Welcome to the ICF International Second Quarter 2012 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Thursday, August 2, 2012, and cannot be reproduced or rebroadcast without permission from the company. And now, I would like to turn the program over to Douglas Beck, Senior Vice President, Corporate Development. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to review ICF's second quarter 2012 performance. With us today from ICF International are Sudhakar Kesavan, Chairman and CEO; John Wasson, President and COO; James Morgan, CFO; and Sandy Murray, former Interim CFO. 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 August 2, 2012 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 specifically disclaim any obligation to do so. I will now turn the call over to our CEO, Sudhakar Kesavan, to discuss first (sic) [second] quarter 2012 highlights. Sudhakar?

Thank you, Doug, and good afternoon, everyone. Thank you for participating in our call to review this year's second quarter results and discuss our current outlook for the remainder of the year. As you can see from our release, revenues for the period were up over 12% year-on-year and net income and earnings per diluted share were up 15% and 16%, respectively. We were able to achieve this strong performance thanks to our business mix and our acquisition strategy, which has strengthened ICF's position in each of our key markets. The major growth driver in the second quarter was our commercial business, which increased 35% year-on-year and rose to 27% of total revenues, up from 22% this time last year. Based on our current forecast, our commercial business should continue to grow at double-digit rates for the rest of 2012. This is a key differentiator for ICF as it enables us to report solid revenue and earnings growth in the face of the softness in our federal government business for the second quarter, which was virtually flat on a year-over-year basis. Our results this quarter also benefited from our work for state and local governments, which was up 9% compared to last year's second quarter. Despite this -- difficult business conditions in the federal space, each of our markets posted higher year-over-year revenue in the second quarter. Energy, Environment & Infrastructure grew 13%, Health, Social Programs and Consumer/Financial grew 15% and together, they accounted for over 85% of total revenue. Revenue for our Public Safety & Defense market increased 3%. This broad-based revenue growth is due to continued organic growth, and our strategy on making acquisitions that provide complementary services in our market, thereby deepening our domain expertise and expanding what we can offer to our clients. As you know,…

Thank you, Sudhakar, and good afternoon. As Sudhakar discussed, our second quarter growth was primarily due to the performance of our commercial and state and local businesses and the addition of our 2 most recent acquisitions. Overall, our commercial market grew 35% over the prior year's second quarter, with particularly strong growth coming from energy efficiency, which grew 23% over the prior year quarter and aviation, which grew 75% over the prior year quarter. The aviation business has finally turned the corner and returned to a growth trajectory due to new wins in the areas of airline restructuring and financial due diligence and airport concession planning. Further, we continue to be pleased with the Ironworks acquisition as it is delivering double-digit growth above the second quarter of 2011, when they were an independent company. Commercial sales were $81 million for the second quarter and totaled $174 million for the first half of the year, representing 40% of the firm's total sales through each of these periods. Given that our commercial business is 27% of revenues for the quarter, this illustrates the increasing importance of commercial business to ICF's future growth. As noted in our press releases, the largest commercial sales this past quarter were in the energy efficiency space. And the energy efficiency pipeline continues to be strong. In addition, we experienced strong commercial sales in areas including aviation, interactive data applications, environmental management of infrastructure projects and power market planning. In our federal markets, we continue to experience uncertainty and headwinds in the second quarter. As we have discussed in the past, ICF typically sees a strong ramp-up in federal revenues beginning in Q2 and continuing into Q3 each year. This year, given the significant uncertainty in our federal market, we experienced no ramp-up in federal revenues from Q1…

Thanks, John, good afternoon, everyone. I'm pleased to be participating in my first ICF conference call, and I look forward to meeting many of you in the coming months. Revenue for the second quarter of 2012 was $239.6 million, a year-over-year increase of 12.3%. Excluding acquisitions, the year-over-year organic growth was 1% for the second quarter and 3.9% for the first half of 2012. As John mentioned earlier, our organic growth during the quarter was impacted by headwinds in the U.S. federal government business. Gross profit margin remained strong at 38.3%, an increase over the 37.4% in 2011's second quarter and similar to the 38.4% in 2012's first quarter. Indirect and selling expenses as a percentage of revenues were 28.1%, an increase from 27.7% in the second quarter of 2011, but below the 28.9% of 2012's first quarter. From an absolute dollar perspective, indirect and selling expenses were $67.4 million in the second quarter, an increase of 13.8% over last year's second quarter. The year-over-year increase was primarily due to our acquisitions of Ironworks and GHK, which were not in the comparable prior year period. Our EBITDA margin for the second quarter of 2012 was 10.2%, an increase over the 9.7% in last year's second quarter, and the highest it has been in nearly 5 years. The increase in EBITDA margins are a reflection of the growth of our more profitable commercial business and the ongoing efforts to appropriately manage indirect and selling expenditures. Depreciation and amortization was $2.8 million in both the second quarter of 2012 and 2011. Amortization of purchased intangibles was $3.5 million in the second quarter of 2012, up from $2.3 million in the second quarter of last year. The increase was primarily due to our recent acquisitions and was in line with our expectations. Operating…

