ICF International, Inc. (ICFI) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the Fourth Quarter and Full Year 2016 ICF Earnings Conference Call. My name is Eric, and I'll be your operator for today's call. At this all time, all participants are in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. [Operator Instructions] Please note this conference is being recorded on Monday, February 27, 2017 and cannot be reproduced or rebroadcast without permission from the Company. I'll now turn the call over to Lynn Morgen of MBS Value Partners. Please go ahead.

Thank you, Eric. Good afternoon, everyone, and thank you for joining us to review ICF’s fourth quarter and full year 2016 performance. With us today from ICF are Sudhakar Kesavan, Chairman and CEO; John Wasson, President and COO; and James Morgan, 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 February 27, 2017 press release and our SEC filings for a discussion 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 ICF’s CEO, Sudhakar Kesavan, to discuss fourth quarter and full year 2016 performance. Sudhakar?

Thank you, Lynn, and thank you all for joining us today to review our fourth quarter and full year 2016 results and to discuss our business outlook for 2017. This was a year of significant organic revenue growth for ICF. The 5% revenue increase we reported was entirely organic and was consistent with the mid-single digit rate that we had expected. Each of our vertical markets and each of our three largest plan categories federal, commercial and state local governments posted year-on-year revenue growth, benefiting from the significant volume of new business that ICF has been awarded over the last two years and a high percentage of recomplete win. Highlights of the year included, revenues from federal government plans which were up 4.1% compare to 2015, the highest year-on-year increase since 2010. The positive momentum in our commercial energy markets group, which achieved double-digit year-on-year revenue growth. The steady revenue performance of our commercial marketing services business, which came in modestly ahead of last year and a 20% increase in diluted EPS to $2.40. In the fourth quarter, we experienced some revenue slippage on the part of certain federal government clients and transaction postponed once in our commercial energy advisory group. Strong performance from energy efficiency programs and our work and infrastructure projects with local government plans were compensating factors. The impact from service revenue, however, resulted in the fourth quarter diluted EPS coming in at $0.65, which product below our recent guidance range for the year. Since the beginning of 2017, our work with federal government plans and on commercial energy transaction has returned to normalized levels. With another year of record contract win for ICF, we have a strong foundation for growth in 2017 and beyond. ICF had a record year-end backlog of $2.1 billion, representing a book-to-bill ratio of 1.26 and the record pipeline of $4.2 billion. Based on what we note today, over 80% of our 2017 revenue guidance is already in backlog, which supports our expectations for another year of solid growth for ICF. In addition to the backlog and pipeline and the important factor assessing our future performance is how the new administration is likely to affect our federal government business. It is early to be precise, but let me give you our current thinking. As you know, we have diversified client base on our federal government business. The Department of Health and Human Services is our federal agency clients accounted for 19% of 2016 revenues. At HHS, we believe that ICF is positioned as the bulk of our contracts out with the U.S. Centers for Disease Control and a National Institute of Health and involve public health and biomedical issues that have by part as a support. Much of our work is around officially collecting and analyzing data, changing behaviors and dealing with front burner issues such as widespread opioid addiction and smoking cessation. On the other hand, there has been a lot of discussion about the new administration priorities with respect to the Environmental Protection Agency, which represented 3% of 2016 revenues. At the EPA, ICF supports a variety of clean air, clear water and voluntary program such as ENERGY STAR. Budget production with the EPA would most likely affect our climate-related programs, which accounted for about $15 million in revenues in 2016. The rules under the Federal Clean Power Plan are likely to change, but we don’t not know the alternate framework that the new administration will put forward to support the EPA and is statutory obligation to regulate greenhouse gas emissions. Any activity whether it'd be a repeal or replacement of plan can be seen as an opportunity for ICF. Also we encouraged by the new administration focus on rebuilding the country's infrastructure. I feel we achieved double-digit organic growth from 2009 to 2011 driven enlarge powered by the infrastructure investments under the Obama similar package well we were involved in the planning and implementation phases of a broad range of projects. As you can see, there are some puts and takes with respect to how the new administration policy may impact our federal business. But we will know once additional federal agency positions are filled and the 2018 fiscal budget is finalized hopefully in the next six months. Looking at the outlook for broadly, our experience has been the freezes in government personal headcount, which have been promised by the new administration usually result in increased work for government services consultants and contractors. And with both President and Congress from the same political party, we should be able to avoid the bottlenecks and the roadblock selection that have caused budget crisis in the past. We believe that our commercial utility focus energy efficiency business, we largely unaffected by the new administration policies as they're under state, not federal jurisdictions also utility generally are supported with energy efficiency program as they enhance customer satisfaction and utilities often earn a shareholder returns for successful delivery of these programs. We're expecting robust growth in our energy markets business in 2017. The marketing services business is growing steadily albeit at a slower pace than we would like. We continue to be optimistic about this business and our demonstrated ability to sell marketing services to ICF's legacy clients. This business is highly correlated to economic growth and as growth accelerates, we should see a more positive impact here. I would now like to turn the call over to ICF's President John Wasson, who will provide an operational update. John?

