ICF International, Inc.

Thank you, operator. Good morning, everyone, and thank you for joining us to review ICF's third quarter 2012 performance.

With us today from ICF International 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 future performance. These statements are subject to a number of risks that could cause actual events and results to differ materially and I refer to our November 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 future developments will cause our views to change.

Please consider the information presented in that light. We may, at some point, elect to update 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 third quarter 2012 highlights. Sudhakar?

Thank you, Doug, and good morning, everyone. Thank you for participating in our call to review this year's third quarter results and discuss our business trends.

We continue to effectively execute our strategy of building a balanced business portfolio. The increased contribution from our commercial and international businesses brought their share in the aggregate to 29% of third quarter revenue, up from 24% in the 2011 third quarter, and our state and local government business grew 10% to represent 10% of revenue.

U.S. federal government work accounted for the remaining 61% of our business in the third quarter, and we are pleased that most of our federal businesses in areas that are expected to grow such as health, health informatics and energy.

Third quarter revenues increased 9% year-on-year, whereas expected remained essentially flat with second quarter levels. Similar to this year, second quarter, our organic growth rates were affected by a reduction in subcontractor cost and the winding down of a large commercial infrastructure project.

As a result, our reported organic growth for the third quarter was negative 1.7%, but for the first 9 months of 2012 was a positive 1.9%.

Our service revenue, which represents revenue generated by ICF staff direct billing was $176 million for the third quarter, a year-over-year increase of 12.4% and $533 million for the first 9 months of 2012, a year-over-year increase of 14.9%. On an organic basis, service revenue increased 1.8% for the third quarter and 4.2% for the 9 months.

This metric provides an important window on the strength of our business where we continue to report solid year-over-year revenue growth.

Also I'm pleased to report that we achieved revenue growth across all our key markets. In the third quarter, revenues from energy, environment and infrastructure grew 4.6%; Health, Social Programs and Consumer/Financial increased 15.2%.

Together they accounted for 86% of total revenue.

Revenues from our Public Safety & Defense market increased 2.9%.

With regard to profitability, EBITDA continued to outpace revenue growth, increasing 11% over last year's third quarter, and EBITDA margin increased to 9.8%.

We have moved ahead this year with 6 initiatives that should enable ICF to continue to grow in 2013. Let me describe them to you.

First, as we mentioned last quarter, we have realigned staff in order to ensure that we maintain our EBITDA margins at or above current levels. As part of this, we eliminated positions in certain parts of our federal business and either reassigned or added staff to those areas in the federal and commercial space that we expected to grow within the current environment, including health, energy, digital interactive, cyber and domain-driven IT services.

One, regional hub and spoke approach that leverages the resource of our larger regional hub offices as we expand to neighboring states within the geography; two, our expanded suite of customized offering for utilities to help their commercial industrial customers reduce energy use and the recent addition of symbiotic engineering will further enhance this program; and three, our ability to offer an integrated set of services to utilities through which we can provide technical expertise, as well as incentive processing, call center and customer service support, strategic communications and IT solutions.

The realignment of staff and expanding the scope of the energy efficiency business.

Onto our third initiative. We have combined our legacy strategic communications and web development activities with Ironworks digital interactive business to form a new division.

With annual run rate of about $150 million, we now have the scale and qualifications to secure larger contracts in both the government and commercial arenas with end-to-end services that optimize client relationships with its customers and stakeholders.

Fourth, we are investing in a small commercial health care consulting practice that we carve out from Ironworks which we intend to grow by leveraging our subject matter expertise in the payor and provider market.

Fifth, we are building upon the positive momentum we have seen in 2012 in our aviation consulting business to expand the penetration globally of both airport planning and development as well as the full spectrum of strategic and tactical services that help airlines address the rapidly changing market.

Finally, we are allocating resources with the development our international business. The GHK acquisition provided scale, and while still at an early stage, we're confident that we can replicate it internationally, the business model that we have built domestically, maintaining a balance of government and commercial work and bringing up profitability levels.

With that as a backdrop, I would like to turn the call over to our Chief Operating Officer, John Wasson, to provide more detail on our business trends. John?

Thank you, Sudhakar and good morning. As Sudhakar noted, we saw a solid revenue growth in the third quarter, thanks to continued performance of our commercial and international businesses and the continued progress we are making in expanding our state and local government work.

