ICF International Inc., Q4 2007 Earnings Call Transcript

ICF International Inc. (ICFI)

Q4 2007 Earnings Call

March 11, 2008 5:00 pm ET

Executives

Douglas Beck – Sr. VP

Sudhakar Kesavan – Chairman, President & CEO

John Wasson – Exec. VP & COO

Alan Stewart – Sr. VP & CFO

Analysts

Jason Kupferberg - UBS
Joseph Vafi - Jefferies & Company
William Loomis - Stifel Nicolaus
Tim Mchugh - William Blair & Company

Tim Quillin - Stephens Inc.

Presentation

Operator

Good evening ladies and gentlemen and welcome to the ICF fourth quarter and fiscal 2007 earnings conference call. (Operator Instructions) I’d now like to turn the call over to Douglas Beck, Senior Vice President, Corporate Development, please go ahead sir.

Douglas Beck

Good evening and welcome to the ICF fourth quarter 2007 earnings financial call. During this conference call we will make forward-looking statements to assist you in understanding ICF management’s expectations about our future performance. These statements are subject to a number of risks that could cause actual events and results to differ materially and I refer you to our March 11, 2008 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 will refer you to non-GAAP financial measures such as backlog and EBITDA. A reconciliation of these measures to the most directly comparable GAAP measures is available in the Investor Relations sections of our website. I will now turn the call over to our CEO, Sudhakar Kesavan to discuss fourth quarter 2007 highlights.

Sudhakar Kesavan

Thank you Doug and good evening everyone. This was another quarter of strong financial performance. This speaks to the very positive trend that we have seen in our markets and the increasingly greater recognition that ICF is gaining for its long standing domain expertise in areas which have become front burner issues for government and commercial clients. We are also seeing the benefits of expanding our domestic and global footprint through the acquisitions we completed in the last 15 months.

We completed four acquisitions in 2007 and one in early 2008. ICF has a good consolidation platform for small and mid sized companies seeking to grow. We have a solid track record of successful acquisitions and the range of firms that we look for are not the typical ones that tradition government IT service providers seek out.

Let me take a moment here and spell out our strategic intent. Ours is a differentiated growth strategy predicated on three distinct elements. First growing revenues by strengthening our competitive position in our four key markets; energy and climate change, environment and infrastructure, health human services and social programs and homeland security and defense. Second gaining scale in our implementation business that provides IT and human capital solutions. And third increasing profitability by doing more implementation work by winning larger contracts, building our business with commercial clients and leveraging our corporate infrastructure.

We intend to do this through strong organic growth supplemented by acquisitions in these markets. We are also pleased that the legacy ICF business has shown strong growth. Revenues from our core advisory and implementation services business excluding all acquisitions and The Road Home program revenues grew 20.8% for the fourth quarter of 2007 as compared to the fourth quarter of 2006. Gross revenues for the fourth quarter of 2007 including acquisitions but excluding The Road Home program revenue grew 45.4% this quarter over the fourth quarter of 2006. The growth for the entire year over the previous year for the core business excluding now all acquisitions and The Road Home program revenues was 10.5%.

In a call last year I had suggested that it was my goal that we reach a run rate of 10% to 12% of organic growth by the end of the fourth quarter for our core business. I am pleased that we substantially exceeded that goal. We believe that over the past year we have executed well in completing complimentary acquisitions and generating strong organic growth. I am confident that we can continue this execution strategy over the next year.

Finally I would like to note that yesterday we added two distinguished independent Directors to our Board; Eileen O’Shea Auen who was most recently CEO of APS Healthcare and has significant experience in the managed health care industry, Richard Feldt is CEO of Evergreen Solar a family company on NASDAQ and brings large experience with the renewable energy and clean technologies industry. Both Eileen and Rick have tremendous track records in growing companies in the healthcare and energy industries and we welcome their expertise and experience.

I would now like to ask John Wasson our Chief Operating Officer to review our new business and operating activities and to describe the way we are integrating our acquisitions and addressing the growth opportunities they provide.

John Wasson

Thank you Sudhakar and good evening. First let me give you an update on The Road Home contract. We completed 90,000 closings by the end of 2007 and we passed 100,000 closings milestone in early March, nearly nine months ahead of the original contract schedule. These closings have corresponded to over $6 billion in payment benefits to eligible homeowners. The seventh amendment to our original contract was executed in December, 2007 and increased its value by $156 million. This increase was necessitated by the need to process approximately 50% more homeowner applications than stipulated in our original contract.

While the complexity and dynamics associated with this contract require ICF to be ready to deal with unforeseen changes and events, we believe we are on track to meet the program performance parameters and that 95% of the closings will be completed by the end of the second quarter of this year. Our remaining work involves performing final reviews of all the grant documentation, providing continued advice to homeowners and supporting the small rental property program. This work will go through the first half of 2009 which is in fact the official end of the contract.