Thanks, Sudhakar. 2016 was a record setting year for ICF. Revenues, net income, year-end backlog, contract awards and our new business pipeline were all at the highest levels in our history. Our 3.1% revenue increase in the fourth quarter was led by 10.8% growth in revenues from commercial clients, and 16.4% growth in revenues from state and local government clients. This performance more than offset the expected decline in international government revenues and the decline in the federal government revenues that we did not expect. The slowdown in federal government workflow in the fourth quarter was primarily due to delays in setting priorities and on start up of new process as certain of our federal clients. Also, we experienced the postponement in pass-through revenues that we were expecting in the fourth quarter. Result, federal government revenues declined 3.1% in the fourth quarter, in short contrast to the 4.1% growth in federal revenues that we reported for the full year. We have seen a return to more normalized pattern the past quarters in contract wrap ups in our federal markets since the beginning of the year. Our federal government work remains well diversified with no single contract accounting for more than 3.5% of total revenues. Our confidence in ICF's growth potential is supported by recent contract wins for process involved our domain expertise and implementation skills. The good example of this is our recent award from U.S. Center for Disease Control and Prevention, the CDC where we won nine contracts with the combined value of up to $34.4 million. Here we are combining our deep subject matter of knowledge in public health, if our marketing and communication services around traditional and social media and engagement to assist the CDC and its campaigns against opioid abuse, smoking and to raise awareness of antibodies resistance and travel-related diseases. The double digit increase in revenues from commercial clients in the fourth quarter was driven by the excellent performance of our energy markets group, comprised of energy efficiency programs and consulting to industry and financial institutions on a range of energy-related business, regulatory and transactional issues. As Sudhakar noted earlier, in the fourth quarter certain of the energy advisory clients we serve postponed transactions in order to assess likely the deregulation initiatives from the new administration. In recent weeks, our work on these projects has resumed. Even with this headwind, the fourth quarter performance of our commercial energy markets group was excellent with revenues up 17.8%, compared to last year's fourth quarter. We are currently working on 150 energy efficiency programs, all of which are driven by state level policies and initiatives. In the fourth quarter, we continue to ramp up previously announced new energy efficiency programs, the significant new work with MidWest utilities including Kansas City Power and Light and Ameren Missouri as well as the standard programs with current clients. In November, we officially announced the major contract win that we have spoken about early in the year to operate all of the common, commercial and industrial energy efficiency programs to the operating utilities owned by Exelon Corporation. This $110 million contractor work represents a conversion and the family of utilities coming together to carry their best practices and energy efficiency program design and delivery across their entire multistate portfolio. This is a new direction that we believe many large and geographically diverse utilities, we'll be watching closely. Exelon's bundling of this portfolio allows ICF to find deeper analytics and how we target, market and engage customers thereby delivering greater energy savings and to be so more quickly and more cost effectively. In addition, we awarded several contract with those new and existing clients. Here, we expect we will continue to provide growth in our energy efficiency implementation business in 2017 and beyond, and our pipeline remains robust. ICF is unique and that we combined advisory work and the intellectual property needed to support that advice with the capability to implement these programs. This gives us significant competitive advantages, which will further enhance by the ICF Olson acquisition. The second major component of our commercial business is marketing services, which operates under the ICF Olson brand. ICF Olson's commercial revenues in the fourth quarter were up 4.7% year-on-year representing the strong finish to a challenging year, and we're in the world's largest marketing services agencies experienced no-or-slow growth. We won a number of new accounts in the fourth quarter across a broad range of industries including financial services, hospitality, retail and gaming and proceeding increasing revenues from existing clients. We are encouraged by the many new process won in the fourth quarter that represented cross sales of the various sales within ICF Olson and between ICF Olson and ICF, and their new business pipeline of innovated service opportunities looks good. Specifically ICF Olson is collaborating closely with ICF commercial energy teams on several business development initiatives, and we have an active pipeline for state lottery opportunities. We continue to make changes to the organization to present an integrated customer experience service offering to a diversified client roster. The combination of ICF Olson's marketing services with ICF's traditional areas of domain expertise such as energy, health and transportation is a natural fit that we expect to be amount from growth driver for our company. We are very pleased today to see the [athlete] named ICF Olson is one of the 12 agencies in the country that has "massively adapted" and an increasingly digital market place. International government revenues were down 11.5% and accounted for 7% of fourth quarter revenues. The issues here are the same mainly delays and activating programs that our largest clients European Commission. As I mentioned last quarter, we've been successful in winning new contracts in Europe and have a trailing 12-month book-to-bill ratio that is substantially above one. We are not counting on this market improving in 2017, but we are positive on a longer term prospects for this business and are willing to wait it out. Revenues in state and local government clients accounted for 11% of fourth quarter revenues. The summary effects work on infrastructure projects and of course work the ICF Olson performances for state lotteries as well as pass-through revenue, which have been higher than usual for most of this year. Guide us for flat revenue performance assumes the pass-through revenues on state and local work, they turn to more normalized levels in 2017. To our full year 2016, we had year-over-year growth in all of our vertical markets. Our two key market groups energy, environment and infrastructure; and health and social programs accounted for 82% of total revenues with safety and security and consumer and financial representing approximately 8% and 10% respectively. Looking ahead, we believe that our diversified business model positioned ICF for continued growth in 2017. Our business development pipeline was a record 4.2 billion even after 2016’s record contract wins of 1.5 billion. The pipeline includes 35 opportunities within 25 million and 69 opportunities within 10 and 25 million. Sooner last year, our total win rate for the year was 16.4%. I will now turn over the call to James Morgan, our CFO. James.