In the third quarter, our commercial business increased 20%, after having increased 48% in last year's third quarter. Exclusive of the large infrastructure projects that Sudhakar mentioned earlier, commercial revenue growth was actually 39%.

Organic commercial revenue growth without the large infrastructure project was low double digits and slightly negative all in.

In the third quarter, we continued to win a number of strategically important, high-profile commercial contracts which contributed to our year-to-date commercial book-to-bill ratio of 1.23, which indicates solid future growth. Again, this quarter, energy efficiency programs continue to be among the largest and steadiest drivers of our commercial business, increasing 9.3% year-on-year and accounting for more than 35% of total commercial revenues.

Among our largest commercial wins in this arena in Q3 was a $7.5 million expansion in scope of an ongoing program in a residential arena for large Midwestern utility client. We've also been selected as the winners of 2 other significant new contracts, which will be included in our fourth quarter sales results.

Both of them strategically position us with programs in 2 states we have not previously served. One in the West, where we expect other opportunities to be opening up over the next few years and one in the Midwest, where we are building a brand and we plan to leverage within the region.

Sudhakar mentioned several business development initiatives that we are moving ahead with to continue to grow our energy efficiency business. Offering integrated services to our utility clients is a real differentiator for ICF and a cost savings for our clients.

In the aviation space, we continue to see strong double-digit growth driven by both increased work from airlines, financial institutions providing financing for aircraft leasing and from airports that are either under construction or are looking to reposition themselves in the changing market. In Q3, we were awarded 2 new contracts with a combined value of more than $5 million to provide an assessment of the leasing market for a major financial institution and to map out the commercial cargo development strategy for a large airport in China.

In the federal market, we were very pleased with the level of wins that we achieved in the third quarter. The majority of which in both dollars and number of contracts were for new wins, not re-competes.

In addition, we completed an assessment of our wins in Q3 this year versus Q3 last year, specifically to look at the expected timing of the revenue flow from those wins. It turns out that while we did achieve a higher total volume of Q3 sales last year, the revenue dollars expected from those wins in the following calendar year as opposed to 2 or more years out, were about the same as those we expect in 2013 from this year's sales.

As a consequence, the value of sales wins in Q3 that we expect to drive business in 2013 in the federal space is similar to where we stood last year, even though the volume of sales in the last year's third quarter was higher.

The press release this morning highlighted the largest of our federal wins. They included an important re-compete win under new a contract vehicle at the National Institutes of Health, valued at $45 million, to continue our providing biomedical, health and disaster information management services at multiple NIH institutes and centers, including the National Library of Medicine and the National Cancer Institute.

We also secured some new important contracts including an $18.1 million win at the Department of Homeland Security to help sustain and improve their network of centers to share information with state and local governments known as Fusion Centers, and the $12.1 million grant with the Department of Education to operate a regional education center to help school districts in 4 Appalachian states.

Finally, in the third quarter, we locked 2 wins from our CDC SIMS contract, which as you recall, is an IDIQ, to provide a broader way of technology services to the Centers for Disease Control. Because some agencies take longer than others to approve our press releases, we just received approval to announce one of those Q3 wins last Wednesday, a $9.2 million task from a Division of Informatics Solutions and Operations to support public health and clinical laboratories initiatives.

I would also like to give you a brief update on our most recent acquisitions, Ironworks and GHK. Ironworks is making a material difference in our ability to offer a full spectrum of services and enabling organizations to understand and interact better with their customers and stakeholders.

In addition to combining many of these ICF-wide capabilities into one division, as Sudhakar mentioned earlier, we are seeing an increase in active proposals and some wins in areas that neither company could have pursued separately.

In the third quarter, we won 2 significant interactive data application projects for industry trade group and the Department of Defense through our combined efforts. More importantly, the volume of joint proposals that blend interactive technology with customer outreach has grown significantly, and we look forward to putting new wins in that area in the future.

We are also pleased with the progress of our integration and joint proposal efforts with GHK. We have organizationally combined the legacy ICF and GHK resources in Europe and Asia into one group, headed by one of our most experienced executives, Jeanne Townend, who previously head up our health and social programs division.

We all do have numerous joint proposals submitted in the domains of energy in the environment, health and development and other areas of labor and social policy.

In Europe, we are focusing on winning broader contract vehicles, as well as using the ones we already have in place, especially with the European Commission. This past quarter, we jointly developed and won what is called a framework contract on evaluating programs for the U.K.

