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Bill Simpson published an analysis for Tradingipos.com subscribers of ICF International's (NASDAQ:ICFI) IPO on September 21st. The company priced at $12 a share, below the expected range, and rose 11% in its market debut. The text of the original write up follows:

ICF International plans on offering 5.5 million shares at a range of $14-$16, assuming over-allotment is exercised. One million shares of this offering will be sold from insiders. UBS will be lead managing the offering; Stifel, William Blair and Jefferies will be co-managing. This is a rather weak underwriting team overall. Post-offering ICFI will have 13.6 million shares outstanding for a market cap of $204 million on a $15 pricing. IPO proceeds will be used predominantly to pay down debt.

CM Equity Partners will own 56% of ICFI post-offering.

From the prospectus:

We provide management, technology and policy consulting and implementation services primarily to the U.S. federal government, as well as to other government, commercial and international clients. We help our clients conceive, develop, implement and improve solutions that address complex economic, social and national security issues.

ICFI is an expertise as well as contracting company. 72% of '05/'06 revenues were derived from the US Federal Government. ICFI focuses their expertise and contracting business in 4 general areas: defense and homeland security; energy; environment and infrastructure.

ICFI pretty much defines their reason for existence thusly, “Increased government involvement in virtually all aspects of our lives has created increasing opportunities for us to resolve issues at the intersection of the public and private sectors.”

ICFI has provided consulting services to the U.S. Environmental Protection Agency [EPA] for more than 30 years, the U.S. Department of Energy for more than 25 years, and the DOD for over 20 years.

What does ICFI do? Three things:

1) Advisory Services: ICFI provides advisory and management consulting services including needs and markets assessment, policy analysis, strategy and concept development, management strategy, and program design.

2) Implementation (contracting): Based on the results of advisory services, ICFI provides implementation services including information technology solutions, project and program management, project delivery, strategic communications and training.

In other words, ICFI advises the Federal government that the Feds should hire ICFI to contract! In IFCI's words, “Because of our role in formulating initial recommendations, we are often well positioned to capture the implementation services that often result from our recommendations.”

3) Evaluation and Improvement Services: ICFI provides follow-up evaluation to their advisory and contracting services.

The specific areas in which ICFI has provided these services include terrorism, federal budget deficits, emergency preparedness for natural disasters and national security threats, rising energy demands, environmental changes and an aging federal civilian workforce, among others. ICFI has consulted and provided services for Homeland Security, energy policy expertise, transportation infrastructure, immigration, population growth, and health care.

ICFI has made a few acquisitions over the past two years to expand their scope; however they're still a pretty small player in the government consulting/contracting space. There is one huge contract however that has not only opened up the window for them to come public, but makes this IPO an interesting and viable offering.

Road Home Contract
: In June 2006, ICFI was awarded a contract by the State of Louisiana to serve as the manager for The Road Home Housing Program. This program, being funded by a Federal Block Grant (from HUD) of $8.1 billion, is designed to assist the population affected by Hurricanes Rita and Katrina to repair, rebuild or relocate by making certain reimbursements to qualified homeowners and small rental unit landlords for their uninsured, uncompensated damages. ICFI was awarded the contract due to a prior advisory relationship post-Katrina with the State of Louisiana.

ICFI is managing this contract not receiving the $8.1 billion. However ICFI estimates that the maximum amount payable to ICFI and its subcontractors to the first four-month phase of the contract will be $87.2 million. ICFI will subcontract to itself 50-60% of this as well as derive fees for managing this contract. ICFI has $208 million in total revenues in 2005, so even if one were to lowball estimates here for the Road Home Contract just won, it is going to have a major impact on ICFI's top and bottom line going forward beginning with the 3rd quarter of 2006(the current quarter). Only the first phase (the $87.2 million) is guaranteed, but that is just business as usual and ICFI is in a great position to continue to derive significant revenues from this program over the next 3 years.

I'm even more certain of this after looking at the Louisiana state website and reading, “The Road Home is now being administered by ICF International” which was contracted by the Office of Community Development to oversee the program through to its completion. A “big deal” for a little player like ICFI as they state, “by far our largest individual contract.”