Thank you, James. As you know, we did not see the sequential increase in federal government work from Q1 to Q2 that we have experienced in the past, and we have not seen evidence of meaningful sequential revenue growth so far in Q3. To put this in context, in 2010, our revenues increased 13.5% from Q1 to Q3. In 2011, they were up 12.1%. For 2012, we have now revised down our revenue growth expectations for the Q1 to Q3 period to about 5%. As a result of this uncertainty in the federal arena, we have lowered our revenue growth guidance for 2012 by approximately this 7 percentage point variation to $930 million to $960 million, which at the midpoint represents 12.4% year-over-year revenue growth. Diluted earnings per share are expected to range from $1.90 to $2, which at the midpoint is equivalent to 11.6% (sic) [11.4%] growth over 2011 level. Full year 2012 diluted EPS comparisons will be impacted by higher interest and amortization expense associated with our Ironworks and GHK acquisition. EBITDA growth, however, is expected to outpace revenue growth in 2012. For the 2012 third quarter, we expect revenues to range from $233 million to $247 million and diluted EPS to be between $0.46 and $0.50, representing year-on-year growth at the midpoint of 9.7% and 2.1%, respectively. As for the full year 2012, EBITDA is expected to grow at a faster rate than revenue. The Q3 EPS is a little lower than the Q2 EPS, primarily due to the increased investments mentioned by John Wasson in his remarks. We continue to generate significant cash flow and reaffirm our expectations that for the year cash flow from operations will exceed the $60 million reported in 2011. In conclusion, our non-federal business continues to grow at double-digit growth rates on an organic and total revenue basis, which is shifting the balance of our commercial and government work. We are pleased with our strong presence in health, energy, infrastructure and the digital interactive markets, which are growing in both the government and commercial arena. Our unique business mix makes us a growing, stable and an increasingly profitable business, and our geographical expansion positions us as a large global player in our areas of expertise. With that, operator, I would like to open the call to questions.

[Operator Instructions] And your first question comes from the line of Tim McHugh with William Blair & Company.

First one asking on the commercial business. Did you see any impact from the macro environment in terms of companies becoming a little tighter with spending on the growth and what was the organic growth for that piece?

Yes. I think the overall growth as you saw was 35%. I think our organic growth was about -- 1/4 of that was the organic growth and the balance was the acquisition growth. If you look at the organic growth, to some extent, it was impacted by one big infrastructure management project which slowed down. And if you basically took that out, it was in the same range as it was the prior quarter. So the organic growth overall was about 1/4 of that 37%, with that one infrastructure management project out it was in the high-teens to the low 20s.

Okay. And, hey, have you changed the guidance reduction? Is this purely due to the federal business or if you had a separate assumption for the commercial business, is there any change to what you expect for the full year for that piece of the company?

No. I think it's purely due to the federal business because we expect step-ups in the federal business in Q2 and Q3, and we haven't seen them.

Okay. And then, the protest awards, how much -- I know you're saying basically you're just not seeing the contracts ramped up. Were there specific assumptions in the second half of the year for those contracts that were under protest and now you're not pursuing?

Yes. I think that the overall assumptions we -- for the whole fiscal year -- for the whole financial year were about -- I think we had assumed about $22 million for those 2 contracts when we gave you the guidance. And those obviously will not happen, and so we have taken those out, and that's reflected in the guidance we've given you.

Okay. And then last one, just you repurchased stock for the first time that I can remember. And so just talk to us about uses of cash. There's also, obviously, some competitors struggling that can make an opportunistic time for some M&A as well. How are you thinking about the trade-off between repurchases and M&A right now?

Yes. We have always said that we are a growth company. We want to spend our -- whatever cash we have on acquisitions because we see significant opportunities in the markets I mentioned. And we will continue to use cash primarily for that purpose. I think we bought a little bit of stock back. We mentioned it, and we think that the better use of cash is to make sure that we continue to grow and invest in growth, both from an organic perspective as we are doing and as John mentioned, and in making sure that we do M&A whether it be systematic or opportunistic. We obviously are always looking at all the options which we have in front of us. So we will always be focused on using cash for that purpose. But when the opportunities present themselves, we'll certainly use the capacity we have to buy stock, and this is what we did in the last quarter.

