good evening and a good quarter here. Let me just ask Jason's question a little bit differently. If we kind of looked the original Road Home contract and the size was -- the overall size, not just to you but of the funding contract overall, was it $8 billion, if I recall properly, the original Road Home contract?

I think the original Road Home contract was actually $6.3 billion.

$6.3 billion, okay.

The state added another $1 billion, so that would be $7.3 billion, and then the state was looking for an additional $4.5 billion, and they got some sense of the $3 billion yesterday and they are still looking for an additional $1.5 billion.

What would be the puts and takes at kind of a high level of that extra funding, relative to what activities you did on that original, let's call it the original contract versus the extension?

I mean there was clearly a lot of set up costs and a lot of -- well, set up activities, let's say, for you on the original contract that wouldn't, I guess, be replicated or duplicated here on the extension, clearly setting up the ability to process the Road Home contract. Is there anything else we should be thinking of in that extra funding versus the original amount to help us get a feel for the revenue contribution for you?

Right. I guess most, as you point out, we have been doing this much more quickly than what we had originally anticipated, the original contract has us doing the closing, 100,000 closings, by the end of '08. We will be at around 90,000 closings by the end of '07. So, most of the additional requirements are for unit price activity, that is, appraisals, home inspections, title searches.

So, we have the staff, we just need to keep the staff a little longer so the labor is not really the main component it is more -- all the unit price activity which needs to be done for the 60,000 additional eligible applicants. So, the focus has to be on the unit price activity which needs to be done for these folks because the labor we have, we might just need them for a month or two or three months more. Because we anticipate, at the current pace, if everything works smoothly, we should be done by the end of the summer of '08.

Okay, and then, if we looked at the contract today, if we looked at let's call it unit price activities you were talking about versus other activities for which you billed against the contract, is there -- how would those -- is there a way to flush out the mix in revenue between those two buckets of activities?

Joe, we don't have the details here. We can -- I can't answer that question because I really don't have the details in terms of the unit price amounts, etc., because there are so many unit price activities and there are so many things which we do on a per unit basis under the contract that I really don't have a specific number to give you.

Okay. Maybe we will just switch gears here a little bit and talk about the pace of the funding environment. Obviously everyone here focuses on a broader range of stock where there is a lot of DoD focus. It looks like the core business is accelerating pretty nicely. It looks like the President is thinking of doing some vetoes here on some of the civilian-related budgets. Do you see any puts and takes or headwinds here relative to a CR environment, as you look forward into the next couple quarters?

I don't, because the CR environment has existed for a while now, so there is a steady state. So, I don't see that but my work is quite diversified across a lot of civilian agencies, so I don't see where -- I think we are small relative to the overall budgets here in the different agencies so we don't perhaps see the impact as much as perhaps some of the defense contractors.

Okay. And then, maybe just one final question on the preliminary '08 outlook that you provided. It is in line with where it was last quarter. Obviously that does not, at this point, include any of this supplemental Road Home business. And then, secondly, looks like the core business is accelerating a bit. Is there -- was there a reason not to come take a look at that or just conservatism overall relative to that outlook still being a bit further away.

No, we have assumed as we go forward. We assumed what told you the growth rate would be. We thought we would be at a 10% run rate in the fourth quarter. We are, I think, there cumulatively if you do year-on-year numbers for the core business. So, we have assumed that we will continue to grow at that rate for the next year, so we did take that into account when I gave you the guidance, so we certainly assumed a 10% growth rate to the core business moving forward, plus whatever residual amounts there will be on the Road Home business.

Okay. Alright, great. Thanks, gentlemen.

Your next question comes from the line of Tim McHugh with William Blair. Please proceed.

Congratulations, guys, on a great quarter. I was just wondering, was there anything unusual in the third quarter in terms of a large project that either started or that you would expect to end in the next few quarters here that makes the organic growth that we saw in the third quarter, I guess, not repeatable.

We don't see any -- there's no specific -- no, I think that there is no unusual --

There is no unusual [single] contract. We had good growth across a number of lines in our practices.

Right, I think we had strong growth across energy, environment, homeland security. We have a diversified contract base. It is really not-- the acceleration and growth of the core business is not one particular contract or a handful of contracts. I think it is general trends in those sectors.

Okay, great. And then, given the growth you are seeing, has the ability to bring people back off the Road Home program given you enough staff and talent to support the organic growth you are seeing, or is utilization running at a particular high level where staffing is a concern at this growth rate?

