ICF International, Inc. Aktie

Welcome to the Second Quarter 2026 ICF Earnings Conference Call. My name is Lauren Cannon, and I will be your operator for today's call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now turn the call over to Lynn Morgan of Advisory Partners. Lynn, you may begin.

Thank you, Lauren. Good afternoon, everyone, and thank you for joining us to review ICF's second quarter 2026 performance. With us today from ICF are John Wasson, Chair and CEO; Anne Choate, President; and James 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 August 6, 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 second quarter 2026 performance. John?

Thank you, Lynn, and thank you all for joining us this afternoon to review our second quarter results and discuss our business outlook. Second quarter business trends in our markets were consistent with our expectations, allowing us to deliver revenues in line with last year's second quarter, while we continue to carefully manage costs and directed our resources towards expanding our pipeline of new business opportunities.

Key takeaways from our second quarter results included a 6% increase in revenues from commercial clients, led by commercial energy efficiency and related utility program revenues that increased 6.7% year-on-year, a sequential increase in revenues from federal government clients as we had anticipated, reflecting growth in our technology modernization work, a 35% increase in revenues from international government clients as we ramped up work on the large contract awards secured in 2025 and earlier this year.

We maintained our strong margins with adjusted EBITDA margin of 11.2%, up 10 basis points from last year's second quarter. Non-GAAP EPS increased 12%, driven by the profitability I just noted and year-on-year tax, interest and share count benefits. Our trailing 12-month book-to-bill ratio was a healthy 1.09. And since the end of the second quarter, we've been awarded contracts in excess of $200 million.

And we ended the second quarter with a robust pipeline valued at $9.3 billion, a 9% sequential increase over the $8.5 billion reported at the end of this year's first quarter. In short, this was another quarter in which our diversified integrated business model made a positive difference in ICS results, positioning us to achieve our guidance expectations for the full year.

Revenues from our commercial, state and local and international clients accounted for 61% of our second quarter revenues in keeping with our expectation that these client categories will represent over 60% of our 2026 revenues, up from 57% in 2025. The diversification within our client set provides us with both resilience and the ability to shift our resources to capture growth opportunities as markets evolve.

Approximately 75% of our second quarter contract wins were in these nonfederal client categories as delays in procurement decisions constrained federal government awards. We continue to invest in these nonfederal client categories, while at the same time, pivoting to expand our presence in federal agencies that are benefiting from increased funding. Additionally, we are seeing greater opportunities to bring insights and capabilities from across client categories and domain expertise to help clients address complex challenges.

For example, many of the issues facing today's energy market, including low growth, grid reliability, transmission development, resilience, affordability and energy security are being addressed simultaneously by commercial clients, regulators and other government agencies. The fact that we work with all these market participants gives us a broader perspective on emerging challenges and potential solutions, providing significant competitive advantage to ICF.

Also, our work with state regulators and industry associations helps us to develop innovative approaches to transmission investment and grid planning and provides us with insights that we can directly apply to our energy advisory clients. Our work related to data centers leverages capabilities across planning, policy, financial and engineering disciplines as well as across our client categories.

We provide assistance to states, counties and other local governments as they evaluate the economic and energy infrastructure and community impacts of data center development [ that ] gives us valuable perspective on stakeholder concerns and public issues that we are able to bring to our hyperscaler, developer and utility clients as they plan for and develop new projects.

And our deep energy expertise, including decades of support to the federal government and the commercial oil and gas companies regarding critical reserves and potential disruptions positions us to support the state of California with real-time monitoring of refinery production, energy imports and [ stock ] so the state can better take actions to address price variability.

Finally, we are adapting AI-enabled analytics and technical assistance solutions that we originally developed for federal government clients to support commercial and state and local government clients. As I mentioned earlier, we ended the second quarter with a business development pipeline of $9.3 billion, Opportunities in the key long-term growth markets we have identified, namely commercial energy, technology modernization and disaster management and related state and local government work accounted for approximately $5.5 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 were similar to last year's second quarter results in advance of our return to year-on-year growth for 2026 and to positive quarterly revenue comparisons beginning next quarter. We're also pleased with the way we have managed our cost structure to maintain strong margin performance while investing in growing our substantial business development pipeline.

Our year-to-date repurchases of over 435,000 shares represented a first half record for ICF and a strong indication of the confidence that management and the Board have in our company's long-term prospects. We continue to review acquisition opportunities, particularly in the commercial energy space, but we remain very disciplined. Our focus is primarily on tuck-in transactions that provide capabilities with the potential to drive meaningful revenue synergies and will be accretive soon after completion.

Now I'll turn the call over to our President, Anne Choate, to discuss our business performance. Anne?

Good afternoon, everyone. I'm pleased to present a business review of ICF's second quarter results, which, as John mentioned, set the stage for our return to year-on-year growth in the second half of this year starting in Q3. I'm also happy to discuss how ICF's diversified and integrated business model continues to differentiate us and provide us with a unique multidisciplinary viewpoint in solving complex problems for clients.

In my remarks, I'll walk through some specific examples of work in each of our client categories, starting with commercial energy. We continue to experience strong demand for ICF utility programs, which include energy efficiency, flexible load management, electrification and battery storage programs. Revenues from this part of the business increased 6.7% in the second quarter and represented approximately 82% of second quarter commercial energy revenues.

Our results in this area were driven by the continued success of our performance-based programs, the expansion of existing engagements and the start-up of new projects. The addressable market for these services is large, and ICF is a recognized market leader with our share gains coming from excellent results we are delivering to clients, introduction of new services and winning work away from competitors. Energy advisory work for commercial clients increased 2.5% in the quarter, reflecting the timing of client transaction activity and increased 8.6% for the first half, accounting for about 13% of first half commercial energy revenues.

Contributions from this part of our business tends to vary due to the timing of assignments and client transactions. As we look to Q3, we're expecting more robust M&A activity, which should drive our valuation and due diligence services. Additionally, we're seeing increased demand for our supply strategy and market access assessments for natural gas as well as greater developer demand for data centers and other large loads in need of assistance in siting decisions.

These decisions reflect a complex suite of factors, including grid capacity, interconnection and queue position and proximity to future load growth, all areas where ICF's integrated advisory capabilities are particularly well positioned. In addition, our energy advisory team is fielding requests from our energy advisory services from state and local governments as they also address siting challenges, affordability concerns, economic development priorities, reliability and growing energy demand.

The remaining less than 5% of our commercial energy revenues represent environmental and planning work that we do for utility and other commercial clients. Lower quarterly revenue comparisons in this part of our business were due to the wind down of several wind energy projects that ended in last year's third quarter. We expect improvement in this area of our business in the second half of this year, given recent utility transmission line-related awards and our increasing support for power developers who are co-locating data centers with renewable generation assets.

To sum up commercial energy, the drivers underlying demand for this part of our business remain very strong. The combination of accelerating electricity demand and the need to modernize aging infrastructure is expanding the addressable market across nearly all of our energy offerings.

As these infrastructure investments are unlikely to satisfy the scale and timing of emerging grid needs, demand for cost-effective, community-centric programmatic solutions such as energy efficiency, demand response, distributed energy resources and flexible load management programs continues to grow. These are areas where ICF has significant scale and expertise and the economics of these solutions are becoming increasingly attractive as power and capacity costs rise.

Commercial energy contract awards represented approximately 47% of ICF's second quarter contract awards and commercial energy opportunities accounted for more than $1.5 billion of our pipeline at the end of the quarter, good indications of our future growth prospects. Next, I'll move to our state and local portfolio.

Second quarter state and local government revenues are 1.9% below the comparable period last year with disaster management and recovery services continuing to account for about 45% of this client category. ICF is a recognized leader in the development and implementation of disaster recovery and mitigation programs, and we currently support 75 active disaster recovery projects in 22 states and territories.

Fewer major disasters and funding delays have constrained near-term activity in this arena, but ICF continues to execute on substantial rebuilding and mitigation projects, which includes utilizing our environmental and climate expertise to advise state and local clients on optimal mitigation solutions. We anticipate a direct opportunity for ICF as states and local governments look to increase their capability and capacity for both response and recovery as well as preemptive disaster mitigation.

In February, we announced the award of a comprehensive management services contract by the state of Florida. As expected, that contract is now serving as a platform for new opportunities, including a $4 million funded contract to support the administration's approach to rural health transformation via state agencies. Also in Florida, we expect to see more opportunities for our state agricultural land preservation program we support that just earned appropriations of $425 million in funding for the 2026, '27 program budget year.

Additionally, we recently leveraged our state and local expertise in the disaster management arena to win a contract to provide grants management and compliance services to a commercial client, a Northeast utility, where we will support hundreds of millions of dollars in FEMA funding across multiple hazard mitigation projects designed to improve the utility's grid infrastructure, resilience and reliability.

Energy, environmental and disaster services have always comprised the majority of our state and local portfolio. As I mentioned, this year, we are actively expanding the offerings we provide to our state and local clients to include health expertise and advanced technology solutions. State and local government opportunities represented approximately $1.3 billion of the total pipeline at the end of the second quarter, and we expect year-on-year revenue growth from this client category in the second half of the year.

As we discussed on our last call, our international portfolio is showing exceptional growth. International government revenues increased 35% in the second quarter, reflecting the significant contracts that ICF has been awarded over the last 18 months by the European Union and U.K. clients. Sales continue to be strong across our international portfolio as we've been winning key recompetes and securing net new contracts that support growth for the next few years.

Lastly, I'll talk about our work with U.S. federal clients. Our federal business has stabilized. Second quarter revenues from federal government clients increased 1.4% sequentially, in line with our expectations after delivering 8.6% sequential growth in Q1.

Moving forward, we are expecting Q3 to be another quarter of sequential revenue growth before returning to year-on-year growth in federal revenues in this year's fourth quarter. Procurement activity continues to improve, but award activity remains constrained and varies from agency to agency. Protests of large opportunities are also much more common. Accordingly, we've adapted our go-to-market approach to increasingly focus on rapid prototyping and demonstration of capabilities, both on contract and to secure new contracts.

Technology modernization represents about 1/2 of our $185 million in revenues from federal government clients and increased 4% sequentially in the second quarter. Over 80% of ICF's technology modernization work is performed under outcome-based fixed price contracts, the preferred contract vehicles for government technology projects. Our federal agency clients remain focused on data, AI, speed, efficiency and automation and continue to prioritize modernizing legacy systems and improving interoperability across the federal technology environment, areas that are closely aligned with ICF expertise.

While primarily serving federal agency clients, we have deployed our technology modernization capabilities across the company's client categories. As such, technology modernization represents approximately $2.6 billion of our pipeline at the end of the second quarter. With respect to our programmatic work for federal government clients, we continue to execute key contracts across our long-standing client agencies. At the same time, we are making progress repositioning our federal portfolio toward areas aligned with administration priorities.

For example, we are seeing growing opportunity as agencies look to move away from traditional, labor-intensive approaches and towards more data-driven AI-enabled customer engagement models. We believe ICF's combination of technology, data and mission expertise positions us well to support this shift. And at both DHS and HHS, we are seeing increased engagement and pipeline activity related to these capabilities.

On balance, we see significant opportunities for our integrated capabilities in the federal government arena. In summary, second quarter business trends across all 4 of our client categories were aligned with our expectations. Our business unit leaders are collaborating across client categories with a winning mindset and a commitment to assist clients with speed and agility.

Now I will turn the call over to Chief Operating and Financial Officer, James Morgan.

Thank you, Anne, and good afternoon, everyone. I'm pleased to provide additional details on our second quarter 2026 results. From an overall perspective, as you've heard from both John and Anne, second quarter results were consistent with our expectations. Our nonfederal revenues increased just under 7% year-over-year, and our federal government revenues increased sequentially, in line with the expectations we provided on our last call.

Additionally, we continue to execute various cost management initiatives that we have discussed on past calls, including modernizing our infrastructure, specifically our contract management system and our vendor management system. These ERP system implementations remain on track and are expected to drive meaningful efficiency gains in our back-office operations over time.

And we have a disciplined programmatic initiative to implement AI tools across our internal processes to drive further efficiencies. While unfortunately, these efficiency gains will be seen in our margin expansion, we will continue to reinvest in growth initiatives to ensure ICF is well positioned to capitalize on the opportunities we see in front of us.

With these efficiency improvements and a favorable business mix derived from the greater contribution of commercial revenues and a higher percentage of revenues tied to fixed and T&M contracts, we remain well positioned to achieve our target of 10 to 20 basis points adjusted EBITDA margin expansion for the full year as well as over the longer term. We have committed to this level of margin expansion over the last decade, during which we have averaged more than 10 basis points per year, and we have the confidence that we will continue to be able to deliver on this commitment into the foreseeable future.

Turning to second quarter results. Total revenue was $474.5 million, stable with the $476.2 million reported in the second quarter of 2025. Revenues from federal clients declined 9.5% year-on-year, given the difficult comparisons caused by the impact of contract cancellations that occurred in the first half of 2025. Non-federal revenues in the second quarter grew 6.6% year-over-year.

On a sequential basis, total revenues increased 8.5% from the $437.5 million reported in the first quarter of fiscal year 2026 as revenues with commercial clients sequentially increased 13.6%, state and local grew 9.1%, international government revenues increased 24.2% sequentially and federal revenues again improved sequentially, consistent with our expectations. Subcontractor and other direct costs totaled $121.4 million and represented 25.6% of total revenues, up 23.6% in the prior year quarter, reflecting higher pass-throughs on certain nonfederal contracts.

In spite of the 200 basis point increase in subcontractor and other direct costs, our gross margin at 37.2% remained similar to the 37.3% in the prior year, benefiting from the contribution of higher-margin commercial revenues as well as a healthy contract mix with fixed price and T&M contracts representing approximately 95% of revenues.

Indirect and selling expenses totaled $123.3 million, representing 26% of total revenues, in line with the prior year. As I mentioned before, we are carefully managing our indirect spend while continuing to invest in our highest priority growth areas.

Second quarter EBITDA was essentially flat year-over-year at $53.1 million. Adjusted EBITDA rose 0.9% to $53.4 million, and adjusted EBITDA margin expanded year-over-year by 10 basis points to 11.2%. Net interest expense declined nearly 20% to $6.8 million, reflecting progress in reducing our average debt balance. The second quarter tax rate was 17.8%, down from 21% in the second quarter of fiscal year 2025. This year's second quarter benefited from various strategic planning -- tax planning actions, which drove a tax benefit of $0.09 to EPS on a GAAP basis and $0.11 to non-GAAP EPS relative to the second quarter 23% tax rate guidance we shared during our last earnings call in May.

We are still expecting our full year tax rate of approximately 20.5%, with the third quarter carrying the largest offsetting discretionary tax benefits. Net income in the second quarter was $26.9 million, $1.49 per diluted share, above the $23.7 million or $1.28 per diluted share reported in the prior year quarter.

Non-GAAP EPS rose 12% year-over-year to $1.86 per share, driven mainly by a lower tax rate, lower interest expense and a reduced share count as well as improved EBITDA margins. The bottom line results are tracking well, and we continue to expect full year EPS to be within the guidance range.

Turning to the balance sheet and cash flows. Operating cash flow in the second quarter was approximately $99.7 million, a substantial increase from the $52 million generated in the prior year period. It is worth noting that the operating cash flow amounts include restricted cash that is mostly associated with energy efficiency programs for utilities.

For those utility programs, the cash is passed through and tied to incentive payments to utility customers, the timing of which can be uneven. Excluding this item, our core cash generation remains strong at $56.7 million for the quarter as compared to $50.4 million in the prior year quarter. Excluding the potential impact of restricted cash, which is aligned with the basis for our initial guidance, we continue to expect full year operating cash flow of $135 million to $150 million.

Days sales outstanding were 72 days compared to 80 days in last year's second quarter, driven mainly by improved collections and increases in advanced payments. Capital expenditures totaled $5.7 million in the quarter, the same as the prior year quarter. We ended the quarter with net debt of $403 million, down from $457 million at the end of last year's second quarter, with approximately 43% of the debt at a fixed rate.

Our adjusted leverage ratio was 2.06. Absent any acquisitions, we expect our year-end adjusted leverage ratio to be under 1.6. On capital allocation, our priorities remain unchanged: organic investment to drive growth and operating efficiencies, ongoing quarterly dividends, returning capital through opportunistic share repurchases and evaluating acquisitions in our key growth markets.

On that note, we repurchased approximately 435,000 shares in the first half of this year. And as John discussed, we are actively evaluating acquisition opportunities with commercial energy the primary focus. Today, we announced a quarterly dividend of $0.14 per share, payable on October 9, 2026, to shareholders on record on September 4, 2026. We are pleased to again reaffirm the guidance we gave in February for 2026 revenue and EPS to return to growth.

Full year revenues are expected to range from $1.89 billion to $1.96 billion. And as of today, more than 90% of the revenues required to achieve our guidance for full year 2026 are already in backlog. For EPS, we continue to forecast GAAP EPS of $5.95 to $6.25 and non-GAAP EPS of $6.95 to $7.25.

Now to help you with your financial models, please note the following for the full year 2026. With regard to the cadence of the remainder of the year, we would expect sequential revenue growth in each of the next 2 quarters, accelerating at a faster pace in the fourth quarter than in the third. Depreciation and amortization and amortization of intangibles are expected to continue to be between $22 million to $24 million. Full year interest expense is now expected to be between $26 million and $28 million compared to the prior guidance of $27 million to $29 million.