Department of International Development known as DFID, D-F-I-D. Using our combined qualifications, we're now preparing bids under this contract on task in public health and climate change issues.

At the EC, we are rapidly expanding our joint qualifications in areas such as public health, environment, education and strategic communications.

Outside of Europe, we are growing our joint pipeline addressing USAID and development bank work in energy, public health and project implementation.

To sum up, we are confident in our ability to continue to deliver above average results. Our pipeline at the end of the quarter was $2.7 billion, below Q2 levels because of the strong third-quarter awards activity, but significantly ahead of the $2.3 billion at the end of last year's third quarter.

Currently, our pipeline includes 34 opportunities greater than $10 million and 22 greater than $25 million.

Finally, our voluntary turnover continues to be low. For the third quarter, our turnover was 3.2%, and our year-to-date turnover translates into an annual rate of 11.1%.

Now I'd like to turn the call over to our CFO, James Morgan. James?

Thanks, John. Good morning, everyone.

Revenue for the third quarter of 2012 was $237.9 million, an increase of 8.8% compared to the prior year. And revenue for the first 9 months reached $705.2 million or 12.5% ahead of last year.

As outlined by John, year-to-date revenue growth has been driven primarily by our commercial and non-U.S. government business.

Gross profit margin was 37.7%, an increase over the 37.2% in the 2011 third quarter, driven by growth in service revenue, our increase in business with commercial clients, which -- and our increase in business with commercial clients which are typically more profitable than non-commercial clients. Indirect and selling expenses as a percentage of revenues were 27.9%, similar to the 27.6% from last year's third quarter but below the 28.5% reported for the first 2 quarters of 2012.

Q3 benefited from the cost reduction actions discussed during the last quarter's earnings call.

Our EBITDA margin for both the third quarter and year-to-date was 9.8%, up from 9.6% in last year's third quarter and year-to-date periods. The increases in the EBITDA margins are reflective of the previously mentioned growth in our service revenues as well our growth in commercial business and our ongoing efforts to effectively manage indirect and selling expenses.

Depreciation and amortization was $2.9 million in the third quarter of 2012 compared to $2.5 million last year. Amortization of purchased intangibles was $3.5 million in the third quarter of 2012, up from $2.4 million in the third quarter of last year due to our recent acquisitions.

Operating income in the third quarter was $16.9 million, an increase of 4.8% over last year's third quarter and operating income margin was 7.1%, down from 7.4% in 2011's third quarter, driven largely by an increase in amortization and purchased intangibles.

Net income was $9.6 million in the third quarter, up 2.6% from last year's third quarter. And diluted EPS was $0.48, up from $0.47 in the third quarter of 2011.

Cash flow from operating activities was $66.9 million in the 9 months ending September 30, 2012, an increase of 42.8% over the prior year. The increase was primarily due to a decrease in accounts receivable resulting from improved collections.

Days sales outstanding for the quarter, including the impact of deferred revenue, were 71 days compared to 75 days at the end of last year. As we have stated in the past, we expect our DSOs to be within the 70- to 75-day range.

Due to our strong cash flow generation, we paid down $28.5 million of debt for the third quarter which resulted in long-term debt of $115 million at the end of this period, down from $143.5 million at June 30, 2012. We ended the quarter with a debt-to-capital ratio of 22%, down from 26% at the end of the second quarter of 2012 and down from 27% at the end of 2011.

In addition, in the third quarter, we repurchased 211,000 shares for approximately $4.6 million, bringing shares repurchased year-to-date to 470,000 shares for approximately $10.5 million. This level of year-to-date share repurchases essentially offsets the 2012 dilutive impact of employee equity awards allowing for a fairly constant year-over-year diluted share count.

Capital expenditures for the first 9 months of 2012 were $10.4 million, a 51% increase over 2011, primarily related to the opening of our Martinsville operations center and the consolidation of some of our Maryland offices in Rockville.

Now we'll update you on our full-year expectations for certain line items. We continue to expect amortization of intangibles to range from $14 million to $14.5 million, depreciation and amortization expense to range from $10.5 million to $11 million, and capital expenditures to range from $15.4 million to $16 million.

We are lowering our expectations for interest expense to a range of $3.3 million to $3.8 million from $4 million to $4.5 million. We continue to expect the full year tax rate of approximately 40%.