Thanks, John. Good afternoon, everyone. We reported solid year-on-year comparisons in the fourth quarter, executing well across key operating metrics, which I will highlight and I walk through the major elements of the income statement. Total revenue for the fourth quarter of 2016 was $289.6 million, compared to $280.8 million in 2015, the increase of 8.8 million or 3.1%. Even though, there was one last working day, the fourth quarter of 2016, service revenue remained essentially flat at 206.8 million as compared to 207 million in 2015. Indirect and selling expenses for the fourth quarter were $77.7 million, or 26.8% of revenue, compared to 79.5 million or 28.3% of revenue in the prior year. Reported EBITDA was 29.5 million for the quarter, 2 million or 7.1% higher than the 27.5 million reported in last year’s fourth quarter. Higher year-on-year EBITDA was due to lower indirect expenses and slightly higher gross profits. EBITDA margin was 10.2% for the fourth quarter of 2016, as compared to 9.8% in the fourth quarter of last year. Adjusted EBITDA for the fourth quarter which excludes special charges related to acquisition, severance for staff realignment and international office closures was 29.9 million or 10.3% of revenue, as compared to 10.1% of revenue in the fourth quarter of 2015. Depreciation and amortization expense was 4.4 million, up from 4.2 million in 2015’s fourth quarter. Amortization of intangibles was 3.1 million in the fourth quarter of 2016, down from 4.3 million in 2015’s fourth quarter. Decrease is due to engaged with some prior acquisitions becoming fully amortized. Lower indirect and selling expenses and lower amortization intangibles were primary drivers that resulted in 2016 fourth quarter operating income, increasing by 15.4% to 22 million as compared to 19 million in the fourth quarter of 2015. The effective tax rate was 36.8%, as the quarter as compared to 35.3% report in the fourth quarter of 2015. 2015 fourth quarter effective tax rate is slightly more positively impacted by favorable return provision adjustments. For the 2016 full year, the effective tax rate was 37.5% compared to 38.1% for 2015. Net income was $12.7 million or $0.65 per diluted share for the fourth quarter of 2016, which included $0.01 per share impact for special charges previously mentioned. Non-GAAP diluted EPS, which excludes amortization intangibles and with special charges was $0.76 for the fourth quarter of 2016, as compared to $0.73 in the prior year. Now, we turn for the full year of 2016 results. For the full year of 2016, we had record revenue in net income. Revenue was 1.18 billion compared to $1.132 billion for 2015, an increase of 4.7%. While service revenue was up year-over-year by 1.8%, the increase in revenue for sub-contractor and other direct cost which were up 13.1% outpace the increase in service revenue. EBITDA increased 3% to $111.9 million or 9.4% of revenue. Adjusted EBITDA which is I mentioned previously excludes special charges related to acquisition related expenses, staff realignment and office closures increased to $113.9 million or 9.6% of revenue compared to $110.7 million or 9.8% of revenue for 2015. It should be noted that excluding that impact of however year-over-year pass-through