ICF (ICFI) Q3 2026 Earnings Call Transcript

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DATE

Thursday, Nov. 5, 2026

CALL PARTICIPANTS

• Chair and Chief Executive Officer - John Wasson
• President - Anne Choate
• Chief Operating and Financial Officer - James C. Morgan

TAKEAWAYS

• Revenue -- $470.5 million, up 1.1% driven by growth in state, local, and international government clients.
• Non-GAAP EPS -- $1.98, representing 19% growth due to margin expansion, lower interest expense, and strategic tax actions.
• Adjusted EBITDA Margin -- 11.5%, increasing 10 basis points behind efficient contract delivery and a favorable contract mix.
• Contract Awards -- $746 million, rising 4.5% year over year with new business accounting for more than 60% of awards.
• Federal Government Revenue -- $191.3 million, down 3.5% year over year reflecting 2025 contract cancellations but increasing 3.4% sequentially.
• State and Local Revenue -- $87.9 million, growing 7.6% through the deployment of energy programs and advanced technology solutions.
• International Government Revenue -- $32.5 million, up 12% as framework contracts for the European Union and United Kingdom continued to scale.
• Book-to-Bill Ratio -- 1.59 for the third quarter, supported by $746 million in total contract wins.
• Total Backlog -- $3.5 billion at quarter end, providing visibility into future revenue streams.
• Business Development Pipeline -- $8.2 billion, with $5 billion focused on commercial energy, technology modernization, and disaster management.
• Energy Advisory Revenue -- grew 14.1% reflecting strong demand for grid engineering, transmission, and interconnection planning.
• Fixed-Price Contracts -- 50.2% of total revenue, up from 48.7% due to the company's focus on outcome-based technology projects.
• Effective Tax Rate -- 15% for the quarter, compared to 22.7% last year, following the implementation of strategic tax planning actions.
• Net Debt -- $368 million, down from $447 million last year as strong cash flow funded debt reduction.
• Operating Cash Flow -- $45.5 million, excluding restricted cash, more than doubling from $17.3 million due to lower cash tax payments.
• Adjusted Leverage Ratio -- 1.87x at quarter end, down from 2.06x at the end of the second quarter.
• Full Year Revenue Guidance -- approximately $1.87 billion, similar to fiscal year 2025 levels following lower than expected commercial energy revenue.
• Full Year Non-GAAP EPS Guidance -- $7.10 at the midpoint, maintaining previous targets as higher margins offset revenue shortfalls.
• Utility Program Revenue Impact -- approximately $15 million shortfall in the third quarter, caused by a pause in incremental energy efficiency spending.
• Commercial Energy Revenue -- $140.7 million, representing 88.6% of commercial revenue and growing 1.5% as advisory strength offset utility program pauses.
• Technology Modernization Revenue -- approximately 50% of federal government revenue, focused on mission-critical agency needs.
• Interest Expense Guidance -- $25 million to $26 million for the full year, reduced from previous estimates of $26 million to $28 million.

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RISKS

• Wasson stated, "Most notable among them was the significantly heightened political and regulatory focus on utility bill affordability which moved from a marginal theme in early 2026 political advertising to 1 of the fastest growing issues of the fall campaign," noting that this caused a slowdown in incremental spending by utility clients.

SUMMARY

ICF International, Inc. (NASDAQ:ICFI) reported a return to year-over-year revenue growth while maintaining its full-year earnings outlook despite headwinds in its commercial energy segment. Management reported that the company is experiencing sequential growth in its federal government business and double-digit expansion in international government contracts. The company reported a shift in the political landscape following midterm elections, which executives indicated would provide a tailwind for energy and environmental programs. Strategic focus remains on higher-margin fixed-price contracts and technology modernization within federal agencies, particularly in national security and public health areas.

• Wasson noted that the midterm election results should benefit agencies and reduce the likelihood of impoundments or rescissions for appropriated funds.
• Choate reported that the company is expanding its network of AI partners, such as OpenAI, to leverage computing power while maintaining domain-specific expertise.
• Morgan stated that AI tools are being used to modernize internal processes and help clients better utilize their existing technology environments.
• Management reported that although utility programs faced a sharp fall-off in contract add-ons, the company retained all key utility program clients during the year.
• Choate indicated that the disaster management market has been constrained by funding delays and a slower pace of major weather events.
• The company reported that its work with hyperscalers is an expanding component of its energy advisory practice, focusing on data center energy efficiency and reliability.

INDUSTRY GLOSSARY

• Book-to-Bill Ratio: The ratio of orders received to units billed, used to indicate future demand and growth potential.
• Backlog: The total value of signed contracts that have not yet been fully performed or billed.
• Adjusted EBITDA: A non-GAAP measure of earnings before interest, taxes, depreciation, and amortization, adjusted for non-recurring or non-operational items.
• Demand Side Management (DSM): Programs implemented by utilities to manage or reduce consumer demand for electricity through efficiency or load management.
• Hyperscalers: Large-scale cloud service providers that operate massive data center networks.
• RFI: Request for Information, a standard process used by government agencies to collect information from potential suppliers.
• Impoundment: An act by a President of not spending money that has been appropriated by Congress.
• Rescission: The revocation or cancellation of an appropriation of funds by Congress.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 26 ICF Earnings Conference Call. My name is Lauren Cannon, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a Q&A session. To ask a question during the session, you will need to press *11 on your telephone. You will then hear an automated message advising your hand is raised, To withdraw your question, please press *11 again. Please be advised that today's conference is being recorded. I will now turn the call over to Lynn Morgen of Advisory Partners. Lynn, you may begin.