Your next question comes from the line of George Price with BB&T Capital Markets.

Just want to start off on the federal business. So you talked about not seeing the typical ramp-up in the second quarter and thus far into the third quarter and not seeing any reason to expect that, that continues in the third quarter or fourth quarter. So a couple questions on that. First, when did you really kind of start to feel that trend versus the expectations that you had and discussed in early May when you reported, because at that point, I think you still expected a good third quarter? Second question related to that is, in terms of not expecting further ramp-up, what do you expect your federal clients to do with the money as we go through the end of GFY '12?

Yes. I think that we basically traditionally think that these ramp-ups will happen towards the end of Q2 and beginning of Q3. And that's traditionally what we have seen happen, and that didn't happen. We were still hoping that, that will happen. And as you saw, we had very significant backlog and very significant funded backlog. So there was no reason for us to think that the patterns are going to change because our -- all the metrics seem to indicate that, that will happen. But that did not happen, and that's what's reflected in our -- in the guidance we have given you. I'm sorry, I didn't catch the latter part of the question.

Just you mentioned, Sudhakar, that you don't see any reason to believe that you'll see a sequential ramp-up through the third quarter or into the fourth quarter and just does that imply -- I mean, what are your federal clients going to do with the money? I mean, just can you talk about mainly, I guess, what you're hearing from your clients, what you think is going to happen as you move through the end of GFY '12 into the fourth calendar quarter?

So we have tried to also gently talk to our clients and tell them that based on our understanding of how sequestration, et cetera, is going to be done, you'll have to set a baseline and if you use the funds then the baseline will be higher than if you don't. And we can only do so much, and we really haven't seen the traction which we expected to see. So I think that it's a good question, George. I -- we are quite puzzled, and we have therefore taken the view that we are going to give you guidance based on what is visible to us. And if something happens to the better in Q3 and Q4, great. We will be happy to perform the services for the federal clients. But at the moment, we are basically focused on just what is clearly visible to us, and that's the basis of our guidance.

Okay. Could you just -- I know DHS and DoD for ICF is relatively small. But just curious if even within that part of the business versus your broader civilian government businesses, are you seeing any differences in terms of demand trends, weakness, delays, et cetera, between those different parts of the business? Is civilian materially weaker than DoD or DHS? Are there particularly pockets of weakness even within the civil markets?

I think it's not a question of weakness. As you can see, our funded backlog is still 46%. So it appears not so much a weakness. It appears to be a lack of intention of trying to give instructions to get the work done. And so we don't see anything particularly weak. I mean, I mentioned that the RFP activity is cranking away in very normal way. So traditionally what happens is that the RFP activity cranks up, we are spending a lot of resources on business development responding to these RFPs, and those costs are in our guidance for Q3. But the traditional ramp-up of revenues in Q3 would generate some additional margin would take care of those costs is not reflective, clearly as we have pointed out to you. So I think that it appears that there's certainly an intention for the federal government to continue to do the work, which they are mandated to do, it's just that this period appears to be an uncertain period, and we hope that over the next few months things resolve themselves. As you all well know, we all know what the situation is. And once these things resolve themselves, then things will back up and the federal government will continue to use the contract vehicles and the other things and the funding, which we currently have.

Okay. Last question on just on the backlog. Total backlog down a couple of hundred million quarter-over-quarter. Was that de-booking the 2 protested contracts you mentioned? Was there anything else de-booked beyond that?

No. This is John Wasson. I think we've de-booked the largest of the 2 contracts in this quarter. So about $65 million of it was due to de-booking a contract, one of the protested contracts. The rest was just burning off the backlog.

Okay. But I mean, you still had a pretty good overall book to bill though. Just was a little surprising, I mean, there must have been something that came out of there?

Yes, I think that we had a book to bill for Q2 of 0.85, and I think 6 months ended 2012 the book to bill at 0.93. So yes, I think it's a pretty healthy book to bill. I mean, there are lots of little things which go in and out, so there's nothing of concern to us. I think our book to bill has remained pretty steady over the last few quarters. And traditionally, we're also expecting that the book to bill in Q3 would be strong and -- as is traditionally the case, because of the RFP activity and the fact that hopefully the federal government will make some decision as the quarter ends. And if they do, then it will be the same -- it will be the similar pattern as we've had in the last year. So in the RFP activity, in the sales activity, et cetera, everything seems to be the normal pattern. But in the spending, as I pointed out, the pattern doesn't seem to have adhered to the normal trend, which we have seen in the last few years.