revenue, our 2016 adjusted EBITDA margin would have been an estimated 9.8% similar to 2015. Operating income increased $7.6 million or 10.1% to 82.8 million primarily due to lower amortization intangible and indirect consulting expenses as well as higher revenues. Net income increased to $46.6 million in 2016 compared to $39.4 million in 2015, an increase of 18.3%. Reported diluted earnings per share were $2.40 for 2016 compared to $2 in 2015, an increase of 20%. Non-GAAP diluted EPS which excludes the amortization intangibles and special charges was $2.87 per diluted share for 2016 as compared to $2.64 for the prior year. the increase of $0.23 per share or 8.7%. December 31st, the Company's sold its interest rate hedge agreement which was entered into in late Q3 of 2016 for $3.6 million as a result of the sale the gain on the sale of the interest rate hedge was recorded in other comprehensive income that will be recognized into earnings over the original life of the hedge which was January 31, 2018 to January 31, 2023. Cash provided by operating activities in 2016 was $79.6 million slight improve to superior to 2015 operating cash flow of $76.3 million of below our guidance range primarily due to temporary timing differences with our billings and collections. As a result of these timing differences, the Company collected almost $10 million more in cash during the first week of '17 as compared to the first week of 2016. The timing differences resulted in day sales outstanding for the fourth quarter of 2016 of 78 days as compared to 73 days in the fourth quarter of 2015. We anticipate our DSOs to be in the 72 to 77 day range during 2017 including the impact of deferred revenues. The priority capital allocations, capital expenditures in 2016 were $17.8 million. We utilized $21.8 million of cash during the fourth quarter and $52.1 million during the full year of 2016 to pay down debt under our credit facility which totaled $259.4 million at year end. Additionally we made stock repurchases in our share repurchase plan totaling $11.9 million during the full year of 2016 and achieve our goal of offsetting dilution cost our employee incentive programs to maintain fully diluted weighted average shares of no more than $19.5 million for the year. In fact for 2016 the fully diluted weighted average shares were 419.4 million. As if 2016 year end the remaining value stock as we repurchase under our share repurchase plan is $37.7 million. Now, I will provide some detail regarding our expectations for the full year of 2017. We are currently forecasting full year depreciation amortization expense to be in the range of 17.7 million to 18.7 million for 2017. We are forecasting the amortization intangibles to be approximately $10.8 million with tax effected impact of $0.34 per share. We are expecting full year interest expense of $7 million to $8 million, capital expenditures are anticipated to be in the $20 million to $22 million range, cash flow from operating activities is expected to range from $90 to $100 million and lastly we expect the full year tax rate of no more than 38.5% and we expect fully diluted weighted average shares of approximately $19.4 million for the year. With that I would like to turn the call back to Sudhakar.

