ICF International, Inc.

Good day, everyone, and thank you for standing by. Welcome to the third quarter 2024 ICF earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw the question, simply press star 1-1 again. please be advised that today's conference is being recorded. Now it's my pleasure to turn the call to Lynn Morgan with Advisory Partners.

Thank you, Operator. Good afternoon, everyone, and happy Halloween. Thank you for joining us to review ICF's third quarter 2024 performance. With us today from ICF are John Wasson, Chair and CEO, and Barry Broadus, CFO. Joining them is James Morgan, Chief Operating 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 October 31st, 2024 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 CEO, John Wasson, to discuss third quarter 2024 performance. John?

Thank you, Lynn, and thank you all for participating in today's call. to review our third quarter results and discuss our business outlook. I want to echo Lynn's happy Halloween issues, and I'm pleased to say we have no tricks and lots of treats in our Q3 results. So with that said, I'll move this along so those of you who are going out trick-or-treating tonight can get there in a timely way. So this was another strong quarter for ICF. Our staff executed very well on existing contracts, and our forward-looking metrics indicate that we are well-positioned for continued growth. Looking at the key takeaways from the quarter, first, revenue from continuing operations increased 6% year-on-year. Additionally, revenues from continuing operations less pass-throughs increased 10% year-on-year. This is representative of the work done by ICF employees. Second, we outperformed across all profitability metrics, reflecting favorable business mix and tax benefits. enabling us to increase our EPS guidance by 35 cents for the full year. Third, we had solid third quarter contract wins, resulting in a healthy trailing 12-month book-to-bill ratio of 1.31. And lastly, we ended the third quarter with a record new business development pipeline of 10.6 billion, providing substantial growth potential for ICF across our government and commercial client sets over the coming years. Third quarter revenue growth, again, was led by our energy, environment, infrastructure, and disaster recovery client market. We're accelerating demand for ICF's multidisciplinary solutions, our analytics, and our program management expertise drove a 15.3% increase in revenue. Robust growth in our higher margin revenues from commercial energy clients continued to be a key contributor to our strong performance. Year-on-year growth conducted both the addition of new clients and the increasing scope of work we're performing for existing clients. ICF is a market leader in developing and implementing the latest generation of residential energy efficiency programs, and we're also gaining share in the commercial and industrial energy efficiency markets. We have a long track record of consistently reaching and exceeding performance goals on our energy efficiency programs, and have invested organically and through tuck-in acquisitions to significantly expand our capabilities in adjacent areas. As a result, we have earned the trust of our utility clients and have a broad range of very timely and relevant offerings that bring together our expertise in energy, climate, grid engineering, and disaster recovery, which is a unique set of capabilities that ICF has. This has led to consistent growing demand for our program development and implementation services beyond energy efficiency programs to include pilot programs on flexible load management, developing programs on electrification, and advising on grid resilience. And this demand has accelerated given the rapid pace of load growth from new data centers and transportation electrification. In the third quarter, we also continued to work for utilities in support of undergrounding power lines and advising on wildfire restoration and resilience. Additionally, third quarter commercial energy market revenues growth reflected ongoing work for renewable developers across solar, storage, and wind, where we have seen recent wins to provide the full breadth of ICF's licensing, permitting, compliance, and habitat conservation services. We continue to see opportunities from the IIJA and IRA. To date, ICF has won about $185 million in work related to the IIJA and IRA, primarily from federal and state government clients, and their pipeline is over 250 million. This does not include all the related work that we're doing for commercial clients, where it's more difficult to tie the engagements to specific legislation. RFPs from state and local governments for IJA and IRA-related grant management support are being released, with many more expected in Q4 and early 2025. These RSPs for programs such as climate pollution reduction, solar for all, home energy rebates, and grid resilience and innovation provide significant opportunities for ICF, building on our existing work across the country for utilities and for state and local climates on climate and clean energy topics. In fact, we