ICFI Q3 2026 earnings call transcript, November 5, 2026

I also think that given our diversified portfolio, we will we should see some midterm benefits of the midterm elections around, you know, tailwinds in our our broader energy and environmental business. Much of that is focused on either utility infrastructure or, you know, changes going on in the energy industry, renewable energy and other issues that I think could see some benefit from the election. There's always the possibility that, you know, negotiations around the budget could also result in compromises that result in, you know, restoration of civilian programs or programs that have been simply cut back in the last couple. years. We'll have to see how that plays out. And, you know, I would just say that, you know, we would expect Congress to assert its authority and responsibility for the federal purpose, as I say, particularly with respect to impoundment and rescission type activities. I mean, when will we see the benefits? I mean, it could be as early as 2027, you know, depending on how the budget negotiates. Work during the lame dub session and what's required for next year. And so it could start in 2027. You know, it's 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. And we're certainly going to stay close to our clients and stay on top of budget developments as we look forward.

Okay. That's very helpful. Thank you. And one quick follow-up. You talked a lot over the past quarter, too, about integrating AI into your go-to-market strategy and the federal tech modernization. You recently announced that you became an OpenAI Select partner. Just hoping you could help frame the commercial opportunity that stems from that relationship and whether this is more an enhancement to existing engagements or an avenue for some incremental standalone opportunities. Thanks. Sure. You like me to take that? So, yes, we are working to expand our network of partners and AI, you know, OpenAI is one 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, you know, when we are able to bring sort of an agnostic approach to a customer, understand their challenge, and then go back and assemble from our partner network the right technologies, the clients themselves appreciated, and we have the, you know, we have the benefit of all of the computing power and the technologies that these partners can bring to the forefront, even though they don't 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's been a good partnership, and I think we are seeing that as an avenue for continued growth. Great.

Thank you very much.

Thank you.

Make sure that you did everything you could to keep those bills low. And so that's what we're trying to navigate right now, which 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 hyperscalers and the need for additional energy. infrastructure may or may not be being passed on to customers. It's a completely separate process, a completely separate separate bucket of funding. But, you know, in the soundbites, it's been hard to to separate. I mean, I would also stand I agree with everything Anne said that I mean, part of what I also think is going on here with causing 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. Energy efficiency, electrical load management, low income, weatherization, should they, you know, they're 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, you know, money in lower income or other, you know, other of their customers. And so I think a bit of that is also going on is, you know, rather than plussing these. programs up and just keep driving them hard, but step back here and think about that too. And so I think that's also playing into this. But it is true that, you know, this public goods charge, you know, that shows up on the bills, it's actually quite small for any customer. I think it's pennies on any one bill. But it is a lever that the Public Utility Commission can look at and has control in the short run to demonstrate that they're aware of the

affordability and looking hard on all the expenditures. Most of the issue, if not 90, the vast majority of the issue is who's going to pay for the generation and who's going to pay for the upgrade to the grid and how's that going to happen? And that's also a discussion of the regulators having, but that's a more complicated problem that it's going to take a longer time frame to solve. And so I think that's also part of what's going on here, Tim. There's no question that if you step back, in the long run, if you're going to solve this problem, energy efficiency programs should absolutely be core to it. They're some of the most cost-effective programs. And I think everybody who's looked at this issue agrees, you're going to need everything you can get to solve this problem. As many forms of generation as you can, you need to push these programs. But this became a white-hot political issue as we got into the midterm elections, you know, after Labor Day. And so the focus on the bill and, you know, and on affordability, you know, has been very high here in the short run. Okay, yeah, thank you for the detail. This does sound like maybe it's more of a shorter-term thing and coinciding a little bit with the midterms, and there'll be a refocus maybe on longer-term cost-effective programs, you know, as we move into 27. Yeah, and so, Tim, along those lines, we have seen it before, come and go, and so, you know, in a very, very limited way during one of the gubernatorial elections a couple years ago, and so we, you know, we feel, as you did, as you do, that this is, you know, that the elections particularly turned up the dial.