Thank you, James. To sum up our growth strategy remains the same. First, we are going to continue to focus on what we know, sustain and grow our distinguish subject matter expertise in our core vertical markets. Second, provide our industry leading function capabilities in technology and marketing and engagement skills to an increasing the broader range of our traditional clients. And third, seamlessly combined the distinctive core market expertise with these functional skills. In terms of 2017 we believe that our diversified business model will lead to revenue performance in the range of $1.2 billion to $1.24 billion and diluted earnings per share of between $2.50 and $2.75 based on several revenue assumptions the key ones being another year of mid single digit commercial growth driven by new market business and federal government revenues that are flat as compared to 2016 or increase at a low single digit rate. We expect the cash flow from operations to be between 90 million and 100 million. And operator, now we would like to open the call for questions.

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Tobey Sommer from SunTrust. Tobey, your line is now open.

Hi, this is actually Kwan Kim on for Tobey. Thank you for taking my questions. Regarding President Trump's plans to cut back spending for EPA. Could you talk about the impact this may have on your customers in 2017? And how your customers have been reacting so far to the developments? And could there be more delays in contract from energy customers this year? Thank you.

So, as I mentioned in the first quarter of this year, things have been pretty normal. And I think that the -- and I've already stated in my remarks, we do about $15 million of work on climate change activities which might be affected revenue. I think the one nuance which I would like to people to understand is that the focus on climate change is an important one and that could certainly be cut back there, but I think from statutory perspective EPA has to regulate greenhouse gases. So, they may not do it using the Clean Power Plan, but they might do it -- doing something else, and we don’t really know what that would be. But whatever that would be that would create sort of work for us. So, I think that we are certainly expecting the EPA revenue to be affective because that's been stated multiple times, and I think the amount of work we do is around $115 million. How and when and where? We don’t know, but we haven’t seen any impact at least in the first quarter. On your question about energy clients, energy clients are primarily utility clients. The utility is basically do, all the energy efficiency work. I don’t see any impact because they all state. They operate under state jurisdictions and state law, and the clients are primarily utility, so we think that will continue to be fine and keep growing, and I think that impact there might be cases where certain states are even more aggressive in terms of regulating on energy efficiency issues. And therefore, in fact they’re might be potentially more work in that arena. So I think the energy and utility time will fine and I think we’ll continue to keep going the way or other are currently doing.

And on ICF also, could you talk about the near-term opportunities you’re seeing and how your pipeline is looking compared to the prior quarters in terms of the mix of new versus the legacy customers and the types of industries are also in the survey? Thank you.

I think on the ICF Olson front, the one thing which is important to understand is that we’ve gotten from significant benefits from them when we take them into our legacy client based, which is why we acquire them. So, we had talk about some of the [Indiscernible] in prior earnings calls to utilities, to aviation companies and to certain government client. So, we have been quite successful there. They continue to be quite successful in their efforts to grow their business and the whole retail, consumer another industries. They have been very successful in selling to hospitality companies, large hotel chains. We are one of the biggest providers of largely programs to some of the largest chain in the world. So, I think they are -- we have done a lot of work for the consumer product, good companies. So I think there will be pipeline is quite strong. We’ve continued to higher people at the senior levels, who have helped us expand the pipeline and have grown it. So, I think they grew 4.1% whatever 1% or something, 4.7% in the fourth quarter. So, I think there is some momentum going in and we hope to that is continue.