Lynn Morgen: Thank you, operator. Good afternoon, everyone. And thank you for joining us to review ICF's third quarter 26 performance. With us today from ICF are John Wasson, Chair and CEO Anne Choate, President and James C. Morgan, Chief Operating and Financial Officer. 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 November 5, 2026 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 ICF's CEO, John Wasson, to discuss third quarter 2026 performance. John?

John Wasson: Thank you, Lynn, and thank you all for joining us this afternoon to review our third quarter results and discuss our business outlook. Also, to briefly comment on Tuesday's election, it is clear that democrats have won significant majorities in both the US Senate and the US House of Representatives. This change should benefit agencies and increase the likelihood that money that is appropriated by Congress will be fully spent. Given ICF's diversified portfolio, we also see the midterm results as a tailwind for our broader energy and environmental business.

Let me start by reviewing several positive highlights of our third quarter performance First, the third quarter marked a return to year on year revenue growth for ICF which we expect to continue in Q4 and into 2027 Second, revenues from federal government clients increased 3.4% sequentially as anticipated and we experienced 7.6% year-on-year revenue growth from state and local clients and 12% revenue growth from international government clients. Third, contract awards were up 4.5% year-on-year representing a book-to-bill ratio of 1.59 for the quarter and 1.11 for the trailing 12 months. Other forward looking metrics including our $3.5 billion backlog and our $8.2 billion business development pipeline were all supportive of future growth.

Lastly, our adjusted EBITDA margin was 11.5%, 10 basis points ahead of last year and notable given that it was achieved on lower than expected revenues. Our margin strength, together with a lower tax rate, lower interest expense and a reduced share count enable us to report 19% growth in non-GAAP EPS in the third quarter and have enabled us to maintain the midpoint of our non-GAAP EPS guidance range for 2026 of $7.10 representing 4.9% year-on-year growth on full year revenues that we now expect to be similar to last year's level.

Our lower than expected third quarter revenues was a result of a confluence of factors that constrained our commercial energy revenues Most notable among them was the significantly heightened political and regulatory focus on utility bill affordability which moved from a marginal theme in early 2026 political advertising to 1 of the fastest growing issues of the fall campaign. In fact, spending on house, senate, and gubernatorial ads mentioned utility, electric or electricity bills, increased from $25 million in Q1 to $47 million in Q2 and almost in Q3 to $138 million with another $96 million spent just in the first 16 days of October.

This has put substantial near term pressure on utilities to further refine plans to address affordability which has recently caused our utility program clients to abruptly pause some incremental energy efficiency initiatives. Anne will review the details in her remarks later in the call and discuss the opportunities we are pursuing in the commercial energy arena including ways our advisory energy practice is supporting utility clients on the affordability issue. In summary, we expect commercial energy to continue to be a long term growth driver for ICF given our clients needs to deliver reliable, affordable energy, which is tied to many of the services we provide.

Over the near term it is likely to grow more slowly than it has historically. The remainder of our business performed as expected, and we continue to benefit from the diversified and integrated portfolio that distinguishes ICF drives our strong new business success. As well as our efforts to position our federal portfolio to win awards at agencies with increasing budgets. We are seeing greater opportunities to bring insights and capabilities from across client categories and domain expertise. To help clients address complex challenges. 1 good example of the benefits of our innovative model is our work with the Department of Energy in assessing the market, regulatory grid operational changes required to integrate aggregated distributed resources while maintaining reliability.

We have taken that expertise directly into our commercial utility work helping utilities develop the strategy operating capabilities, regulatory frameworks needed to make these resources work in practice. Another example is how we are bringing together disaster management energy, utility and program management expertise to deliver energy efficient housing with disaster-impacted homeowners, under a 5-year contract awarded by California's RISE program, an initiative funded by the California Public Service Commission ICF is helping eligible property owners rebuild all electric, energy efficient homes following natural disasters.

And in the third quarter, we won 2 new multi-year work orders under the County of Los Angeles Energy Support Services Master Agreement with a combined ceiling value of $70.9 million ICF will serve as 1 of 3 implementers supporting the Southern California regional Energy Networks public sector energy efficiency programs. Leveraging our track record as a leader in energy efficiency programs for commercial clients, to win more on this important state government contract. In the federal arena, we continue to pivot to align our portfolio with federal agency spending priorities, As you can see from our release this quarter, we have been successful in winning several new awards with agencies responsible for national security, public safety, and law enforcement.

As I mentioned earlier, we ended the third quarter with a business development pipeline of $8.2 billion after we won $746 million in contracts in the quarter. Opportunities in the key long term growth markets we identified namely commercial energy, technology modernization, and disaster management related state and local government work accounted for approximately $5 billion or 60% of that pipeline supporting our expectation for continued growth. In these markets.

Summing up the quarter, we were pleased that our revenues demonstrated the return to year-on-year growth we anticipated would begin in the second half of this year Looking ahead to the fourth quarter, we expect year on year revenue growth across our client set, with revenues from commercial energy clients rebounding to mid to high single digit growth. With respect to capital allocation, we continue to review acquisition opportunities, but we remain very disciplined and are focused on transactions that have the potential to drive meaningful revenue synergies and that will be accretive soon after completion. I will now turn the call over to ICF's President, Anne Choate for a business review. Anne?