So we've a small Federal government contractor that just landed a huge management contract win.

Financials

  • Note that revenues through the most recent reported quarter 6/06 do not include any of the Road Home contract revenues. Those will kick in beginning the 9/06 quarter. Prior to this contract ICFI has managed to post 9 straight quarter of sequential quarterly revenue growth.
  • No real cash on hand as the bulk of offering proceeds will go to pay down debt. There will be a bit of debt post-offering, $12 million; however this is down substantially from $50 million pre- IPO. Debt was laid on in acquiring complementary businesses.
  • Due to an acquisition, revenues ramped in 2005 49% to $208 million. Gross margins were 41%. SGA expense ratio was 34%. Operating margins were a slim 4% and net earnings after tax/ interest payments were 3% rounded. Note as always I've folded out debt servicing costs for the debt paid off on offer. ICFI made $0.44 in 2005. On a pricing of $15, ICFI would be trading 34 X's 2005 earnings.
  • Growth looks to have been muted through the first 1/2 of 2006 at 6-7% or so. That obviously will change drastically when ICFI starts receiving the Road Home monies the back half of '06. Frankly until they post a quarter with these monies, it is difficult to say for certain how much revenues will be derived and how much will filter to the bottom line. The following forecasts for full year 2006 DO NOT include any projections from the Road Home contract. I'm not ducking out of a tough projection here either. ICFI themselves state, "Because the contract is in its start-up phase, it is not possible for us to predict the level of revenue or profit we will earn during the first four-month phase or through the balance of the contract”. I do believe revenues for ICFI from this contract will be significant in the 2nd half of 2006, in 2007, in 2008 and possibly beyond. An $8+ billion program is a big one and ICFI is the sole manager of the first phase of this program and would seem to be in line to manage the future phases as well.
  • So without the Road Home contract factored in at all, ICFI stood to being in roughly $220 million in revenues in 2006. Gross margins and SGA expense ratios would mirror 2005. Net margins again appeared to be headed for the 3% ballpark. Net earnings without the big contract win looked headed for approximately $0.55- $0.60 per share. On a pricing of $15 ICFI would be trading at 26 X's 2006 earnings.
  • Risks

    The biggest is should ICFI lose the Road Home contract. As is typical, the contract itself and ICFI's involvement is only guaranteed through the first phase with both needing renewal before phase II and then before phase III. I see this as typical oversight and checks and unless ICFI grossly mismanages Phase I, they should be in line to receive significant revenues from this contract for the next 3-5 years. Keep in mind though, should something occur and they lose this contract, the stock price will tumble fast and far. 26 X's current earnings is expensive for a company this size in this space. Without this contract, those are the projections for ICFI and should that contract evaporate, so will the stock price.

    Conclusion

    The big contract win makes this deal work. Also keep in mind the government consulting/contracting space has been consolidating rapidly this decade. There have been at least four government contracting IPOs this decade that have been bought out way, way up over IPO price in the past few years. The most recent was Anteon, which IPO'd in 2002 at $20 a share and was bought out by General Dynamics (NYSE:GD) earlier this year for approximately $56 a share. Anteon was a much larger/ stronger player then ICFI, however the buyout trends in this space have been strong this decade. ICFI is definitely a buyout candidate themselves, especially with this large Road Home contract in Louisiana. I honestly don't know what ICFI will earn in 2006 and 2007 as I'll need to see at least one earnings report reflecting revenues from the Road Home contract.

    However it appears automatic to me that this contract will bulk up both the top and bottom line substantially for ICFI the next 3-5 years beginning this quarter. The combination huge contract win and existing in a rapidly consolidating space (consolidating at a premium) makes this deal work.

    Without the big contract win I would be neutral to pass in range on this offering. With the contract win, I like this deal in range quite a bit. Even more so should it get overlooked in a crowded IPO field and price below range, which I think is possible. Why possible? Without looking closely here, ICFI looks average at best....and the IPO market often does not look closely initially.

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    Source: An In-Depth Look at ICF International's IPO