We anticipate capital expenditures of $23 million to $25 million versus prior guidance of $24 million to $26 million. We continue to expect operating cash flow of $135 million to $150 million for the full year, exclusive of the impact of restricted cash. As I previously mentioned, we continue to expect the full year tax rate of approximately 20.5%. And lastly, we have lowered our full year weighted average share count guidance from 18.3 million shares to 18.2 million shares to reflect share repurchases in the first half.

With that, I'll turn the call back over to John for his closing remarks. John?

Thanks, James. We are pleased that 2026 is shaping up as we expected, and we are looking ahead to a return to growth this year and an acceleration next year, bringing us back to mid- to high single-digit growth in 2027. This could not be achieved without the agility and dedication shown by our professional staff and management teams who have effectively pivoted to capture revenue opportunities while maintaining our margin levels.

In many ways, the disruptions in 2025 have made ICF a stronger company, more diversified, more collaborative, more efficient and more agile. We're enthusiastic about the opportunities ahead. And with that, operator, please open the call to questions.

[Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair.

Congrats on the solid execution here in the second quarter. It sounds like the guidance is fully intact here. So I'm going to ask some more targeted questions. The first one is on your commercial energy business. It grew 4% in the second quarter. I think that implies a growth rate of about 3% in the first half. I think you need to grow more in the mid-teens range in the second half of the year to achieve your full year goal of at least 10% growth for the full year. My question is, am I right about that math? And can you walk us through the primary drivers that would help get you there?

Well, maybe I'll start off, Kevin, and then I'll let Anne and James weigh in. I think generally, your math is correct. We'll have to grow mid-teens in the second half of the year to achieve that goal. I think as you noted, and as I think we indicated in our remarks, I think the way we'll get there is first of all, we did have strong awards in the second quarter as announced in our release. You can see the list of projects there.

Second, we do have a set of projects that we -- since that time, we've been told we will be awarded, but we're still in negotiations with those contracts. and we have a robust pipeline of opportunities on the commercial energy front. So I think those 3 things are giving us confidence that we can achieve the double-digit growth required in the second half of the year to get to our original guidance. I'd also note that our performance awards and performance fees are typically back half loaded.

And so we'll certainly benefit from those awards coming in to help drive additional revenue growth for the year. So I think that's at a high level, what we see getting us to that level of growth. But Anne, do you want to add anything on...

Well, maybe I'll just mention that -- so the energy advisory work, which you know is a smaller percentage, but an important percentage of our commercial energy work, that was a little bit slower in the second quarter, and that reflected delayed timing of certain of the technical advisory and the independent engineering services that we provide, which actually had -- the reason for that was that the administration sunset date for some of the tax credits was July 4. It put several of the client there -- it put their focus on the immediate -- initiating construction to hit that tax credit deadline. And so now that we're past that date, we've already seen signs that the planning and the financing work that we do will proceed as expected for the rest of the year. So that's a piece of that. But otherwise, I agree with what John had said, the pipeline is really strong.

And I would just reiterate, I mean, again, the last 2 years -- the 2 prior years in our energy business, we grew mid-teens for the year. And we have not seen that shift in the market and the trends driving that business. And so I think for us to return to mid-teens growth in our energy -- commercial energy business in the second half of the year is achievable, and it's consistent certainly with the performance we've had the last several years in that market.

Okay. That's a good point, John. And I appreciate all the color there, Anne. I also heard you say in your prepared remarks, too, you expect to pick up in M&A activity in the second half, maybe some other things, too. So that's helpful color. Shifting gears really quickly to the backlog, which was $3.3 billion, down slightly sequentially from the first quarter. We've seen backlog flat to up the last couple of years as you move from the second -- from the first quarter to the second quarter.

Can you talk about some of the factors here that impacted that slight decel into the second quarter? Is it still somewhat sluggish, I guess, on the U.S. federal side? Or is it primarily a timing thing? I'm just trying to understand your expectations for book-to-bill as we move through the third quarter here.

Yes. I guess I can speak to that a little bit. I would say as far as we reported for the quarter, this is James. for the quarter, our book-to-bill was 0.85. And where that was the main impact below 1 was in the federal space where I think as we've mentioned, we've had a little bit slower in the procurement cycle. But we are seeing signs where that's picking up and has been starting to pick up even subsequent to the end of Q2. So we are looking to have a healthier book-to-bill as we move into Q3, which will certainly look at driving the backlog up as we move forward beyond that. So from an overall perspective, if you look at what the impact is on backlog quarter-over-quarter, it's more on the federal area is probably the biggest area impact.

Our next question comes from the line of Jason Tilchen with Canaccord Genuity.

To start, your outlook commentary referenced that same return to mid- to high single-digit growth in 2027 that you mentioned last quarter. Just hoping maybe with a little bit more visibility, you could expand on your expectations for next year a bit more and help frame some of the key puts and takes that could drive either upside or downside relative to that range.

Sure. So I think, as you know, we do expect to return to mid- to high single growth next year. And I think the way we've discussed that in the past, I think, and what we continue to believe today is for the 60% of the business that's nonfederal, we would expect to deliver high single-digit to low double-digit growth. In the federal arena, we'd expect to achieve low to mid-single-digit growth. And so then if you do the math on that, I think it will get you to mid- to high single-digit growth across the portfolio. And so I think that's how we're thinking about that for next year.

Okay. Great. And then I just wanted to unpack that particularly strong international growth, both in the quarter and really the award wins you've seen over the past 18 months or so. Just wondering if you could help dive into some of the underlying trends in those markets that are driving those wins and how confident you are that you expect that to be able to continue here going forward?

So I think I mentioned in my remarks, so we had won several of those contracts over the last, say, 18 months or so. And it was a matter of sort of mobilizing. It took a while as a result of elections and some other things happening in Europe for those contracts to really hit their stride, but we now feel like they have hit their stride. We feel that the runway for those contracts and our positioning is really strong. In some cases, we're the single award holder. In other cases, we are 1 of 2 or sort of at the top of a framework contract sort of right of first refusal.

And so as a result, you're seeing the result of, I guess, of that long-term business development efforts materialize here. And we continue to expand that footprint, which so that's been -- that's the part that from a BD standpoint that's been exciting this year is just using that as the launching off point or winning work with additional agencies sort of under the EU umbrella.

Yes. This is James. I would just add on top of that too. I mean, if you look at even going forward, certainly, we're ramping up those programs in the past, but also the pipeline of opportunities that we have in front of us is actually healthier now than even what it's been in the past. There's a multitude of opportunities coming out. So we have the largest pipeline of opportunities for our international government business beyond what we've had in the last ever, I mean, actually.

And I would say for -- I mean you guys have seen the results for the first half of the year in terms of growth in the international business. I think we expect similar growth results for the second half of the year. And based on the comments both Anne and James has made about the pipeline and the backlog, I'm confident in double-digit revenue growth in international as we look for 2027.

Our next question comes from the line of Tobey Sommer with Truist.

Within your technology modernization business, what the trends been like on contract size and the procurement environment and pace of procurements? And maybe if you could, as part of your answer, touching on this particular market, describe your experience with customers purchasing licenses and other things that historically have been passed through directly from OEMs.

So I think that in terms of -- you have several parts, but I think that we've seen procurement picking up in that area. We have a very significant amount of a high fraction of our submitted bids where we're pending award related to that technology modernization business. That's an area where, as we mentioned, we've been pivoting in the federal space. We've been using that -- those technology modernization services as a way to access new clients and new offices within client agencies.

So that's been pretty successful. In terms of the size, I don't think we've seen a significant change in the average size of those deals. We have -- as I mentioned, we have seen tremendous variability in terms of the time between knowing about an opportunity, seeing an RFI or not seeing an RFI going to either a limited competition or an open competition and then actually getting to award and then in many cases, when it's large, seeing a protest. And so I think that is -- that's the part of that sales cycle that we're trying to navigate. But I think that it's pretty consistent for technology modernization across the federal government right now. I'm trying to think of your last question, the licenses with OEMs, can you say a little bit more about that?

Yes. There's been news in the market about the government deciding to procure those sort of things directly from the OEMs rather than via an integrator. So I'm wondering if that's something that you're having experience with or not at this juncture.

Not that I'm aware of. So I think that we're working in close partnership with our customers. And in some cases, for instance, their access to certain providers, they may want us to sort of work in their cloud environment or something like that. But I'm not aware of anything beyond that.

Yes. I would say we haven't seen a material shift. As you know, Tobey, we work and have the capabilities to work across a low code, no code set of players, and we're still seeing opportunities to support the federal government and partner across Salesforce, ServiceNow, Appian. We also can deliver IT modernization capabilities and services on open source. And I don't think we've seen a fundamental shift in those markets or our relationships with those players to date [indiscernible] IT modernization work.

I guess I would also say, too, I mean, the majority of the work we do is more labor-based services. It's not passing through of license costs and things of that nature.

Okay. And last question for me. On the capital deployment front, I think maybe looking to reengage and be more active since the -- in the wake of the DOGE experience and the business stabilizing and even kind of starting to grow. What are your expectations as you look at the back half of the year and into '27 for growing the business inorganically?

I think as we've discussed in the past, I mean, I think we remain in the market looking for potential acquisitions that we think are good strategic fit, good cultural fit and meet our financial criteria, I think we'll be very disciplined. I think as I said in my remarks, I think we're primarily focused in that arena in the commercial energy area. I would expect many more to tuck-in acquisitions as we think about the rest of this year. And generally, I think we have a balanced approach to capital allocation. We're investing for organic growth. I talked about the stock buybacks. We've been active there. And we'll continue to look to deploy it on the M&A front if we find the right opportunity. And so balanced but disciplined would be my message. I don't know, James, do you want to...

No, I mean, I think that's right. And we're fortunate enough that we certainly have the capacity in our credit facility where we're not constrained, where we can continue to have that balance between investing organically and doing share buybacks and then also the right opportunity comes across from an acquisition perspective to pursue that. So -- and certainly, that is -- that's a focus on identifying and finding those opportunities.

Our next question comes from the line of Kevin Steinke with Barrington Research Associates.

In your prepared remarks, I believe you talked about on the federal programmatic side, shifting your focus from more labor-intensive projects to more along the lines of helping your clients with AI enablement, efficiencies, et cetera. Correct me if I'm wrong, but I think that's how I heard it. And I'm just wondering what that would do to kind of your business model in terms of project size or staffing levels or any other metrics?

So Kim, this is Anne. Thank you for asking because that -- I'm hoping that's not how it came across. But what I did say was that we are looking to help the federal government in places where they -- the federal government or these agencies are looking to move away from their traditional sort of labor-intensive approaches, like think of things like grant management, think of things like data validation and things like that, where they're trying to move from many, many federal staff and support doing these kinds of tasks.

We're trying to help them where you can tie systems together, you can have more data-driven, AI-enabled customer engagement models that allow them to basically provide their -- to fulfill their mission, but in a more efficient sort of streamlined way. And so that's where we have -- where we've been successful working with some of these agencies, combining technology and data and mission expertise. So you know where you can and where you can find those streamlining efficiencies. And so that's been a sweet spot for us.

Does that help?

Yes. Yes. Thank you for that color and that clarification. So I think you also -- when talking about commercial energy, you mentioned one of the growth drivers as being the introduction of new services. I don't know if there's been anything more recent on that front or if it's kind of been some of the other program management type services that you've discussed in the past contributing to growth.

Well, no, I think we -- a couple of years ago, and maybe it was only a year ago, we started talking about how important large load in data centers are going to be. So obviously, that's been a place where we have been introducing new services and new packages of services to address kind of a new need. So for -- as an example, for hyperscalers, now we're helping clients evaluate the speed to power, what strategy should they use to get speed to power, assessing the alternative power and technology solutions. They're navigating procurement and funding in new ways.

There are some that are trying to look to get the speed to power, but in a renewable or a sustainable way kind of depending on where they are. That's obviously a place where we can provide a lot of value. We also are supporting some of this community impact initiative. To the extent that they're trying to work to balance the need for increased electricity with the impact on the communities, we're helping to work with them to think about that strategy, those strategies. That's one example or one suite of examples, but I could give you more.

No, I think that's fine. Yes, that's helpful. Lastly, I just wanted to ask a little more about international government. You talked about these large contracts maybe being a launching point for you to pursue work with other EU agencies. I'm just wondering how much of a focus international government is right now for growth investments, expansion of services or kind of you feel like you have the service footprint already in place that you need there?

I think that we are -- I think that the role that John has asked me to play does provide a little bit more connectivity. So for instance, our energy, our decarbonization or whatever skill sets that we have here where we can augment, skill sets that we have in our Europe and Asia business lines. I think that connectivity is strong and has been strong, but I think it's even stronger now. I think that the business development engine that we have there is pretty tight and efficient. And we have -- because of the work that we've done in the last couple of years, I think that our brand, our reputation is really strong, both in the U.K. and the areas where we work and also in the -- so I guess the answer is absolutely, we're committed to it. Absolutely, we're supporting it, but I don't see that we're investing more necessarily in that direction. is there anything...

I think it's -- I mean it's a business is doing terrific. I do think that there's ways we can connect the capabilities in North America to Europe and find additional opportunity. And so we have a very strong fellow the running that business. And so it's a good business. I don't think we're -- it's not one of our key -- I mean the scale and size, it's just not one of our key growth drivers. So it's not getting a disproportionate amount of investment. But we're certainly investing at levels as we have in the past, and we're seeing very nice results. So we'll continue to do that.

Our next question comes from the line of Marc Riddick with Sidoti.

I wanted to touch a little bit on disaster recovery and mitigation. And maybe you could touch a little bit on some of the commentary you had in -- either in prepared remarks or just in the press release as far as the fewer disasters and funding delays that you're seeing. Maybe you could touch a little bit on some of the details around that and maybe the sources of that? And then I just have a quick follow-up there.

As you know, I'll start off, Anne...

Okay. [indiscernible] another question.

We've been in the disaster business for quite some time. We were quite committed to that business. We're a market leader in that business. I think as Anne noted in her remarks, I mean, there's been fewer disasters recently that have limited the number of new opportunities. With a long-term view, I do think this is a growth market and there's optionality. As those of you who have known ICF for some time, we've had 3 or 4 periods in this room of disaster recovery materially grew the company in response to significant disasters.

And so we remain quite committed, but there is -- we've had fewer disasters, but this is certainly optionality in my view, for significant growth as we look down the line. I think we've managed the business very well and are seeing opportunities in state and local markets. And we've also connected the dots. I think some of the answer remarks talked about how we've connected it to utility work and other areas. And so I think we expect the business to grow, and it will be -- there's optionality for very significant growth.

The only thing I would say is that anybody who's looking at their phone at any point in the day, probably thinks, well, what do you mean there are less disasters? There are plenty of natural disasters that are on the news. I think the issue is that the disasters of the size that really -- that John is talking about, those are the ones that have been that have been too and far between. And so it's the size and the declaration that would then lead to the funding that would be a large-scale disaster recovery program.

Okay. I got you. And then I wanted to follow up on just the timing of procurement decisions on the federal side. And I think you made commentary to that loosening up toward the end of the quarter, I guess, or going into the third quarter here. But I was wondering if you're seeing that as -- is that -- do you think that's something that's tied to approaching the end of the federal year-end? Or is it sort of driven more by current project needs and -- or maybe what might loosen up that opportunity?

I mean my take is that it's so variable. Even within agencies, it's variable. There's -- in some places, you have contracting officers who understand they have some sort of deadline, regulatory deadline or otherwise, and they are incentivized to get these -- to get their contracts moving even if they've installed. And in other places, you might have that same driver, but you don't have enough contract up to get the thing out the door. And that's where you sometimes see some mods. People are just modding repeatedly. They might also be moding because they're afraid of a protest. And so just to keep for continuity purposes, they mod. And so that's that delayed. In other places, we've seen a pickup and things moving more quickly. So it really is -- I would argue, it's really variable by agency. I'm looking at John and James to see if...

[indiscernible]

Great. And then last thing for me, maybe you could talk a little bit about some of the range of catalysts on the technology modernization side that you're seeing and whether they different federal versus nonfederal? Or are you seeing any particular catalysts or needs that are sort of coming to the forefront that are driving folks to act as opposed to sort of standing on the sidelines and sort of weighing how some of these things sort of play out, whether it's an AI-driven concern or cost driven or the like?

In the federal space, I would say that the drivers are much as what we've been talking about, probably not just us, but we have been discussing the desire for streamlining, desire for modernizing aging systems, the desire for more efficiency, also a desire on the part of the federal agencies to find ways to utilize AI, whether it's for efficiency purposes or whether it's for -- as part of this modernization activity. So I think that's all true. I think that when we get involved in technology projects at the state and local level, often, it's because there's a mission orientation, whether it's disaster or energy or underground storage or whatever it is, and there's a technology system that's getting in the way of doing that mission-oriented work, that's where we actually have a lot to offer because we can say, well, we can unstick that technology barrier to achieving your mission outcome. And so that's really where our sweet spot is outside of federal.

Well, I know it's been quite the journey to get to growth resumption over the last few quarters and certainly encouraging to see the pacing there. So congratulations on that.

[indiscernible].

A lot of hard work.

This concludes the question-and-answer session. I would now like to turn it back to John Lawson for closing remarks.

Well, thanks, everyone, for participating in today's call. We look forward to seeing you at upcoming conferences and calls. So hope to see you all soon.

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

Welcome to the Q1 2026 ICF Earnings Conference Call. My name is Lauren Cannon, and I will be your operator for today's call. [Operator Instructions]

Please be advised that today's conference is being recorded. I will now turn the call over to Lynn Morgen of AdvisIRy Partners. Lynn, you may begin.