Anne Choate: Thank you, John, and good afternoon. I am pleased to present a business review of ICF's third quarter results while providing additional color on the factors that reduced our expected revenue from utility programs and highlighting the growth opportunities we see ahead across the full portfolio. I have organized my remarks by client category, starting with commercial, of which nearly 90% is represented by commercial energy revenues. Before it is overshadowed, let me touch on our energy advisory work, where revenues increased 14.1% in the third quarter and 10.5% year-to-date. We experienced particularly strong client demand this quarter for our support on grid engineering and planning, transmission and interconnection, resource adequacy, and storage.

Some of these services relate to the affordability issues that John mentioned, and provide opportunities for ICF. Our work with hyperscalers is small but growing component of our energy advisory practice. We are advising on a broad set of issues created by the scale of data center development, including energy efficiency, community impacts, power supply, and reliability. And we gain valuable perspective on pressing data center issues through the assistance that we provide to states, counties and other local governments as they evaluate the economic, energy, infrastructure, and community impacts of data center development. Now to our utility programs, which represent the majority of our commercial energy work.

As John mentioned, the large variation between our third quarter revenue projections and revenue performance reflected a combination of factors that materialized quickly during the second half of Q3 and continued to impact our clients. The most significant factor relates to political pressure on utilities and regulators. This heightened pressure is a consequence of the focus on energy affordability amid drastic increases in energy demand and inadequate enabling infrastructure. Political pressure on the issue of affordability has grown exponentially, driving several utilities to pause incremental spending on certain demand side management programs. While they consider how to best deploy these programs to address the affordability challenge.

This shift caused a sharp fall off in the typical contract add ons that we capture in the second half of the year. The pause in add ons, combined with some slower than anticipated ramp up on contracts, were the main driver of the miss. Costing us approximately $15 million in third quarter revenues, and what we would expect to be a similar amount in the fourth quarter. While our utility clients navigate this swift uptick and affordability concerns, we are leaning in to support them in new and expanded ways. We have built a meaningful pipeline in areas where we see utility spending increasing, including in audits and weatherization, virtual power plants and demand response opportunities.

These opportunities, when you pair them with innovative marketing campaigns that reimagine the utility customer relationship provide solutions that support utilities as they meet this moment. Keep in mind that energy efficiency is 1 of the most economical ways to increase electricity capacity, and therefore it is key to any long term solution to address increased energy demand and affordability for customers. Commercial energy wins accounted for approximately 26% of year-to-date contract awards, and commercial energy opportunities represent more $1.6 billion of our pipeline at the end of the third quarter. Indicating strong underlying momentum. Contract wins are on track to exceed our annual plan range, and our win rates improved across every measure.

Lastly, our utility programs practice has taken away a handful of contracts from competitors this year. adding 6 new portfolios and 10 new logos. During the same timeframe, we can report successful retention of all key utility program clients. Now, I will move to our state and local portfolio. Third quarter revenues from state and local government clients increased 7.6%, demonstrating ICF's ability to leverage its deep domain expertise and robust technology capabilities across its client set. The projects driving growth in this client category include developing and managing energy programs in the Northeast and California, where we are seeing state agencies step in to support energy efficiency efforts as a complement to or an alternative to utility programs.

Other drivers of growth in this client set included deployment of advanced technology solutions to several states and territories and providing rural health services at the state level that were formerly administered by the federal government. During the quarter, ICF supported more than 50 active disaster recovery programs in more than 20 states and territories. While we continue to view the disaster management market as a driver of long term growth, funding delays and the slower pace of major events have constrained near term activity in this arena. 1 recent development that could unlock opportunity is the presidential declaration for hurricane Isaias recovery support in Florida, where we hold a relevant prime contract.

In the third quarter, we won a large number of new on call contracts with state and local governments, bringing our total to approximately 70 contracting vehicles, a 30% increase over where we were last year. These contracts accelerate our ability to support current and future state clients that may need additional capabilities and capacity at the time of a major weather event. And to provide additional resources if a reduced federal support model is implemented. State and local government opportunities represented approximately $1.1 billion of the total pipeline at the end of the third quarter. Moving to our international government work, we continue to see strong growth in the third quarter with revenues increasing by 12% year-on-year.

This growth reflects our team's effective execution of the significant contracts that we have won over the last 2 years serving the European Union and the UK government. ICF has been successful in key recompetes pursued to date, and the pipeline remains healthy across the business, supported by continued demand for ICF's integrated policy communications evaluation and implementation expertise. Lastly, I will talk about our work with US federal government clients. We were pleased to see the 3.4% sequential growth in revenues in the third quarter. Procurement activity is improving, but bottlenecks continue to constrain award activity. And protests of large opportunities are common.

Within this environment, we are framing our business development initiatives around rapid prototyping and demonstration of capabilities. We continue to see strong demand for technology modernization with agencies maintaining their focus on mission critical modernization needs. As we align our federal portfolio around administration priorities, we have increased our focus on the Department of War, particularly non mission areas as well as national security and the Department of Transportation. We are seeing tangible progress from these efforts within DOW, we have responded to multiple task order opportunities and are beginning to see awards come through, expanding our footprint and building a solid pipeline of new opportunities.

We are also gaining ground at the Department of Health and Human Services agencies, where we are winning new work and recompetes in child care capacity building, public health surveillance modernization, and work for the Office of Dietary Supplements and the National Library of Medicine. We also recently won an HIV elimination project supporting the Office of Infectious Disease Prevention and HIV Policy. In summary, the majority of our revenue base performed as expected in the third quarter. In utility programs, we understand the challenges our clients are facing, and we are working with them to cost-effectively, reliably, and affordably deliver energy to their customers.

Our business leaders are collaborating across client categories, and are committed to bringing the breadth of ICF's expertise along with speed and agility to every client program and project. Now I will turn the call over to Chief Operating and Financial Officer, James C. Morgan.