continue to see strong demand for our climate-related services across our clients set in the third quarter, with revenues up substantially year-on-year and solid growth and new contract wins. Indicative of the breadth and depth of our climate work with state governments are third quarter wins with the state of Hawaii for sea level rise vulnerability assessments, the California Air Resources Board for a refinery infrastructure study, and carbon reduction strategies for the Texas Capital Area Metropolitan Planning Organization. And our disaster recovery work continues to be in high demand. As you know, we generally are not involved in the initial response to disasters. But we have won numerous small contracts from clients in Florida, North Carolina, South Carolina, and Virginia to provide immediate disaster assessment support post-hurricanes Helene and Milton. Later in 2025, we will respond to competitive solicitations to address their longer-term recovery needs, and these small initial assignments will raise ICF's profile and allow us to develop key client relationships now. ICF is currently delivering on roughly 50 disaster recovery programs in 16 states and two territories. And we're currently supporting more than 30 clients mitigation efforts in 10 states and one territory. And our programs are expanding as evidenced by a recent $38 million contract extension from an existing client to continue supporting their disaster recovery and mitigation efforts. And a new contract with another existing client to provide services to support compliance with federal and local disaster management regulations related to its hurricane recovery efforts. Moving to our health and social programs client market, reported revenues from continual operations declined 5.2% year on year, but that includes a reduction in pass-through revenues of approximately $12 million in the third quarter. Adjusting for the lower pass-through revenues, revenues from continual operations in this client market were slightly ahead of last year. As we discussed last quarter, we have faced difficult comparison in this client market in 2024 for two major reasons. The anticipated fall-off in revenues from small business set-aside contracts that were held by the IT modernization firms we acquired in 2022 and ramp-up delays on certain USAID health-related contracts. Please also keep in mind that several of our large international government contracts are included in this client market. We won several new contracts in the public health and social programs arena in the third quarter, including a new task order worth $40 million to deliver strategic and digital communication and engagement campaigns to combat human trafficking. And we continue to see growth opportunities related to capacity building, training, and technical assistance for federal grantees. Currently, we support about $200 million per year of this work across the federal government, including at ACF, NIH, CDC, DOJ, and EPA. Also in the third quarter, we were awarded a new $70 million contract by the government of the U.S. territory to design, build, and implement a new geospatial data management system. This is an excellent example of the increased traction we're seeing on opportunities that combined our technology and domain expertise, particularly when the scope of work includes a data or AI focus. Other examples of recent wins where we're combining our technology and domain expertise within the public health and social programs area include a new project for the Advanced Research Projects Agency for Health, or ARPA-H, in which we'll develop and apply methods to make genomic and other complex scientific data AI ready. The biomedical research data from NIH institutes and centers will then be included in ARPA's age biomedical data fabric toolbox and be more easily accessible by researchers. Also, we executed on our expanded contract to modernize the data infrastructure that supports CDC's Youth Risk Behavior Survey, which is the largest public health surveillance system in the U.S., monitoring health-related behaviors among high school students like alcohol and drug use, physical activity, and unintentional injuries and violence. As we end the year and move into 2025, We believe that the federal digital modernization efforts will continue to remain a bipartisan spending priority and that this market will continue to grow at a high single-digit rate. Further, we're pleased to see an increase in the number of procurements being released with expected awards in the first half of 2025. On the topic of new business, as I mentioned earlier, we ended the third quarter with a healthy trailing 12-month book-to-bill ratio of 1.31, which is a positive indication of future growth. New business accounted for 63% of our year-to-date contract lens, demonstrating how well our capabilities are aligned with client spending priorities. In summary, this was a quarter of significant progress for ICF in terms of execution, profitability, and forward-looking metrics. I'll now turn the call over to our CFO, Barry Broaddus, for financial review. Barry?