Offsetting the anticipated falloff in Road Home revenues however is the growth in our core business which has benefited from a strong demand as well as the revenues in cross selling efforts relating to our recent acquisitions. Exclusive of The Road Home contract, the backlog was $485.9 million at the end of the fourth quarter while 46.4% above last year’s levels. This was slightly below the $519 million we reported at the end of the third quarter reflecting the seasonal factors in our traditional business. As we noted in our earnings release today we have seen increasing demand for a core advisory and implementation services across all of our markets. The year end backlog number includes ZTech, a provider of implementation services to the federal healthcare market and does not include SH&E which we acquired in early December, 2007. SH& E serves the commercial market and therefore has a smaller backlog. We will add that backlog to our reporting for the first quarter of 2008.

The total value of our contract wins in the fourth quarter was approximately $230 million. In addition to the increase in capacity the Louisiana Road Home implementation contract there were several additional key wins in the fourth quarter that were especially helpful to growing our climate change and health and human services businesses.

They included a five year contract valued up to $23 million with the Environmental Protection Agency to provide clean energy and emissions production expertise. A $7.5 million implementation contract with The Federal Agency, a $4.8 million award with HHS for IT support services for children’s programs and over $10 million in new contracts with the Administration for Children and Families at the Department of Health and Human Services to provide technical assistance.

In total we won over 170 new engagements during the quarter across all of our government and commercial markets.

In addition I would like to note two new wins since the beginning of the year. First we announced yesterday that we were one of six winners for a $200 million five year basis purchasing agreement to assist the Assistant Secretary of Defense for Networks and Integration in transforming information technology throughout the Department of Defense. This is our first Department of Defense IT vehicle as a prime and it demonstrates our ability to provide competitive services against some of the premier IT service providers in this space. We have also been informed that we have been selected for a new five year $42 million implementation support contract with The Federal Agency and will be announcing the details tomorrow. We believe this contract is likely to be fully funded over its life.

ICF’s new business pipeline was $1 billion as of December 31 versus $927 million at the end of October and $794 million as of December 31, 2006. As of March 1^st of this year the pipeline stood at over $1.1 billion.

In addition to fostering a steady growth of our pipeline we also pleased that we are continuing to develop larger opportunities that combine both the advisory and implementation phases of our strategy. For example, some key targets in our active pipeline being those leads that are already in capture include $100 million series of contracts to provide nation wide support for the Department of Health and Human Services, a $50 million IT support contract for the Department of Defense and a $36 million contract for the Department of Justice.

This growing pipeline is certainly a function of the increased strength of our historical businesses but it also reflects the speed at which we’re able to integrate and build new opportunities as a result of our acquisitions. As you know, a primary strategic rationale of our acquisitions is the ability to bid on and win new contracts jointly, [be their firm what] has succeeded before.

I want to take a few minutes this evening to highlight some of the steps we have taken in integrating acquisition business development activity. As you are aware we have three important acquisitions the past eight months; ZTech, SH&E and Jones & Stokes. ZTech’s added capabilities and achievement of CMMI level 3 status immediately helped us position for a number of multi million dollar opportunities at the Department of Health and Human Services and they were also very helpful in winning a subcontractor role on a major IT BPA and another federal agency. More recently in the case of SH&E we developed integrative teams of senior staff from each firm for climate change opportunities at airlines and airports and for joint opportunities at the Federal Aviation Administration and Transportation Security Administration. Each team has developed specific service offerings and tested them with existing clients before going to market.

Thus far we have worked over two dozen specific joint opportunities and we have won a major new training task at FAA for up to $5 million and we’ve been asked to begin negotiations as the winner of an important new airport planning initiative for over $1.5 million in California. We’ll announce the details once the negotiations are completed. We are pleased with these quick wins.

Likewise with Jones & Stokes we have organized integrated business development teams centered on specific environmental markets, state and local transportation and public sector climate change activities. We are currently working on over 20 initiatives and have already submitted a number of multi million dollar proposals as a result of these efforts. I should also note that Jones & Stokes was part of the team that has been asked to begin negotiations on the just mentioned airport planning effort in California.

In sum, we are pleased with the progress of our acquisitions thus far and look forward to reporting to you an ever expanding pipeline and win portfolio as a result of them.

In addition to our focus on business development we of course need to retain and attract top personnel. I’m pleased to note that our personnel retention rate continues to be good. Total turnover in the fourth quarter excluding The Road Home was 4.1% and 5.2% with The Road Home. For 2007 as a whole total turnover was 13.9% without The Road Home and 20% with The Road Home effort factored in.

Now I would like to turn the call over to our Chief Financial Officer Alan Stewart for the 2007 financial highlights, Alan?

