ICF International, Inc. Aktie

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.

Welcome to the Second 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, Lauren. Good afternoon, everyone, and thank you for joining us to review ICF's second quarter 2025 performance. With us today from ICF are John Wasson, Chair and CEO; 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 July 31, 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 the call over to ICF's CEO, John Wasson, to discuss second quarter 2025 performance. John?

Thank you, Lynn, and thank you all for joining us today to review our second quarter results and discuss our business outlook. I am pleased to report that we executed effectively in the second quarter with results benefiting from our diversified client base and demonstrating our agility in adapting to changing market conditions.

There are several key takeaways worth noting. First, second quarter revenue was generally stable with first quarter levels, in line with our expectations. Revenues from our commercial, state and local government and international government clients set increased 13.8% in the aggregate and accounted for 57% of our second quarter revenues. Second, within this client set, revenue from commercial energy clients remained robust increasing 27% year-on-year, thanks to continued strong demand from our utility clients for our energy efficiency programs and ICF's expertise in flexible load management, electrification and grid resilience. Third, we expanded our adjusted EBITDA margin by approximately 20 basis points year-on-year, reflecting favorable business mix and cost management initiatives, and fourth, we only experienced an additional $2 million impact on our 2025 revenues from contract cancellations in the U.S. federal market.

In the past month, we began to see a pickup and federal procurement activity. Taken together with our strong second quarter book-to-bill ratio of 1.3, these factors give us confidence in a more positive business outlook for 2025.

Taking a closer look at 2025 business trends. Revenues from commercial clients increased 25.2% in the second quarter led by the 27% increase in commercial energy that I just mentioned. This growth was driven by new and expanded energy efficiency, electrification, possible node management and customer engagement programs for utility clients as they address rapid low growth. ICF is the market leader in designing, developing and implementing residential energy efficiency programs, and we are progressively gaining share in commercial energy efficiency market as well. These energy efficiency programs represent the core of our commercial energy work.

And as a reminder, they are funded by a small surcharge on ratepayers [indiscernible] by public service commissions in over 30 states. Over the last 20 years, ICF's track record of meeting or exceeding the energy savings goals of our clients has enabled us to significantly increase our utility client base. And as we have built out our capabilities, we have been able to considerably expand the scope of services we provide to these clients, allowing us to capture a larger share of a growing market.

We believe that the demand for energy efficiency and other demand side management programs, we'll expand into more states and be relied upon even more in the coming years with the unprecedented demand for electricity associated with the construction of data centers. We've already seen early signs of this in several states [indiscernible] working in, including New York, Georgia and Illinois. Our energy advisory practice saw a sequential revenue increase led by a recent increase in grid engineering projects and new business wins in the second quarter and included a broad range of activities, including good transformation planning, fuel constraint analysis, price forecasting, rules development and M&A support.

Additionally, we have seen an uptick in activity since passage of the One Big Beautiful Bill and anticipate an increase in development and M&A activities over the next 6 to 18 months, now the regulatory [indiscernible] has been eliminated and developers seek to meet safe harbor deadlines associated with expired tax credits for projects already underway. Experienced strong demand for our environment and planning services for commercial clients in the second quarter, driven by growth of renewable and transmission permitting, construction monitoring, wildlife restoration and new awards additional work areas. This included a new project to increase mineral attraction by developing the first-ever environmental impact assessment for a coal facility associated with the January 2025 executive order directing federal agencies to accelerate critical energy infrastructure projects.

The current pace of our work for utility clients and energy developers, together with the opportunities we see on the horizon, underpin our confidence that we will see sustained growth in commercial energy for the foreseeable future. Revenues from state or local government clients increased by 1% in the quarter. In disaster management, which accounts for about 45% of this client category, ICF is currently supporting more than 90 disaster recovery programs in over 20 states and territories, with the largest being in Puerto Rico and Texas. Late last year, [indiscernible] nearly $11.9 billion in [ CDBG DR ] funding to enable long-term recovery from disaster separations in 2023 and 2024. And in January 2025 [indiscernible] released these funds to 46 states on localities. We are actively positioned to compete for this work, and we expect decisions on additional procurements to take place in the second half of this year.