And lastly, we expect fully diluted weighted average shares for the year of 20 million. With that, I'd like to turn the call back over to Sudhakar.

Thank you, James. As you can see from our news release, we have narrowed the full year revenue guidance to a range of $930 million to $945 million, a year-over-year increase of 11.5% at the midpoint and a fully diluted earnings per share range to $1.90 to $1.95, which represents 10% growth at the midpoint.

Also based on our strong cash flow generation year-to-date, we are increasing our guidance for full year 2012 cash flow to more than $75 million.

For the fourth quarter, we expect revenues to range from $225 million to $240 million and earnings per diluted shares to range from $0.46 to $0.51.

Looking ahead, we believe that ICF is well positioned for growth. Let me share our preliminary outlook for 2013 with you at this time.

With a year-to-date book-to-bill ratio of 1.13, we are on track to continue to grow next year. We expect to enter the year with a funded backlog similar to the levels we've had at the beginning this year, which gives us relatively good visibility.

At the same time, we expect continued growth from our commercial business in 2013 specifically from the areas I mentioned earlier, energy efficiency, digital interactive, aviation, consulting and international. And on a companywide basis, we expect net income performance to outpace that revenue.

We will give you more specific guidance at the time of our fourth quarter 2012 earnings release early next year.

With that, operator, I would like to open the call for questions.

Sudhakar, I'm trying to figure out precisely how to take your comments on 2013. And when you say that funded backlog should be about the same as it was when you entered 2012, at the end of the day, it looks like your organic growth is going to be relatively flat in 2012.

But are you saying that, that funded backlog is more representative of your federal outlook and that you expect commercial growth to reaccelerate after you lap the large infrastructure contract that wound down?

Yes. I think that what I was saying was that the funded backlog numbers which we had as a percentage of the overall revenue number for the year is very similar.

So if you look at that, then the nature of the business is, in the federal arena, is pretty similar to what it was in end of 2011. And we certainly -- I agree with you, we certainly expect the commercial business to accelerate once the infrastructure project doesn't wind down.

It's not going to go to 0 it's just that the amount they are spending this year, given the size of the project last year was quite significant. It's almost $30 million.

And this year, the project is going to spend still $18 million or $19 million. And next year, again, going to spend around $15 million, we think.

So it's not that it's going to 0, it's just that the scale of the project was so significant that as we reduced it, it impacts the organic growth number. So I think that we certainly continue to expect the aviation business, which is growing very rapidly again in 3Q, to continue to grow, the energy efficiency business to continue to grow, and overall, organic growth in the commercial business to accelerate as you say once we've reached steady-state on the infrastructure project.

Right. And then what is the outlook for federal over the next couple of quarters as what are your customers telling you as they're dealing with the potential for sequestration?

How much of a lull in bookings are you going have to endure or think about as you plan for 2013?

I think that our bookings for the quarter were quite good. We think the bookings for Q4 are trending in a good way.

We are quite optimistic about the performance of our Q4 bookings. We think that the commercial bookings will also accelerate.

John mentioned some of the energy efficiency projects which are sort of like federal projects in the sense that when you get one of those projects, it's a long-term project and you get the fund immediately, in the sense they are available for you to spend. So I think that we are optimistic about the Q4 bookings both in the federal and commercial arena as well as the Q3 bookings are good.

So now it's question of -- there's no real significant change in our outlook on the ground in the federal business from what it has been in the last quarter. So how are our clients responding to sequestration?

Obviously, things have slowed down in the federal business as you can see, but there's no change in that. I think the pace is what it is and appears to us that at least for the moment it is continuing the way it had been for the last quarter or 2.

Just looking at the commercial, Sudhakar, could you just talk about the big sequential growth from first to second quarter and then a sequential decline from second to third? Can you just touch on what the drivers were there?

I know you talked about year-over-year, but just sequentially, and then what you expect in the fourth quarter for commercial?

Sure. I think the commercial revenue is basically -- first thing is that some of our infrastructure project had what I call red flag days.

Red flag days are dangers of higher risk. Every time there's a red flag day, you lose $100,000 that day and you cannot -- we had a number of red flag days in California.

So that has some impact. You can see that the temporary impact has just moved to the right, but the revenues are there.

It's a question of they did better in the right time. And our litigation business, which is quite lumpy, didn't have that much volume as we thought it would have in Q3.