James C. Morgan: Thank you, Anne. Good afternoon, everyone. I will provide some overall comments regarding our top and bottom line performance, as well as cash flow. And then discuss our third quarter results financial results in more detail, and walk through our updated outlook for the year. As expected, we returned to year-over-year revenue growth in the third quarter, Revenue was up modestly led by state and local and international government clients. Federal government revenue was in line with our expectations. Growing sequentially and remaining on track to return to year-over-year growth in the fourth quarter However, while revenue from commercial energy clients grew, the rate of growth was below our expectations due to the near term challenges as previously discussed.

That shortfall is the primary cause for our lower revenue outlook for the full year. We are pleased that our profitability continued to improve gross margin up 50 basis points year on year and adjusted EBITDA margin up 10 basis points. We delivered these gains while continuing to invest in the business. As we expected, indirect expenses were slightly higher this quarter, we expect to keep reinvesting in our key growth areas while we modernize our systems and apply AI tools across our internal process to drive efficiencies. At work for clients, our AI investments are strengthening our ability to deliver complex data survey and program support work more efficiently.

Importantly, AI is not replacing our subject matter expertise It is augmenting that expertise, allowing our teams to move faster, modernize established processes, and help clients make better use of the technology environments in which they have already invested Margin expansion in the third quarter together with lower interest expense and a lower tax rate, allowed us to maintain the midpoint of our non-GAAP EPS guidance for the full year of 2026. Despite a lower revenue forecast. We are also maintaining our operating cash flow guidance as our cash generation has been strong year to date with operating cash flow excluding restricted cash more than doubling from last year.

Now to discuss our third quarter results in more detail, Total revenue increased 1.1% to $470.5 million up from $465.4 million in last year's third quarter. Revenue from state and local clients increased 7.6%, and international government clients were up 12%. As our EU and UK contracts continued to scale. Together, these gains more than offset a 3.5% year-over-year decline in federal revenue. Which reflects last year's contract cancellations and slower procurement environment. Sequentially, federal revenue increased 3.4%, representing the third consecutive quarter of sequential growth. Led by our technology modernization work. And we continue to expect year-on-year growth in federal revenues in the fourth quarter.

While the year over year comparisons benefit from the impact last year's government shutdown, we expect this year's fourth quarter revenues to show positive growth beyond approximately $12 million in federal revenues that we lost during last year's fourth quarter shutdown. Total commercial revenue increased 1.5% a remaining about 1-third of total revenue. Consistent with last year's third quarter. Our gross margin expanded 50 basis points to 38.1%. Benefiting from efficient contract delivery and a favorable contract mix. Higher margin fixed price contracts represented 50.2% of our third quarter revenues. up from 48.7% in last year's third quarter. Fixed price and T&M contracts together represented 94.3% of third quarter revenue up from 92.9% last year.

Indirect and selling expenses increased 2.8% to $125.6 million representing 26.7% of total revenue compared with 26.3% a year ago. And consistent with our expectations. Gross margin expansion more than offset the slightly higher indirect and selling expenses and EBITDA increased 1.6%. With adjusted EBITDA up 1.9% to $54.2 million Adjusted EBITDA margin expanded 10 basis points to 11.5%, consistent with the 10 to 20 basis points expansion anticipated for the full year and that we have consistently guided to as our annual objective. Net interest expense fell 18.9% to $6.4 million as we continue to use our strong cash generation to pay down debt.

Our tax rate for the quarter was 15%, compared to 22.7% a year ago, Our tax rate is benefiting from various strategic tax related actions, And as we discussed on our last call, the third quarter of this year was expected to reflect the largest discretionary tax benefit related to those actions. We expect to realize further benefits from these actions and now expect our tax rate to be approximately 19% for the full year, down from our previous guide of 20.5%. The effective tax rate management along with higher adjusted EBITDA and lower interest expense and a lower year-over-year share count, drove strong bottom line growth.

Net income increased 33.5% to $31.7 million and diluted EPS increased 37.5% to $1.76 while non GAAP EPS increased 18.6% to $1.98 Operating cash flow was $35.2 million in the third quarter, excluding restricted cash related mainly to our utility programs, which fluctuates with the timing of incentive payments to utility customers, operating cash flow was $45.5 million up from the $17.3 million a year ago. The first 9 months of the year operating cash flows totaled $131.7 million. Excluding restricted cash, year-to-date operating cash flows were $88.7 million up from the $30.2 million in the first 9 months of 2025, on a similar adjusted basis.

This improvement in year-to-date operating cash is being driven by lower year over year cash tax payments associated with our ongoing tax strategies as well as timing of vendor and payroll payments. We continue to expect operating cash flow, excluding restricted cash, of $135 million to $150 million for the full year. Our cash generation continues to fund debt reduction, as net debt was $368 million at quarter end down from the $447 million a year ago and $403 million at the end of June. And our adjusted leverage ratio declined to 1.87x from 2.06x at the end of the second quarter.

Consistent with what we said on our last call, we expect our leverage ratio at the end of this year to be roughly 1.6x. Absent any acquisitions or share buybacks. Approximately 47% of our debt carries a fixed rate. DSOs came in at 75 days, versus 77 days a year earlier Capital expenditures were $5.6 million, consistent with the prior year. Our balance sheet gives us considerable flexibility and our capital allocation priorities have not changed. And those are funding organic growth paying our dividend, buying back shares opportunistically, pursuing acquisitions, within our long term growth markets. Today, we announced a quarterly dividend of $0.14 per share payable on 01/08/2027, to shareholders of record on December 4, 2026.