Additionally, in response to uncertainty with respect to future [indiscernible], ICF has been actively developing and approach [indiscernible] model to provide disaster recovery support, the state and local government should greater responsibility shift from the federal to the state and local levels. Our climate, environment and infrastructure services for state and local clients represent about 40% of our stable government category. We're also seeing growing opportunities for our environmental business arising from changing federal priorities and increasing state-based environmental initiatives. As federal emphasis on environmental protection declines, we are seeing many states increase their efforts to fill the gap, creating opportunities for ICF estate planning, rule making, state rule engagement, permitting and compliance.

Moving to international government. Our second quarter revenues increased 2%, representing a slow ramp-up of our recent sizable contract vehicle wins with the European Union and the U.K. government. We weren't pleased to see a pickup in new task orders being issued under these contract [indiscernible] towards the end of the quarter, which will benefit our revenues in the second half of this year as well as in 2026. Despite the delayed activation of work in the international government arena, ICF revenues from commercial, state and local government and international government clients are on track to increase approximately 15% this year and will represent over 55% of our 2025 total revenues.

Now to our revenues from federal government clients, which declined 9.8% sequentially, representing a 25.2% reduction from last year's second quarter. As I mentioned earlier, the dollar amount of our total 2025 federal revenues that has been impacted by contract cancellations remained stable with our last report on May 1 of this year. As of today, July 31, that number stood at $117 million, only $2 million more than we reported on May 1. This does not include the impact of the slower pace of program and procurement activity that has also affected our federal revenue comparisons. As we await final decisions on the reorganization of the Department of Health and Human Services, we continue to sort our clients other health programs. For example, [ CDC's BioSense Surveillance System ] and the National Program of Cancer registries. Likewise, we tend to build a database of substance abuse and mental health treatment facilities, helping families in crisis find care. In our scientists review studies that [indiscernible] for inclusion in clinicaltrials.gov, so people needing treatment might obviously find a [indiscernible] trial.

Recently, we've also begun to see new opportunities come out from the Health Resources and Services Administration, from NIH, Administration for Children and Families, and CDC. We believe our expertise in key areas such as nutrition, obesity, suicide prevention and research and the health risk associated with use of pesticides, chemicals and food additives position us well for future opportunities.

In IT modernization in the federal arena, while the pace of new opportunities in contract modifications has slowed this year, second quarter procurement activity was up from Q1, and that trend is expected to continue in Q3. This improving procurement momentum, combined with our skills and positioning gives us confidence that this portion of our federal business will return to growth in 2026. The ICF is well positioned to respond to the needs of our federal clients as we believe our differentiated approach to building agile, flexible and lean engineering and product teams allows us to deliver value quicker and more efficiently than competitors. And as the federal government continues to shift IT modernization procurements towards outcome-based contracting that is deliverable based and/or fixed price, ICF can easily adapt to these changes and support our clients in the transition given that approximately 80% of the work we currently perform in this area is in [indiscernible] and sprints, and will be [indiscernible] under fixed price for outcome-based contracts.

Further, to help address the pressure for federal agencies to modernize quickly, improve service delivery and operate more efficiently. This month, we are introducing ICF's 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 the full potential of AI to support mission outcomes. ICF Fathom is built on a proprietary platform and offers a suite of tailored solutions and services and it includes a set of intelligence, AI agent that can be directly and securely embedded into existing workflows and infrastructure.

Agents automate complex task, support informed decision-making, reduce waste and boost productivities. These agents can be configured to support a wide range of functions from software development cybersecurity to document processing, [indiscernible] management and regulatory analysis. Our early discussions with clients have generated considerable interest in other programs, and we look forward to providing updates on our progress in the coming periods.