Thank you, Lauren. Good afternoon, everyone, and thank you for joining us to review ICF's first quarter 2026 performance. With us today from ICF are John Wasson, Chair and CEO; Anne Choate, President; and James 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 May 7, 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 first quarter 2026 performance. John?

Thank you, Lynn, and thank you all for joining us this afternoon to review our first quarter results and discuss our business outlook. The first quarter represented a solid start to the year. We executed well across our client set, reflecting successful strategic initiatives to diversify our business model and our track record of delivering positive outcomes for our clients.

This track record is a function of ICF's deep domain expertise paired with cross-cutting capabilities in technology, digital transformation, complex program management and engagement. By going to market with this unique combination of capabilities and experience, we continue to maintain healthy win rates, report industry-leading book-to-bill ratios and build our business development pipeline, all metrics that underpin ICF's future growth potential.

Key takeaways from the first quarter of 2026 include: first, an 8.6% sequential increase in our revenues from federal government clients, representing a strong indication that this part of the business has stabilized and is on the upswing. As we noted last quarter, we expect to see sequential improvement in our revenues from federal government clients through the third quarter of this year with year-on-year growth in this client category anticipated for the 2026 fourth quarter.

Second, a 17% year-on-year increase in revenues from international government clients, which was a strong showing tied directly to recent contract wins, many of which are single award contracts. Third, of the total of $12 million in revenues that shifted out of the first quarter due to timing of project work for commercial and international government clients, we expect half to be recognized in the second quarter and the remainder to come through the second half of this year, supporting our full year guidance for company-wide revenue growth of 3% at the midpoint.

And lastly, we continue to win north of 90% of our recompetes. New business, including modifications, represented 65% of this quarter's awards, a strong indication of how well our qualifications are aligned with client demand. ICF was awarded $450 million in contracts in the first quarter, maintaining our 12-month book-to-bill ratio at a healthy 1.21.

And after this quarter's awards, our business development pipeline stood at $8.5 billion. Also, we were pleased with our strong margin performance in the first quarter, which we achieved while continuing to invest organically in areas where we have identified as drivers of long-term growth for ICF, namely commercial energy, disaster recovery and federal technology modernization.

There are several important secular trends supporting our growth expectations for these areas, including rapidly growing demand for electricity in North America, highlighting the importance of energy efficiency and grid modernization programs, the increased frequency and severity of natural disasters, including hurricanes, wildfires and other extreme weather events, which often result in major damage to homes, businesses and critical infrastructure and the tremendous need for digital and AI-driven technology modernization to improve mission delivery across federal civilian agency.

ICF is well positioned to capture more than our fair share of growth in these markets, which supports our confidence that ICF will return to mid- to high single-digit organic growth in 2027 and continued growth beyond. And when you layer on the potential for accretive acquisitions, we see a clear path to return to double-digit growth. Given our expectations for continued favorable business mix and our ongoing internal efficiencies, many of which are coming from AI and other tools, we expect our earnings growth to continue to outpace revenue growth as we look forward.

I know that investors are concerned about the impact of attentive AI tools on the technology modernization work that is being done at federal government agencies. While we understand the concerns, we are doing work in this market every day. And over the last 2 years, we have adjusted our offerings to strengthen our resilience to just that concern.

For example, we focus on longer-term demand drivers, including AI augmented application development and foundational modernization and AI governance and orchestration. There are several insights that are relevant to ICF. First, 80% of our technology modernization work for federal clients is fixed price or outcome-based and our civilian agency clients require a lot of support in this area.

As AI augmented methods enable us to complete projects in less time and at a lower cost, we will simply move on to the next project more quickly than in the past. While technology is moving quickly, there is a substantial backlog of modernization work to be done to address the existing technical debt in the federal civilian arena.

Second, as our clients move to advance AI at enterprise scale, we anticipate even greater demand for foundational data, cybersecurity and cloud services. This is the foundation that determines whether AI deployments produce reliable, secure and scalable outcomes or fail in production. We are prepared to help our clients continue on their journeys to improve and modernize their data and cloud architectures in order to capitalize on the promise of AI.

And third, these AI capabilities also open up a larger technology market. We will see new opportunities for smarter workflow automation as agencies reimagine what's possible, also be able to address legacy technical debt that was heretofore too expensive to address through traditional modernization.

And finally, we'll help our clients are addressing new challenges with AI governance, orchestration and platform optimization that are all emerging as we speak. These areas require both technology and domain expertise combined with human judgment and oversight to get it right. The upside is that the government technology market is expanding in scope, shifting in shape and acting more of its partners than it did before AI.

ICF is positioned to lead and grow through this evolution. Before turning the call over to Anne Choate, our President, who will provide a more detailed business review, I did want to comment on M&A. Last year, we were fully concentrated on building our capabilities across our nonfederal client base and on tightly managing our federal government business in light of the volatility that we experienced in the first half of 2025.

This year, we are taking a more aggressive stance with respect to M&A, given the substantial opportunities we see in our key growth markets and in particular, commercial energy. We remain disciplined, but if we find an acquisition that meets our criteria for driving revenue synergies and growth areas and for being accretive soon after completion, we will move forward.

Acquisitions have been an important part of ICF's growth strategy over the last 25 years, and we have a great track record of using free cash flow to pay down debt quickly. So now I'll turn the call over to Anne to discuss first quarter business performance across our client set. Anne?

Okay. Good afternoon, everyone. I'm pleased to be presenting our business review on my first official conference call as President of ICF. During my 30-year tenure, I have had the opportunity to work in many areas of the company, which makes it very exciting for me to be able to speak to you about the totality of the business.

First quarter revenues were led by commercial, state, local and international government clients accounting for over 58% of total first quarter revenue and are on track to exceed 60% of our full year 2026 revenues. Taking a closer look at our client categories, I'll start with commercial energy.

There continues to be strong underlying demand for our utility programs, which include energy efficiency, flexible load management and electrification. These programs represent approximately 80% of the trailing 12-month commercial energy revenues. The addressable market for these services is large, and ICF is a market leader.

We continue to gain share, receiving plus-ups on existing contracts, reflecting the results we're delivering, introducing new services and then winning contracts from competitors. Our commercial energy advisory work delivered mid-teens growth in the first quarter. This growth reflected considerable demand for our market assessment and due diligence work, which supports client M&A, the expansion of the grid reliability and protection work and increasing demand from data center developers.

In addition, our engineering support to utilities working to accommodate data center loads continues to accelerate as those clients expedite the development of new substations. Many of these engagements draw on our proprietary tools like Energy Insight, Sightline DER and ClimateSight Energy risk. We pair these model outputs with actionable decision support within the confines of the regulatory and stakeholder environment.

From a Q1 perspective, as John noted, there was a timing shift affecting our work on several fixed price energy efficiency programs that must be completed in '26. Without this shift to the right, commercial energy revenues would have increased 8.3% in the first quarter instead of the reported 2%.

Next, I'm going to talk about our state and local portfolio. Q1 state and local government revenues were stable. And for the full year, we expect revenues in this client category to increase at a mid-single-digit rate. ICF is a recognized market leader in disaster management and recovery services, which continue to account for about 45% of this client category's revenues.

In February, we announced the award of a comprehensive management services contract by the State of Florida, which positions us to compete for a broad portfolio of projects extending beyond disaster management to include habitat conservation planning and agricultural land conservation. We are also encouraged that following the confirmation of the new Secretary of the Department of Homeland Security in late March, DHS went on to approve the obligation of $730 million in hazard mitigation grant program funding, signaling the continued intent to fund rebuilding efforts that mitigate future disaster losses.

DHS also recently indicated its intent to restart the FEMA Building Resilient Infrastructure and Communities or BRIC program that we have historically supported on behalf of BRIC recipients. The combination of these events supports our confidence that disaster management and recovery services will continue to be a driver for ICF over the mid and the long term and will expand our efforts well beyond the current 75 disaster recovery programs in 22 states and territories that we support today.

Technology has always played an important role in our work for state and local government clients, and we've expanded our offerings there to include advanced technology solutions and services as well. As we discussed in our last call, our international portfolio is growing nicely. International government revenues increased 17.5% in the first quarter, reflecting the significant contracts that ICF has been awarded over the last 18 months by the European Union and U.K. clients.

The additional $4 million that shifted in the second quarter -- into the second quarter and second half of this year represented the timing of pass-through revenues that are associated with outreach marketing events that are under fixed price contracts requiring the work to be completed in this year. Sales continue to be strong across our international portfolio, winning key recompetes and securing new contracts with international government clients that support growth for the next several years.

Finally, I'll talk about our work for U.S. federal clients. Our federal business has stabilized, and we continue to expect consecutive revenue growth in Q2 and Q3 and then year-over-year growth in Q4 as we execute on the nearly $1 billion in federal government contracts that we've won over the last 12 months. We are pleased to see procurement activity pick up in the first quarter. Some opportunities that were paused or canceled last year have reentered the market, and we've seen a restart of some of the work we were awarded in the past, such as support of a grant program for the Department of Energy.

The procurement environment has changed in the last year, and we have pivoted, focusing more on rapid prototyping and demonstration of capabilities than ever before. Several sweet spots exist at the intersection of the administration's priorities, the agency's gaps in manpower and our expertise.

These include applying AI and advanced analytics for fraud prevention and supporting child and family services, transportation safety, grid reliability and technology modernization. A good example of how we combine deep domain expertise, advanced technology and human judgment is our work modernizing the Center for Medicare and Medicaid's Quality Improvement and evaluation system.

The program involves the transition of more than 278 million clinical assessments into a national repository, enabling real-time monitoring of care standards across skilled nursing facilities, home health agencies and hospitals. This work advances the administration's priorities around quality of care, fiscal responsibility and system resilience.

In summary, the trends underlying our business are aligned with our expectations. Our leaders are leaning in across the full portfolio with a winning mindset and eagerness to emerge as a partner of choice as our clients navigate what is a really fast-moving and exciting time. Now I'll turn the call over to our Chief Operating Officer and Financial Officer, James Morgan.

Thank you, Anne. Good afternoon, everyone. I'm pleased to provide additional details on our first quarter 2026 financial performance and the factors shaping our results as well as our outlook for the remainder of the year.

At a high level, first quarter results reflect solid execution across our diversified client base. Margins remained strong. Contract awards resulted in a book-to-bill above 1. We continue to have a healthy pipeline of opportunities, which we are pursuing. And as Anne mentioned, permit activity in the federal space is showing signs of improvement.

In fact, in the federal space, we submitted nearly $400 million of bids in the first quarter, the majority of which were from new opportunities. While first quarter total revenue came in below our expectation, this was entirely due to timing of certain commercial energy and international government contract work.

We fully expect to recover these revenues throughout the balance of the year with half expected in the second quarter. I would also note that our first quarter tax rate came in above our expectations, which I will address in more detail shortly, but our full year outlook for a tax rate of 20.5% remains unchanged.

Before discussing the first quarter financial metrics, I want to highlight some of the strategies that are supporting margin improvement and helping to drive shareholder value. First, cost optimization has been a key theme as we work to manage infrastructure costs while funding growth initiatives.

We continue to invest in modernizing our ERP systems and our back-office operations while implementing AI tools. These ongoing investments have and will continue to make us more efficient, provide us the ability to scale over time by offering both operational and financial benefits.

From a strategic financial standpoint, we continue to focus closely on capital allocation. To that end, organic projects, share repurchases and acquisitions are top of mind. In the first quarter, we repurchased slightly more than 217,500 shares, and we will continue to opportunistically repurchase additional shares.

Further, as outlined by John, we are actively pursuing acquisitions given our strong cash flow and borrowing availability, which was expanded as part of the refinancing we completed last month.

In summary, we are executing on our strategic plan and remain on track to return to growth in 2026 and deliver on our full top and bottom line -- full year top and bottom line guidance. With that context, I will now review our first quarter financial results.

Total revenue in the first quarter was $437.5 million, a decline of 10.3% compared to the first quarter of 2025. As we discussed on our fourth quarter call, both first quarter and second quarter of 2026 revenue comparisons will reflect the impact of federal contract cancellations that occurred between February and May of last year.

First quarter revenues were approximately $12 million below our expectations, reflecting a push to the right of roughly $8 million in project work for commercial energy clients on fixed price contracts and $4 million in international cover. The timing of the work simply shifted later in the year.

We will recover all of these revenues over the balance of the year with approximately half expected in the second quarter. As a result, we are reiterating our expectation that revenues from commercial, state and local and international clients will grow at a double-digit rate and represent over 60% of total revenues for the full year, supported by strong underlying demand from utility clients, the continued ramp-up of international contract wins and growing state and local revenues.

In our federal government business, we were encouraged to see revenues grow 8.6% sequentially to $182.3 million, which was aligned with our expectations. The sequential improvement was supported by our technology modernization work, which we are well positioned to win and deliver in the current procurement environment.

Subcontractor and other direct costs were $102.7 million, representing 23.5% of total revenues, up from 22.7% in the prior year quarter due to higher pass-throughs on certain nonfederal contracts. Despite the year-over-year decline in revenues, gross margin rose 10 basis points to 38.1%, highlighting our favorable business mix and a contract mix that remains largely comprised of fixed price and time and material contracts.

Fixed price and T&M contracts represented approximately 93% of first quarter revenues with cost reimbursable contracts accounting for only 7%. Indirect and selling expenses were $118.8 million, a decline of nearly 10% year-over-year and representing 27.2% of total revenues.

As I mentioned previously, as we optimize our indirect spend, we will continue to invest in high-growth areas, including energy and technology modernization while preserving our core capabilities in the programmatic side of the federal business, ensuring ICF is well positioned when the market recovers.

First quarter EBITDA was $47.3 million compared to $52.1 million last year. Adjusted EBITDA totaled $48.9 million with an adjusted EBITDA margin of 11.2%, stable compared to the 11.3% reported in last year's first quarter, demonstrating the effectiveness of cost management initiatives and the structural improvement in our business mix.

We continue to expect adjusted EBITDA margin expansion of 10 to 20 basis points for the full year. Net interest expense in the first quarter was $6.7 million, down 8.5% year-over-year, reflecting a meaningful reduction in our average debt balance compared to the prior year period.

Our first quarter tax rate was 25.1%, above our expectations due to less-than-expected deductible equity-based compensation expense. This compares to 10.5% in the prior year quarter, which, as a reminder, included a onetime tax benefit. We continue to expect a full year tax rate of approximately 20.5%, with each of the next 3 quarters expected to see a lower tax rate than the first quarter.

The largest offsetting benefit is expected to be in the third quarter. To close out on taxes, I should note that the higher-than-expected first quarter tax rate had an unfavorable impact of $0.07 on GAAP EPS and $0.09 on non-GAAP EPS in the first quarter. But given that we still expect a full year tax rate of approximately 20.5%, the Q1 tax rate does not change our outlook as to how taxes will impact our full year EPS guidance.

Net income in the first quarter was $20.5 million or $1.12 per diluted share compared to $26.9 million or $1.44 per diluted share in the prior year period. Non-GAAP EPS was $1.50 compared to $1.94 per diluted share in the first quarter of 2025.

As noted, both GAAP and non-GAAP EPS for the first quarter of this year reflected the unfavorable tax item that I previously described. We remain confident in our full year outlook, which calls for 3% revenue growth at the midpoint of our guidance range, supported by recent contract activity and the strength of our backlog and pipeline.

Our backlog stood at $3.4 billion at quarter end, approximately 51% of which is funded and our business development pipeline remained healthy at $8.5 billion. Taken together, these metrics provide good visibility for the year.

Now turning to our balance sheet and cash flows. We used $3.1 million in operating cash flow during the first quarter, a meaningful improvement compared to the $33 million used in last year's first quarter, reflecting improved receivables collections and working capital management. Days sales outstanding were 74 compared to 81 days in last year's first quarter.

Capital expenditures totaled $2.8 million compared to $3.5 million in the first quarter of last year. We ended the quarter with net debt of $436 million, down considerably from the $499 million at the end of last year's first quarter and approximately 40% of our current debt is at a fixed rate.

Our adjusted leverage ratio was 2.23 turns versus 2.25 turns at the end of last year's first quarter. Subsequent to the end of the first quarter, we refinanced our credit facility and remain well positioned to invest in organic growth, repurchase shares, pursue strategic acquisitions in our key markets while maintaining our dividend.

Today, we announced a quarterly cash dividend of $0.14 per share, payable on July 10, 2026, to shareholders on record as of June 5, 2026. To wrap up, we are pleased to reaffirm our guidance for a return to revenue and EPS growth in 2026, our revenues expected to range from $1.89 billion to $1.96 billion, representing 3% growth at the midpoint, GAAP EPS from $5.95 to $6.25 and non-GAAP EPS from $6.95 to $7.25 or 5% growth at the midpoint.

To further help you with your financial models, please note the following for the full year 2026. Both depreciation and amortization and amortization of intangibles are expected to continue to be between $22 million and $24 million.

Likewise, we continue to expect full year interest expense to be between $27 million and $29 million. As I mentioned earlier, our full year tax rate expectation remains unchanged at approximately 20.5%. In the second quarter, the rate is estimated to be around 23% with a significant reduction in the third quarter.

We anticipate capital expenditures to total $24 million to $26 million. Given share repurchases in the first quarter, we now expect our year-end fully diluted share count to be 18.3 million shares compared to our prior expectation of 18.5 million shares. And we continue to expect operating cash flow of $135 million to $150 million for the full year. With that, I will turn the call over to John for his closing remarks.

Thank you, James. We are pleased that 2026 is shaping up as we expected to be a year which ICF returns to growth. In many ways, the cause of 2025 have made us a stronger company. We are more diversified, more efficient and more agile. As we look to the future, we see a clear path to return to mid- to high single-digit growth in 2027 and continued growth beyond.