Thank you, John, and good afternoon, everyone. I'm pleased to provide you with additional details on our 2024 third quarter financial performance. Our third quarter revenue was $517 million, representing an increase of 3.1% year-over-year, or 6%, after adjusting for the divestiture of the commercial marketing business last year. These positive comparisons were primarily driven by 15% growth in our energy, environmental infrastructure, and disaster recovery client market, which benefited from continued strong demand From our commercial energy clients, revenues from continuing operations less subcontractor and other direct costs yielded a 10% increase year over year. While our federal business delivered revenue growth of 1% in the third quarter, excluding the impact of lower subcontractor and other direct costs, federal revenue grew an estimated amount of 6% year over year. Comparisons continue to be impacted by lower pass-through expenses associated with international development programs with USAID, as discussed in our prior calls. Subcontractor and other direct costs of $127.6 million represented 24.7% of total revenues, down from 27.1% in the third quarter of 2023. The 250 basis point decline in pass-through costs resulted in a shift in our revenue mix towards ICF direct labor, which is more profitable than revenues generated from subcontractor and other direct costs. This favorable mix, higher utilization, and a migration toward more fixed price and TM contracts along with higher margin revenue growth with our commercial energy clients led to 160 basis point improvement and gross margin of 37.1%. Indirect and selling expenses of 132.8 million were up 1% year over year, well below our revenue growth, reflecting considerable operational efficiencies. As a percentage of revenue, Indirect and selling expenses declined 50 basis points to 25.7% due to our continued emphasis on driving higher utilization rates, maintaining discipline cost controls, and leveraging our scale, while at the same time ensuring that we are adequately investing in various initiatives to drive long-term growth across our markets. Our third quarter EBITDA grew at 18.4% year-over-year to 58.2 million, while adjusted EBITDA grew at 7.8% to $58.5 million. Adjusted EBITDA margin of 11.3 with 50 basis points above the prior year's quarter, reflecting our improved gross margins I previously mentioned, as well as actions to manage our indirect cost. Interest expense for the quarter was $7.2 million compared to $10.6 million in last year's third quarter. The decrease in interest expense was driven by our lower year-over-year average debt balance of approximately $160 million. Our tax rate was 13.8% versus 1.4% last year, which was impacted by a one-time tax benefit associated with business investors in 2023. Our tax rate in this year's third quarter reflects various ongoing tax optimization strategies. As a result of these efforts, it is our expectation that we will continue to have an estimated tax rate of roughly 21% over the course of the next several years. Net income totaled $32.7 million, and diluted EPS was $1.73 per share in the third quarter. This compares with last year's net income of $23.7 million, or $1.25 per diluted share, which included $5.2 million, or 20 cents, per share of tax-affected special charges. Non-GAAP EPS of $2.13 per share increased 17.7% year over year. As we noted in the release, we increased our EPS forecast for 2024 by 35 cents at the midpoint. The increase in our EPS estimates reflect our strong operational performance and the benefit of our lower tax rate. Shifting to cash flows in our balance sheet, our year-to-date operating cash flow totaled 76.2 million, well ahead of the 45.6 million reported in 2023, reflecting improved cash management, yielding a more favorable networking capital position. Day sales outstanding were 75 days compared to 73 last year. Here today, capital expenditures declined to $15.6 million from $17.9 million in last year's third quarter, due primarily to the timing of certain projects and the divestiture of the commercial marketing business. At the end of the quarter, our debt was $419.1 million, down from $533.9 million at the end of the prior year quarter, reflecting the use of our favorable cash flows to pay down debt. Approximately 65% of our debt is set at a fixed rate. Our adjusted net leverage ratio was 1.85 times at quarter end compared to 2.7 times at the end of last year's third quarter. Turning to capital allocation, we continue to expect to deploy capital across a few key areas. These include organic growth investments, strategic M&A opportunities, debt reduction, quarterly dividends, and targeted share repurchase offset the dilution from our employee incentive plans. Today, we announced a quarterly cash dividend of 14 cents per share payable on January 10th, 2025 to shareholders of record on December 6th, 2024. Now, to help you with your financial models, please note the following expectations for our full year 2024. Our depreciation and amortization expense is now expected to range from 20 to 22 million. Amortization of intangibles is expected to be 32 to 33 million. We anticipate interest expense to range from 30 to 31 million. Capital expenditures are expected to be between 23 and 24 million. Our full year tax rate expectation is now 20.5% down from the 23.5% we previously guided you. We continue to expect a fully diluted weighted average share count of approximately 19 million shares. And we continue to expect a full year operating cash flow of 155 million. And with that, I'll turn the call back over to John for his closing remarks.