To sum up, we are pleased with our second quarter performance as it was in line with our expectations, demonstrated sequential stability and reflected our [indiscernible] agility in managing through a dynamic environment.

Now I'll turn the call over to our CFO, Barry Broadus, for financial review. Barry?

Thank you, John. Good afternoon, everyone. I'm pleased to provide you with additional details on our second quarter financial performance. Revenues in the quarter were $476.2 million down 2.4% from the first quarter and in line with our expectations. On a year-over-year basis, total revenues declined 7% or 4% when you exclude subcontractor and other direct costs. Compared to the second quarter of 2024, revenues from our commercial, state and local and international customers grew 13.8% and accounted for approximately 57% of total revenues, up from 47% a year ago. This performance was led by revenues from our commercial energy clients, which increased 27%, reflecting the robust demand for utility clients for our extensive domain expertise and implementation capabilities. The continued strong growth in revenues from our nonfederal government clients offset a significant portion of the 25.2% year-on-year decline in federal revenues, which was primarily due to contract funding curtailments and delays in federal program and procurement activities, as John mentioned in his remarks.

While the federal government business environment continues to evolve, our outlook for this client category has improved since our first quarter call, as we have not experienced a significant increase in contract terminations, and we have begun to see some positive movement with contract modifications, funding and pipeline opportunities more recently. Our book-to-bill for the quarter was 1.3 which included an uptick in federal sales with majority of the federal new wins generated for recompetes and contract quantifications. Subcontractor and other direct costs declined 15.5% year-over-year and represented 23.6% of total revenues, down 240 basis points from the second quarter of 2024, primarily due to the lower pass-throughs in the federal business.

As a result, a higher percentage of our revenue was tied to ICF direct labor, which generates higher margins. Our second quarter gross margin expanded 160 basis points to 37.3% as compared to the second quarter of last year. This increase in gross margin was attributable to 3 main factors: First, direct labor as a percentage of total direct billable costs increased by 270 basis points as compared to the same period last year as we continue to transition to a higher percentage of revenue being driven by direct labor, as I previously noted, Additionally, the continued expansion of our higher-margin commercial business accounted for approximately 1/3 of our second quarter revenues compared to 24% last year. And finally, we continue to see the favorable shift in our contract mix as fixed price and T&M contracts now represent approximately 93% of our total revenues, up from 88% in the prior year quarter while our cost reimbursable contracts account for less than 7% of total revenues.

Indirect and selling expenses declined 3.2% to $123 million and represented 25.8% of total revenues. We are closely managing our indirect cost continuing to selectively invest in growth markets, expanding our capabilities in AI and other technologies and implementing more efficient and effective front and back office systems and tools. These investments will help us scale efficiently as revenues rebound. EBITDA was $53.1 million versus $55.6 million in the second quarter of 2024 while adjusted EBITDA was $52.9 million compared to $56 million in the prior year's second quarter, adjusted EBITDA margins expanded 20 basis points to 11.1%, reflecting our gross margin expansion.

Second quarter net interest expense was $8.4 million compared to $7.7 million in the comparable period last year due to higher debt balance. Higher debt balance was due in part to our acquisition of [ ATG ] in December of 2024. We also repurchased an additional 11 million shares during the first half of this year as compared to the prior year as well as funding seasonal working capital needs, mainly in the first quarter of this year. Our tax rate was 21%, below the 26.3% reported last year as we continue to realize benefits from our tax optimization efforts.

Net income was $23.7 million with diluted EPS of $1.28 versus net income of $25.6 million and diluted EPS of $1.36 in last year's second quarter. Non-GAAP EPS totaled $1.66, which was slightly below the $1.69 reported 1 year ago. Backlog at the end of the second quarter was $3.4 billion, which incorporates year-to-date contract cancellations and other changes the administration's priorities, 54% of our backlog is funded reflecting the stability and long-term visibility we have in the business.