Now to our outlook. We are updating our full year revenue guidance to reflect lower than expected third quarter commercial energy revenue and our pared down expectations for fourth quarter. We now expect revenue to be roughly in line with fiscal year 2025, at approximately $1.87 billion, which assumes low to mid single digit growth in commercial energy for the full year. That said, our underlying demand metrics for the longer term remain healthy. More specifically, our book-to-bill ratio was 1.59 in the third quarter and 1.11 on a trailing 12 month basis. And third quarter contract awards increased 4.5% year over year. With new business accounting for the majority of the awards.

Our business development pipeline stood at $8.2 billion at quarter end. With respect to profitability, we expect GAAP EPS of approximately $5.95, inclusive of the impact of $0.11 of year to date special charges Non GAAP EPS is projected at approximately $7.10, which is the midpoint of our range as higher margins lower interest expense, strategic tax planning actions have offset the impact of lower revenue. As I noted earlier, we continue to expect operating cash flow of $135 million to $150 million excluding the impact of restricted cash. To help with your financial models, our guidance for a few additional metrics is as follows.

Depreciation and amortization is now expected to be $22 million to $23 million compared to our prior range of $22 million to $24 million and amortization of intangibles is expected to be $23 million, the midpoint of our previously provided range. Interest expense is expected to be between $25 million and $26 million compared with prior guidance of $26 million to $28 million We anticipate full year capital expenditures to be $21 million to $22 million versus the prior guidance of $23 million to $25 million As I mentioned earlier, we now expect our full year tax rate to be approximately 19% and we continue to expect a weighted average share count of approximately 18.2 million.

Now I will turn the call back to John for his closing remarks.

John Wasson: Thank you, James. ICF is on the path to second-half year-on-year revenue growth. And we see positive momentum as we head into 2027. In addition to the change in the political landscape, several factors support our confidence in the future notably our consistently strong margin performance, our considerable backlog, the strength of our new contract awards and our robust new business pipeline. I would like to take a moment to recognize the hard work and dedication of our people, who show tremendous commitment to our clients and to ICF. They set us apart and drive our success. And with that operator, let's open the line for questions.

Operator: Thank you. At this time, we will conduct a Q&A session. As a reminder, to ask a question, you will need to press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again. Our first question comes from the line of Jason with Canaccord Genuity. Your line is now open.

Jason: Good evening, and thanks for taking my questions. To start, in the prepared remarks, talk a little bit about the midterm elections. And being a tailwind to the business. I was hoping you could spend a minute or 2 talking about the comments surrounding sort of fully spending that money appropriated by Congress and just a little bit more about how you expect the phasing and timing of when ICF may benefit from that. Thanks.

John Wasson: Okay, sure. And so as I obviously talked about in my remarks, I think we see a number of positive impacts for ICF's business. Associated with the election. First, I would say certainly as a minimum, I think we believe it will ensure that we see no further unexpected budget cuts or cancellation of any key civilian programs going forward given democratic support for such activities. Obviously there will also be compromise between a democratic congress and republican president to pass annual budgets signing into law certainly under the new Congress.

And with that, we would expect increases or decreases in civilian budgets to move in the same way or at the same levels as percentage change in defense national security budgets, going forward And certainly I think this change should benefit budgets and civil and agencies and increase the likelihood that the monies appropriated will be fully spent. And by that, I mean, there will be that the likelihood of impoundment or rescissions will be reduced, I also think that given our diversified portfolio, we will we should see some midterm benefits from the midterm elections around tailwinds for our broader energy environmental business.

Much of that is focused on either utility infrastructure, or changes going on in the energy industry renewable energy and other issues that I think could see some benefit from the election. there is always the possibility that the, you know, negotiations around the budget could also result in compromises that result in restoration of civilian programs or programs that have been simply cut back in the last couple of years. We will have to see how that plays out. And you know, I would just say that would expect Congress to assert its authority and responsibility for the federal purse, as I say, particularly with respect to impoundment and rescission type activities. When would we see the benefits?

I mean, could be as early as 2027. Depending on how the budget negotiations work during the lame duck session and what is required for next year. And so it could start in 2027, You know, it is hard for me to provide specific you know, quantification of the potential benefit, but I think there should be benefits as we look to the future. We are certainly going to stay close to our clients and stay on top of it. Top of budget developments as we look forward. Okay. that is very helpful. Thank you. And 1 quick follow-up.

You talked a lot over the past quarter or 2 about integrating AI into your go to-market strategy in federal tech modernization. You recently announced that you became an OpenAI Select partner Just hoping you could help frame the commercial opportunity that comes from that relationship. And whether this is more an enhancement to existing engagements or an avenue for some incremental stand alone opportunities. Thanks.

Anne Choate: Sure. Would you like me to take that? So, yes, we are working to expand our network of partners in AI, and OpenAI is 1 example, I think that our opportunities there are expanded through those partnerships. I think that firms like OpenAI benefit from the services and the experience that we bring.

In fact, what we are seeing is that when we when we are able to bring sort of an agnostic approach to understand their challenge, and then go back and assemble from our partner network the right technologies the clients themselves appreciate it and we have the we have the benefit of all of the computing power at the technologies that these partners can bring to the forefront. Even though they do not have the same sort of domain expertise that some of the same depth of understanding of some of the internal workings of these agencies. So it is been a good partnership, and I think we are seeing that as an avenue for continued growth.

Jason: Great. Thank you very much.

Operator: Thank you. Our next question comes from the line of Tim Mulrooney with William Blair. Your line is now open.