Thank you, Barry. Continued favorable business mix and utilization metrics together with an estimated full year tax benefit of approximately 25 cents per share have led us to increase the midpoint of our earnings per share guidance for full year 24. 24 by 35 cents. A revised guidance range for GAAP EPS is 605 to 615, excluding special charges. And non-GAAP EPS is expected to range from 740 to 750, representing year-on-year growth of 14.6% at the midpoint. We have adjusted our full year 2024 revenue guidance range to reflect an estimated $50 million reduction in past dues that reflect the slower than anticipated ramp-up of work on recently awarded contracts and delays and a few key award decisions. We are confident that these new business awards will be forthcoming in the near term and the ramp up on these programs will begin to accelerate in the upcoming months. Reduction primarily affects gross revenue comparisons in our health and social programs client market with no meaningful impact on margins. We are now expecting gross revenues of $2 billion to $2.03 billion compared to our previous guidance of $2.03 billion to $2.1 billion. Our forward-looking metrics point to continued growth for ICF as we enter 2025. We have a strong multi-year backlog, a record business development pipeline, and a solid track record of new business wins. We are experiencing consistent, robust demand from commercial clients for our energy and environment expertise and related implementation and technology capabilities. We have excellent credentials in disaster management, resilience, and mitigation work to assist state and local governments with recovery after storms, flooding, and wildfires, as well as with their future resilience planning. The large majority of our federal work is in areas that have bipartisan support, particularly IT modernization, which remains an area of priority spending. And importantly, our people are fully engaged in achieving the objectives and missions of our clients which underpins our confidence in ICF's future growth potential. With that, operator, I'd like to open the call for questions.

Thank you so much. And as a reminder, that is star 1-1 if you do have a question. Our first question is from the line of Joseph Baffey with Canaccord Genuity. Please proceed.

Hey, guys. Good afternoon. Nice to see the strong margins. Maybe we'll ask a question on margins. You know, clearly, you've got some favorable mix shift going on. I think probably, especially out of your utility and, and, and energy practice, just wondering how you see the next few quarters, perhaps do you, do you still think that you think of favorable mix shift continues to play out from here? Or, you know, do you think that, you know, perhaps some of the other practice areas, you know, growth may, you know, accelerate a little bit, and we don't see as much of a mixed shift moving forward the next few quarters, and then I'll have a quick follow-up.

I think, Joe, we certainly expect the commercial energy business to continue to have quite strong growth, and we also expect that other components of business will also pick up their growth as we look into 2025, but I think given that the energy group certainly is experiencing the highest growth and has the highest margin. I think there's some more room for margin improvement, even as other parts of the business also increase their growth. So I think we would expect that to continue into next year. I think, as you can see from the results, I mean, our margin, our adjusted EBITDA to revenue is up 50. We expect it to be up 50 basis points for the year. We've generally been guiding 10 to 20 bps. And so, you know, I think you can see the power of the commercial energy business in our margins.

Sure. That's great to hear, John. And then, you know, anything notable coming out of, you know, these last set of storms, I guess, here in the month of October? Is there anything we should read through on disaster recovery this year that might be different than previous years? Thanks a lot, guys.

Well, you know, I think as I said in my remarks, I think we still continue to do significant work in Texas and Puerto Rico, and those remain, you know, important clients and long-term clients for us. You know, we've had the recent hurricanes, Helene and Milton. We have picked up, as I said, numerous small opportunities to do disaster assessments, to do quick analyses of, you know, the potential damage in areas. It is allowing us to develop relationships and get people on the ground. I expect there will be significant opportunities. As we've talked about in the past, it usually takes 12 months for those opportunities to develop and get to the RFP stage. So I would say in the second half of next year, we would expect to see opportunities in Florida and the Carolinas related to disaster recovery.