So we don't believe there's anything out of the ordinary here. I think the red flag day revenue will accrue some time in Q4 and Q1 and then the litigation work will come back up as and when it comes back up.

It always seems to go up and down.

Okay. And just on organic, what was the -- I missed -- I might have confused the numbers on organic growth for commercial both with and without the large infrastructure project?

It was low double-digit with -- without the infrastructure project and slightly negative with the infrastructure project.

Okay. And then on the 2 energy efficiency deals you're negotiating, are these -- can you give us just a ballpark magnitude on the size of those 2?

I think plus some -- around $50 million.

Combined?

Combined.

Okay.

Let me say $40 million to $50 million.

Just wanted to kind of continue on the commercial side. Certainly, given some of the political and the macro uncertainty, some of the public companies out there that play in spaces much like Ironworks and adjacent to Ironworks have recently talked about slower sale cycles, slower project ramps, not decline in growth but -- or not declines, but just a little bit slower growth.

And so I wanted to understand really what happened -- what your outlook is going into the fourth quarter next year, what your commercial growth expectation is in light of that if you're seeing any of those trends?

You mean first quarter next year, correct? Going into next year, I think that we basically, overall, on our commercial side, we think that we can do around 10%, which we have said.

I think if you combine all our growth rates, I think that 10% number is a good one for us to work with, and we think that we can do that. So I think our -- we have given some scale in the commercial business to the digital interactive arena.

We certainly hope that, that will help us win bigger projects. So we anticipate that, that business will continue to grow.

It -- how much and whether it's going to slow down or not, I don't have a view on that at the moment. Right now, it's doing okay and we certainly hope that we can accelerate it and not have it slow down.

Well I guess, let me ask it a different way. Are you seeing any -- are you seeing the pace of deals on the commercial side, of project ramps on the commercial side, are you seeing the pace coming in as you expected?

Or are you seeing any impacts of more -- or of slower sale cycles and slower project ramps?

No. In fact, our book-to-bill ratio, as John mentioned, was 1.23 on commercial.

So we certainly think the commercial velocity of the work is higher. Plus our Q4 bookings in commercial are going to be quite strong.

So we don't see a slowdown there.

Okay. In terms of the 2012 guidance coming down, at least at the top end, is that more -- I guess, can you talk about what specifically is driving that down.

So is that just continued sluggishness on the federal side, things moving to the right and so forth as opposed to -- commercial or anything else coming in lower than previously expected?

Our commercial business, like I said, is doing quite well, I think it's primarily because of the fact that we continue to see the federal business at the same sort of pace, and we think that it's not going to suddenly accelerate in Q4. And so we saw -- we will give you guidance which we think is appropriate.

So it's not -- I don't think we are reducing any guidance. I think we are narrowing it, and we are narrowing it to reflect what we see is the business going forward.

My first question in regards to the federal segment, I think you had mentioned that you're seeing a number of new wins coming in contracts and not so much re-competes. So I was wondering how that compared to last year and then maybe what's behind that change?

I think John mentioned that the quantum of work -- the number of re-competes we had was lower this year, which is a good thing. We won a large number of re-competes last year.

So this year the number of re-competes' overall percentage was lower, 46% re-competes in 2011, 36% of our wins in Q3 were re-competes 2012. And I think that we -- and the amount of revenue which will accrue from the wins in Q3 in 2013 is approximately the same as we had even though the volume of wins last year was higher.

So I think that -- it's just -- there's nothing strange about it. It's just -- we are just trying to indicate that it's a good news story that we have enough wins and the normality of the whole award process indicates that we should do okay on the federal side as far as at least the backlog and the winning of contract is concerned.

Now how quickly they spend the money, et cetera, will depend to some extent as to how the transition takes place. But we certainly think that from a contract vehicle perspective and from backlog perspective, we are in very good shape.

Okay. And then on the reimbursable in subcontractor cost, the decrease we've seen this year, could we expect that trend to kind of hold going forward?

Or is this more of effect of the slowdown in the events business we had seen earlier?

It's a -- I think that to some extent there's some slowdown because in certain government arenas, the number of conferences, et cetera, declined. It also generally doesn't vary that much, 1 or 2 percentage points I think from quarter-to-quarter.

So I think that it's hard to predict exactly what it will be, whether it will be 1 percentage point lower or higher, because of -- as you call it the event issues. If the government solves all the contracting issues associated with the events, then it will crank up.