I don't think we have concerns there. I think that we have been bringing senior staff b back from the Road Home project, integrating them back into core business both in terms of the client needs and in terms of business development. I think we are starting to see the effects of that with the acceleration of the organic growth in the core business. I think that we are in good shape there and we have been doing quite well in that front.

Is the strength still coming from your historical in the advisory services or are you seeing continued uptake in implementation type of projects?

I think the core advisory work is strong. We certainly are winning more implementation work and seeing a growth from that. I think we are seeing opportunities again in IT and program management, human capital change management that is certainly driving some of our growth. So, we are seeing a success from the implementation side of the business.

Also we are seeing quite a lot of opportunity around clearinghouses. I think I mentioned a couple of those in my remarks. So, I think it is a mix. It is both the core advisory business and we are growing into and are growing the implementation side of the business.

Okay. Thank you very much.

Your next question comes from the line of Bill Loomis with Stifel Nicolaus.

Hi, thank you, great quarter. Looking at the organic growth and tailing on some of the other questions. It did show up pretty sharp, the acceleration year-over-year in the third quarter. Can you point to some of the contracts and the dollar amounts relative to the contract sizes you have announced this year? You seem to have a big pick up. Were there a few contracts that had an outside contribution on that that you can point us to for the non-Road Home business?

As some of you pointed out, sometimes we don't win enough large contracts, but we do win a lot of small contracts. And, that is a good thing and a bad thing here. It is a good thing traditionally because we are quite diversified so we don't see the impacts of ups and down, except of course Road Home. But, John --

We are seeing strong trends and strong growth on our energy and climate business. I think a significant portion of that is commercial so it is going to tend to be smaller jobs that's driving the growth there.

I think it, again, it is strong trends in the energy and climate business that is driving growth there. I think in the environmental business, environment transportation business we won several contracts late last year with EPA, new prime contracts, that I think we are starting to see revenue under that that has helped grow in the environmental front.

Homeland Security, I think we have a BPA we won early this year with DHS, maybe late last year. We have seen an acceleration in task orders under our DHS BPA, that's driving program management related activities. And then we have won several clearinghouses, or clearinghouse related tasks, in HHS and that has certainly contributed to the growth here too.

You had the jump up to about 22% organic growth in the year-over-year in the third quarter and then you are saying it is going to go back down to 10% in the fourth quarter?

No, I think our -- we assumed that right now, year-on-year, if you look at our nine month numbers they are somewhere between 10% and 12%, if you take out Road Home and you take out Z-Tech. So, given that, we are not assuming that it will go down. We are just making sure that we can stay up there. We are hoping that this is going to continue. I think that when you talk about organic growth we are not assuming that 22.5% (inaudible - highly accented language) take out Z-Tech when you talk about the number.

Right, and what was Z-Tech, about $6.2 million, or what was --

Z-Tech was performing, as we told you, around $25 million for the year. So it is pretty level, if you take a quarter of that revenue for each of the -- so, if you take that out, then you know you can assess what our core business growth rate. On a year-on-year basis, we are in the range we told you. So, it is not going to come down, we just hope that it stays up. But when you take the full 12 months, I think it is not going to be more than I am suggesting.

And, on the margins and through the year you have been saying that as you got passed some of the earlier parts of Road Home that will probably a little less profitable. But the operating margin should move up sequentially. What is the reason for that in the September quarter, and why dropping off so significantly in the fourth quarter per guidance?

I think the third quarter reflects, as John said, some of the pick up in the advisory in other work, and the growth beyond the Road Home program. The Road Home revenue was slightly down by $4 million. That was made up by the Legacy growth as well as Z-Tech coming in. I think they have better margins on our Legacy side of the business and Z-Tech for gross margin basis. So, I think that has been helpful. I think in the fourth quarter, we are trying to be prudent looking at our guidance.

There is -- you have holidays coming in, you clearly have some concerns on catching up on unit pricing and some drop off as Sudhakar said on the expectations on Road Home revenue and working through the closings of those that we have already gone through the unit price work on, home inspections, appraisals, et cetera., that were recognized revenue in prior quarters so we are kind of factoring that into our fourth quarter.

Okay, thank you.

(OPERATOR INSTRUCTIONS). There are no questions at this time and I would like to turn it back to management for closing remarks.

We would like to thank you all for participating this evening. As you heard, we are very pleased with our third quarter performance. We look forward to keeping you up to date on developments at ICF. Thank you again.