The dedication of our professional staff has been critical in helping us navigate dynamic business conditions, pivot to take advantage of new opportunities and set the stage for ICF's future growth. We appreciate their support. With that, operator, I'll open the call to questions.

[Operator Instructions] Our first question comes from the line of Jason Tilchen with Canaccord...

I believe in the prepared remarks, you talked about the advisory business for commercial energy growing mid-teens year-over-year in the quarter. Just wondering if you could help give us some additional color on sort of where you're seeing the most activity today as it relates to the data center opportunity, how those conversations are evolving and sort of what exactly as it relates to your skills and capabilities is giving you an edge to continue to win business in that area?

Sure. So on -- when I mentioned the advisory side and that growth, I think that it's important to point out that it's been the work that we're doing, expanding our client portfolio since we -- a couple of years ago, we acquired a firm called CMY, which added some engineering capabilities.

We've been able to expand our client set in that area. And so providing those engineering skills to utilities, for instance, who are trying to build out capacity to support data centers in their area. And then our power modeling team has been benefiting from a resurge in support from renewable developers across a suite of technologies, not wind, but really others of batter solar storage, et cetera, and then increased demand from data center developers as well.

Great. That's very, very helpful. And then one additional follow-up. Just at a high level, in terms of some of the investments that you're making today in sort of the ERP system, other technology, I'm wondering if you could help frame how much of those investments today are sort of offsetting some of the benefits from recent cost optimization efforts? And how we should be thinking about the cadence of maybe the more substantial gross or operating margin expansion here over the coming quarters and years?

Yes. I mean this is James Morgan. At the -- I would say from an overall perspective, I mean, certainly, we've been -- we've had a program for the last few years where we have been going through and modernizing our ERP systems. And that is certainly driving efficiencies and the amount of investments that we put into that.

We do this in such a balanced way whereby we're receiving benefits. We're becoming much more efficient. We are able to process and work faster internally. In addition to ERP systems, we're also taking time to implement AI into many of our processes that we have in the back office, and that's continuing to drive additional efficiencies.

And what we're doing, we have the ability, as we've talked about in the past, and we continue to mention today, and we're looking at having 10 to 20 basis points of margin improvement this year, and that's what we've targeted in the past years. We have the ability to deliver more, but we're using those dollars, what we save to drive and invest in long-term growth initiatives in the areas that John and Anne mentioned as part of their opening comments.

So it's -- I guess I would say that we do this in such a balanced way that we -- I don't see this as detracting significantly from our ability to continue to improve margins as we...

Our next question comes from the line of Sam Kusswurm with William Blair.

I guess to start on the commercial energy business, it grew 2%, but I think you shared it would have grown 8% if we were to add back the $8 million in project work that got pushed out. At the start of the year, you shared you're expecting at least 10% organic growth for the year in this business. So I guess I'm asking if you still expect that? And then what are you seeing in your backlog that is really supporting that? And then maybe also, can you comment on how the residential and utility energy piece of the business performed versus more of the commercial and industrial energy piece here?

Sure. So I'll start off. This is John. I think we remain confident in growth for our commercial energy business. As you know, I think we have strong backlog. We have a strong pipeline. I think we've talked about in those markets, we've -- markets are growing high single digit. We've been benefiting from plus ups. We've been benefiting from takeaways that have increased our growth rate above the market average. We remain confident that we'll continue to do that.

And so we're confident in 10% growth in the commercial energy business for the year. In terms of residential versus the industrial, Anne, do you have any? I think we talked about we're a market leader in residential energy efficiency programs. We have about a 35% market share. We think we can continue to expand that. And we're also we play significantly on the commercial building side, we have about a 15% to 20% market share.

Yes. And -- but I don't have any sort of update necessarily. I think it's progressing as we discussed in the last call. In terms of the share of the residential versus commercial, which I think is what you were getting at. Just one more thing I would add, just to underline what John mentioned about the long-term growth trajectory.

So upstream of these programs that we run, we also provide regulatory and consulting support to some of these utilities, which gives us a good sense of kind of the programs that are coming down the pike. And so that's another indicator of where we see opportunities for a strong sales year for both recompetes and wins in the program side.

I think the one thing I would mention, too, is that historically, if you look at our commercial energy business, we typically would recognize somewhere in the neighborhood of, call it, roughly 47% of our annual revenues in the first half or somewhere give or take 5% or so.

And it's the back half is when we typically -- we hit certain milestones with regard to energy incentives and so forth. And so it's -- that also has a natural uptick in the back half of the year versus the front half.

Got it. I appreciate the color. I think I'll ask then about the federal business next year, but there was something that caught in the prepared remarks. It was a piece about capturing more of the federal opportunities that are aligned with the administration's priorities.

And I was hoping you could maybe expand upon that more. For instance, from an operating standpoint, what does it really mean to pivot in that direction? And then are there any recent successes that you could point to in this effort? Or is it still kind of early on that front?

Sure. So I may have alluded to it in the script as well, but there is definitely a different way of selling in this environment in the federal space. And so it's definitely more of a focus on show what we can do, come in with prototypes, come in with good ideas that we can demonstrate and where we can demonstrate the ability to take a client to a relatively quick win.

And so I think in terms of how we think about capture, how we think about business development, that's an example of pivoting. I think in terms of new opportunities that we've seen and new agencies, so we've been successful winning opportunities in new areas. So for instance, like Department of State, Department of Labor, Department of Defense, these are agencies where we work, but we're finding new offices and new areas where we can help them. So for instance, we recently won a large BPA with the Defense Counterintelligence and Security Agency, DCSA and that's one where we incorporate AI-driven components to modernize what are very complex operational processes, but doing that in conjunction with human oversight and sort of and deep expertise. So those are the kind of places where we are focusing more in certain of these offices and agencies than we may have in the past, and we're finding that our skills resonate.

I should also add that, I mean, this administration wants to work to be outcome-based or fixed price. And the vast majority of our work is in that category. We're down under -- we're in the single digits now on cost plus and that's been declining. In addition to a, I mean, there's a real focus on AI first and AI-led.

We're leaning in on that. We have our AI platform, which allows us to do some of the rapid prototyping and other work for federal agencies. We also have a real capability around waste fraud and abuse at CMS that came to us with the SemanticBits acquisition. We -- it's a material part of our technology business, and it's a material part of our AHS work. And that's an area where there's a lot of focus and we're seeing real opportunity there. So yes, we're pleased that we're seeing -- increasingly seeing areas where our capabilities can align with some of the priorities of this administration.

Our next question comes from the line of Tobey Sommer with Truist.

I was hoping you could give us some sketch of what your M&A could look like given the pressures in the federal space, the valuation in your own stock and the group largely has declined? And how do you think about multiples and leverage in this context, how engaged and active do you expect to be?

I think as we've talked about, I would say, as you well know, Tobey, I mean, if you look at the -- I mean, I see a strategic intent in our history over the last 20 years as a public company. M&A has been a key part of our strategy, and there's been 3 or 4 times where we've levered up and then within a year or 18 months, paid down the debt.

And it's been quite successful for us in terms of, I mean, both organic and inorganic growth. And I do think it remains a priority for us. I think we've talked at length about -- generally, we're focused on opportunities in our key growth areas. I would certainly say right now that energy is the first among equals and that the primary focus on the M&A front is on the commercial energy front.

And there, I think we would look for opportunities that are align with our core energy business, but bring us additional geographies, different additional scale, additional capabilities, additional clients. And so it's bringing those types of things to the core business.

And then we'll look at adjacencies, which I think would tend to have more of an engineering focus. Ann mentioned CMY, which brought grid engineering, large data center load, large load capabilities. I think that's an area that we view as an adjacency that there could be some real synergies and opportunities for us given our our core business.

I think as we've talked about it, I think at the highest level, we'll want any acquisition to be accretive in the first year, we'll -- something is a good strategic fit, a good cultural fit. We'll obviously need to see material revenue synergies I think to achieve those goals.

So I think at a high level, that's how we think about it. Obviously, the multiples in the energy arena for our current business, mid-teens multiples. And so we have to find the right fit with the right synergies to meet our criteria. But I think that would be -- that's the primary focus right now. I think if you look at our history in terms of our leverage ratio, I think in periods where we have levered up, we've levered up to 3.5, 3.75 maybe at the peak with SemanticBits 3 or 4 years ago with ICF, a few years before that.

I don't see us going higher than that. I think we certainly want to be something that we could pay down quickly with our strong cash flow in a year or 18 months. I don't know, James...

No, I think you've covered the key points.

Could I also ask you from a commercial energy perspective, how quick -- I understand some work was stretched out, pushed to the right. What kind of growth cadence do you expect this year? And how quickly will the year-over-year or sequential growth kind of resume?

James, do you I mean I think as I said, I think we expect 10% for the year. I think we certainly going to ramp up throughout the year. I think...

Yes, it is. I would -- you can expect mid- to upper single digits, I think, as you move forward in this next quarter or so and then it's going to go beyond that and continue to ramp up as we move throughout the second half, especially the fourth quarter is -- I mean that's the timing when we end up having many of the energy incentives are realized during that period of time, Tobey. So obviously, Q4 continues to be like it's always been the strongest growth period.

Okay. And you talked about a resurgence of renewable. Could you give us some context around that in maybe a little bit more detail because the news flow around the politics is mixed. So I'd love to understand your experience when the rubber hits the road.

So yes. So this is Anne. And the mention of renewables is that all of a sudden that there's a renewed interest. And so this all of the above is really more of a thing. And so we have hyperscalers who may have made commitments that they're going to provide energy that is renewable to support their data centers.

So all of a sudden, that provides an opportunity for us to support in that analysis. I think that in the case of the hyperscalers, you're dealing with stakeholder engagement, crisis communication, but you're also supporting the siting and interconnection analysis with developers, we're doing siting analysis.

We're expanding renewable facilities, looking at brownfield repurposing, again, with an eye on potential renewables. Gas procurement strategies are still in there, but also understanding interconnection applications and sort of what can come -- its speed to power is a really important point.

And then obviously, battery storage is the conversations around battery storage are obviously way more in the forefront, and that's always been a part of the work we do anyway, but that's obviously much more of interest to the customers or to our clients.

Our next question comes from the line of Kevin Steinke with Barrington Research Associates.

Great. Just from a housekeeping perspective, can you just expand on what resulted in the later timing of some revenue in both the commercial energy and international markets?

Maybe I'll start it off, you can add. I think in terms of the shift of the revenue to the right, I think it's just a confluence of events on a couple of handful of projects where we just didn't ramp up the work quite as quickly as expected as we started the year, both for ICF and our subcontractors. As James also mentioned, I mean, this is all fixed price contracts. it's all in backlog.

It all has to be recognized in 2026. But it's also we have to meet certain milestones to book the revenue, and those have pushed out a little bit. And then there's also our fees are performance related when we meet specific energy reduction goals and those are pushed out. So it was just a of events that pushed to the right.

I don't -- it was not -- there's no underlying challenges or problems with the projects. I think it's just push the right for a handful of projects that...

Yes. Got it. Understood. And so you mentioned in the federal space that you submitted $400 million worth of bids in the first quarter, I believe. Can you just give us a little more flavor around the type of work that you are predominantly bidding on in the federal space?

Sure. So I think as I mentioned in my earlier commentary, I think we are -- and Ann said it, too. I mean, first of all, I would say that certainly within HHS, CMS remains an area where we're seeing opportunity and that was certainly a key part of those figures.

We are bidding more opportunities particular on the technology front than the Department of War. And so -- and Ann mentioned one of the material IDIQ contracts we've won. We actually have several IDIQ contracts we won in the last year or 18 months that we're seeing more opportunity for the types of skills we have.

I would also say the Department of Homeland Security is an area of opportunity that we're certainly pursuing. We're working at CISA. You know we work at FEMA and other agencies within in DHS. And so those are the ones I think that coming to mind to me and certainly. I think those -- I think that gives you a flavor, CMS, DHS, 1 or 2 other clients.

I would just say to that most recent vehicle that we -- John mentioned the part, we did more recently win a task order, our first task order that too. So that was good to see.

All right. Maybe one more here. You mentioned the target of returning to mid- to high single-digit revenue growth in 2027. Realizing you're not giving a detailed outlook or guidance, but can you comment on whether that contemplates a return to year-over-year growth in the federal government space?

I think -- yes, I think it would assume a return to growth in the government space. Let me say it this way. I mean I think as we've talked about, we have 60% of our business growing 10% or more collectively commercial state and local and international.

I think we continue to believe that's a long-term trend. We've indicated that our IT modernization business will return to low single-digit growth this year. So that gets 80% of our business to growth. As you know, our guidance for this year for the remainder 20% of our federal business is, I think, down mid- to high teens given the difficult comps we have from the impacts in those last year.

I think we think that we've bottomed out there or stabilizing there. And so I mean, you can do the math if we're stabilized for that and the other 80% is growing, that would certainly get us to mid-single digit or better organic growth.

And so I mean that's 1 month experiment for 2027. And then the upside would be we could do better than stabilization or low single-digit growth in IT modernization, it could go higher. Obviously, we've been higher than 10% on the other 60% in recent years last year, other years. And so I think that's the kind of mental model I want to be thinking about as we think about how we get there.

And then, of course, we talked about acquisitions. We've also -- that's been part of our strategy. We find the right deal, we'll do something there. I mean I think we'll -- but we'll be very smart and we'll be very careful and we'll be very disciplined. I think there are opportunities out there, and we'll certainly look at those too. If we did that, that would certainly move us to double digit.

Our next question comes from the line of Mark Riddick with Sidoti.

I wanted to touch a little bit -- maybe we could talk a little bit about what you're seeing on the state and local government activity levels and maybe what you're seeing there as far as RFPs and the like and sort of their demand as well as maybe touching a bit on the disaster side of things. And then maybe also you could touch a little bit on what you're seeing internationally as far as the opportunity set there.

Sure. Okay. So on the state and local front, I spent a fair amount of time on disaster, so I'm going to start with the other. So environmental services, so we provide environmental services to state and local governments, and those have been buoyed recently by a focus on new broadband fiber installations as well as opportunities in the mining sector, so where gold and critical minerals are in high demand.

And so that's been good. We've won some recent things in the broadband area, and we see more coming. For state transportation agencies and metropolitan planning organizations, we won a suite of separate but related projects that address the resilience of transportation infrastructure to extreme weather, but also focuses on safety, mobility, et cetera.

And so that work is pretty interesting. It utilizes proprietary ICF models. and deep expertise and the focus is on providing these state and local organizations with actionable investable sort of recommendations. And then I did -- I briefly alluded to this, but we are seeing opportunities to support states with advanced technology solutions that are akin to what we do for the federal -- in the federal modernization space.

So for a major state client, for instance, we're working on a legacy modernization project where we have the opportunity to pilot the use of a Gent modernization code to speed the process. So that's a pilot with that state agency, but that's showing some promise as well and it's kind of an interesting and new place for us to engage in the state area. You asked about disaster.

Beyond what I mentioned, I think that we are seeing that the work in disaster management, obviously, a lot of that has shifted to states and a lot of the work that we've done over the past several years has been supporting state and local governments in this sort of proactive, as you can imagine, sort of leaning in and increasing resilience before a storm is less expensive than responding after a storm.

So that's already a place where we're very active. That's definitely a priority of this administration, and that seems to be where this administration is going to be paying attention. So that's -- I think that's an area. So for instance, I mentioned BRIC, but there are other programs like it that are also in that sort of proactive resilience front.

And then last, you had asked about what we -- how things are going in our international business. Is that right? So I have mentioned that we are very focused on delivery. We've won a lot in Europe and the U.K. in the last couple of years.

We're very focused on ramping up some of those large contracts. But we've also had some exciting procurement activity there. And I think we see -- we continue to see very strong recognition of ICF brand with those clients, both the U.K. government clients and also the EU government clients.

And so that's been great. We -- I think we see a lot of momentum there. But as you saw with 17.5% growth in the first quarter, there's a quick ramp-up, and we continue to expect that, that's going to grow over the course of the year. John, anything I missed?

I just would say at the end of the day, I agree with all the points Anne made. I think our expectation is our state and local business will grow mid-single digit this year. And -- and international will be strong double-digit growth.

It really, really helpful. I was sort of curious -- I wanted to touch on the prioritization of federal in certain areas like -- and I guess I'll just keep it to the things like fraud prevention and the like. Do you anticipate -- are you beginning to see any of that type of work and pursue on the state and local level as well? Or any other sort of examples where states are sort of moving in the same direction as federal for certain types of opportunities?

It's interesting you asked. I think that some states are certainly more focused in areas that are a priority for the federal administration than in other states are focused in areas that are not a priority for the federal administration.

And I think in both directions, we have skills that can be supportive to those state agencies. So for instance, we've seen some states trying to "fill gaps that they see left by administration, the administration shifting away from certain priorities and focus on others. And then there are states that are trying to align themselves very directly with the administration priorities. And there, obviously, we're following that queue as well.

I'm showing no further questions at this time. I would now like to turn it back to John Lawson for closing remarks.

Thank you for participating in today's call. We look forward to seeing you all at upcoming conferences and meetings. Thanks again for attending.

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

Welcome to the Fourth Quarter and Full Year 2025 ICF Earnings Conference Call. My name is Lauren Cannon, and I will be your operator for today's call. [Operator Instructions] Please be advised that today's conference is being recorded.