It's not that, you know, we've been talking about affordability on these calls. We've been talking about it with our customers for several years. We've moved our solutions. And the direction of those weatherization audit programs, the programs we believe in the long run are going to be most cost effective. So it's 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, we think was highly correlated to the politics of this midterm season. Okay. That's really helpful color.

Thank you guys on that.

And then if I could just squeeze one more quick one in James, the growth. Martian was quite strong in the quarter up 50 BIPs 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 or are there other, you know, seasonal or other factors we should be aware of? Yeah. I mean, I think it's, it's no one single thing, but the overall thematic is that. We've just, we continue to make sure that we are very disciplined in 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's, that's part of it. And, you know, if we look at our full year, we expect our gross margins to improve slightly from year over year, maybe. 20, 30 BIP range, something like that. And I would expect that as we move forward and move into the next year, and we'll continue to see, there'll 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'll be able to continue to try to drive some improvement there. And at the end of the day, we're obviously very tightly focusing on managing margins at the EBITDA level, and continuing to drive that 10 to 20 base points of margin improvement year-over-year, which certainly we're continuing to target this year and into the out years.

Understood.

Thanks, guys.

For the fourth quarter, I'm not sure if we covered this directly, but what we are thinking is that with the fourth quarter, we're going to be more of the high single-digit growth rate in the commercial area. I think we said mid to high single digits. Mid to high. Fourth quarter. Okay. We see a rebound there. I think we've assumed with that that we'll still be impacted by the... That's assuming that... Right. These impacts will continue. They'll continue through the end of the year. And so that's what we've assumed through the end of this year. Okay. No, all that makes sense. And there's, you know, a nice quarter for the bookings and makes a ton of sense. You'd benefit from the midterms in 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. Like kind of what that business could potentially grow at next year based on what you're seeing today. I mean, I think as we look at 2027, I mean, if I were to give you an early preview, I would say, I mean, first of all, we expect to grow across all of our client categories next year. So federal, commercial, state, local, international for 2027. As I said, we've said that we will have second half growth. We should exit 2026 with a growth rate of about 4% to company level for the second half of 2026. And that includes normalizing for last year's government to for government shutdown. So that's basically 4% organic growth, you know, normalizing for the shutdown. I think that's an indicator of our growth potential.

Our actual growth as we head into the 2027. I think it's a little too early for us to provide specific guidance. You know, we just obviously had the election. We're leading the outcome of the federal budget for next year. And, you know, we have this short term affordability issue. But, you know, our positive, our metrics looking forward are very positive sales. We'll obviously cover our guidance. But it's always going to expect to grow. And, you know, I think that I don't know if there's anything we want to say about the next year. I mean, for the federal government. I think we've provided specific guidance for the federal. Just to add a little bit of color on federal. So the outlook for federal is stable. I think we, you know, we've seen, we're encouraged by a healthy award, you know, a bit of an award activity that happened at the close of the government fiscal year. We definitely have seen them marked. And the cadence of RFIs that are coming through is a word. It's become, if not, predictable. It's definitely less chaotic than it was. And as John said, we're looking for year-over-year growth there in the federal. Thanks. Okay. Appreciate all the detail there. Yeah.

at the forefront, obviously, this fall, but also, you know, some of these other priorities, which, you know, can swing in terms of their rank order on that list, whether it's energy efficiency or energy conservation, or jobs, clean energy jobs, or energy justice, or climate, or whatever. So, that's what we're watching.

Okay. Yeah, that makes sense. That's helpful. Yeah, go ahead.

Yeah, I mean, I think, you know, I think the comments I gave in terms of how we're thinking about 2027 today, given, you know, the election, I'm waiting to see where the federal budget lands and what. And, you know, this issue we've had with not getting the plus ups with the energy, even seeing if that clears or improves, you know, by the end of the year, you know, so I think we're, you know, we're going to wait to see that to provide any further updates. Kevin, I mean, I think as I said, we'll exit the year growing 4%, you know, and I think that's a, that's good momentum and we'll update. 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 single digit, but we'll, we'll, we'll, we'll see how the, the budget shake out and where we are on this, you know, the, the issue we're having with these plus ups being held up on our energy efficiency work and provide further guidance in our next call.