Alan Stewart

Thank you John and good evening to all. Our revenue for the fourth quarter ending December 31, 2007 was $186.4 million, an increase of $72.5 million or 63.7% from the $113.9 million reported in the comparable fourth quarter of 2006. Revenue from The Road Home contract was $108.8 million compared to $60.5 million in the fourth quarter of 2006. As Sudhakar noted fourth quarter revenue from core advisory and implementation business excluding The Road Home contract grew 45.4% this quarter over the fourth quarter of 2006 by $24.3 million from the $53.3 million in quarter four of 2006 to $77.6 million this fourth quarter of ’07.

Direct costs increased as a percentage of gross revenue to 71.8% from 68.6% fourth quarter of last year primarily due to increased levels of subcontract and other direct costs associated with The Road Home contract. Gross profit margin for the quarter was 28.2% slightly below the 31.4% reported in last year’s fourth quarter and an increase over the 25.8% reported in the third quarter of 2007. Indirect and selling expenses were $33.0 million or 17.7% of revenue for the recent quarter compared to $19.9 million or 17.5% of revenue for the fourth quarter of 2006. Of the charges for non cash compensation attributable to equity was $1.5 million in the fourth quarter of 2007 compared to $0.5 million in the fourth quarter of 2006.

Indirect and selling expenses increased $3.3 million from the third quarter of 2007 to the fourth of 2007 primarily due to the addition of $1.1 million of indirect and selling expenses associated with the consolidation of SH&E that was purchased in December, $0.7 million charge for due diligence costs, a $0.3 million increase in audit [inaudible] related costs and an additional $0.7 million in FAS 123R costs. A significant pre tax charge of $700,000 or roughly $0.03 per share was taken in the fourth quarter of 2007 as a result of due diligence costs expended by ICF on a large potential acquisition target which the seller decided to take off the market after many months of due diligence by ICF and within three weeks of closing on the transaction.

fourth quarter 2007 EBITDA was $19.5 million, the EBITDA margin was 10.5% exclusive of the non cash stock compensation charge, adjusted EBITDA was $21.0 million and the adjusted EBITDA margin would be 11.3%.

Depreciation and amortization for the fourth quarter of 2007 was $2.1 million compared to $0.9 million in the fourth quarter of 2006. The increase is substantially due to increased amortization of purchased intangibles related to the multiple acquisitions ICF has made during the year. Net interest expense for the fourth quarter of 2007 was $0.5 million compared to $0.1 million for the fourth quarter of 2006. The affective tax rate for the fourth quarter of 2007 was 43.0% compared to a rate of 39.4% affective rate fourth quarter of 2006.

This increase in the tax rate in the fourth quarter is attributable to a decline in tax credits and increase in non tax deductible expenses as a percentage of taxable income and increased charges for FIN 48 related to foreign operations of ICF. We anticipate an increase in our tax rate on an annual basis from the 41.3% reported in 2007 to approximately 42.5% in 2008 as these tax credits decline.

This result in the fourth quarter 2007 net income of $9.6 million or $0.64 per fully diluted share, this compares to net income of $9.2 million or $0.65 per fully diluted shares in the fourth quarter of 2006. fourth quarter results do include one month of operating results from SH&E which was acquired on December 3. The fully diluted shares for the fourth quarter of 2007 include 14,423,000 for basic weighted average shares and 716,000 common stock equivalents for fully diluted total share count for the quarter of 15,139,000. It should be noted that we issued 416,350 restricted stock units and stock grants in the fourth quarter of 2007.

Our revenue for the year ended December 31, 2007 was $727.1 million, an increase of $72.5 million or 63.7%, excuse me from the $331 million reported for the year ending December 31, 2006. Revenue for The Road Home contract this year was $459.4 million compared to $116.0 million for 2006. Direct cost increase as a percentage of gross revenue to 73.2% in 2007 from the 65.7% reported in 2006 primarily due to increased levels as we mentioned of subcontract and other direct costs associated with The Road Home contract.

Gross profit margin for 2007 was 26.8% slightly below the 34.3% reported last year. As we continue to replace revenue from The Road Home program with revenue from organic growth and acquisitions we would anticipate seeing a return to our higher historical gross margin levels over time. We are reporting for the year ending December 31, 2007 net income of $40.6 million or $2.72 per fully diluted share. This compares to net income of $11.9 million or $1.10 per fully diluted share for the prior year.

In reviewing our balance sheet at December 31, 2007 there are several points to note. Our net accounts receivable balance was $190.2 million compared to the $157.2 million balance September 30^th. If you exclude the $8.7 million in net accounts receivable from the SH&E acquisition and add back deferred revenue this would represent 81.1 day sales outstanding for the company at the end of the year compared to 64.6 and 62.8 days at September 30, 2007 and June 30, 2007 respectively.

The increase in DSO at year end is primarily attributable to increased Road Home contract receivables as we accelerated work to reach the 90,000 closings at the end of the year. The DSOs on these contract receivables have been lower than the rest of the company in the past but at year end they rose to levels normally seen by the historical rest of ICF business. We anticipate a substantial improvement by the end of the first quarter 2008 as these contract receivables will have been collected and the levels will drop back to a much lower level than at the year end.