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

Looking at international, what was the total international in the quarter because I know you guys changed your segments. I just want to be clear because this is the first full quarter with GHK in it.

I think if you look at the other government, which is what -- I think that part of the reason, Bill, is that the full international is about $20 million or so.

$20 million?

Yes.

Okay. And then just looking at the federal. So you thought as late as a month or 2 ago that the third quarter you'd see that sequential ramp-up. How is this still turning up. How did this -- how is this -- I'm just trying to understand kind of what the customer behavior is here. Were there things that they just pushed to the right? You had mentioned that direct labor was growing about 5% and you expected the same in the second half. So I'm having a tough time reconciling what does that mean, exactly? It sounds like they're going forward with funding ICF labor on programs, but you're getting less pass-through subcontractor work and why?

We've seen -- in specific agencies, we've had subcontracts which have been sitting where we have the time, we have these subcontracts sitting there and they won't approve them. There is no -- and we've tried like hell because we do get some fee based on the subcontract. And but it has -- there have been delays in those subcontract approvals. And I think as you know, there's lots of work, which we do in terms of Social Programs side, where there's some important conferences and other things which are held, which are fairly large conferences, which have been delayed and have been pushed to the right. And those conferences traditionally require lots of ODCs and other things. So all those -- because of all those GSA issues, et cetera, which you are familiar with have not happened. So I think that I pointed out the service revenue numbers only because of the fact that I thought that, that demonstrates that our underlying business is pretty strong. It's going along quite nicely. And part of it is also that -- is just that, we are puzzled. We don't really know why the government doesn't approve the subcontract. We have pushed -- we are trying like hell to make sure that it happens, but it doesn't. And the conference stuff I think will not happen for a few months, I'm sure, until such time as the noise over these conferences subside.

Bill, it's John Wasson. I mean, I do think that some of the projects where we've experienced delays are some of our larger implementation projects or we've experienced client turnover where we would have a heavier use of subcontracts. And so that's impacted capacities that were expected on those types of projects.

And if you look at the pass-through number last year, I think we were about 2, 2.5 percentage points lower in terms of pass-throughs and if you just multiply that, we would be $5 million, $6 million -- $5 million or $6 million or $7 million more than what we are currently in terms of gross revenue. So I think that -- and with the associated ODCs, we'd be pretty consistent with our Q2 guidance. But we don't see that, those pass-throughs coming through. We see some continued service revenue growth, but again, we do need all the other stuff to happen in order for us to come up with the growth, which we had initially thought will happen.

And what gives you confidence that, that direct labor, the ICF direct labor can continue to grow in mid-single digits? Who's to say that doesn't go below 0?

Yes. I think, basically, when I gave you the numbers, that was organic revenue growth across our business, both federal and commercial. So I think that I'm talking about service revenue across the business. And so we have pretty good visibility in the federal arena. We know how much work will be required in terms of visibility, and we see that the commercial business is growing and a lot of that is done by our guys. And that requires more of our folks and less sub work because in the commercial arena there's less -- in certain parts of the commercial arena, there's much less sub work. So I think that's the basis on which we have given you the estimate. So we have pretty good visibility on the federal side. We think on the commercial side, we have good momentum and that momentum will carry us through, so those revenue therefore should grow continually for the next 2 quarters.

[Operator Instructions] Your next question comes from the line of Stuart Gillespie [ph] with Stephens.

I wanted to see if you could talk a bit about the coming extension in Washington and any impact you think that might have on your federal?

You mean the continuing resolution?

Yes.

Well, it certainly helps that there's clarity. I think it makes our clients more comfortable, and we hope that, that will help them get some more confidence that there is that -- the intent is to continue to spend at levels which they have set. And we -- there is still the issue of how -- there is still some uncertainty -- this is the uncertainty, and we just have to watch how all the sequestration issues, which have still got to be resolved play out. So it certainly is a good first step. It doesn't -- and is a good first step in reducing uncertainty. But doesn't -- there are a number of things to happen in order for the uncertainty to reduce further.

Your next question comes from the line of George Price with BB&T Capital Markets.

First thing, I just wanted to circle back around on the staff reductions you mentioned in the federal business, as I know it's a sensitive topic, of course. But just wondering if maybe you could talk about how many people are affected. I mean, how this is going to impact your headcount.

We -- let's say about 75 people round numbers were affected, and their headcount is going to go up in the commercial arena, obviously, because of the increased growth there. But we're being very careful in the federal arena. So I think that overall, the Q-on-Q headcount at least for this quarter was flat, and this was a reduction in the alignment of staff at all levels. So we certainly did what we had to do, and I think that we are redeploying, as John said, the staff in places where we can and where there's growth. And otherwise, those folks are not with us. So that's basically what -- I think I answered that question in terms of numbers.