I will now turn the call over to Lynn Morgen of AdvisIRy Partners. Lynn, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to review ICF's fourth quarter and full year 2025 performance. With us today from ICF are John Wasson, Chair and CEO; Barry Broadus, CFO; joining them are James Morgan, Chief Operating Officer; and Anne Choate, President.

During this conference call, we will make forward-looking statements to assist you in understanding 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 February 26, 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 fourth quarter and full year 2025 performance. John?

Well, thank you, Lynn, and thank you all for joining today's call to review our fourth quarter and full year 2025 results and discuss our business outlook for 2026. Let me also welcome Anne Choate to her first earnings call as President of ICF.

And with that, let me start by saying that our fourth quarter results were firmly within our guidance ranges and capped the year in which ICF demonstrated notable resilience mid-challenging conditions in our federal government business. In fact, we delivered on what we said we would 1 year ago, and we are anticipating a return to revenue growth in 2026 and at the midpoint represents an over 10% year-on-year swing.

To summarize, 2025 revenues were firmly within our guidance framework despite the direct and indirect impacts of the 6-week government shutdown. We maintained our full year adjusted EBITDA margins at 2024 levels despite the 7.3% dip in revenues. Revenues from nonfederal clients increased 14% to account for 57% of full year revenues, led by 24% growth in revenues from commercial energy clients, of which 15% and represented organic growth. And ICF ended the year with a book-to-bill ratio of 1.19, a firm backlog of $3.4 billion and a business development pipeline of $8.6 billion, all metrics that underpin our growth expectations for 2026.

As I just highlighted, we saw robust demand for our services to commercial, state and local and international government clients throughout 2025, benefiting from the investments we have made over the last several years to build out key growth areas and further diversify our business. In fact, we anticipate that this client set, we've achieved double-digit revenue growth again this year to account for more than 60% of our total revenues in 2026.

The top performer in this grouping continued to be commercial energy where client revenues reached just under $550 million and grew 23% in the fourth quarter and 24% in 2025. And we are expecting another year of double-digit growth in this client category in 2026. The primary growth driver continues to be sustained strong demand from our utility clients for our market-leading energy efficiency, flexible load management, electrification and grid optimization programs, which accounted for approximately 80% of our 2025 commercial energy revenues.

These are critical areas for utility clients as they address the tremendous projected growth in electricity demand and the [indiscernible] grid resilience and affordable energy. ICF is the market leader in developing and implementing residential energy efficiency and new related programs for utilities, with a 35% market share, and we are continuing to gain market share in the commercial and industrial energy efficiency space, approaching a 20% share of this part of the market. Our market growth is a direct result of the strong performance of our programs, which consistently meet or exceed client objectives. As a consequence, we are winning [ recompetes, ] benefiting from expanded scopes of work and taking away contracts from other providers.

Additionally, revenues from our commercial energy advisory work picked up in the second half as the regulatory environment became clear to developers and investors in the energy space. We saw higher demand for our grid engineering services associated with accommodating data center loads as utilities expedite development of new substations. ICF energy engineering capabilities expanded considerably with our acquisition of [ CNY ] in 2023, which strengthened our offerings in grid modernization, and this is an area that we expect to build out further organically and potentially through tuck-in acquisitions.

We're also seeing additional demand from small modular nuclear reactor developers seeking DOE funding, market perspectives and regulatory support, along with demand for policy work regarding SMR from states and stakeholders. We also foresee work exploring the transmission impacts of upgrading existing nuclear facilities.

Our work on renewables is expected to continue to grow in 2026 led by solar and battery storage. A significant amount of renewal development has been safe harbor for investment tax credit purposes, creating sustained demand for our services for at least the next 2 to 3 years. Also, despite the reduced support from renewables by the new administration, we see consistent private sector interest in renewable and storage development on nonfederal lands. This trend will continue through the advanced economics of these technologies and the need to meet the near-term demands of rapid load growth.

And keep in mind that when we refer to our commercial energy revenues of $550 million, this number does not include our energy-related work for federal, state and local and international government clients, which amount to approximately $60 million in 2025. In fact, our commercial energy clients very much value ICF's public sector work as it gives us a broader perspective on emerging technologies as well as regulatory and policy issues.

Moving ahead to our state and local government clients. Our revenues increased 4.3% in the fourth quarter, up 2.2% for the year. Our disaster recovery work accounted for approximately 45% of our 2025 state and local revenues and reflected our current support for over 80 active disaster recovery projects in 23 states and territories. ICF is recognized as a market leader in the development and implementation of disaster recovery and mitigation programs. Just a few days ago, we announced that we were awarded a comprehensive management services contract by the state of Florida. This contract will enable us to compete for a wide variety of opportunities to help Florida improve and accelerate statewide program delivery and strengthen long-term infrastructure resilience, and we are very encouraged by this win.

We continue to see [ HUD-funded ] procurement opportunities, resulting for nearly [ $12 billion ] appropriation to enable long-term residential housing recovery from disaster [ restorations ] in '23 and '24 and are actively positioning to compete for these procurements. As has been widely reported, the future role of FEMA is under review. FEMA provides funding for the rebuilding of public infrastructure, such as hospitals and schools following disasters. And while this review has slowed the flow of funds, we believe FEMA funding will ultimately flow to state and local governments.

Lastly, our international government revenues increased 12.8% in the fourth quarter and 7.6% for the year, reflecting the ramp-up of contracts we won in late 2024 and early 2025 with the European Commission and the U.K. government. We expect to see greater growth in 2026 with the full ramp-up of those contracts. Plus in January of this year, we announced 2 significant new contracts to design and deliver large-scale communication campaigns across all 27 European Union member states.

To sum up, we expect our revenues from nonfederal clients to increase at a double-digit rate this year and account for over 60% of our full year 2026 revenues. Let me now turn to the federal arena.

As you know, 2025 was a challenging year, but we are looking ahead to a much improved 2026 for ICF. Our revenues from federal government clients declined 25% year-on-year in 2025 as a result of contract canceled between February and May of last year, the slowdown in new procurements and the direct and indirect impacts of the 6-week government shutdown.

In terms of where we stand today, our federal business is on much [indiscernible] footing than last year at this time. We were awarded approximately $1.1 billion in federal government contracts in 2025, representing about 1/2 of our total contract wins for the year, and about half of that amount represented new business, including expanding the scope of current contracts. This is a good indication of ICF's strong positioning in our federal markets.

After last year's government shutdown ended, procurement activity picked up and that momentum continued into 2026. We are seeing continued emphasis on efficiency which we are well positioned for, given that the vast majority of our IT modernization work, which I think that's about 1/2 of our Federal government revenues is outcome-based and done under fixed price and time and materials contracts. And we are starting to see a shift towards federal agencies outsourcing more work, which is creating additional opportunities for us.

I know investors are concerned about the potential for agentic AI tools such as [ Claude code ] and Gemini and [ Codex ] to eliminate need for platform and service providers to play a central role in modernizing federal IT systems. Agentic coding tools can certainly speed up development but they cannot replace the need for federal IT modernization. Here are 3 additional points to consider with respect to ICF. First, as I just noted, 90% of our IT modernization work is outcome-based and our civilian agency clients require a lot of support in this area. Thus, if we can complete certain projects and less time at lower cost, thanks to agentic AI, we will utilize available funding to move on to the next project. In other words, reducing costs increases the amount of backlog we can tackle for a client.

Second, there is funding, federal government budgets for IT modernization are robust and recent reports indicate that a significant majority of federal IT systems still need modernization.

And third, it is all about what you're doing and not doing in this arena. ICF does not maintain legacy systems. We don't manage project management offices. We don't run federal call centers, and we have exited other areas that we expected to be commoditized due to AI. Rather, all work is in the higher end, higher margin areas like application development, cloud services, AI government, governance, automation, data curation and system post-processing.

So in summary, AI as an accelerator and a net positive for ICF as we've already seen material improvement in our productivity, both in our client work and the internal management of our business.

Looking across our federal government work more generally, we expect continued scrutiny around spending, but the market backdrop is much more stable than it was a year ago. And we see solid opportunities aligned with our core capabilities, particularly where agencies are modernizing systems, improving efficiency and advancing mission-critical public health and/or infrastructure priorities.

In 2026, we expect revenues from federal clients to decline at a high single-digit rate. The first half of 2026 will be a difficult comp as revenues in the first part of 2025 included federal government work that was canceled between March and May -- I'm sorry, February and May of last year. On the plus side, we generally expect sequential improvement in federal revenues from the first quarter through the third quarter of 2026, returning to year-on-year growth by the fourth quarter.

To sum up our federal work, we have a firm backlog of federal given contracts, a significant pipeline and expect revenues from our IT modernization work to increase this year. In 2025, we did navigate difficult business conditions to emerge as a stronger company in many ways. We are more diversified, we're more efficient and we're more agile. These advantages are positive catalysts for ICF in 2026 and beyond. We demonstrated our confidence in ICF's long-term outlook by repurchasing approximately 564,000 shares of our common stock last year, of which about 220,000 were purchased in the fourth quarter.

So with that, I'll turn it over to our CFO, Barry Broadus, for his financial review. Barry?

Thank you, John, and thank you, everyone, for joining today's call. I'm pleased to provide you with some additional details on our fourth quarter and full year 2025 results.

Total revenue in the fourth quarter was $443.7 million compared to $496.3 million in last year's fourth quarter and $465.4 million in this year's third quarter. The 10.6% year-over-year decline was consistent with the guidance we provided on our third quarter call.

The fourth quarter capped a strong year for our non-federal business, which continued to offset a large portion of the decline in federal revenues. Revenue from our commercial, state and local and international clients increased 16% year-over-year and accounted for approximately 62% of our fourth quarter total revenues. Commercial energy remained a standout performer with revenue up 23.1% year-over-year, accounting for nearly 1/3 of our total revenue, reflecting the sustained demand for our energy efficiency, electrification, flexible load management and grid optimization services.

Conversely, federal revenue declined 35.1% in the fourth quarter as year-on-year comparisons were amplified by the direct and indirect impacts of the 6-week government shutdown. Fourth quarter subcontractor and other direct costs declined 5.8% year-over-year and represented 26.7% of total revenues compared to 25.4% in the prior year quarter, reflecting increases in our pass-through revenues with our nonfederal clients.

Fourth quarter gross margin were 35.7% compared to 36.1% a year ago. The decrease was due to a shift in our cost mix associated with a higher percentage of subcontractor costs and higher fringe expenses. Indirect and selling expenses declined at a slightly higher rate than revenues as costs decreased $14.2 million or 11% year-on-year to $115.2 million. Our indirect expenses were 26% of total revenues, which were slightly less than last year's fourth quarter and 30 basis points below the third quarter of 2025.

Fourth quarter EBITDA was $43 million compared to $50.8 million in the prior year. Adjusted EBITDA was $46 million versus $56.3 million last year, with an adjusted EBITDA margin of 10.4% compared to 11.3% a year ago. The decline in adjusted EBITDA was primarily driven by the decrease in our gross margin I previously mentioned, along with the temporary effects of the government shutdown.

Fourth quarter net interest expense totaled $7.2 million compared to $6.5 million in the prior year quarter due to our higher average debt balance, reflecting $55 million in share repurchases executed during the year and the [ AAG ] acquisition completed in late 2024. Our tax rate in the quarter was 18.7% compared to 20.9% and in the prior comparable quarter as we continue to execute on our tax optimization strategies.

Net income for the quarter was $17.3 million or $0.94 per diluted share compared to net income $24.6 million or $1.30 per diluted share in the prior year. Non-GAAP EPS was $1.47 versus $1.87 a year ago.

Now turning to our full year results. Revenue was $1.87 billion compared to $2.02 billion in 2024. Our non-federal business grew 14.2% year-on-year led by the continued strength in commercial energy, which offset a significant portion of the 25.7% decline in federal revenues. Full year subcontractor and other direct costs represented 24.2% of total revenue, down 90 basis points from 25.1% in 2024, reflecting the larger proportion of revenue tied to ICF direct labor.

On a full year basis, gross margins rose 60 basis points to 37.2% driven by the shift in our mix toward higher-margin commercial revenues, which grew 23.2% year-over-year and accounted for 33.2% of total revenues, up from 25% in 2024. Full year gross margin also benefited from our favorable contract mix as fixed price and [ T&M ] contracts represented approximately 93% of total revenues, up from 89% in 2024. cost reimbursable contract declined to 7% of total revenues.

Indirect and selling expenses declined 5% to $492 million or 26.3% of total revenues. We remain focused on managing our cost structure in 2025 while continuing to invest in growth areas, including AI and other technology capabilities to support our long-term growth aspirations.

2025 adjusted EBITDA totaled $207.2 million versus $226 million a year ago, adjusted EBITDA margin was 11.1%, stable with the 11.2% reported a year ago and consistent with the guidance we provided at the start of 2025. The full year adjusted EBITDA margin reflected the strength of our non-federal business and the tight management of our cost structure.

GAAP EPS was $4.95 compared to the $5.82 in the prior year, non-GAAP EPS totaled $6.77, inclusive of a noncash unfavorable FX impact of $0.11, which was driven by the declining value of the U.S. dollar in the first half of 2025 and associated with intercompany transactions. In the prior year, non-GAAP EPS was $7.45.

At year-end, our backlog stood at $3.4 billion, half of which is funded, reflecting the long-term visibility we have in the business. Our full year book-to-bill ratio was 1.19, and our business development pipeline remained healthy at $8.6 billion.

Now turning to cash flows and the balance sheet. Our fourth quarter operating cash flow totaled $75.6 million, bringing our full year operating cash flow to $141.9 million, near the upper end of our most recent guidance range. We ended the year with total debt of $401.4 million, down from $411.7 million at the end of 2024. During the fourth quarter, we reduced our debt by $48 million, reflecting strong cash generation despite the government shutdown. Approximately 44% of our debt is set at a fixed interest rate. Days sales outstanding were 77 days compared to 82 days in the prior sequential quarter.

Capital expenditures for the full year were $21.7 million, similar to $21.4 million reported in 2024, and our adjusted leverage ratio was 1.98x at the end of the fourth quarter, down from 2.3x at the end of the third quarter.

Our capital allocation priorities for 2026 remain unchanged and reflect our disciplined balanced approach. We will continue to invest in organic growth initiatives, pursue strategic acquisitions in attractive markets, reduce debt, fund our quarterly dividends and execute opportunistic share repurchases. Consistent with these priorities, we repurchased approximately 220,000 shares of common stock in the fourth quarter, bringing our total repurchases to approximately 564,000 shares for the full year, underscoring our confidence in the strength and long-term outlook of the business. Today, we announced a quarterly cash dividend of $0.14 per share payable on April 14, 2026, to shareholders of record on March 27, 2026.

Turning to our guidance for 2026. With respect to the cadence of the year, our first half year-over-year comparisons will be down as revenues in 2025 included federal contract work that was canceled between February and May of last year. We expect to generate roughly 48% of our total revenue in the first half of the year with the balance in the second half. Now to help you with your financial models, I would like to note that from a sequential standpoint, our first quarter of 2026 had 2 fewer days -- 2 fewer working days as compared to the fourth quarter of 2025, which equates to approximately $14 million in revenue.

We also anticipate the following: depreciation and amortization expense is expected to range from $22 million to $24 million. Our amortization of intangibles are now expected to range from $22 million to $24 million, which is $14 million down from 2025 at our guidance midpoint. The expected decrease is due to the mid-year roll-off of intangibles from acquisition made in the 2020 and 2022 -- 2021 time frame. We anticipate interest expense of approximately $27 million to $29 million. Capital expenditures are anticipated to be approximately $24 million to $26 million. Our full year tax rate is expected to be approximately 20.5%, we expect our full -- our year-end fully diluted weighted average share count to be approximately 18.5 million, and we expect full year operating cash flow of $135 million to $150 million.

And with that, I'd like to say it has been a great pleasure for me to work with the incredible people of ICF. I am grateful for their steadfast support and shared commitment to our company over these past 4 years. I will certainly miss interacting with our analysts and investors.

And with that, I'll turn the call back over to John for his closing remarks.

Well, thanks, Barry, and thank you for doing a great job as CFO during the last 4 years, time flies when you're having fun. And all I can say is enjoy your retirement.

We are pleased to guide to a return to revenue and EPS growth in 2026, with our revenues expected to range from $1.89 billion to $1.96 billion, representing 3% growth at the midpoint, GAAP EPS from $5.95 to $6.25 and non-GAAP EPS from $6.95 to $7.25 or 5% growth at the midpoint. These expectations anticipate double-digit revenue growth from our non-federal government clients, led by commercial energy, bringing non-federal revenues to over 60% of ICF's total 2026 revenues, and also assume a return to year-on-year growth in certain parts of our federal government business.

This guidance does not anticipate any new large contract wins in the federal space nor any acquisitions. For the first quarter, we are guiding to revenues of approximately $450 million, GAAP EPS of approximately $1.20 and non-GAAP EPS of approximately $1.55.

I would like to take a moment to recognize the dedication and hard work of our professional staff who have been instrumental in helping us navigate 2025 and whose dedication to ICF and our clients has had a lasting impact on this organization. And with that, operator, I'm pleased to open the call to questions.

[Operator Instructions] Our first question comes from the line of William -- sorry, Tim Mulrooney with William Blair.

I want to start off by saying to Barry, congrats on the retirement, and I wish you all the best on your next adventure.

Thank you, Tim. Appreciate it.

You got it. So I just had a few here. And I apologies if you addressed this already. I'm bouncing around earnings calls, but I wanted to ask about your commercial energy business. I mean, commercial is going to be 60% of your revenue by the end of this year. I want to focus more on this. So could you just share how your commercial energy business grew in 2025? And what your expectations are for 2026?