Tim Mulrooney: John and James, good afternoon.

John Wasson: Good afternoon, Tim.

Tim Mulrooney: Yes, 19% EPS growth in the face of some of these continuing challenges. I think that is pretty strong execution in the quarter. So congrats on that.

John Wasson: Thank you.

James C. Morgan: Thanks.

Tim Mulrooney: So first, I want to dig into commercial energy a little bit more, Anne. You talked about utilities shifting spending priorities for certain existing utility programs, I think, around energy efficiency, How much of your commercial energy business are these energy efficiency programs? Versus advisory and other things? And you know, why would not energy efficiency resonate as well with utility clients right now given higher energy costs are such a major issue right now.

Anne Choate: Well, that is a very good question. So what I will tell you. The vast majority of the commercial energy revenues are related to those energy efficiency and whether it is traditional demand response programs or demand side management programs or the more nontraditional sort of demand response virtual power plant type programs. That expanse of programmatic support that we provide to utilities does make sense in this moment. However, the scrutiny on utilities for any spending that they are doing that might impact a customer bill, has been intense recently, as you probably have read.

And so it is I think that what we saw in the third and fourth quarter and the lack of these incremental add ons was a response to that pressure because any of the kind of flexibility that we have seen in the past or the kind of urgency to meet a particular kilowatt hour saving target or maybe a greenhouse gas emission reduction target was not as intense as it was to make sure that you did everything you could to keep those bills low.

And so that is what we are trying to navigate right now, is the long term rational need for these programs with the short term conflation of these programs and this small public surcharge that goes on the bill with the other conversation, which is the utility business model as a whole and how. and the need for additional energy infrastructure may or may not be being passed on to customers. it is a completely separate process, completely separate bucket of funding, but in the sound bites, it is been hard to separate.

John Wasson: I mean, I would also just add is, like, there is nothing Anne said that-- I mean, part of what I also think is going on here with pausing some of this spend is, I think clients are also trying to figure out given the set of programs they can run, under these public goods charges, efficiency, flexible load management, low income, weatherization, should they you know, They are taking a step back and saying, can I continue to get the savings but shift the spend that also helps on the affordability and perhaps puts more money and lower income or other of their customers?

And so I think a bit of that is also going on is rather than plussing these programs up and just keep driving them hard, let's step back here and think about that too. And so think that is also playing into this But it is. It is true that, you know, this public goods charge you know, that shows up on the bills is actually quite small for any customer. I think it is pennies on any 1 bill. But it is a lever that the Public Utility Commission could look at and has control in the short run to demonstrate that they are aware of the affordability and looking at all of the expenditures.

Most of the issue is not the vast majority of the issue is who is gonna pay for the generation and who is gonna pay for the upgrade to the grid and how's that gonna happen? And that is also discussed in the regulator having, but that is a more complicated problem that it you know, that is going to take a longer time frame to solve And so I think that is also part of what is going on here, Tim. there is no question that if you step back in the long run, you are gonna solve this problem, energy efficiency program should absolutely be core to it. Some of the most cost effective programs.

And I think everybody who is looked at this issue agrees. You are going to need everything you can get to solve this problem. As many forms of generation as you can and you need to push these programs. But this became a white hot political issue as we got into the midterm elections after Labor Day. And so the focus and the focus on the bill and, you know, and on affordability has been very high here in the short run.

Tim Mulrooney: Okay. Yeah. Thank you for the detail. This does sound like maybe it is more of a shorter term thing and coinciding a little bit with the midterm and there will be a refocus maybe on longer term cost effective programs as, you know, as we move into 2027.

Anne Choate: Yeah. And so, Tim, along those lines, we have. We have seen it before. Come and go. And so, you know, in a very, very limited way. During 1 of the gubernatorial elections a couple of years ago. And so we feel, as you do, that this is that the elections particularly turned up the dial. it is not that we have been talking about affordability on these calls. We have been talking about it with our customers for several years. We have moved our solutions in the direction of those weatherization audit programs. The programs we believe in the long run are going to be most cost effective.

So it is not to say that there is not a shift happening in terms of how we can support the utilities, but this spike that we experienced, you know, think was highly correlated to the politics of this midterm season.

Tim Mulrooney: Okay. that is really helpful color. Thank you guys on that. And then if I could just squeeze 1 more quick 1 in James. The gross margin was quite strong in the quarter, up 50 bps. Year over year Can you just dive in a little more detail on what the primary drivers of that were? And do you think that strong level of profitability can carry into the fourth quarter?

Analyst: Are there other, you know, seasonal or other factors we should be aware of?

James C. Morgan: Yeah. I mean, I think it is no 1 single thing, but the overall thematic is that we have just we continue to make sure that we are very disciplined on how we manage our programs. And certainly as you get a larger and larger percentage of your programs that are fixed price, that effective management certainly helps improve profitability. So I think that is part of it. And if we look at our full year, we expect our gross margins improve slightly from year over year, maybe 30 bps range, something like that. And I would expect that as we move forward and move into the next year, and we will continue to see.

There will be some variation, as you would expect, quarter to quarter depending on which programs are more rapidly being worked on versus others. But and the timing of pass throughs and things of that nature. But I think the overall trend will be that we will be able to continue to try to drive some improvement there. At the end of the day, we are obviously very tightly focusing on managing margins at the EBITDA level and continuing to drive that 10 to 20 basis points of margin improvement year over year which certainly we are continuing to target this year and into the out years.

Tim Mulrooney: Understood. Thanks, guys.

John Wasson: Thank you.

Operator: Thank you. Our next question comes from the line of Tobey Sommer with Truist. Your line is now open.