Okay. Actually a good segue, and another question I had, which is flipping over to the commercial business and a little bit more on the investments that you talked about in the business development side there. What kind of operating margin do you see that business having going forward? Given these investments, now that you've had it, you've done some integration work, you've had the ability and the time to evaluate it and see -- you obviously see some investments that need to be made. So what kind of operating margin do you see that business having versus the upper teens to I think close to 20% level I think you discussed when you acquired it and this is primarily, I guess, directed at Ironworks?

Yes, they continue to do good, solid profitability of the kind you mentioned. I think overall, we are basically making sure that we meet the EBITDA targets, which we have set. And as we have managed to get an earnings expansion here. And I think that's due to the fact that we have businesses which are more profitable, and we will continue to focus on that, which is why, as I said at the end, that we get the -- we, as we grow the commercial business, the earnings will expand. I think we will grow the business. And we also have the benefit of the federal business, which is very stable. It may not be growing at the moment, so you have both the advantages of stability, as well as earnings expansion and growth. So I think we are focused on that 10% number, around 10%. And certainly the more profitable commercial business helps.

Okay. And were there any one-time acquisition expenses in the quarter, anything lingering?

No.

Okay. Last question. I know you gave an organic growth number for the quarter, 1%. And if you gave this, I apologize if I missed it, but did you give or could you give an acquired revenue number for the quarter and, if possible, maybe break it down between Ironworks and GHK?

We haven't done that, George. I don't think we're going to do that now. But I think I gave you broad indications as to where the overall commercial growth, the organic, et cetera. So I'll just stop at that.

Your next question comes from the line of Tobey Sommer with SunTrust.

I wanted to ask a little bit about pricing. Are you seeing other competitors make a move towards more commercial space? Are you running into new entrants? Has there been any pricing changes either on the commercial side or the federal side?

We have lots of competitors, I think, in the commercial space. We, for example, if you look at the Ironworks space, they have their traditional set of competitors on it, were there any new ones which they have seen or they have pointed out to us. If you look at our aviation business, we have a traditional set of competitors, both in the United States and in Europe. So I don't see any new competitors but it's a very competitive space. But I think traditionally, there is a certain acceptance of the rates which they do. So I think in terms of margins, if you're asking this from a question of, is there margin pressure? I think every possible businesses have been pretty -- and I think in that world, that's the kind of margins they get. And we certainly have been competitive and Ironworks loses its share of work because of price. But that's not because of the fact that it's any different from any other normal situation. I think, at least in the aviation and in the digital interactive space, they have their traditional set of competitors.

It's John Wasson. I would say in the energy space, I don't think we've seen any new participants in the same set of firms we typically compete with and I generally agree with what Sudhakar said, I think it is a competitive environment, but I don't think we've seen any intense increases in price pressure. Obviously, as we do re-competes of that thing, the established programs, we could pay attention to products and we do, but we certainly haven't seen new -- no new entrants on the energy side recently.

Yes. And I think when we gave you the 10% guidance, we were obviously looking at the pricing and looking at things which we are doing, and we are trying very hard to make sure that we do that 10% EBITDA with all the attendant pressures which we have on pricing and other things so that we reach our goal.

Okay, great. And I may have missed it, but did you give CapEx guidance for the year?

We did give CapEx guidance for the year, and it was a range of $15.5 million to $16 million for the full year.

Okay, great. And just, you had a couple nice contract wins with major U.S. utilities. Can you talk a little bit about the demand environment on that side? How early we are in that developing and what type of horizon you see out there?

Yes, sure, this is John Wasson. I mean, I think as we've discussed in the past, I think that we continue to see a robust demand for energy efficiency programs in the United States. I think we've talked many times about the fact that there's, I think, 25 or somewhere between 25 and 30 states that have public good charges in place to fund energy efficiency programs, the public utility commissions have put those in place. The utilities typically manage in many cases to outsource those programs, and I think we're probably the largest provider of energy efficiency programs in that market. And so I think there's still -- I think over time, additional states will put those kinds of charges in place, and so there'll be market expansion from that and then I think in -- there's certain states where we don't have as large a market position as we believe we ultimately can and should have, particularly in California, which spends billions of dollars each year on energy efficiency. So I think it's a long-term market, with I think long-term positive trends. We're a market leader, and there's significant potential so I think we're quite bullish and believe that can be a key driver of growth here for the next several years.

There are no questions at this time. I would now like to turn the call over to management for closing remarks.

So thank you for your interest. We look forward to speaking with you at our next earnings call. Thank you again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.