Sure. I think as I indicated in my remarks, Tim, our commercial energy business grew about 24% for the year last year with 15% of that being organic. And so it certainly led the way in terms of growth within the firm. I think our guidance for this year is at least 10% organic growth in our energy business. We continue to see very positive trends there across the business. As you know, 80% of that business is in our utility programs business that spans energy efficiency, flexible management, electric storage, battery storage. We are a market leader there. We have an addressable market of $3 billion to $5 billion. As I said in my remarks, we had about a 35% share in residential, 20% share in commercial and industrial. That market is growing high single digit. We're outperforming that. We're able to outperform because clients are plusing us up because of the high-quality work we're doing, and we are taking share from competitors.

And so we think that has a long runway. We see tremendous opportunity. And then the remainder of the business is in the advisory side with a significant increase in electricity demand and focus on utilities on affordability and reliability. Again, we see tremendous opportunity and a significant addressable market. And so we're quite positive. We'll have double-digit growth there. And so we're -- I think the commercial energy side of the business will lead the way in terms of contributing to our organic growth in 2026.

Okay. Do you expect -- where is more of that growth coming from? Is it coming from the utility programs or the advisory business as we think about the grid and just this insatiable thirst for more electrons, we're just not going to have enough over the next 5 years. How do I think about parsing that apart?

Yes. I think the -- well, I'll say a few words, and I'll turn it over to Anne Choate here so that her -- share her thoughts. I think both components of the business, the utility programs and the advisory, I think we ultimately believe will grow at least 10%. I think the advisory, I think has the most long-term potential to grow more rapidly given it looks across the entire value chain in the energy arena.

And as you know, we're also investing more on the engineering side of the business. We did -- as I said in my remarks, we did the [ CMI ] acquisition, I guess, about 2 years ago. And while that's a smaller part of our business, I think that has as we continue to invest the potential for quite significant growth. That's an where we're looking to deploy our balance sheet in addition to organic [indiscernible] Anne, do you want to...

Tim. Nice to hear from you. I agree with everything that John said. All I would clarify is just that the energy efficiency part of our business is larger. The market is not growing as fast, but we have addressable market, and that's where we've been gaining. We've been gaining market share on the commercial industrial side. we've continued to grow on the residential side, and those are just larger numbers. But the faster growth, I would say, is in the advisory and the engineering and these other areas that John was mentioning. And so even though that's a smaller part of our business, that's an area where we see a faster pace of growth.

Got it. I actually -- if you don't mind me squeezing one more in. Anne, while I have you, I've been wondering about this question. We get a lot of inquiries about this part of your business, the commercial energy business with how that compares with some of the other public companies. I'm thinking about a company like [ Willdan, ] where we've seen a run-up in the stock and a strong valuation multiple. I'm curious what your thoughts are on that, like how your commercial energy business compares with someone like that. .

So that question periodically does come up. And so I'd say that I'm obviously -- I know ours much better than I know [ Willdan. ] But what I -- based on what I know, I see some similarities in terms of what ICF and [ Willdan ] provide in the energy space and then some areas that are different. I think on the -- in terms of where we're similar, we both serve utilities, in terms of how we design and deliver these energy efficiency and energy demand programs. And our business, ICF's business in that area is roughly twice theirs in that particular space, with a much stronger focus in ICF on the residential, but then also a growing share in the commercial. Whereas [ Willdan ] tends to be more focused on commercial and industrial programs.

I think there's a second place where we could talk about the -- comparing the 2 companies is that we bolster public sector customers, but I think that the work that we do, that ICF does for public sector entities tend more towards like the planning the environmental aspects, imagine like a transmission line and the environmental planning around that. as compared to more of the -- closer to the ground engineering and sort of construction oversight that might be more akin to their program portfolio.

And then similarly, we both work in the data center area. We work on data center-related projects. But we focus more on like planning, financing, energy integration, great interconnection, that's sort of where our sweet spot is. We focus less on the actual construction and the risks associated with that. So most of our work is performed by professional staff and not subbed out.

I guess the last thing I would say is that for us, I think our energy business, our primary customers are utilities where there's includes a lot of state and local clients who are installing like energy-related infrastructure.

Our next question comes from the line of Tobey Sommer with Truist.

It's [ Henry ] on for Toby here. I appreciate my question, and thank you, Barry, for all you've done. Maybe just to start, it looks like you already achieved this in the fourth quarter, and I'm sure there was some of the shutdown and other things in there. But just on the kind of greater than 60% non-federal share you're projecting for 2026. Is the exit rate in the fourth quarter is kind of a good proxy to think about that? Or can we see that top even more towards non-federal in '26? And I guess the cadence of that over the course of the year.

Yes. Thanks for the question. As we discussed, we're definitely going to see more non-federal business in 2026 as that continues to grow. So we're looking at north of 60% as we look towards '26. So that trend will continue.

Got you. Understood. And then maybe just switching to the federal side, on the procurement environment now. It sounds like things are incrementally better, obviously, than they were at the start of last year. Can you just kind of speak a little more to that and kind of the the variance between your major agency customers at this point?

Yes. I would say that -- well, first, I mean, in terms of the procurement environment, I mean, I think as we've talked about the last quarter or 2, I think we have not seen any contract cancellations or anything of that nature of the last couple of quarters. So we're not seeing those concept disruptions. I think as I said in my remarks, obviously, as we got to the end of the third quarter going -- and in the fourth quarter with the government shutdown, that slowed and impacted the procurement environment. But I think since we got past the shutdown, actually, in the IT modernization front, we've seen a pickup in that procurement environment is getting better. It's not back to where we'd like it, but it's certainly improving, and we're seeing opportunities move in that environment, I would say.

More broadly on the broader programmatic business. There's been improvement there. I think we're seeing certainly on the recompetes are occurring in a timely way. We've been quite successful in winning our recompetes. We're seeing additional funding on existing contracts. New opportunities there haven't been as as robust as on the IT modernization side. But generally, I would say that the procurement environment is improving and is -- we're ending the year and starting the year in a better position than we were sort of in the first half of last year.

And so with that, I don't think I said in the guidance, but let me just -- for our federal business, which is about -- 42% of our business, about half of it is IT modernization and half of it is broader programmatic work. And as I said, we expect IT modernization to return to growth with the improved procurement environment for 2026, and we expect the entire federal business to return to growth in 2027.

Got it. I appreciate that. And if I can just sneak 1 more in, there's been some mixed talk about this, but looking ahead to kind of the summer, maybe early fall. If there were to be another reconciliation bill before the midterm, what are kind of the main areas that you would want to see that could benefit you the most in terms of big, big funding streams and kind of the administration is looking at.

Well, I mean the first thing I'd like to see is the budget passed in a timely way without kind of continuing resolutions in the risk of government shutdowns, which we've we've been through. So that would be a nice outcome.

I think that generally, I would say the budgets for this year, we're -- generally aligned with our expectations. I mean, I think for us, CMS is an area on the health side that we're quite focused on and continue to see a lot of opportunity, Department of Transportation and then generally across the IT modernization front. I mean, I think we're seeing a lot of activity and a lot of interest across our entire client set on that front.

The focus is obviously AI first. Efficiency of [indiscernible] fraud and abuse, doing in a natural way with commercial terms, we think we're in a really good spot to take advantage of that. And so I think those are examples.

We're also seeing opportunities in DOE. I think we're -- this administration is focused on on certain technologies and certain generation, nuclear, natural gas, extending coal plants. I mean, there's things -- those are areas that we can support and are interested in. And so yes, as I look at the budget for 2027, yes, having passed in a timely way and voting that uncertainty would be terrific.

Our next question comes from the line of [ Jason Tilchen ] with Canaccord Genuity.

I guess to start, you noted the prepared remarks that you're already starting to see some improvement in productivity of client work and internally, from AI. I'm just hoping you could maybe provide a little more detail on some of the specific ways that this is happening? And then how much of a benefit from this sort of greater efficiencies is contemplated within the guidance you provided today?

Yes, sure. I think obviously, as we think about AI, I mean, one lens to look at it is how we use it internally. And there, I think we are using it and have a number of use cases we've been focused on to help us provide support to our staff in areas around human resources, also recruiting new talent into the firm. Obviously, contracts and our ability to review contracts more quickly, business development, another area. Any area where volumes are high and the [indiscernible] are predictable we are finding we can gain efficiency to help us make us more cost efficient.

I mean BD is also an area where AI is really helpful with throughput. We can write more proposals, submit more high-quality bids more quickly. And so there, those are all about efficiency gains. I think we think we have generally guided to 10 to 20 bps of profitability improvement for a year. We're getting -- historically, we've gotten a portion of that certainly in the last several years from the mix of the business with commercial growing rapidly, but I do think that -- we do think AI will allow us to continue to improve our profitability through the leverage from the technology, and we're comfortable with 10 to 20 bps with potential upside from the internal use.

Externally, I think we're -- we've really -- as I said in my conference call remarks, we've really been focused on areas where we think we can have the most impact and add the most value for our clients. And so in our business, I mean, that's -- to a large extent, we've been primarily focused around IT modernization and how to best leverage it for that. And so that, I think, is -- we're quite focused on how it can improve efficiency of our coding and building our technologies, how we can use it for rapid prototyping. We're using -- we've developed [indiscernible] agentic AI platform. It's allowing new rapid protocol for clients. We're doing AI governance. We're doing data organization. And so there's a number of areas we're focused on leveraging it for clients.

I don't know, Anne, if you want to add anything on from a client perspective?

I think we've seen that it can speed up development. We -- I think what we try to do is pair up our understanding of the regulatory environment and the the needs as you modernize these systems with the efficiency that we can gain through the AI tool.

Great. That's super helpful. And then just 1 other one. In terms of international growth, it's accelerated over the past 3 quarters. You just announced $300 million of new European contracts in January. I was wondering if you can just drill out a little bit more on what's been driving this momentum and more broadly, how you think about the international opportunity going forward.

Well, as you know, I think we have won several large contracts here sort of last year and and 1 or 2 more as we started the year here that I think are primarily -- well, there's 2 areas. One is marketing and communications for the European Commission and helping them with communicate their programs and outreach to citizens in the European Commission on their policy and program efforts. We've talked at length that those are significant contracts. The activation of those contracts was a bit slow last year, but as we ended the year and began this year, we are seeing the activation really begin to kick in. And so we're quite confident we'll have double-digit growth. That will help drive double-digit growth with our European Union clients.

We also won several contracts with the U.K. government last year with [indiscernible], which is an agency of the U.K. government, those are activating. And so those are really nice wins. I think they give us it gives us visibility, very clear visibility for strong double-digit growth next year. And I think those will -- those contracts will offer both for the next several years for us on the international front.

Our next question comes from the line of Kevin Steinke with Barrington Research Associates.

Great. I was just wondering if you could refresh us on the relative size of the market for the residential energy efficiency versus the commercial and industrial energy efficiency where you noted you're gaining market share and how those market share gains on the industrial and commercial side kind of expand your growth runway in your market opportunity overall for the commercial energy business?

I think as I said in my prepared remarks, I think we see the utility program which includes the residential and commercial industrial but also [indiscernible] electrification, I think flexible load management. I think we see the total size of that market in the $3 billion to $5 billion range. Anne, I don't know if there's -- to break it down.

So the demand side management programs, Kevin, I think you could think about those being about a $2 billion market and that's residential and commercial, traditional demand-side management programs. And then when you start to get into some of these other types of programs that we are involved in, like marketing, electrification, demand response, that's when your market the addressable market grows up to get into this range that John has mentioned, so $3 billion to $5 billion. And that's -- I think those are the numbers that we're thinking about there.

And as I said, we have about a 35% share in the residential and about a 20% share -- growing share in commercial and industrial with a traditional program. So I think we view that as significant headroom. And as we said, we've been taking share. And so we certainly believe that will be part of our strategy going forward. I think in the more emerging areas of electrification, flexible management, battery storage, there's significant addressable market there. Those are newer and rapidly evolving. And so those offer, I think, significant growth opportunities as we look down the road, in 3 to 5 years. They're not as material to our overall business today, but that's what we -- on the program side, that's where we would expect to see much more rapid percentage growth as we look forward.

Understood. That's helpful. I also just wanted to ask about how you're thinking about adjusted EBITDA margin in 2026, if you think you maintain that versus 2025? Or with your expectation of a return to revenue growth, if maybe you can get back to that kind of 10 to 20 basis points of expansion that you've historically targeted?

Kevin, this is Barry. Yes, I think that we can go ahead and get into that 10 to 20 basis points improvement on a year-over-year basis as we continue to see the growth on expansion in the commercial markets and the nonfederal business, higher margins. So that -- as well as the economies of scale and the efficiency we can get from the back office side of the expense equation. So I think that, that certainly is a reasonable expectation. .

[Operator Instructions] Our next question comes from the line of Marc Riddick with Sidoti.

Barry, I wanted to extend my congratulations and appreciation for the time that we've had the opportunity to work together and certainly wish you the very best in your retirement. And I know a lot of us are going to miss you. But congratulations, and thank you so much for all you've done with us.

Thank you very much, Mark. Appreciate it.

I wanted to touch a little bit on the sort of the activity that you've seen as far as shifting of spending or pace of activity on the state and local side? And maybe you can touch a little bit on what you're seeing and what you're thinking of seeing going into '26 as far as whether there are particular services that have been a little more active on the state and local side picking up from where the federal government spending cut and whether there's any particular states or regions that have been sort of leading the way as well as practice areas that you see being a little more active than we were maybe 6 to 9 months ago?

Maybe I'll say a few words, and I can -- if Ann wants to add something. I think our state and local business, I mean, largely, we have 2 kind of main pillars of that. One is kind of the environmental-related work we do in front of large infrastructure projects, energy projects, roads, bridges, things of that nature. I think generally, there, we certainly saw growth in that business last year. I think -- and certainly on the state and local side have done well with that. I think we would expect that to continue to show growth, particularly with the investments being made around energy infrastructure.

I think the other key component of our business is disaster recovery. There, I think we have -- that has been a mid-single-digit growth business for us. I think we have strong backlog. We have good visibility for that business. And so I think we certainly see that as a growth business as we look forward. It is -- for breakout growth, it is dependent on the frequency and severity of severe weather events or wildfires. But I think generally, we view the state and local market as a growth market in those 2 areas. I don't know, Anne, do you want to...

Yes. Kevin, I think I would just add that we -- it's Marc. Marc, so just I would add that we have been also seeing opportunities where, for instance, you might be working in a state, in a disaster or another context and they have modernization needs related to visualization or whatever. And so our ability to opportunistically grow in those states because of an existing relationship, whether it's tied to disaster work or work that we've been doing on the environmental side. that's we've been able to leverage that, and that has led to some growth that you are able to see in the numbers.

Yes, I think 1 of the things we do well is we can connect the dots between different parts of our business, working on a given state. And so we certainly have examples where our environmental work or our disaster management work has led to technology work and state governments and vice versa. And so again, I think we -- across some of the things we do, we've also seen, as the federal government step back, the states have stepped forward. So for instance, just on the climate front, obviously, this administration is not has had as great a focus on on climate and resilience. But we've seen state government step forward, and that's also created opportunity for us.

Yes. And the examples there are, for instance, understanding the return on investment for investing in transportation infrastructure to get ahead of vulnerabilities to extreme weather so that you're not going to have to pay more later to rebuild those roads or to deal with the consequences. So focusing on resilience in transportation infrastructure at the state DOT level or focusing on resilient supports from an economic activity standpoint. Those are the kinds of areas where we have a lot of traction.

Okay. Great. Wanted to shift gears into maybe what you're seeing as far as the pricing dynamic. And it's certainly -- and sort of I guess maybe in a bigger picture way how that plays into the '26 revenue guide, I mean what your expectations are as far as a pricing contribution there.

I think let me say a couple of things. First of all, I think at a high level across our business, and you're seeing it in our -- the nature of the contracts we have. I mean we certainly in our federal business, and I would say with our commercial clients. But in our federal business, we're seeing much more focused on performing outcome-related contracts and/or fixed price related work -- and certainly, a lot of our energy works on our energy implementation work is also fixed price.

And so I think that trend, I think, has generally been positive for us. We -- our margins tend to be higher on fixed price outcome focused work. And so I think that's positive. Generally, obviously, we compete. For everything we do, pricing is an important consideration, but I wouldn't say that it's not the primary or the single most important criteria in our work. I mean our clients are generally -- the price is important, but it's the quality or the impact of the work, the innovation and the work.

And so again, we try to manage our portfolio to stay at the higher end of the value chain and invest for that. And as things commoditize, we'll step back or we'll subcontract it out.

Okay. Great. And then I guess last 1 for me, I was sort of wondering if you give an update as to how you feel about the acquisition pipeline currently? Maybe can you sort of give a sense of some of the -- given the things that you're looking at, are you getting the sense that the pipeline is similar to where it was maybe 6 months ago or so? Or are you beginning to see more opportunities there and valuation levels, things like that?

I mean, I think, first, as you know, I mean, obviously, M&A, inorganic growth has been a key part of our strategy. And as Barry noted, I think we haven't done a material deal in several years, and so our leverage ratio is now down under 2. So we have capacity. So it is something we're focused on.

I would say we generally think about the areas where our business is growing. So first, and we see long-term growth opportunities. So obviously, energy is an area that we're looking at very carefully. And I would say there's deal flow there. I think it's -- there's a lot of focus broadly on the energy sector and the opportunities there. I think the valuations are fulsome, let's -- I'll say it that way. But we're certainly looking at areas that would add skills and capabilities in the markets we serve [indiscernible], the utility programs, the advisory work or more engineering-oriented work, we're taking a hard look and are quite interested in that.