Great. Thanks very much, John.

Thank you. One moment for our next question. That comes from the line of Tim Mulroney with William Blair. Please proceed.

Hey, this is Sam for Tim Mulroney. Thanks for taking our questions here. I guess regarding first-year climate services, we've been receiving more questions just around some of the work being done, particularly with respect to your federal clients. I believe this business has been growing in the double digits, and I think investors would like to understand a bit better Just how much of that growth is coming from federal clients versus more your state and commercial clients?

You know, I would say that the climate business has certainly been growing double digit here in total and sees robust demand. As you know, if you have a business there that spans our commercial client set, our state and local client set, our federal government client set, and our international government client set. So we truly have a diversified portfolio and are a market leader in that market. You know, I think all in, if you look at that business, you know, the federal component is, I would say, 15 to 20 percent of the business. The remainder is primarily in commercial and state and local. And so, you know, federal is an important component, but it's 15%. And so we are seeing strong growth and we have scale in commercial markets and in state and local in that area. And so it's a diversified business. And I think, you know, I'm not sure if your question is trying to direct here, but I would say that, you know, we would expect that we'll continue to see strong growth opportunities regardless of kind of what happens with the presidential election and the federal market, I think we have confidence that we can grow that business and grow it robustly on the back of our state and local and commercial and international clients. And honestly, in prior administrations, to the extent that federal focus shifted on climate, state and local governments stepped forward. And so I think we would look for and focus on

That possibility is to look forward if you need it.

That was a very helpful color and kind of the angle I was approaching that with. Appreciate that. Maybe pivoting a little bit to the federal IT side, you know, we noticed you announced another large contract on the federal IT side. And I know a piece of your IT strategy is to really increase the share of some of these larger contracts compared to maybe more of your historical average of 10 million to 25 million a project, let's say. Can you help us understand if there's a mixed shift occurring here, your average contract size, and then how you think your project's mix might look like a few years from now?

Well, I think we're certainly focused on trying to expand the size of contracts we're bidding on and move up in terms of the average size of our IT modernization contracts. You know, I would say our sweet spot historically in the last couple of years is But in the $10 to $25 million range, we are winning contracts north of $50 million. I think we're certainly bidding contracts north of $100 million. And so you're absolutely right. That is part of our strategy. I think we're focused. I think that it doesn't happen overnight. I mean, I'm sure as you know, when you bid these large IT modernization contracts in the federal government, you have to get them in capture and spend 18, 24 months positioning to win them. And so the pipeline, I think, is showing good progress. We did win a very nice contract. We just talked about in our commentary with the U.S. territory. And so we're seeing positive signs, positive developments, but that's exactly the strategy. We do believe we have reached a size and a scale where we can bid larger IT modernization contracts and certainly where we can combine our domain expertise with technology capabilities. We can also differentiate ourselves, at least in civilian markets. And so I think we're making good progress. We've had some early wins, and the pipeline's looking good, and we feel pretty good about it.

Awesome. Well, appreciate the answers here.

Thank you so much. One moment for our next question. And he's from the line of Toby Sommer with Truist Securities. Please proceed.

Thanks. In the commercial energy space, The press release and your comments talk about the elevated demand growth that utilities are now forecasting for a host of reasons. What do you expect the impact to be on ICF with respect to maybe the rate of growth of that business as well as the length of period of time that you expect to have good growth?