Pebba: This is actually for Pebba on for Tobey. I apologize if you covered this in the prepared remarks Can you maybe frame what you are assuming in Q4 for some of the deferred kind of energy projects do you think that kind of rebound sequentially? Or remains at more of a low level and it is more of kind of a 2027 thing as utilities figure out their priorities and budgets.

James C. Morgan: For the fourth quarter, we are not sure if we covered this directly, but what we are thinking is that with fourth quarter, we are going to be more of the high single digit growth rate in the commercial area. I think we should mid to high single digit.

John Wasson: Mid to high. Yep. Fourth quarter. Okay. So we will see a rebound there. I think we have assumed with that we will still be impacted by the Yeah. that is that is that is assuming that this pause on some of the. Right, the impacts will continue. They will continue to the end of the year and you know, and so that is what we have assumed through the end of this year. Okay. No, all that makes sense. And there is, you know, nice quarter for the bookings, it makes a ton of sense you would benefit from the midterms and terms of some of the kind of priority shifting.

But wanted to ask if you had any kind of detail or thoughts on what next year might look like for the federal business and what that business could potentially grow at next year based on what you are seeing today?

Analyst: I mean, I think as we look at 2027, if I were to give you an early preview, I would say we expect to grow across all of our client categories next year. So federal, commercial, state, local. International for 2027, As I said, we have said that we will have second half growth. We should exit 2026 with a growth rate of about 4%. company's level for the second half of 2026. That includes normalizing for last year's government Q4 government shutdown, that is basically 4% organic growth you know, normalizing for the shutdown. I think that is a indicator of our growth potential or our actual growth as we head into 2027.

I think it is a little too early for us to provide specific guidance We just obviously had the election. We are winning the outcome of the federal budget. For next year and know, we have the short term affordability issue. But our metrics looking forward are very solid, both book-to-bill, backlog, pipeline. We will all obviously cover our guidance and our and to your call, but so we certainly expect to grow and, you know, I think that I do not know if you have to say anything. Do we want to say about the For next year, I mean, for the federal government. I think we provided specific guidance for next year.

Anne Choate: Just to add a little bit of color on federal. So the outlook for federal is stable. I think we have seen we are encouraged by a healthy award, you know, bit of an award activity that happened at the close of the government fiscal year. We definitely have seen the market improve and the cadence of RFIs that are followed through with an award, it is become-- it is not predictable. it is less chaotic than it was. And as John said, we are looking for year-over-year growth there. In the federal. Space.

Analyst: Oh.

Pebba: Okay, more-- I appreciate all the detail there. Yeah. Thank you for taking the questions.

James C. Morgan: Thank you.

Analyst: Sure.

Operator: Our next question comes from the line of Kevin Steinke with Barrington Research. Associates. Your line is now open.

Kevin Steinke: Thank you. Good afternoon. Just wanted to follow-up on the commercial energy discussion. With regards to the public goods charges, funding the energy efficiency programs. Are you actually seeing some of those charges ripped off consumers' bills? And if so, you know, I mean, how easy is it to remove those charges? And how easy is it to get them back on?

Anne Choate: If utilities wanted to continue funding the energy efficiency program So maybe I will start and I will start.

John Wasson: And if you have anything you wanna add, you can. So just to be clear, when we talked about our commercial energy results, we did not lose any programs. We have not had programs go away. It was that we did not get add ons or mods on the programs that we already have under contract, but that is typical for us to get those mods and add ons. But as you talk about the public good charges and the you know, the effects there, I think we have seen. We have not seen public good charges be removed from utility customers' bills.

We have seen some of the program budgets go forward with a lower budget than in a previous year. And so that is the and we also see, you know, some other states you see that they have increased the program spending. So really is very state specific. And I think that it is going to be interesting to see how you know, the activities of earlier this week you know, impact how states wanna go forward because it is.

You know, they are trying to balance a number of priorities, whether it is affordability, is at the forefront obviously this fall, but also some of these other priorities which you know, can swing in terms of their rank order on that list, whether it is energy efficiency or energy conservation, or jobs, clean energy jobs or energy justice or climate or whatever. So that is what we are watching. Okay, yep, that makes sense. that is helpful.

Operator: Yeah, go ahead.

Kevin Steinke: Okay. Well, I have another couple of questions here. So, yeah, you. I think on your last call, you talked about targeting mid to high single digit revenue growth in 2027. Just from the commentary here, seems like that it is probably less certain realizing that you have not given guidance and you are still working through the budgets and all that. But I just kind of trying to frame what you had said before compared to kind of the commentary today.

John Wasson: Yeah. I mean, I would. I think you know, I think the comments I gave took you to our thinking about 2027 today given you know, the election, I am waiting to see what the federal budget plans and what, you know, if this issue we have had with not getting the plus ups with the energy. You have seen it that clears or improves by the end of the year. So I think we are gonna wait to see that to define any further updates Kevin. I mean, I think as I said, we will exit the year growing 4% you know, and I think that is a that is good momentum and we will update the guidance.

4% for the back half of the year. Right. For the back half of the year. Which would be you know, in the range of mid single digit But we will we will see how the budget shake out and where we are at this.

Kevin Steinke: The. You know, the issue we are having with these plus ups being held up on our energy efficiency work and provide for the guidance in our next call. Okay. Very understood. And maybe just last 1. 1 last 1 here. Just you talked about focusing more on defense and national security with your IT modernization services in the federal arena. Maybe just give us a sense for the size of the opportunity there and, you know, I would assume there are some pretty well established competitors there and just kind of how that looks from a competitive standpoint.