So it's just one of those things where it's hard to project exactly, but the variation is not huge. It is 1 or 2%.

But we don't think that, that really indicates any trend.

Sudhakar, I was trying to understand your comment or John's comment, I guess, excuse me, about third quarter contract awards, kind of having the same impact on next year's results as a larger number of contract awards did 1 year ago. Is it because the contracts are kind of shorter duration or something like that, so they're going to be more concentrated in the following year's results?

Can you give me a little bit more color?

Yes, John. And I'm sorry, all I can -- since I better be honest [ph].

No, I think, what happened last year was that we won a number of contracts which is 7, 6, 7-year contract, and this year, we are back to the 5-year contract. So I think they're not shorter and that they are like a 1-year contracts, but they are more normal in the sense of traditional 5-year government contracts or the 3-year energy efficiency contracts.

So I think that, that basically accounts for the difference. Last year when we won almost $500-plus million of work in the third quarter, a lot of that revenue would occur in year 2 and 3.

Here, a lot of the revenue would occur in year 1 and then 2 and 3. And a majority of the revenue will occur in year 1 and then 2 and 3.

So I think that was just -- we have to divide it by 7 and -- to be simple we have to divided it by 7 for certain contracts last year, and here we divide it by 3 or 5.

Okay. So yes, a shorter duration, but it isn't that this quarter is abnormal, that year-ago quarter was longer than normal?

Right.

And then the cash flow guidance is very strong. Is that -- were there any contributions to this year's cash flow that wouldn't persist on an ongoing basis?

This is James. I mean, typically, if you look at our net income and some of the non-cash items and the amortization and so forth, we would expect at our level now that you would have cash flow of $70 million to $75 million.

And really, we are driving above that, due to the fact that we just have improved collections and continue to improve our DSO position. So there's nothing too abnormal other than we've improved cash flow collections a little bit this year and reduced the DSO from 75 to 71 days.

And we expect to continue to stay in that range in the future. I mean, that's kind of the normal range that we anticipate.

Okay. So what is the benefit of that reduction from 75 to 71 days, to kind of get an ongoing cash flow generation capability?

I mean, you're typically speaking to something in the neighborhood of $2.5 million or so per day. That's roughly what it is.

Okay. And then I wanted to ask a question on the endeavor to kind of start a commercial health care practice.

What kind of expectations do you have for that to be a contributor and I think you mentioned payor and providers. Could you just give us a little bit more color on what your plans are there?

Yes. I think we're not starting it from scratch.

There is a $10 million or so run rate business we have currently commercial, which was part of Ironworks. We are just adding more resources, and they already have a strong set of clients, and it's a bigger platform.

So we hope there's more credibility of doing larger projects. So they're doing currently work with a lot of payors and some providers, primarily payors.

And we certainly hope to expand that business going forward. So we've added 2 or 3 folks on the commercial business development sales, commercial sales side of the house.

We think that we can grow the business more rapidly with more resources than has been possible. And we will know more as we invest in it and as it grows.

So we certainly hope for more than 10% growth there. We'll see what happens and we'll report back to you as this transpires.

My last question has to do with your international aspirations. You did gain some scale with GHK.

It sounded like your plans do entail additional investment internationally. Can you, in your opinion, get margin expansion together with that investment?

Or is it more a function of driving growth and kind of trying to just manage profitability at some stable level?

No, we certainly hope for margin expansion. We certainly think that we can get margin expansion as we grow there.

I think we have some scale. We'd like more scale, but we have some scale.

And we think that the margins can be expanded as we grow. So just like we've done here, we certainly hope that we can demonstrate growth and margin expansion both.

Just a couple of things looking at your comments around next year. First, just to talk about continuing to grow next year.

Does that factor in any way any specific planning around sequestration? My assumption is no, since it's such an unknown, but I just wanted to confirm that.

Yes. I mean, all the plan we've done around sequestration is to batten down the hatches and try and control cost on the federal side to the extent we can and watch what happens.

But it's very hard to plan for something which is so uncertain.

No, no. Understood.

And then just on your comment about expecting net income to outpace revenue growth in 2013. Is that the primarily driven -- your expectation that, that will primarily be driven by higher margins?

Does that factor in any share repurchases above and beyond, just maybe offsetting dilution? Any other factors perhaps like tax rate, if you are pushing more internationally?