At quarter end, our new business pipeline remained healthy at $9.2 billion. Operating cash flow in the second quarter was $52 million and $18.9 million on a year-to-date basis.

Our second quarter results represented an improvement of approximately [ $85 ] million for the first quarter of 2025. This improvement reflects the continued success of our cash management initiatives. Days sales outstanding were 80 days, down 1 day sequentially and capital expenditures were $9.2 million, down from $10.4 million in the comparable prior year quarter. Debt at the end of the quarter was $462 million as we reduced our debt by approximately $40 million in the second quarter. This reflects our strong cash flow generation and supports our plan to meaningfully reduce debt by year-end and position ICF for future acquisition activity, approximately 38% of our debt is set at a fixed rate, up from 35% in the first quarter of this year. We expect to continue to improve on that fixed rate, and we expect approximately 50% of our debt will be fixed at a fixed rate by the end of the year. Our adjusted leverage ratio was 2.1x at quarter end compared to 2.25x at the end of the first quarter.

Absent any acquisition activity, we expect our leverage position to decrease by about half a turn by year-end. We maintain our balanced approach to capital allocation in addition to paying down debt remain focused on funding organic growth initiatives, expanding our capabilities and service software, offerings like those infused with AI, pursuing strategic acquisitions, maintaining our quarterly dividend and executing opportunistic share repurchases alongside our standard buyback program signed to offset the dilution from our employee stock programs.

Today, we announced our quarterly cash dividend of $0.14 per share payable on October 10, 2025, to shareholders of record on September 5, 2025. We are maintaining our prior expectations for the following metrics for full year 2025. Our depreciation and amortization expense is expected to range from $21 million to $23 million. Amortization of intangibles is expected to be $35 million to $37 million. We anticipate interest expense to range from $30 million to $32 million. We continue to expect a full year operating cash flow to be approximately $150 million. The capital expenditures are anticipated to be approximately $26 million to $28 million. The full year tax rate is expected to be approximately 18.5%. We expect a fully diluted weighted average share count to be approximately 18.6 million shares.

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

Thanks, Barry. As we noted in our earnings release, we are maintaining the guidance framework for 2025 that we provided at the time of our fourth quarter 2024 earnings release. But our business outlook has improved since then. Based on our year-to-date results and current visibility, we do not foresee full year revenues to decline by as much as 20 -- by as much as 10% from 2024 levels which was the floor indicated by our original guidance. We continue to expect 2025 adjusted EBITDA margins to be similar to those of 2024, and our GAAP and non-GAAP EPS are likely to be at the higher end of our guidance framework. This guidance framework does not contemplate an extensive government shutdown this year or a prolonged period of process and funding modifications to existing contracts or new procurements.

Our increased confidence in ICF 2025 year-on-year comparison is underpinned by our expectation for continued robust demand from our [indiscernible] energy clients, stable revenues from state and local government clients and the increasing ramp-up of recently won contracts by international government clients. Together with the agility and resourcefulness that we have demonstrated to date in serving our federal government clients. We are looking ahead to ICF return to revenue and earnings growth in 2026, supported by continued growth from our nonfederal government clients, improvement from portions of our federal government business and the continued support of our professional staff who have [indiscernible] commitment to ICF into our clients and have been instrumental to helping us manage through challenging industry conditions.

With that, operator, please open the call to questions.

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Sam Kusswurm with William Blair.

I think I'll stick around more of the backlog for my questions. I believe you referenced having a backlog of $3.4 billion, which was down year-over-year but flat sequentially. In recent quarters, both before and after the creation of DOGE, you referenced several large government contract wins that I believe are still in that backlog. Can you give us a sense of the mix of federal work in your backlog and how you're thinking about timing and visibility into those contracts?

Sure, Sam. Thanks for the question. Yes, so from a backlog perspective, our federal government backlog is -- has the majority of the backlog, and it is about in the neighborhood of half to backlog, maybe a little bit more. And then the rest is divided amongst the state and local and commercial client base.