Anne Choate: Yeah. So in the. In that area, obviously, Department of War, Department of Defense is a massive market, but we are not trying to become a defense contractor. In fact, what we are trying to do is to take the services in the areas where we have specific expertise and really a brand that is recognized into non mission critical areas of DoD. So childcare is an example of that. there is some other places where we have seen that our skill sets seem to match up well as well as the modernization. But modernization as it relates to some of those same topic areas. And so that is national security is another area.

We know that we feel that IT and additional modernization are sort of bipartisan priorities. I mean, obviously we have been doing for civilian agencies as well, but over the course this year, we really did make a push into some of these others and I think we are starting to see traction there.

John Wasson: Try to think of anything I So I think that is right. I mean, I think we are not working in the core you know, working in programs that kind of across DOD kind of leverage our traditional support services, child care, mental health, health, public health, substance abuse, suicide, leveraging systems, leveraging technology, to support those kinds of activities. So you know, I think that is when the right opportunities come along, we can be quite competitive because we will have the technology capability and we have you know, the programmatic or domain expertise to deliver those kinds of systems.

Kevin Steinke: Okay. Yeah. That makes sense. Thanks for taking the questions.

Operator: Thank you. As a reminder, to ask a question, please press *11 on your telephone and wait for your name to be announced. Our next question comes from the line of Marc Riddick with Sidoti. Your line is now open.

Marc Riddick: I wanted to see if we could touch a little bit on a couple of areas that maybe we have not as of yet in the call. Talked a little bit about the international marketplace and what you are seeing there. It seems as though there is a fairly solid growth level on international. And maybe you could talk a little bit about the catalyst that you are seeing there. And then I have a follow-up after that.

Anne Choate: Sure. So, yes, it is been a great year for the nongovernmental team. We have had significant trajectory that is sort of across that non US government business. In particular, we have been pursuing large recompetes successfully and then new business contracts for the main customers there, the European Commission and its agencies, and then also the UK government. A lot of the growth that you have seen over the year has been activation of these large framework contracts. That are on topics like media relations, events, monitoring and evaluation of government services, And then we have seen an interest in training as an area of significant growth.

We have a new contract to deliver training to the Director General of the European Commission which is pretty exciting. And so anyway, that is, there is been a very positive trajectory there. And I think that we are also seeing, as we have ramped up these programs, I think there is a risk that we had so much growth in a short period of time, but that client satisfaction has been excellent. Partnerships seem very strong, and the outcomes of some of these, you know, outcome oriented projects have been fantastic. So it is-- she's been doing a great job.

John Wasson: Yeah. The only thing I would add to that too is that even as we have been winning this work, these contracts and performing well on them, we still have a very, very healthy pipeline there. I mean, the pipeline that they have of opportunities to go after is the highest level it is been at in the last several years. So Yeah.

Anne Choate: And the other thing that is interesting there is that we have had luck this year in combining some of the policy expertise alongside some of the campaign support, and that is been a benefit to the to the clients.

Marc Riddick: Great. And then I wanted to shift on to cash usage and prioritization. Maybe you could talk a little bit about how your feeling about the acquisition pipeline and what is out there currently and as far as valuations and the like. But then also, comfort levels, as you know, as. You know, there is been, you know, debt paid out and the like. I was wondering if you could talk a little bit about comfort levels and, I guess, overall you know, acquisition appetite these days?

James C. Morgan: I think the acquisition environment is. there is obviously we are very active looking for opportunities that are in our growth areas and it makes sense for us to get them at the right price, the right cultural fit, the right strategic fit. And obviously, it has to, as John mentioned in his prepared remarks, that we are looking to see that they can be accretive in the short term at the same time So, as far as prices, what we have been seeing is they have-- yeah. They are still pretty frothy, I would say, within the energy space recently. And that space still continues to be as you would expect, a little bit hotter than the other areas.

And with regard to. If you think about the technology modernization space, it is pretty much where you would expect them to be somewhere in the kind of low double digit range on multiples. So that is what we are seeing there as far as far as our comfort level, You know, as we talked about, we are looking at having a leverage ratio at year end if we do not do any further-- or do any acquisitions or significant buybacks or anything of that nature, we would be at roughly 1.6x You know, I think that the synergistic value and the opportunity for a potential acquisition, I think we would be willing to go to the lower 3 times.

But that is so that gives us plenty of capacity though to go after a fairly sizable acquisition.

Marc Riddick: Okay. Excellent. And then there was, I did wanna touch a little bit on state and local catalysts that you are seeing, and maybe-- oh, that was the other thing I wanted to ask about. The, while there is a lot around elections, I was wondering if there were any particular funding measures that we should be thinking about, aware of, or that kind of, you know, maybe flew under the radar that you view as opportunistic for ICF? Thanks.

John Wasson: I think it is early for me to provide you with some sort of definitive answer there. I know that there was something we were following in Florida amendment 3, but we do not expect that is gonna have material near term impact on ICF. It was you know, it had the potential to constrain local government spending because it was gonna increase homestead deductions for certain property taxes. But, anyway, we thought about it. we do not see-- you know, In the last 2 days. We have not come up with anything, so that is 1 that comes to mind. But I am sure that as we unpack all this, we will have more to say.

Marc Riddick: Got it. I appreciate it. Thank you very much.

Operator: Thank you. I am showing no further questions at this time. I would now like to turn it back to John Wasson for closing remarks.

John Wasson: Okay. Thank you, everyone, for participating in today's call. We look forward to updating you on our progress in the future. Thank you.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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