We continue to anticipate DSOs in the long term for ICF to follow our more traditional 75 to 85 day historical average.

At December 31, 2007 our revolving bank debt was approximately $47.1 million and as of March 7^th it was approximately $80.4 million. It should be noted the debt levels in March were after the expenditures of approximately $51 million for the acquisition of SH&E corporation on December 3^rd and $50 million in expenditures for the acquisition of Jones & Stokes on February 14^th. In February we closed on a new syndicated debt facility with a revolving line of credit capacity to $275 million with an accordion feature for potential $75 million addition to bring our capacity to $350 million. With our robust pipeline of acquisition targets we see the potential for significant expansion in our business in the rest of 2008 and in 2009.

And with that I’d like to turn the call back over to Sudharkar.

Sudhakar Kesavan

Thanks Alan, before ending our formal remarks I would like to go over our outlook for the full year 2008 and for the first quarter. Based on current available information we expect our existing portfolio of business to generate revenues of $690 million to $720 million for the full year 2008 of which about 60% would be the traditional core ICF business and 40% The Road Home revenues. This is an important stream from 2007 when Road Home was about 60% and the core business was about 40%. EBITDA margins should be within the range of 9% to 10%. This will equate to earnings per diluted share of $1.85 to $2.10 based upon approximately 15.4 million weighted average shares outstanding.

For the fourth quarter 2008 we expect revenues to range between $175 million and $180 million. EBITDA margins of approximately 9.5% and earnings per diluted share to range from $0.48 to $0.52 based upon approximately 15.2 million weighted average shares outstanding.

With that operator I’d like to open the call for questions.

Question-and-Answer Session

Operator

Your first question comes from Jason Kupferberg – UBS

Jason Kupferberg – UBS

Just wondering first off if there’s any potential for add-on work to extend Louisiana beyond mid 2009?

John Wasson

Well as you know the contract currently ends in the middle of June 2009. I think we are looking at several other contracts we could bid in Louisiana that would allow us to continue to support the state on The Road Home contract beyond June of 2009. We’ve had indications from the client that they would like continued support on several aspects of the program information technology and other that would go beyond June of 2009. So I think we certainly believe those opportunities are there.

Jason Kupferberg – UBS

Okay, great and then can you just discuss your acquisition pipeline areas that are with [inaudible]?

Sudhakar Kesavan

Sure, it think that for us as I said that are our strategic intent of our client right from the beginning was we are looking for strength and depth and before [inaudible] which we have traditionally been in which I have spelt out in the call, and we are also looking to get more scale in our IT and human capital business. So it think as long as we understand the business and as long as we think that we can grow the top line faster and reduce and have some consolidation in costs and get some cost efficiencies and it is in a size range which is amenable to our whole integration activity, we will go ahead and do that. So I think we basically are looking for those four areas in scale in the IT and human capital arena.

Jason Kupferberg – UBS

Okay great and then just lastly, would you mind commenting on cash flow guidance for ’08?

Alan Stewart

I would expect, I think our target is 9% to 10% of EBITDA. I would use that as a proxy for cash flow. I do say as the Louisiana revenue goes through the contract and we start to collect those receivables we’ll probably see a quarter or two where we will have greater cash from collecting those receivables to pay down the debt. It’s difficult to determine at what month that may occur at this point, more likely in the second and third quarter, but I would continue to use 9% to 10% EBITDA on these projections as a rough proxy for cash flow at the present time.

Jason Kupferberg – UBS

Okay great, thanks guys, nice quarter.

Operator

Your next question comes from Joseph Vafi - Jefferies & Company

Joseph Vafi - Jefferies & Company

Good afternoon and you can add my congratulations here on the quarter as well. Maybe we could start a little bit on the core business. I know you talked a fair bit about pipeline and some of the recent deals and the like, if we kind of look at the sustainability of the kind of the current organic growth rates, what could get in the way of that sustainability here if we look out to ’08, as we look into ’08 I guess?

Sudhakar Kesavan

I think that if you’re talking about the legacy business I think that it’s a question of us making sure that we continue to recruit aggressively, make sure that we have the delivery capability to service all the business which is being generated and ensure that as the business comes in especially in the legacy areas which are growing very strongly especially as I pointed out energy and climate as well as environment and infrastructure, the whole transportation arena, health human services. Those three are certainly growing quite strongly and I think that for us it’s all a question of making sure that we recruit aggressively and make sure that we have the delivery capability to stay slightly ahead of the curve. And it’s always a fine balance between recruiting too much, too many people and then recruiting just enough to make sure that the timing is right.

