ICF International, Inc. Q3 FY2025 earnings call

• Business mix continued to shift with commercial, state and local and international government client revenues increasing 13.8% and accounting for 57% of the quarter's revenues. - Commercial energy revenues increased 24%, reflecting strong demand for advisory and implementation services. - Adjusted EBITDA margin improved by 10 basis points despite reduced revenue. - Contract awards value surpassed year-ago levels, with a book-to-bill ratio of 1.53 for the third quarter. - Federal government revenues were impacted by the shutdown, but had positive news like about half of third quarter contract awards being for federal government clients. - Non-federal government work showed strong performance, with commercial, state and local and international client revenues up 13.8%, commercial energy representing 30% of third quarter revenues and growing 24%, state and local government revenues up 3.8% driven by disaster recovery technology work, and international client revenues up 8% but new contracts ramping up slower than expected. - Management changes: Barry Broadus retiring, James Morgan to be Chief Operating and Financial Officer, and Anne Choate to become President.

Third quarter revenues totaled $465.4 million. Revenues from commercial, state and local and international clients increased 13.8% in the quarter, led by the 24.3% year-over-year increase in the commercial energy business, which represented 30% of third quarter revenues. Federal government revenues declined 3% sequentially in the third quarter, representing a 29.8% decline from last year's third quarter. Year-to-date, revenues from commercial, state and local and international clients increased 13.8%, offsetting a significant portion of the 29.8% year-on-year decline in federal revenues. Subcontractor and other direct costs declined 11.8% year-over-year, and gross margin expanded 50 basis points to 37.6%.

• Anticipate return to revenue and earnings growth in 2026 supported by non-federal government client growth, federal business improvement, recent contract wins, and large pipeline. - Estimate $8 million revenue reduction and $2.5 million gross profit reduction in October due to shutdown, and maintain original guidance framework for 2025 even if shutdown extends through year-end. - Revise full-year guidance: depreciation and amortization expense expected to range from $20 million to $22 million (down from $21 million to $23 million), interest expense from $30 million to $32 million, capital expenditures from $23 million to $25 million (down from $26 million to $28 million), full-year tax rate expected to be approximately 18.5%, and 2026 tax rate in range of 21%.

• Government shutdown impact on revenues and gross profit, with an estimated $8 million revenue and $2.5 million gross profit reduction in October. - Slowdown in federal government procurement and project activities, particularly in programmatic public health and human services areas. - International new contracts ramping up slower than originally anticipated, such as the ramp-up of new contracts with the European Commission and U.K. government being slower than expected.

Q: Tim Mulrooney asked about how much the federal business is expected to be down in the fourth quarter.

A: John said no Q4 estimate for federal business decline was given, and Barry added that absent the shutdown, federal revenues in Q4 would be down more than in Q3, and with the shutdown, it would be substantially more than the Q3 decline.

Q: Tim Mulrooney inquired about the $8 million monthly revenue impact from the shutdown and the dynamics.

A: John said it's a mix of projects placed in stop work, with about $8 million impact for October, expecting a $25 million revenue impact and $7.5 million gross profit impact for the quarter, and most of the revenue from the shutdown to be pushed to the right and recouped over the contract life.

Q: Tobey Sommer asked about the impact of the shutdown on the ramp-up of new wins.

A: John stated that the IT modernization part of federal business has continued without significant impact, while the programmatic work at Health and Human Services is more impacted, expecting return to growth in 2026 with non-federal business growing double digits, federal IT modernization part returning to growth in 2026, and programmatic part returning in 2027.

Q: Marc Riddick asked about bandwidth in non-federal growth areas and investments.

A: John said significant investments are being made in key growth markets, including recruiting talent, investing in technology and AI, with international business expected to grow double digits in 2026 and state and local business having good growth prospects.

Q: Marc Riddick inquired about the acquisition pipeline and cash usage.

A: John said the primary focus is on energy, asset management, and infrastructure areas, and Barry added that they continue to focus on paying down debt and will look to use dry powder for appropriate acquisitions.

Q: Kevin Steinke asked about the market opportunity in commercial energy and James' CFO role arrangement.

A: John said there are material opportunities in commercial energy market, and James is uniquely qualified to do both COO and CFO roles for now, with Anne Choate to take on the role of President to drive growth and business development.