And our next question comes from Tim McHugh of William Blair. Tim, your line is now.

First thing is, Sudhakar, can you remind us the 80% that you have in backlog I guess in terms of visibility to ’17. I seem to recall just ahead of 70% number in the past, but can you remind us, sorry, how that compares, I guess in terms of visibility to what you’re guiding to?

Yes. I think is about 4 percentage points higher than loss year, it was 77 last year.

Okay. And then just the outlook for mid-single digit growth and commercial, given the growth you’re seeing in the utility or the energy sector especially in the first half of the year just given the run rate from the second half of ’16. It doesn’t seem like you’re expecting or embedding a big growth number for the marketing services side of the business. Is that wrong are how should I look at that?

Yes, I think that there are various components of our commercial business. So, it’s important to understand that a small portion, which is promotional healthcare. We do some TRPP work, which as you know that big contract which has over the last three or four years. We’ve done a lot of work two or three years ago and slowly ramping down. So, I think when you include all those elements in there that is what it comes to because if you lose $6 million or $8 million or $9 million in a specific infrastructure contract at TRPP that brings the growth rate down. So, I think that would be, as you point out that there is the utility work we continue, we think there is momentum in the future marketing service business that will continue. But I think that the TRPP and some our commercial healthcare work is very uncertain at the moment and I think that we assumed is going to be down, and the aviation business is going to be a little bit up. So, I think when you include all that than you basically get to that mid-single digit number.

Okay. And then just subcontractor fees I think you mentioned state and local, but just generally what's embedded as a percentage of revenue maybe or if you want to give a growth rate. But are you expecting that to continue to ramp up and add to the revenue outlook or we had a level where this is going to stabilize, just trying to think about the impact on revenue growth as well as margins for '17?

Hi, Tim this is James. If you take a look at our pass-through rates for the last couple of years and 2015 we were around 25% this past year we averaged around 27%. We're taking that towards 2017 that it's going to be some more in the middle of that range as what we're anticipating, a little bit less than what we have in 2016, but kind of the middle to invest to roughly.

And our next question comes from Joseph Vafi from Loop Capital. Joseph, your line is now open.

I thought first just one more question on the energy efficiency business given how big it is now, if you could give us a feel for what you think this total addressable market is, And if I believe you're going to start to run into upper growth ahead because you've penetrated market pretty successfully so far? And then secondly I was wondering if the European business is profitable right now? Thanks.

Yes, so just in terms of addressable market, Joe welcome back first, great to have you back. I think we let me just say numbers that is around $800 million of energy efficiency look at the pipeline which we have at the moment in addition to all the other work which we are currently doing. The addressable market we've done any number of exercises it's have accommodate specific numbers but it is $2 billion to $5 billion with the addressable market. And I give you that broad range because sometimes we underestimate the addressable market. The California market is the large one, we see that that will as we slightly waiting for -- we've been waiting for the California market to Pop for last year or two but now we think it will happen sometime in late-'17 early '18. And I think that that is a very large market where we have a very small share and we're at least focused on trying to see how we can increase that. so I think if you look at all of that it's a pretty strong good market. I think on the European business, Yes, it certainly generate contribution margin. It's not as much as we would like but we are trying to make sure that the focus on -- and we have an excellent group lead who has been there for now, who is very experienced general manager, who is really what he can pick up the profitability of that business. And John do you want add something on energy efficiency?

No, I think you covered the key points.

Right, thanks so much Sudhakar.

And our next question comes from Edward Caso from Wells Fargo. Edward, your line is now open.