So that’s what we’re trying to balance so I think that we see strong trends, just a question of getting the right people and making sure that we get them at the right time and they are available pretty quickly after they come in to the company. So I think that’s what we are, so I think people are the main constraint at the moment. I think we should be able to continue stay strong. Will we stay as strong as 20% a quarter? I mean I don’t want you to go away thinking that that would be the case. As I’ve always said we want to be in the 10% to 12% range and we want to add another 10% to 12% through acquisitions so in the overall 25% range, so I would again guide you to that overall number but we certainly would take whatever growth we can get and right now we are constrained only by the delivery capability in these markets which I mentioned.

Alan Stewart

The acquisition of Jones & Stokes and SH&E and the geographical expansion of ICF hopefully gives us broader areas to recruit from that can help sustain this.

Joseph Vafi - Jefferies & Company

Okay, that’s very helpful. So it really just sounds like a lot, you have good visibility in terms of contract vehicles at this point in if you want to call it the legacy business or the non Road Home business I guess. Maybe just a little color on that, has there been a change in the overall demand environment say from the IPO days in your core markets or do you think this is also maybe a function of maybe a little bit more aggressiveness on ICF’s part in business development?

Sudhakar Kesavan

I think there has been certainly in the climate, energy arena there has been a significant change from a year and a half ago. When you can’t pick up the paper without reading something on climate nowadays. So it has become a front burner issue for a number of companies and we are surprised that the companies which have interest in this issue. Of course the government also is currently analyzing all kinds of potential regulations that at least ten Bills in congress which we are analyzing for different federal agencies using our modeling frameworks. So there’s been a significant change there. Plus I think we’ve also because of the public aspect of it, we’ve also had some significant success in recruiting which comes as a surprising benefit. I hadn’t anticipated it where we get people just wanting to join us because of the fact that we are perhaps a little more visible. So I think both we have been a little more aggressive but I wish I could say it was all because of our aggression I think its also because of the fact the markets have significantly shifted and I think that there’s enormous interest in this issue. I gave a speech at the Northern Virginia Technology Council which is an IT forum on ICF going carbon neutral and 550 people showed up to listen to me. Which I was anticipating 50 so I think that does give you a sense of sort of general interest in a community which traditionally would not really focus on these issues.

Joseph Vafi - Jefferies & Company

Okay that’s helpful. So if we looked at the backlog obviously nice growth year over year but I guess there’s some acquisition related additions to that backlog if we were looking at it, is that true?

Sudhakar Kesavan

Correct yes but I think that generally the backlog has stayed up quite well. In fact in the last earnings call we showed you the backlog without acquisitions, that was up too so I think that if you look at the backlog quarter to quarter it, all through the third quarter of 2007 if you take out any of the acquisitions we were up. From Q3 ’07 to Q4 ’07 the ICF core backlog without acquisitions was about flat and then the ZTech backlog went down a little bit so which is why the slight adjustment in the backlog downwards. But otherwise I think our backlog has been pretty strong right through the quarters. I think in the fourth quarter traditionally not much happens and given the continuing resolution I think the government doesn’t have enough of the money and therefore they don’t necessarily add a lot of work.

Alan Stewart

And it should be noted that the December backlog does not include anything for SH&E and or Jones & Stokes which was acquired in February so as we go through their processes into our contract numbers and scrub, we should be able to then report their numbers in the upcoming quarters.

Joseph Vafi - Jefferies & Company

Okay, that’s helpful. One housekeeping question, how should we be looking at interest expense here in ’08 because you’ve done some recent acquisitions might not be fully showing up on the balance sheet and the P&L at this point.

Alan Stewart

As I’ve indicated between Jones& Stokes and SH&E we spent about $101 million. We had I think $47 million at the end of the year and $80 million as of last Friday in total debt. The requirements of The Road Home can swing anywhere from zero to $30 million at any point in time but again as we collect those receivables I would hope as we get through the middle of the year we’d be able to pay off a substantial amount of that debt. So we have a lot of capacity and then for new acquisitions under this new agreement. And then so interest expense all modeling a little north of a million plus a quarter as a rough gauge at the present time.

Joseph Vafi - Jefferies & Company

Okay but it sounds like you want to pay this off, it’s going to get paid off, [x] any more acquisitions it’s going to get paid off somewhat quickly.

Alan Stewart

That’s my hope yes.

Joseph Vafi - Jefferies & Company

Okay, very good thanks, great quarter guys.

Operator

Your next question comes from William Loomis - Stifel Nicolaus

William Loomis - Stifel Nicolaus

Good quarter, can you look the, just talk about The Road Home revenue, how you expect it to fall out in 2008 so if we take the 40% of the high end of guidance, get about $288 million in Road Home revenue you did $574 million since inception so that’s $862 and I think that contract’s you know only is something around $912 so do you still expect it to come up to that ceiling and the remainder falling in ’09 and then also in ’08 if you can give us some sense of how you expect that revenue to fall out in ’08 particularly at least for the first quarter, what a range of revenue obviously it has to be higher than 40% I would guess, but the range might be for first quarter Road Home revenue.