Okay. Okay. Understood. Maybe this last one, one last one here, just, um, you talked about focusing more on defense and national security with, uh, your IT modernization services in the federal arena. Um, 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, uh, competitors there. And just kind of how that looks from a competitive standpoint. Yeah. So, um, so in the, in that area, obviously Department of War and Department of Defense is a massive market, but we are not trying to become, uh, you know, a defense contractor. In fact, what we're trying to do is to take the services and the areas where we have specific expertise and really, you know, uh, well, you know. Grant that is recognized into sort of non-mission critical areas of DOD. So childcare is an example of that. There's some other, there's some other places where we've seen that our skill sets seem to match up well, as well as the modernization, but modernization as relates to some of those same topic areas. And so, um, so that's, you know, that's national security is another area. You know, we know that we feel that enterprise IT and digital modernization. Our sort of bipartisan priorities. I mean, obviously we've been doing it for civilian agencies as well, but in the, in the, over the course of this year, we really did make a push into some of these others. And I think we've, you know, we're starting to see traction there. Um, try to think of anything. I think that's right. I mean, I think we're not working in the core. You know, we're working in programs that kind of across DOD that kind of leverage our traditional support service.

You know, childcare, mental health, public health, substance abuse, you know, suicide, leveraging systems, leveraging technology to support those kinds of activities. So, you know, I think that's, you know, when the right opportunities come along, we can be quite competitive because we'll have the technology capability and we have the, you know, the programmatic or domain expertise to deliver those kinds of systems.

Okay. Yeah, that makes sense.

in a short period of time, but that the client satisfaction has been excellent, that, you know, the partnerships seem very strong. And the outcomes of some of these, these, you know, outcome oriented projects have been fantastic. So it's, it's been doing a great job. Yeah, the only thing I would add to that, too, is that even as we've been winning this work, these contracts and performing well on them, we still have a very, very healthy pipeline there in the pipeline that they have. Opportunities to go after is the highest level it's been at in the last several years. Yeah, and the other thing that's interesting there is that we've had luck this year in combining some of the policy expertise alongside some of the campaign support, and that's been a benefit to the clients. Great, and then I wanted to shift on to cash usage and prioritization. Maybe you could talk a little bit. about how you're feeling about the acquisition pipeline and what's out there currently as far as evaluations and the like, but then also comfort levels as there's been debt paid on and the like is when you can talk a little bit about comfort levels and I guess overall acquisition appetite these days.

I think the acquisition environment is there's obviously we're 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're looking to see that they can be accretive in the short term at the same time. So as far as prices, what we've been seeing, they're 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's pretty much where you would expect them to be somewhere in the low double-digit range on multiples. That's what we're seeing there as far as our comfort level. As we talked about, we're looking at having leverage ratio at year end. If we don't do any further acquisitions or significant buybacks or anything of that nature, we'd be at roughly 1.6 times. I think that it's about people, the the synergistic value and the opportunity for a potential acquisition, I think we'd be willing to go to the lower three times, but that's a way that gives us plenty of capacity, though, to go after a fairly sizable acquisition.

I think it's early for me to provide you with some sort of defense. That's a definitive answer there. I know that we had, there was something we were following in Florida, Florida Amendment 3, but we don't expect that's going to have material near-term impact on ICF. It was, you know, it had the potential to constrain local government spending because it was going to increase homestead deductions for certain property taxes. But anyway, we've thought about it. We don't see in the, you know, in the last two days, we haven't, we haven't come up with anything.

So that's one that comes to mind, but I'm sure that as we unpack all of this, you know, we'll have more to say. Got it. I appreciate it.

Thank you very much.