Okay. And maybe another way to ask to, we've been hearing that the federal government has been a bit slower to convert award contracts that have been funded into actual task orders. So although contract awards look good, the translation into actual work and revenue has been a bit slower. I guess is that something that you're also seeing at all on your end kind of as we enter this budget flush season, the federal government's fourth quarter?

Well, I would say that from a procurement activity perspective, yes, I would say that new procurement certainly has slowed and we're just getting back on track with contract modifications, additional funding, extensions, et cetera, like that. I would say that with those type of activities, we're seeing what I would consider a normal battle rhythm activations and getting to [indiscernible]. There have been some slowdowns as the various agencies figure out what their priorities are and get to work. But I would say that we haven't really seen a slowdown once we get the contracts activated and online to do the work. So I haven't seen a significant drop off in that respect.

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

So you referenced a pickup in federal government activity in the last month or so and also expected improvements from parts of the federal government business in 2026. I'm just wondering if you could add a little more color or detail on the specific parts of the client set or program level where you're seeing the improvement, the pickup and the expected improvement, whether it be IT modernization, health or elsewhere?

Sure, Kevin. This is John. So I guess I would just start by [indiscernible] obviously, we're pleased to see that [indiscernible] contract cancellations have flatted out here and we didn't really see a material increase there in Q2 across our federal client set. I would say that certainly, in Q2, we've seen a pickup in modifications and plus upon contracts and I would say we've seen those broadly across our clients. Certainly, I think the technology showed the first signs of that and has been leading the way, but we've also seen a pickup across our [indiscernible] management or domain consulting as we got later into Q2. And so we have seen progress, as I say, with modifications and plus ups.

And then on the awards front, on the RFP front, and again, I think the technology area, IT modernization and certainly show more live and we're seeing more green shoots there and that we saw that in that area first. Although most recently, we've also seen a few green shoots in our complex program management opportunities. I think as we look to 2026, certainly, we would expect the federal technology area to return to growth given the priority to [indiscernible] and the focus on technology modernization and the use of AI. And we would expect to return to growth in that business in 2026. I think the complex program management the domain, and to consulting has certainly been more challenged and that it could perhaps take more longer there, but we're certainly optimistic on the -- and have confidence that we can return to growth on the federal technology side next year.

Okay. And as you talked about in your outlook section, you don't see full year 2025 revenues declining by as much as 10% from 2024. Just -- I don't know if there's any more color you can provide on how much higher you've raised the floor there in terms of the potential decline? Or are we trending more towards the midpoint? Or I don't know if there's again, any additional color you could provide on that?

Yes. I'd say that -- I guess I would just first remind you, I mean we -- obviously, when we gave our guidance in February of 2025 was a very dynamic environment. And we obviously indicated at the bottom end of the range was minus 10% across the key financial metrics and that was really meant to be a floor. I think we shared our analysis of the maximum downside risk at that time with federal clients. And I think we said it was a floor, and we really were setting and so we did not have to come back [indiscernible] bigger number.

So I think based on the visibility we have and what we've seen here in Q2. We certainly don't think we're going to decline by as much as 10% from 2024 levels. I mean I think it's a little too early for us to hold a specific number on that. And it's Q2 there's still risk waiting to see how the 2026 budget shakes out how the continuing resolution plays out. There's a lot of changes going on with the federal government procurement. So I think more to come in future calls, I don't think I'm ready to give a specific number. I think we'll certainly come in less than 10% down. And as we said on the earnings side, I think we'll be towards the high end of our range there, given the strong growth in our commercial energy business and the strong cost management we've had. And so I think I'm going to leave it there in terms of any more color on it.