Just some clarifications on the guidance, so what's the implied EBITDA margin?

The implied EBITDA margin is upper 9% range, somewhere between 9.6 and 9.8.

Okay. And sorry, fighting a cold here. Just have another question, I guess that’s it. I am good, thanks.

[Operator Instructions] And our next question comes from Ben Klieve from Noble Capital Market. Ben, your line is now open.

Two questions. First a follow-up to your commentary from Joseph's question, what are you seeing in California market that gives you a little bit of optimism regarding that market nothing really '17 or early '18?

This is John Wasson. I think in the California market we are seeing is California PUC has generally require the utilities to outsource about 20% of their energy efficiency program there are some room making underway in California in the PUC to up that to 60% outsourcing and so it’s a very significant market and obviously has a increased the amount of work that is outsourced by threefold that will be a significant opportunity for folks in the energy efficiency business. So that’s sort of a potential significant driver and I think there is a reasonable chance that will become a regulation by lead in 2017 or early in 2018.

One question regarding your exposure within Department of Health and Human Services. Do you have any exposure at all to the Affordable Care Act?

This is, John Wasson, again. No, we have basically no exposure to the Affordable Care At. Most of work in HHS is either public health related, dealing with chronic disease prevention, health informatics, and we do a lot of outreach using digital communication around public health issues. So most of work we have done -- we've continued to see it a lot of opportunity a lot of our pre-activity is obtained to be bipartisan programs; and so, we are constantly optimistic on the work we do within HHS.

We don’t do any work with CMS.

CMS, we don’t do anything for CMS.

Centers for Medicare & Medicaid Services is the one which run the ACA, we don’t do that one.

And then kind of transitioning here couple of questions regarding as M&A activity, I guess first of all regarding future debt reduction. What kind of debt are you comfortable with? What are you looking for give target at the end of -- by the end of '17 for our net debt levels?

This is James Morgan. If you look at where we are for ending the year 2016, we are at about 2.3 times EBITDA. Certainly, we are comfortable with that range. Our debt covenants allow us to go up to 3.75. We have plenty of room for acquisition for there. But it's -- we are comfortable in the low twos and if we don’t find an appropriate opportunity that makes sense for us this coming year given our cash generation, we would expect that we would get down to a leverage ratio of somewhere around 1.7 or so for this coming year, by the end of the year.

And then I guess last question. What are you looking at right now kind of provided from an M&A perspective? Where do you see opportunity here more? On the commercial digital sign, do you see any opportunity? And in the government sign, do you see a little bit everywhere? Where is your focus?

I mean the broadly the way, I think about the business as we have an energy infrastructure business. We have federal business and we have marketing services business. If you look at those three and I think we feel opportunity for adjacencies and debt and geographical sort of dispersion in each of those areas. And I think that we are constantly looking at various opportunities, the enormous opportunities in all these areas. I think and we just have to make sure the valuations such that we do the deal or not. As you would have noticed, we haven’t done any acquisitions since the end of 2014, which is about two years now. On the other hand, we’ve done about two on average of the year for the last 10 years. So, I think that we always looking and seeing whether we can find something which we understand and which we can afford in. And I am we'll continue to look and hopefully, which we find something, as Jim said we will -- we have the potentially do it. But it’s all the question of the fit and the evaluation.

Perfect. Thank you, guys. And actually I give one more question and then I’ll hop back in queue here. Given some of the pass-through revenue issues and then various kinds of delays you saw in Q4. Are you expecting any meaningful change in seasonality come up here in 2017, as it can be frontloaded towards front half of the year than maybe the year past?

No, I don’t think. So I think, we did see a bit of slowdown in Q4 as we said. We’ve seen a rebound in Q4. We’re back to expected levels on the federal business. I don’t think we expect any change in our seasonality.

We have no additional questions at this time.

Well, thanks very much for participating in our call then and we look forward to speaking to you next quarter. Thanks again.