John Wasson

Well let me say first, I think we shouldn’t expect to spend the full $912 million by the end of the contract in June of ’09. I think we’ve modeled approximately $275 million in 2008, the remainder in 2009 which is somewhere in the order of approximately $60 million. In terms of how it will play out in ’08 I think the first half of the year will certainly be stronger than the second half of ’08. In terms of the first quarter number…

Sudhakar Kesavan

You know it just depends on how many closings we can do and what, so it’s a little hard but I think for us to give you exact numbers for I think you’re right in terms of the 40-60 number, it would obviously be higher in the first quarter but I think that I would take the run rate in the fourth quarter and adjust it a little downwards and that will be the number for Road Home in the first quarter is all I can tell you. It’s kind of hard for us to exactly, which is why we are a little careful in what we want to say here.

William Loomis - Stifel Nicolaus

Can you tell me how much revenue from just the SH&E revenue acquisition was in the December quarter?

Alan Stewart

Only one month and it was approximately $3 million.

William Loomis - Stifel Nicolaus

My final question on just looking at the profitability and the margins, you have it going down in the first quarter sequentially, could you just explain the rationale there and as Road Home continues to drop off even more quickly in the back half how do you see the profitability playing the costs and so forth as that revenue drops.

Alan Stewart

Well I think as we, again as we are able to grow these acquisitions or organic growth I would say our gross margins will continue to start shifting up over time. I think one thing that’s clearly depressing earnings initially are the FAS 123 costs, the depreciation and amortization and I do have a little bit of a higher tax rate in ’08 from ’07 mainly due to the drop off of these tax credits that I had the advantage of last year. So I think those three elements probably are the prime contributors. Clearly as we continue to make these acquisitions and we’re able to get some scalability of using our personnel for greater growth as we’re able to maybe combine offices where we have offices for both acquired and target and ICF in a particular city, they may see some savings out of that but that may take three or four quarters before we can work through that. And also we have in the last piece of The Road Home contract we do have another series of rate negotiations and audit so we want to be a bit cautious on how we see The Road Home revenue in this period.

William Loomis - Stifel Nicolaus

What’s the next deadline on Road Home or target, can you give us the next either reschedule or a rate negotiation or specific closings deadlines or anything like that may be outstanding?

Sudhakar Kesavan

I think that the current focus of the state is to try and get us to commit to 95% of the closings by the end of the second quarter. But they’re quite keen to make sure that 95% of the work in terms of the homeowner program, which is the most politically visible program, is done by the third anniversary of Katrina which is the 29^th of August. So I think that, so we haven’t quite negotiated those metrics yet and we are in the process of doing that but that is going to be the next deadline which is end of June of this year.

William Loomis - Stifel Nicolaus

Okay, thanks a lot.

Operator

Your next question comes from Tim Mchugh - William Blair & Company

Tim Mchugh - William Blair & Company

I wanted to, first just a numbers question, the EBITDA margin guidance as shown in the press release, that’s a not before backing out stock based comp, am I understanding that correctly?

Alan Stewart

That’s correct.

Tim Mchugh - William Blair & Company

That’s not an adjusted EBITDA?

Alan Stewart

No it’s purely taking operating income plus D&A but not adjusting for FAS 123R charges.

Tim Mchugh - William Blair & Company

Okay, and then on the core business you guys are doing well there, can you talk about it seems you’re obviously winning a lot of new contracts but any of the energy and environmental work that you’re seeing more demand as of last from corporations, any hesitancy there lately given macro concerns or do corporations continue to make this a greater focus?

Sudhakar Kesavan

We haven’t seen any hesitation because there isn’t, this is the one area where at least the companies we are dealing with which is primarily the utility industry and a lot of the transportation companies are all going to be hit by regulations so the larger [middles] are all doing stuff because of the fact that they can’t afford not to. Because 15 minutes after the next President regardless of which of the three it is, there’s likely to be some sort of regulatory initiative because all three have positions in this arena which are quite similar. So I think the larger [middles] which we traditionally work with are all quite keen on making sure something happens. The aviation industry is going to be regulated by the airplane union and has been told it’s going to be regulated starting 2012 so they have to make preparations now. So I think in the larger [middles] there is enormous amount of concern and so there will be work there.

Even amongst the financial services industries which we don’t do much work with for at all, they in fact see this as a growth area so in fact we are getting calls from them because their portfolios and ways in which they could potentially profit from this they’re looking at ways and they’re getting calls from their clients to see how the carbon market will affect their portfolio. So they are also looking for ways in which they could profit and in fact we might benefit from these larger financial services companies trying to find other markets especially the carbon market, the carbon emissions trading markets.