If you have any comments on that.

Well you wouldn't like my answer but all of the above and we'll tell you more in the 4Q earnings call next year.

First of all on the commercial bookings in the third quarter of $49 million, so book-to-bill was a little below 1. Granted you have a couple of energy efficiency contracts that maybe were pushed out.

But is book-to-bill below 1 unusual for commercial?

No. I think the book-to-bill for year-to-date is 1.23 as we said.

So it's not unusual. To some extent, it is a little lumpy.

But generally, we think that the book-to-bill of 1.2 plus is pretty good. At any time we have hundreds of commercial projects underway, and some -- you win some for longer durations and some for shorter duration.

So I would plead -- my plea to you is not to just look at Q3, but look at Q1 through Q3. And I think that would give you a better run rate of our book-to-bill than just looking at Q3.

Okay. That's fair.

And then how should we think about the timing of a re-acceleration of organic growth in commercial, which you said was slightly negative in the quarter? Would that start next year?

Or can you kind of see it in the pipeline when things roll off or when things start? And do you have pretty good confidence in that re-acceleration?

Yes. I think it will start next year.

I think you should see it starting up again in Q1 of 2013.

Okay. Okay.

And then just lastly on capital deployment, so you're generating a lot of cash, obviously. You're buying back stock but just to offset dilution.

So is there any chance that you would accelerate buybacks or start paying in dividends or is the idea to stockpile cash to -- for future acquisitions?

As we've said before, our capital allocation priorities are obviously investing in business development, acquisitions, stock buyback and then other things, including dividend, as you point out. I think those remain our priorities.

I think, we certainly think that there is a strong pipeline of acquisitions which we could potentially do. Plus we are also doing continued internal investment.

I think, we have good cash flow generation. So most, I think, a good portion of our cash is used also to pay down our debt, and then of course we have the ability to leverage up as we need to.

So I think that those remain our priorities and we will continue to use our ability and our debt capacity to do those things. And I think those remain our priorities.

So that's what, at least, is our current position.

Question is relative to the experience you've had in 2012 and '11 with regards to either contracts that have come to their end and have gone -- business gone away and/or re-competes lost. What is the amount of business in those categories that you've had to replace in both '11 and '12?

Mark, I couldn't offhand tell you. Our re-compete win rates are pretty high, 91%, 92% on a dollar weighted basis.

So if you look at that number, I guess you have to replace the 8% on each of the years. So I think that is the best I can give you just off my head.

Okay. And you did mention one infrastructure contract that was completed.

Do you track programs that aren't evergreen as such and that come to an end that you -- in your business model, you have to replace to get organic growth back to flat?

Oh, yes. We certainly do that.

This infrastructure project is not, as I pointed out earlier, it's not been completed. It's just that they spent $30 million last year and they are going to spend $18 million this year and $15 million next year.

And so we don't know how long it could go on for another few years. So it is.

And then there are other projects which the same company does which we certainly hope to continue to work on. So to some extent, this project is not one of those things which will -- the project itself might start and end, but our relationship with the company will continue and they are spending a lot of money in infrastructure development.

So we think that we can continue to get a stream of revenues from that company in this sort of activity for many years. So I think that -- we certainly track those projects and we certainly look at those and -- to see how we can replace that revenue absolutely.

We are looking at it all the time.

Okay, but you didn't sort of in your -- back of your mind, a level of business that you -- of new business you have to generate to reflect either re-compete loss or things that may be coming to an end that's not a 8%, 10%, 12%, 15% number?

I think that most of our relationships in the commercial arena are ongoing. They are project to project.

But once you to start working for a specific client, that client always has a need to hire consultants all the time and it's sort of the nature of the business. So we certainly have to replace some percentage of projects, which on the infrastructure side, I think, the large project we just have 1 or 2 or 3 projects like the one which I'm talking about, not that scale, but in the $5 million to $10 million range.

And we're constantly having to look to see what else we can do to win other projects as those ones come to an end. That's the normal part of our business.

What the percentage is off the top of my head, I don't know. There's no single contract we have across the company which is more than 4%, around 3.5% to 4% of our annual revenue.

Is that helpful, I don't know whether that's helpful.

Thank you very much for your interest. We look forward to speaking with you next year and in anticipation, Happy New Year, and we'll see you in February.

Thank you.