I think in state and local, disaster recovery is an area that certainly, we add greater geography greater scale, state and local clients, it is something we we'd look at. And federal technology, I mean, we're certainly looking at deals there, I think we'll be more careful there, given the uncertainty in the federal market. I think valuations, the valuations have come down in federal, but we'd be pretty careful there. I think -- but we're certainly out of the market and looking at it, particularly in energy and in state and local. And we're keeping our eyes on federal, but I think we'll be more opportunistic and more careful there.

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

Well, thank you for participating in today's call. We look forward to engaging and seeing hopefully all of you at upcoming conferences and at meetings. Take care.

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

Welcome to the Third Quarter 2025 ICF Earnings Conference Call. My name is Lauren Cannon, and I will be your operator for today's call. [Operator Instructions] Please be advised that today's conference is being recorded.

I will now turn the call over to Lynn Morgen of AdvisIRy Partners. Lynn, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to review ICF's third quarter 2025 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 30, 2025, 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 over the call to ICF's CEO, John Wasson, to discuss third quarter 2025 performance. John?

Thank you, Lynn, and thank you all for joining us to review our third quarter 2025 results and discuss our business outlook. This was another quarter of resilient performance for ICF, demonstrating the importance of our diversified business model, our agility in managing costs within a dynamic business environment and the strength of our business development activities. Key takeaways from our third quarter results are: first, the continuing shift in our business mix with revenues from commercial clients, state and local and international government clients increasing by 13.8% and accounting for 57% of the quarter's revenues, up from 46% at the same time last year.

Second, the continued robust performance in commercial energy, where revenues increased 24%, reflecting the sustained strong demand for ICF's advisory and implementation services. Third is the strong growth in our higher-margin commercial revenues, which together with our careful cost management resulted in a 10 basis point improvement in adjusted EBITDA margin, in line with our plan to maintain margins despite reduced revenue. And lastly, the value of our contract awards, which surpassed year ago levels, resulted in a book-to-bill ratio of 1.53 for the third quarter.

Our year-to-date contract awards of $1.8 billion, together with our $8.4 billion pipeline supports our outlook for a return to growth in 2026. We had expected third quarter revenues to be approximately $15 million higher than reported. This variance was primarily due to delays in the ramp-up of our recently won international government contracts, although that situation is getting progressively better. And another factor was the slowdown in federal government procurement and project activities, particularly in our programmatic public health and human services areas in the latter half of Q3, leading up to the government shutdown.

With the federal government on everyone's mind, I will begin my business review with our results in that area and how the government shutdown has affected ICF to date. In the third quarter, our federal government revenues declined 3% sequentially, representing a 29.8% decline from last year's third quarter. The dollar amount of our total 2025 federal revenues impacted by contract cancellations did not change in Q3 as we have not experienced any material new cancellations since our last report on July 31.

However, expectations for Q3 federal revenues, as I just mentioned, were affected by the slower pace of program and procurement activity this quarter as things slowed down considerably in advance of the shutdown. There are several good news items to report in our federal government work for Q3. Approximately 1/2 of our third quarter contract awards represented work for federal government clients and about 1/2 of these wins represented new business, including broadening of scope on current contracts.

This new award activity, combined with our high recompete win rates is a good indication of how well ICF's capabilities are aligned with the needs of our federal agency clients. In particular, you can see from today's release that we are winning both our recompete and new work in IT modernization. Our differentiated approach to building agile, flexible and lean engineering and product teams is allowing us to deliver value quicker and more efficiently than competitors. Approximately 80% of the work we currently perform in this area is in agile scrums and sprints and more than half is under fixed price or outcome-based contracts, which is aligned with the shift in federal contract procurement parameters.

And we're also seeing growing client interest in ICF Fathom, a new suite of tailored artificial intelligence solutions and services designed specifically for federal agencies. This is a production-ready solution that can integrate seamlessly into existing systems at scale to unlock the full potential of AI to support mission outcomes. We have won a few initial contracts and have seen very positive response to this launch from several of our federal agency clients interested in areas such as citizen engagement, technical assistance, program evaluation and policy modeling.

Now to the financial impact of the government shutdown. In the month of October, we estimate that ICF's revenue will be reduced by approximately $8 million and gross profit by approximately $2.5 million as a result of the current government shutdown. Our IT modernization practice has seen relatively few stop work orders. The majority of stop work orders have been related to our public health and human services work. Also, proposal activities have continued in IT modernization, although there has been some slowdown.

All in all, the impact on ICF to date has been painful, but manageable, and we view this as a temporary situation. While we have taken steps to reduce costs associated with work that has been curtailed, we currently plan to retain key staff, which will position us to quickly recoup the majority of these revenues in future periods. You will see that we filed an 8-K this afternoon, noting that our named executive officers will take a 20% salary reduction for the length of the shutdown in consideration of the impact of the shutdown and in support of our employees and clients.

Now I'll move on to our nonfederal government work, which accounted for 57% of our third quarter revenues and is making a positive difference for us as we navigate dynamic market conditions in the federal space. Revenues from our commercial, state and local and international government clients increased 13.8% year-on-year in the third quarter, led by a 24% increase in revenues from commercial energy clients. Our consolidated third quarter margins benefited from the increased contributions from our fast-growing commercial energy work, which represented 30% of our third quarter revenues, up from 22% in last year's third quarter.

Additionally, our long-standing work for commercial clients has given ICF the experience and infrastructure to effectively work in this [indiscernible] a competitive advantage in today's federal market as federal agencies are being encouraged to adopt a more commercial business model. Third quarter revenue growth from commercial energy clients was led by strong demand from our utility clients for ICF's industry-leading energy efficiency programs and expertise in flexible load management, electrification, grid resilience and affordability, expertise that is closely aligned with the needs of our utility clients as they respond to increased demand for electricity.

We are executing on new and expanded programs as well as gaining market share in both residential and commercial energy efficiency program development and implementation. Additionally, in energy advisory, we saw higher demand for our grid engineering, renewable development and transaction services. And in environment and planning, we benefited from increased renewable and transmission permitting, construction monitoring and wildfire restoration projects. We continue to see evidence that our commercial energy business will sustain its strong growth.

Despite the lack of support for renewables by the new administration, we believe that renewable and storage development by the private sector on nonfederal lands will continue due to the advanced economics of these technologies and the need to meet the demands of rapid load growth. Additionally, we work across a full suite of resources supported by this administration, including natural gas, nuclear and coal that will also be important in optimally serving emerging needs for power and we have seen an uptick in development and M&A activities in these areas.

We continue to benefit from the rapid increase in electricity demand associated with AI, data centers and other large loads by providing a broad range of services necessary to plan, site, permit, connect and manage such facilities. ICF is currently working with utility clients, hyperscalers and independent power and renewable energy firms, providing services ranging from location analysis, transmission planning, distribution engineering and construction permitting through community engagement and workforce development. The major growth challenge, the range of complex technical issues involved and the diversity of stakeholders make ICF well positioned for continued growth in this area.

Moving on to state and local government clients. Our revenues increased 3.8% in the third quarter, primarily reflecting year-on-year growth in our technology work in the disaster recovery arena. ICF is currently supporting 95 active disaster recovery projects in 22 states and territories. This includes new contracts in California, Oregon, Virginia and Michigan, which were awarded during Q3. We continue to see HUD-funded procurement opportunities resulting from the nearly $12 billion appropriation to enable long-term recovery from disaster declarations in 2023 and 2024 and are actively positioning to compete for these procurements.

Additionally, in response to uncertainty with respect to the future role of FEMA, state governments are showing additional interest in disaster case management, individual assistance as they consider the potential implications of taking on additional responsibility for initial disaster response and recovery efforts. ICF is actively engaged with state emergency management agencies, and we are broadening our partnerships in emergency response, disaster survivor assistance arena as the states prepare for the possibility of additional responsibilities.

Our climate, environment and infrastructure services represent the other major component of our work for state and local government clients and revenues in this market have remained relatively stable. As federal emphasis on environmental protection declines, we are seeing many states increase their efforts to fill the gap, creating opportunities for ICF and state planning, rulemaking, stakeholder engagement, permitting and compliance. We're also experiencing increased demand for sectors with strong economic activity, including data centers, fiber networks, minerals extraction and transportation.

And we're working on synergies with our disaster management teams in supporting states with recovery efforts, including Florida, New Jersey and others. We continue to benefit from solid revenue growth from international clients in the third quarter. Revenues increased 8% year-on-year. We have won key recompetes and new business. As I mentioned earlier, the ramp-up of the new contracts we've won with the European Commission and the U.K. government late in 2024 and earlier this year has been slower than we originally anticipated as we expected double-digit revenue growth in the second half of this year.

We have seen sequential acceleration in the number of task orders being issued under these contracts over the last 2 quarters, but we now do not expect the full benefit of these contracts until 2026. To sum up, our third quarter performance demonstrated the benefits of ICF's diversified client base, our agility in adapting to challenging market conditions in the federal government and our success in winning recompetes and new business.

I'm sure that many of you have seen the release we issued today simultaneous with our earnings announcing that Barry Broadus, our CFO, is retiring, and we have named 2 of our senior [indiscernible] new roles. First, let me say that Barry has been a tremendous asset to ICF. He has strengthened our financial capabilities, built a strong finance team and positioned ICF to take advantage of future growth opportunities. We certainly wish him all the best in his retirement.

We are fortunate to have a strong group of talented leaders like James Morgan and Anne Choate to help drive our future growth. We have to have James Morgan, currently COO, to take on the additional role of CFO following the publication of ICF's full year 2025 financial results. In addition, Anne Choate, currently Executive Vice President, will take on the role of President of ICF early in 2026. I look forward to working closely with both of them to drive organic growth and acquisition growth and to implement financial strategies to build our future growth and profitability.

So with that, I'll now turn the call over to Barry for a financial review. Barry?

Thank you, John. We say that it's been a pleasure to work at ICF over these past 40 years. ICF is truly an amazing organization with an outstanding team of dedicated and passionate professionals. Serving as the ICF's CFO has certainly been the pinnacle of my career. I could not end my career working with a better team of people. That said, I am now pleased to provide you with some additional details on our third quarter financial performance.

Third quarter revenues totaled $465.4 million compared to $517 million in the third quarter of 2024 and relatively stable with the $476.2 million reported in this year's second quarter. The year-over-year revenue comparisons reflect ongoing headwinds in our federal government business, partially offset by the continued strength across our commercial, state and local and international client base. On a year-to-date basis, revenues decreased 6.2% and revenues, excluding subcontractor and other direct costs declined 4.3%.

Revenues from commercial, state and local and international clients increased 13.8% in the quarter, led by the robust growth in our commercial energy business, which posted a 24.3% year-over-year increase. On a year-to-date basis, our energy business grew approximately 25% and represented 28% of our total year-to-date revenues. The strength in this client category underscores the ongoing demand from our utility clients for ICF's expertise in energy efficiency, flexible load management and grid resilience solutions, capabilities that are increasingly critical as they address our country's growing demands for electricity.

The continued strong growth in revenues from our nonfederal government clients offset a significant portion of the 29.8% year-on-year decline in federal revenues in the third quarter, reflecting the continued impact of the contract funding reductions and the procurement delays that John mentioned in his remarks. On a sequential basis, federal revenues declined only 3% as the impact of contract cancellations has remained stable following our second quarter earnings call. To date, we have seen an impact on 2025 revenues of approximately $117 million and a total backlog impact of approximately $420 million from contract cancellations and stop work orders with no material increases since our last call on July 31.

Third quarter subcontractor and other direct costs declined 11.8% year-over-year and represented 24.2% of total revenues, down 50 basis points from the 24.7% in the third quarter of 2024. The decline was primarily tied to lower pass-through revenues in the federal business. As a result, a higher percentage of our revenue was tied to ICF direct labor, which generates higher margins. Third quarter gross margin expanded 50 basis points to 37.6%, primarily driven by a continued shift in our business mix towards higher-margin commercial revenues, including the uptick in our energy business.

Gross margin also continues to benefit from a higher proportion of ICF direct labor that I mentioned as well as a more favorable contract mix as fixed price and T&M contracts represented 93% of our third quarter revenue, up from 88% in the year ago quarter, while our cost reimbursable contracts accounted for only 7% of third quarter revenues. Indirect costs declined 7.9% to $122.3 million and represented 26.3% of total revenues. As we have discussed on recent calls, we remain focused on managing our indirect costs while continuing to invest in growth areas, expand our capabilities in AI and other technologies and implement systems and tools that increase our efficiency and will support our future growth.

As we navigate the current government shutdown, we will continue to be mindful of tightly managing our costs by balancing short-term results with our plans for a return to growth in 2026. Thus, the shutdown continues, it will impact our fourth quarter margins as we need to maintain a certain level of staffing and core capabilities in order to ramp up quickly once the shutdown is lifted. Third quarter EBITDA totaled $52.8 million, down from $58.2 million in the third quarter of 2024. And adjusted EBITDA was $53.2 million compared to $58.5 million in last year's third quarter.

As a percentage of total revenue, adjusted EBITDA margins expanded 10 basis points to 11.4%, reflecting our gross margin expansion as well as our success in executing cost management initiatives. Net interest expense in the third quarter amounted to $7.9 million compared to $7.2 million in last year's third quarter due to a higher average debt balance related to the AEG acquisition in December of last year as well as our repurchase of ICF stock. Our tax rate was 22.7%, above the 13.8% in the prior year quarter.

In this year's third quarter, we incurred a onetime negative tax adjustment related in part to certain tax provisions and the new legislation signed into law this past July. As a reminder, last year's third quarter tax rate benefited from tax optimization strategies and several onetime tax benefits the company enjoyed at that time. Additionally, as we discussed in our last call, our full year 2025 tax rate is expected to be approximately 18.5%.

And we also estimate that our tax rate for 2026 will be in the range of 21%. From a cash tax perspective, we expect to realize approximately $30 million in cash savings in 2025 and additional $40 million in 2026, resulting from provisions of the new tax legislation I mentioned. Net income totaled $23.8 million or $1.28 per diluted share compared to net income of $32.7 million or $1.73 per diluted share in the third quarter of 2024. Non-GAAP EPS was $1.67, inclusive of a $0.04 per share impact related to the negative tax adjustment I just noted. Last year's third quarter non-GAAP EPS was $2.13.

Our backlog stood at $3.5 billion at quarter end, up approximately $180 million as compared to the second quarter of this year due to the robust book-to-bill total of 1.53 that John previously noted. 52% of our backlog is funded. Our third quarter new business development pipeline stood at $8.4 billion and is approximately 4.3x our trailing 12 months revenues. Third quarter operating cash flow was $47.3 million, up from $25.5 million in the comparable quarter last year. Year-to-date operating cash flow totaled $66.2 million.

Days sales outstanding were 82 compared to 80 days in the prior sequential quarter, and third quarter capital expenditures were $5.5 million as compared to $5.2 million in last year's third quarter. We ended the quarter with debt of $449 million, down from $462 million at the end of the second quarter. The third quarter debt reduction was in line with the debt reduction in the same period last year. 39% of our debt carries a fixed rate, and we are tracking to have approximately 45% of our debt at a fixed rate by year-end.

Our adjusted leverage ratio was 2.13x at quarter end. And absent any acquisitions, we expect our leverage position to decrease by about 0.25 of a turn by year-end. Our approach to capital allocation remains consistent and disciplined. We are focusing on investing in organic growth, pursuing strategic acquisitions in attractive markets, paying down debt, sustaining our quarterly dividend payments and executing an opportunistic share buyback. As we noted last quarter, we have been prioritizing debt repayments to position ICF for acquisition activities in 2026.

Today, we announced a quarterly cash dividend of $0.14 per share payable on January 9, 2026, to shareholders of record on December 5, 2025. For modeling purposes, for the fourth quarter, we estimate the year-on-year percentage decline in revenues and non-GAAP EPS to be similar to what we experienced in the third quarter. This assumes the impact of the government shutdown remains consistent with the estimated reduction of approximately $8 million in revenue and $2.5 million of gross profit for the month of October and the government shutdown extends through the end of the year.

We have also revised our cash flow guidance to a range of $125 million to $150 million from approximately $150 million to reflect the potential collection delays related to the shutdown. In addition, other full year guidance metrics include the following: Our depreciation and amortization expense is now expected to range from $20 million to $22 million, down from $21 million to $23 million. Amortization of intangibles is expected to remain between $35 million and $37 million. We anticipate interest expense to range from $30 million to $32 million.

Capital expenditures are now anticipated to be between $23 million and $25 million, down from the prior range of $26 million to $28 million. As we previously noted, our full year tax rate is expected to be approximately 18.5%. And finally, we expect the fully diluted weighted average share count to be approximately $18.6 million.

And with that, I will now turn the call back over to John for his closing remarks.

Thanks, Barry. Our year-to-date results have put us squarely within the guidance framework we provided for 2025 at the beginning of this year, and we stated that a 10% decline in revenues, GAAP EPS and non-GAAP EPS from 2024 levels was the maximum downside risk we foresaw from the loss of business primarily from federal government clients during this transition year. At that time, we also noted that our guidance framework did not consider the potential impact of an extended government shutdown.

As I previously mentioned, in the month of October, we estimate that the shutdown will reduce ICF's revenues and gross profit by approximately $8 million and $2.5 million, respectively. Based on this monthly impact continuing, we are pleased to be able to maintain our original guidance framework for revenues and non-GAAP EPS even if the government shutdown extends through the end of the year. Looking ahead, we continue to be confident in our ability to return to revenue and earnings growth in 2026.