Yeah, well, I think the, there's no question that, you know, these utilities are seeing significantly increased potential load growth as they look down the road, you know, given five or six different, you know, broad trends, certainly including the latest with AI data centers. And our clients, you know, are certainly, are seeing that. And so that impacts our business in in multiple ways. I mean, we do front-end advisory work for utilities. We help them on their load forecast, their load demand growth. We help them think about their portfolio of generation assets to meet that growth, how they can manage it with programs like energy efficiency and electrification, so it moves into the program side of the business. And we can help them with resilience. And so I think that significant The future long-term growth, load growth, will create long-term opportunity for us to help our clients on the advisory side come up with their strategies and their approaches to meet that growth or manage that growth or support that growth. And it's not just its utilities, but it's also governments, the Department of Energy and other federal agencies that are part of this. It's state PUCs and state energy agencies. And so... And so, you know, we're seeing a lift and a focus both on our advisory work and our energy implementation work. And I think it's a long-term trend. I mean, I think I've said before that it's like a once-in-a-hundred-year trend. This is going to take decades to work through and come up with solutions. So I think it's a long-term opportunity for us, Toby. I mean, I can just You can just look at our growth in commercial energy. We grew 15% in 2022 and 2023. We're growing north of 25% in 2024. And I think that's in part due to some of the ramp-up of opportunity here. And so I think there's very significant long-term growth attempts on this market. Now, I mean, there is the It's also, you know, there's a law of large numbers. It's hard to kind of 25%, 35% growth, you know, forever as you get larger. But, I mean, I think there's significant opportunity for us here. We're working across many parts of this market at scale, and so I think we're quite excited about it.

Thanks. A couple of things helped profitability in the quarter and for the balance of the year this uplift in direct cost percentage. Is that episodic or sustainable? And then is the annual rate down closer to 20% a good proxy for future tax rates, or will we lap this, you know, next year?

Hey, Toby, this is Barry. I'll touch on the tax rate. You know, as I said in my remarks, we believe that, you know, the tax rate of approximately 21% It's something that we'll be able to achieve next year in 2025 and certainly, I think, maybe in 2026. We're comfortable that the things that we're doing right now from an optimization perspective will stick, not just for the fourth quarter, but in the next couple of years.

Direct labor?

From a direct labor perspective, if you think about the shift in the business towards more ICF labor, directed revenues, that certainly is pushing the improved margins. We think that that's going to continue as our advisory services continue to expand, especially in the energy sector and that client market. We think that obviously we're pleased with that. We're pleased with you know, the growth from a revenue perspective that is derived from, you know, our labor. So I think that that certainly is positive.

Yeah, I agree with everything Barry said. I mean, I think in our energy business, you know, the passive ratio is generally not as high. ICF is doing more of the business. It's a very profitable business. It drives more profit. I do think we're in a period where our passive ratio has been down in the health and social program area. the last couple quarters. You can look at our pass-through ratio last year to this year for the company, and I think it's down 250 basis points. It's in our federal health and international health businesses. But I think we do expect that pass-through ratio to see more pass-throughs next year as we ramp up these handful of contracts that we're focused on. But with that, I still expect that there will be longer-term improved profit. with the rapid growth in our energy business. And, you know, that's – I mean, we've been – we've gotten to 10 to 20 pips of even margin improvement in years, I think. Obviously, again, I would say you see the power when the commercial business is really growing. You know, we're 40, 50 pips higher right now.

Yep. What parts of the business, the government business specifically, are declining and how large are they?

Well, I think... I mean, we're seeing the decline. You can see the decline in the health and social programs market area. That market area was down 5.2% in the quarter. On total revenues, I think it would be higher on service revenue than what was done by ICF. You know, I think... And so we're generally flat to low single digit, I think, in that market on the work done by ICF. You know, I think that we're seeing, I think our USAID business right now, we're not seeing the pass-throughs for a variety of reasons. We expect those to ramp back up, but certainly the USAID business has been down this year. I think that's the biggest driver. Barry or James, is there anything else you'd like to add?