So I think both in Europe as well as potentially here so we are not seeing any diminishing. I would also add that the government is also cranking up and getting ready to do a lot of work in this arena and in fact we have won quite a bit of work with them and there appears to be a significant change in the way they approach things because climate change has not been in the forefront over the last six years of this administration but I think there has been a change there and there has been a lot more work with the federal government too so I think its both in the corporate sector as well as in the federal government. This is one area which appears to be quite strong.

John Wasson

And if I could just add to that, I think we’re also seeing on the corporate side kind of non traditional ICF clients, technology companies, media companies, either for branding purposes or because they are energy intensive in their use of energy, are approaching us on climate issues and energy issues and we’re actually finding quite a few non traditional clients for us around these issues and that’s continued strong.

Tim Mchugh - William Blair & Company

Okay, given that strength that you just talked about can you talk about the competitive environment, are you seeing any more companies try and target this area more aggressively?

John Wasson

Yes I think we see a lot of companies with interest in this area and entering this market. I think that we’ve been working in this market for 15 or 20 years. We have quite a sizable staff of people and I think we have a culture here that allows us to retain that staff so I think we have a significant advantage in that we’re obviously a very earlier player in this market. We have significant scale but we’re certainly seeing a lot of firms trying to enter but we certainly find ourselves in a very strong competitive position and able to win a significant portion of the work.

Tim Mchugh - William Blair & Company

Okay great and then lastly can you just clarify for me; did you say the 2008 guidance assumes a 10% to 12% organic growth rate?

Sudhakar Kesavan

Yes I think that’s what we have been consistent in saying the 10% to 12% organic, we achieved 10.5% this past year if you exclude all the acquisitions and if you exclude The Road Home program revenues so I think 10% to 12% for our non Road Home work would be a good marker to move with, yes.

Tim Mchugh - William Blair & Company

Okay, thank you very much.

Operator

Your next question is a follow-up from Joseph Vafi - Jefferies & Company

Joseph Vafi - Jefferies & Company

Just maybe a quick follow-up, a couple of follow-ups, do you think you could quantify how big energy and climate is now as a percent of the business.

Sudhakar Kesavan

I can’t give you the number of people because we have people across different groups which work on it in terms of, we have, if you look at our energy and climate business and the environment and transportation business because there’s a whole bunch of people who work across different groups. Here there are about approximately 1,000 professionals in those two groups so at any one time there will be a significant number working on those so I think that internal organization is such that those two groups comprise about 1,000 people. But they do a whole range of work on energy, climate, environment and transportation. So those are the four areas which these 1,000 people on and climate is such a broad area that every major sector is affected in some way or the other by these. So I think it could be the revenues could be at any time between around $75 million or so would be the number for energy, climate associated revenues across the front.

I don’t have, I wouldn’t hold me to the number, it could be a little higher or could be a little lower.

Joseph Vafi - Jefferies & Company

Okay, just trying to get a kind of gauge for it all and then just back just one more on the acquisitions here, the acquisition activity is clearly picked up and obviously based on your press release there was another acquisition that didn’t quite get across the finish line. How should we be looking at all this acquisition activity, would you have done the two acquisitions that you already had done if this other had not fallen through and should we be, how should we be thinking about this stepped up acquisition activity here. Obviously Road Home is a big piece of business that’s not going to be there, but I’m just trying to get a little more comfort here on the strategy behind all the acquisitions.

Sudhakar Kesavan

Let me just make a point here that if you look at the acquisitions we have done if you look at say the latest one Jones & Stokes, it is in a business which for a lot of our competitors its not a sexy business. The whole environment and natural resources business. But it is the business we are in for a large part of our company. So we are trying to do these acquisitions based on our understanding of the business and based on the fact that we should be able to mitigate the risk if bad things happen. That is our, we are pretty conservative in looking at these things and we understand that business extremely well.

On the SH&E business it is an exact analog to our commercial energy business and they work for the whole set of clients who are actually similar other than of course, and we have worked with airports and we in fact were working with airlines too on climate change issues but they brought us a whole slew of airlines and airport client whom we could take our business into. So again there is a strong relationship with the kind of business we acquire and what we have done. So we have to, we need to understand that business really well. Prior to that we did ZTech and ZTech was a federal, Department of Health and Human Services business and I think that that was again a business which was clearly something which we understood well because we have a strong presence at HHS.

In terms of your specific question of would we have done these acquisitions, yes, in fact at one point we were doing both the Jones & Stokes purchase agreement and this other acquisition purchase agreement at the same time. And we were a little surprised that they withdrew the company and in fact it has not been sold. They just took it off the market. It has not happened to, I’m sure it happens all the time but this was the first time it happened to us.

Joseph Vafi - Jefferies & Company

So does that mean that maybe it’ll, potentially it could come back?

Sudhakar Kesavan

It’s hard to say because it’s hard to say. It’s a large company selling a division. You never know. So I would not speculate.