This outlook is supported by the continued growth from our nonfederal government clients, improvement from portions of our federal government business, recent contract wins and the large pipeline of opportunities. Also, as Barry mentioned, we are keeping our powder dry as we consider potential acquisitions in 2026 that will provide additional growth momentum, and we have substantial authorized capacity for share repurchases. Our professional staff across all markets and geographies have been instrumental in helping us navigate difficult business conditions and their ongoing commitment to ICF and our clients underpins our ability to drive long-term growth.

With that, operator, I'm pleased to open the call to questions.

[Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair.

I wanted to start off by saying congratulations to Barry on a well-earned retirement and to Anne and James on the promotions. You bet. So sorry, I've been hopping around calls here, so apologies if I missed it. But did you give an indication for how much you expect your federal business to be down in the fourth quarter?

I don't -- no, we did not give a Q4 estimate for what the government business would be down. And in the fourth quarter, obviously, year-to-date, we've reported those numbers, we're down about 22.7% at the end of the third quarter. Obviously, the government shutdown will be down further in the fourth quarter. Barry, I don't know if...

I mean -- I would say that absent of the government shutdown, we expect that our fourth quarter federal revenues will be down more than what we had in the third quarter. But if you include the government shutdown and the impact that we mentioned, it would be more than -- substantially more than the third quarter decline.

Yes. That makes sense. And you did give the full -- your total revenue assumption, so we can -- trying to back into it. In your guidance assumptions, you said that you're expecting an $8 million revenue hit per month from the shutdown, which on the surface, I think, is less than what we were expecting. Is it just that many of these projects are still progressing along just without government interaction? Is there something that we're just not fully appreciating here, the dynamics around this business?

Well, I think it's a mix. I mean, we certainly have had a set of projects that were placed in stop work. And based on the activity on those projects, that's -- and that occurred early in October. So we saw those impacts quite quickly, and that amounts to $8 million of impact for October. And I think -- so for the quarter, we would expect a $25 million impact on revenues and a $7.5 million impact on gross profit, just extrapolating on those numbers.

And so we think that's a good number. And given that we saw those impacts early in the month and really haven't seen material increase since early October, and we feel pretty good about that number. It is certainly the case that a portion of our government business continues to operate and has not been impacted by the government shutdown. There's a portion that has been impacted by the shutdown. In certain cases, we can continue to work it's fixed price and we have funding and we have the appropriate technical direction.

And then we've seen the processor shut down. And so I think that number, the $8 million a month, $25 million for the quarter in revenues, we think it's a good number. And there's obviously uncertainty around it. As you know, with this administration, there's been a lot of change. But I think we feel pretty good about that number and I think that is likely to be the impact we'll see from the government shutdown if it goes all the way to the end of the year.

Got it. That's helpful color. And just lastly, as I'm still sticking on this federal government, I wanted to ask about your commercial energy business, which is a very exciting area, but I'll leave that to others. Just sticking with the federal government or the federal business. As we think about you moving into 2026, we were all thinking about a return to growth.

But I'm wondering, does this shutdown impact things that you were expecting to come in early 2026 that may be pushed out now because of the shutdown? Does it cause delays and how the contracting works or anything like that? How should we think about the impact on future work, not necessarily how it's impacting you during the shutdown, but after the shutdown is over? Is there any knock-on effects?

No, it's a good question. I mean I would say a couple of things. One is, for the work that's been impacted by the shutdown, the $25 million -- typically, in prior shutdowns, once the work comes back, we will do that work. So it's a push to the right. If history is any guide at that foregone revenue, we would recoup it over the remaining life of the contract in future years. And so we would expect for that to happen again. And so I do see it as a shift to the right with the impacts we've seen.

I would say also if the shutdown goes at the end of the year for those clients that we're seeing these impacts, it's certainly going to impact awards and potential modifications. And so it could have some impact early next year in terms of the level of business if the awards get delayed or the modification still comes quickly. But I think that's how we think about it. I think ultimately, I would expect that most of the revenue from the shutdown will be pushed to right, and we'll get it back over the life of the contracts.

Our next question comes from the line of Tobey Sommer with Truist.

I wanted to start with just a follow-up on that shutdown. You had a pretty good book-to-bill in the quarter. We have been kind of expecting lower than that. I'm curious how those new wins are ramping and if the shutdown is pushing that process off to the right, in particular, of course, for new or takeaway work rather than recompete wins?

Yes. I would say, as you know, Tobey, our federal business, we kind of break it into 2 components. One of the -- roughly half of it is kind of in the IT modernization technology arena. There, I would say that we've -- the procurement environment and the work we're doing has continued. We haven't seen as significant impact as we've seen in the portion that's programmatic. And so -- and I think some of the awards you see in Q4 certainly are in the IT modernization area and we would expect those to ramp, and we expect the modifications to continue.

So I'm less concerned or would not expect a slowdown or disruption in the ramp-up of those efforts. Where we see most of the impacts of the government shutdown is in our programmatic work at Health and Human Services. Many of those agencies are impacted by the shutdown. That's also impacted the procurements there. So that portion of the business, I think, will take longer to rebound post shutdown in terms of procurements and plus that's certainly reflected in our -- in how we're thinking about Q4 and the guidance we've given.

And as we think about returning to growth for next year, I think our view right now is we've clearly indicated we expect to grow in 2026, and I would think at least a low single-digit level. Obviously, 58%, 59% of our business is growing quite robustly. We expect that to continue. In terms of the federal business, I think we would expect our IT modernization business, so roughly half to return to growth next year. And then the half is programmatic, will not return to growth until 2027. We'll have tough comps there, and it will take more time. But with that mix, we're confident we can get back to growth for next year.

Okay. Let's switch gears a bit and maybe we can talk commercial and -- commercial energy. Which service lines and offerings within your portfolio are experiencing the best demand and sort of superior growth? And what, if any, areas are lagging and understand with such a rapid rate of growth for the collection of them lagging doesn't necessarily mean you're not achieving fairly good growth?

Well, I think -- no, it's a good question, Tobey. I think as you know, our commercial energy business, through 3 quarters, 70%, 75% of that business is designing and implementing utility programs, energy efficiency, electrification, load management, doing the marketing for those programs. We're seeing tremendous growth there, tremendous opportunity. We've been winning new contracts. We've been taking away market share. We've been winning our recompetes.

And I think with the increased significant demand for electricity, those programs will continue to be a key component. And so certainly the utility program implementation is extraordinarily strong. I would say our kind of the energy advisory business, so where we really do more front-end advisory work for utilities on a range of issues from generation to transmission to demand forecasting, demand load management, grid modernization, many aspects of that business are enjoying very robust growth given, again, the strong demand for energy.

We do expect our energy advisory business to have double-digit growth next year. I think the only area that's been challenging is in the renewables area, certain components of the work we do around certainly offshore wind or implementation of renewals on federal lands. This administration is not supportive of that. So there has been some impacts on projects in that area. But I have to tell you that in the scheme of our overall energy business, it's pretty de minimis.

I think on an annualized basis, the entirety of that business might be up to $10 million a year. We certainly are losing a significant portion of it, but that is the one area where this administration is not as supportive. Having said that, as I said in my remarks, we also do have capabilities around key generation assets that this administration does support natural gas, nuclear and coal. And so we're seeing opportunities there.

And then specifically within energy, and this is probably somewhere in between commercial and your government energy business. But when the shutdown began, there was news around Department of Energy canceling some clean energy and infrastructure awards. Is ICF impacted at all by those kinds of actions that have been happening more recently?

No, we haven't -- I don't believe we -- I'm not aware of any material -- I'm not actually aware of any shutdowns on our DOE contracts. Honestly, Tobey, I think the extent that we saw impacts in DOE was due to contract cancellations around DOGE and GSA earlier in the year. And so the work that remains, I think, is generally continuing, and we haven't seen impacts from a stop work perspective.

[Operator Instructions] Our next question comes from the line of Marc Riddick with Sidoti.

So I just wanted to add my congratulations to Barry and James. And certainly, Barry, it's been a pleasure working with you and all the best for your retirement and certainly looking forward to continue to working with the team going forward. So I just wanted to express my gratitude there.

Thanks, Marc.

I wanted to touch a little bit on -- so the growth areas that we're looking at that as we go into next year, and I know you're going into planning and the like. But I was wondering, as we look at the non-federal are the areas that are actually growing and doing really well right now, can we sort of maybe talk a little bit about how you feel about your bandwidth there, given the growth that you've seen, the growth that you could potentially see in the near term there and the type of bandwidth where you are now and maybe other investments in personnel, technology or the like to sort of be able to extract those opportunities?

I would say that we're certainly investing materially in the key growth markets to take full advantage of that includes recruiting new talent to help us win and develop the work and bring new skills, investing in technology, software and leveraging AI to grow those businesses. And so we're certainly making some appropriate investments, and that's where the investment focus is right now. The primary focus of the investments in ICF are in those markets. In terms of recruiting the talent, I think that we're investing a lot in recruiting, and we're able to recruit the talent to be able to stay in front of that.

I think as we look to next year, we certainly expect double-digit growth across commercial -- the combination of commercial, state and local and international. We can do it quite robustly in commercial energy. We have a strong recruiting engine there. We're a market leader in these markets, and -- and the talent inside the firm helps us find the best talent outside the firm. And so I think we'll -- so I think we can -- we'll be able to retain and recruit the talent. I do think we expect as these international projects ramp -- continue to ramp up for next year, we'd expect very strong double-digit growth in our international business.

And again, we've been working the recruiting for that quite well. And I would say the same in the state and local. So I think we're making the appropriate investments. We'll ensure we have the talent. We have a pipeline of candidates. And so as the work comes in, we will not have backlog that we're not able to translate into revenue quickly, we will let that happen. So I think we feel quite good about our ability to translate contract wins into revenue quickly.

Okay. Okay. That's helpful. And then there were on a couple of occasions, I guess, within prepared remarks, some commentary around potential for inorganic investments and cash usage prioritization and the like. And I know certainly, you're going to be addressing that and looking that over again as we go through your planning process.

But I was wondering maybe if you could take us through what you're seeing out there right now from the acquisition pipeline potential front. I mean, are you seeing much in the way of -- like what does the pipeline look like as far as volume? We're seeing more and more M&A activity generally, but maybe you can sort of share your thoughts of what you're seeing as to attractive opportunities and valuation levels currently?

[indiscernible] I'll speak to M&A and Barry can speak to cash flow. I think in terms of our M&A strategy, I think M&A remains an important component of our overall strategy. As you know, if you look at the history of ICF, we've certainly been acquisitive and it's been an important part of our overall growth story. I think right now, we're quite focused on looking at opportunities in the energy arena that could add scale or add geography or add key capabilities in the core markets we serve across both the advisory business and the program implementation business.

And so we're certainly out in the market looking at those and -- and I think that would be -- if we could find the appropriate opportunity with the right strategic fit and the right cultural fit, we would certainly take a hard look at that. I mean I think with everything going on in the energy arena, the valuations are certainly fulsome, but we're looking there. I think we've also looked at opportunities around fast recovery and infrastructure-related work in state and local markets. And I think there are opportunities out there in those markets.

In the federal market, we've -- I think we're less likely to do something. I mean I think it remains a challenging market. The valuations are challenging. I think we certainly are looking at opportunities in IT. And so I wouldn't rule that out, but I think the federal market brings obviously, challenges given the state of that market and the uncertainty in it. And so I think our primary focus is around energy and around asset management and infrastructure. And I guess, Barry, I'll let you -- do you want to talk about the broader investment.

I would say, as I noted in my remarks that we continue to focus on paying down debt. Expectations is that from a leverage position, we'll be below 2x levered at year end. And that would provide us with capacity to go after various assets that we think are appropriate. So we'll continue to stay focused on that and pay down the debt as we've done in the past and be looking at [indiscernible] to see we can put some of that dry powder to use.

Our next question comes from the line of Kevin Steinke with Barrington Research Associates.

So you mentioned when talking about the commercial energy business, obviously, you're winning new business there and you're taking market share. I was wondering if there's any way you could kind of frame the size or the extent of the market opportunity there, maybe in terms of the continued opportunity to win new business and take market share, maybe just either in terms of the utilities you might not be working with or states you haven't penetrated or the opportunity to continue penetrating and winning additional business with existing clients?

I think that -- I think we still think there's material opportunities for us to -- there will be new opportunities. There will be opportunities for takeaways and takeaway businesses from competitors. And obviously, as we win recompetes, we hope we can expand the scope of those. I think it's -- I mean, in terms of the size of the market, then this market is north of $2 billion.

I don't think we're constrained by the size of the market. I think we're strongest in residential and commercial energy efficiency. I think our market share is perhaps in the 15% -- 10% to 15% range. I don't think we're constrained by that. And so -- and I think our track record is quite strong on being able to compete effectively for this work and deliver integrated solutions. And so I don't think we're -- I don't think we're constrained by the size of the market or our market share. I think there's certainly a material additional opportunity for us.

Okay. Great. And on your second quarter call, you had also -- when talking about the guidance framework for 2025, you had mentioned given the slowdown now in the pace of contract cancellations with the federal government that you probably wouldn't be at the low end of that guidance framework. Is that still the case given that you haven't seen any more cancellations in the federal arena? Or kind of does the shutdown make that kind of full range still within the realm of possibility?

I would say that -- obviously, when we gave -- as I said in my remarks, when we gave that range at the beginning of the year, it did not assume a federal government shutdown. And I think -- and certainly in our second quarter call, we indicated the [indiscernible] 10% on revenues. I think -- let me say it this way. I think prior to the government shutting down and -- prior to the government shutdown, I think our expectation and our expectation was, and I think we had confidence that from a revenue perspective, we'd be down 6% on the year in that range without a government shutdown.

And we were progressing on that and felt that confidence through a good part of Q3 until we hit the point where it became clear that the government shutdown was quite likely, and we began to see impacts prior to the shutdown in terms of the level of procurement and certainly in our Health and Human services arena. I think -- with the shutdown now, I think we will be towards the lower end of the range. And we've given you -- I think Barry gave you guidance on how to do that.

But certainly, the federal government shutdown and the magnitude of the revenue and profit impacts will move us towards the lower end of the range. I just do want to say we are quite proud of the fact that we -- with our kind of range we gave, which was without a government shutdown, we've been able to manage the business through the first 9 months of the year, stay firmly within that range, maintain our profitability at levels prior to this administration. And then now with the government shutdown, we can maintain that range.

Obviously, we'll move -- it will have an impact, but we'll stay in that range. And I think that's quite -- something that I feel quite good about and quite proud of. I mean I think it's -- when we gave that, we gave that range, our initial range very early in February. There's a lot of interest in people for us to kind of quantify what was the maximum downside risk of the new administration of those activities, GSA activities, changes in procurement, federal employees leaving the government. So we gave that guidance very early, and it stood the test of time, and we've managed to it. And so I think that -- so I'm proud of that. And then I think now we have this government shutdown. We're managing that very carefully. We have a playbook to do it.

And we'll deliver results and we'll stay in the range -- that range will hold with a government shutdown. And we'll manage our profitability and part of the business outside of federal will continue to grow double digit. And so -- so I know that's a long-winded answer to your question, Kevin, but we'll certainly be in the range now with this government shutdown. It will have some impact, temporary impact. I do think that the revenues will come back in over the life of the contracts, whether that's in the next year or 18 months. And we -- so that's -- I guess that's kind of how I see the guidance. And we do feel good about how we've managed through all this.

Yes. I appreciate that. Very helpful. And yes, a nice job on forecasting that out with so much uncertainty. But I guess just my last question. With James taking on the CFO role, is that how you see that going forward as kind of a more a permanent arrangement with both a dual COO, CFO role? Or would you eventually...

I would say that -- I'd say a couple of things. One is, I mean, I think as you know, James was CFO for 8 or 9 years in his first 8 or 9 years at ICF. He then transitioned into the COO role for the last 5 years -- 5 or 6 years. And so he's done both those roles. I think he is, in some ways, uniquely qualified to do both those roles. And I think given where we are and the size and scale of the firm and the maturity of the firm and the strength of the team behind Barry, I think it makes sense to combine this.

So James' new title will be Chief Operating and Financial Officer. And whether that remains or we change it down the road, I haven't got that far. I'm just pleased James can take on this role. At the same time, we're also asking Anne Choate, who's done a phenomenal job growing our energy business, has been at ICF for 30 years. She's going to take on the role of managing our operating groups and our business development function, who has been reporting to me. But I think she'll bring a tremendous focus on translating our strategy into growth, driving growth managing -- making sure we -- our clients are delighted with our work and driving business development.

And so I think it's great opportunities for both of them, and it will allow me to focus on strategy in a time of significant change, M&A, developing the next generation of leaders and representing ICF externally. And so I think that's how I see it. I think we're -- I think it's -- I'm just pleased we have the bench here to do this. And I think one of the things we've done really well over here is to provide opportunities for folks to grow their career at ICF. I think this is another indication. And Anne's promotion has a ripple effect in our energy business, which will give a number of key leaders there additional responsibilities, which I'm really pleased to do, and we'll certainly continue to do that as we go forward as...

I just wanted to add, it's been a pleasure working with you, Barry, and best wishes for your retirement.

Thank you, Kevin. Likewise.

I'm showing no further questions at this time. I would now like to turn it back to John Wasson for closing remarks.

Okay. Well, thanks, everybody, for participating in today's call, and we look forward to connecting at upcoming conferences with you. Thank you.

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