How many were you talking about? Yeah, you know, I would say if you look at the client market segments, you know, the energy, environmental infrastructure and disaster recovery area for the U.S. government, you know, on a year-to-date basis is growing quite nicely. We're getting new contracts with a variety of federal agencies. And so, you know, that market is continuing to grow. You know, I would say in the health and social programs, You know, I think that, you know, the issue that we've seen there is, you know, with the contracts that we've talked about where, you know, some of the programs just haven't been ramping up as quickly as we thought. We're waiting for some key awards that we think are forthcoming. We think that that business is going to turn around. You know, and if you look at security and other civilian commercial areas, you know, that business is growing as well. And so, you know, we're pleased with that. You know, all standing, I think there's a lot of potential in the federal government arena. You know, I think that once we get some of the ramp up and some of these awards pushed through, that you'll see the turnaround in the federal market space in that one client market area. But, you know, the other client markets, there's real solid growth there, and we're pleased with that.

Thank you very much.

Thank you so much. And as a reminder, that is star 11 if you do have a question. We have a question from the line of Mark Riddick with CWOT. Please proceed. Hey, good evening.

Good evening, Mark. So I wanted to touch on, and thank you for the commentary on the tax rate and the efforts there to sort of, you know, to bring that to the levels that you're looking at for for the current period and the next couple of years there. I wanted to shift gears a little bit as far as there's been significant amount of debt reduction. And I did want to sort of touch on maybe kind of where you... we're looking at as far as comfort levels, and then it seems as though that would position you well for, you know, any potential acquisition activity. So I was wondering if maybe you could bring us up to speed on your views on the current pipeline availability, quality of assets that might be out there that would be a good fit for the company.

Yeah, thanks for the question. As far as the debt reduction is concerned, you know, I think, as I said in my remarks, you know, our favorable cash flow that we've had this year certainly are contributing to the debt reduction. We'll continue to do that. You know, and I see that we can, you know, turn, have our leverage, that leverage ratios continue to be reduced throughout the end of this year. We are, we have plenty of capacity to look at different M&A opportunities. We are, you know, considering a number of things and, you know, as those come through and, you know, they meet the various attributes that we're looking for from a capabilities perspective, a culture perspective, you know, the customer sets, contracts that they have, you know, we'll take a good look at that. But I think that you know, our ability to delever, and we're certainly comfortable where we are right now, for sure, you know, gives us, you know, plenty of flexibility, you know, to pursue different acquisition opportunities as they present themselves. So, you know, we'll continue to pay down debt, give us self, you know, plenty of headroom, you know, from a capacity perspective to go out and acquire companies. So we'll continue to go on that road.

I agree with everything Barry said. I would just say from a market perspective, I think obviously we're focused on acquisition. It's been a key part of our strategy. I think we've obviously been paying down debt here over the last couple of years, but I think within our growth drivers, I think there was an interesting assets and energy around federal health IT. We would certainly look at them. So we're out in the market, we're looking, but we have very clear criteria and we're disciplined and so we'll stay out of the market. But I think those are the areas where we're focused from a strategic standpoint.

Great. And then I was wondering if you, and this might be a bit of a squishy question, so I apologize in advance, but do you feel as though the valuations that folks are Are they a little more reasonable or about the same as they were maybe a year ago? How do we feel about that spread at this point?

I think the valuations generally have been lofty. I think there's been some movement that they've made some progress in coming back into alignment. I mean, it really depends on the market. I mean, look, in the energy area right now, you know, and the types of work we do, there's tremendous opportunity and there's a lot of interest. I mean, we're seeing all kinds of new and different entrants looking at these markets. And so, you know, the valuations are going to be challenging there. You know, in federal, I think, you know, it really depends on what the focus of the business is. You know, I think in the high interest, high value added areas, valuations are still rich, but I think they're workable for the right asset. Really, it comes down to do you see the synergistic value? Can you find the synergies, at least for us on the revenue side, to justify the opportunity?

Thank you very much.

Thank you. And with that, I will close the Q&A session for today and turn the call over to John Watson for final remarks.

Okay, great. Well, thank you for participating in today's call. We certainly look forward to connecting at upcoming conferences and events, and we appreciate your interest. Thank you.

Thank you all who participated in today's conference. You may now disconnect.