Alan Stewart

One comment I’d like to add is I think one thing that’s unusual for ICF is the large amount of senior talent, program manager and consultants that we have and I think as part of this acquisition process we’re pulling back some of those senior staff in Louisiana. We’ve been able to deploy a fair number of them to help us on the integration of these acquisitions, to be more systematic on the business development and the system integration side. So I think we’ve got very good capacity with professionals that have been with ICF 10, 15, 20 years who can really help us to make sure that we integrate these companies well. Get them in our culture, get the business development pipeline moving and I think we do have the capacity now both in the credit facility as well as management talent to be able to handle a multiple acquisition.

Joseph Vafi - Jefferies & Company

Okay great, thanks for the color.

Operator

Your next question comes from Tim Quillin - Stephens Inc.

Tim Quillin - Stephens Inc.

Three questions, one can you just give us a sense of the timing and magnitude of new opportunities that you might have with the State of Louisiana?

John Wasson

I think that’s a little difficult to predict. I think that the new opportunities I would assume would be in ’09 and as I said, we will have work there; it’s quite likely we’ll have work beyond June of ’09. We’ll need to find additional contract vehicles to continue with that and the size of that, it’s really difficult to predict.

Tim Quillin - Stephens Inc.

Is it just order of magnitude are we talking a presence of $5 million a year or are we talking $40 million a year?

Sudhakar Kesavan

I think it’s difficult to say Tim, its, we right now have a very strong presence there and what we are currently focused on is trying to get our work done and finishing it well and then we’ll see what happens in the future because I think for us it’s a question of making sure that we get everything done, then if the state requires assistance and additional help we’ll certainly look at it at that point and see what we can do. But it’s hard to predict and it’s hard to tell you exactly what the number would be. We really would be really speculating and I would hate to do that on this call.

Tim Quillin - Stephens Inc.

No, that’s fair. The second question is with regards to the, your tolerance and maybe the bank’s tolerance for debt. The $350 million of capacity is pretty high relative to your expected EBITDA this year which includes a pretty good contribution from Road Home; I mean how high are you willing to go in terms of leverage relative to EBITDA?

Alan Stewart

Our debt covenants have a capacity of 3 ½ x to 1 of debt to EBITDA. I think that’s within sort of the government contractor market place. I think this is a five year facility so it’s something that we don’t have to renew for five years and gives us a chance at capacity to use it over the five year period.

Sudhakar Kesavan

And we also, as we grow we’ll require working capital and I think this does give us some scope for additional working capital needs because I think our intent is to continue to grow so I think both for acquisitions and for working capital we certainly, we’re not looking to leverage up any more than what we truly need.

Tim Quillin - Stephens Inc.

Now in terms of 3 ½ to 1 that’s on a trailing basis I assume, would that include EBITDA contribution from Road Home, I mean would you think of it, would you think of going up to 3 ½ to 1, 3.5 with Road Home?

Alan Stewart

The credit agreement is on trailing 12 month basis of what ICF has on it’s consolidated reported numbers as well as if we do any acquisitions and in doing it trailing 12 months of their numbers pre closing with ours so that’s the calculation.

Tim Quillin - Stephens Inc.

Okay and you would go up to 3.5 right now including The Road Home EBITDA just to be clear?

Sudhakar Kesavan

I don’t really understand the question. I mean there is no reason for me to go up to 3.5 to 1. Right now we have just gone through the call and we have said we’re going to pay down most of our debt.

Alan Stewart

We’re only at $80 million right now.

Sudhakar Kesavan

We’re only at $80 million so I really, it would be purely speculative to say that what are we willing to do and what are we not willing to do. Right now we’re not even at 1x 1. In fact we’re going to pay most of that down so I think the situation doesn’t quite arise at the moment and its just one of those things where we will deal with the issue when it arises.

Tim Quillin - Stephens Inc.

Okay fair, and then lastly the, do you have the current mix with the SH&E and Jones & Stokes, what the current mix by customer might be in terms of commercial, international, defense, federal, civilian, do you have that in front of you by chance?

Sudhakar Kesavan

On a pro forma basis or on our 2007 numbers?

Tim Quillin - Stephens Inc.

Pro forma would be great. But whatever you have.

Sudhakar Kesavan

We don’t have it.

Alan Stewart

We really don’t have it at this point.

Sudhakar Kesavan

We don’t have it at this point, we can, I think it will be in the 10-K for ’07 Tim which we’ll be filing sometime in the next few days.

Tim Quillin - Stephens Inc.

How about just this question, how big is the commercial business, order and magnitude as a percent of revenue now with the acquisitions?

Sudhakar Kesavan

$75 million to $80 million.

Tim Quillin - Stephens Inc.

Okay, thanks I appreciate your patience.

Operator

Ladies and gentlemen we have no more questions in the queue; I would like to turn the call over to ICF management for closing remarks.

Sudhakar Kesavan

We’d like to thank you all for participating this evening. We are pleased with our fourth quarter performance and the year and we look forward to keeping you up to date on the developments of ICF, thank you again and good evening.

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