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

Good evening, everyone. I wanted to touch a little bit on maybe you could share what you're seeing with state and local activity, specifically. Are you seeing -- are we beginning to see any shifting of responsibilities [indiscernible] from federal has talked about as much. And if so, maybe you could touch on maybe a few highlights or points to where you might be seeing that, whether that's in service -- particular services or particular geographies where you're beginning to see some activity along those lines?

Obviously, there's been a lot of discussion around the future role of FEMA and the impacts of FEMA's rule could be on future disaster recovery and what the federal or state or local will be. And let me just say clinically, I don't have a crystal ball on where this is going to land. And I guess I have a couple of observations for you. First note, with all the speculation going on, we have not seen a decrease in federal funding certainly authorized for FEMA programs. And there hasn't been a discernible decrease in the number of federal disaster at location approvals. Now while the approvals are moving more slowly in, we did have one recent in the state of Maryland that was denied. And we haven't seen -- in terms of the day-to-day operation, the disaster is underway. We haven't seen a shift and how the work is being done.

And so I think that -- and there's the funding on this, I mean, in the [indiscernible] 2024, Congress did pass an additional [ $29 million ] for the disaster relief fund. As part of the continuing resolution for storms in '23 and '24, the disaster fund at FEMA has a $14.7 [ billion ] balance right now. I talked about the [ CPT ] opportunities, the housing opportunities certainly have. And so I think that there will be opportunity for us there. Our business continues to -- we're quite active in the work we have. And we're also preparing if there is a commission looking at this, if, in fact, more of the responsibilities pushed to the states, I think we'll be in a good position to support them playing a larger leadership role.

And so I think -- and so those discussions continue. But the business data efforts right now continues. And I think regardless of where it lands, there will be disasters and there will be disaster recovery, there will be funding for it, and we will continue to be one of the market leaders in that area.

Okay. And then I was wondering shifting gears here. Maybe you could talk a little bit about the -- maybe what you're seeing as far as acquisition pipeline that's out there available. Has that changed much since the beginning of the year have valuations and any shifts and maybe sort of how you're feeling about what's out there today versus beginning of the year?

Well, I would say that from an acquisition standpoint. First of all, acquisitions we've been acquisitive over the years, and it's the key element of our strategy. And I think from a longer term perspective, it will remain that. I think our focus right now, certainly we're seeing tremendous growth in our commercial energy business. We're a market leader in several aspects of we do. And I think we're taking a hard look at other firms that could bring potential acquisition targets that could bring additional scale, in geographic scope or client scope. It would be kind of the next concentric circle out from the work we do across energy programs, with modernization, advisory consulting, environmental and planning consulting fee utilities.

So we're taking a very hard look at that market and if the right opportunity came along. I think we certainly should seriously consider that. I think that market is experiencing [indiscernible] changed. There's a tremendous opportunity and I think more scale and more geographic reach would be very helpful to us. So I think that's our #1 priority, and we're out in the market, and we're looking I think that in federal, I think we're unlikely to do anything in federal, certainly, this year or early next year, there's still a lot of uncertainty certainly in the concepts we serve in terms of the budgets and where budgets and all that land and procurement and uncertainty, there's not a lot of activity in the markets we're in. And I think the valuations are unserved.

And so I don't think we'll do anything in federal in the near term. Disaster recovery, I think, again, I think there's a lot of uncertainty there. I do believe in the modern run, the frequency and severity of disasters is going to continue to increase, and there will be funding. But I think in the short run, the uncertainty there is pretty high. So it's a long-winded way, I think as we're pretty focused on energy, although we'll certainly look at disaster recovery in other areas is an interesting opportunity rises.

Great. And then the last one for me, maybe to swing back to your commentary around on Fathom. Maybe you could talk a little bit about the -- maybe some of the competitive advantages and dynamics that you're looking at there that -- and maybe tell us a little bit more about that rollout?

Sure. I mean I think it's -- obviously, everyone on this call knows, I mean, this administration is very focused on leveraging technology and an AI-first approach to implementing technology in the federal government. And so I think having leading edge AI skills is absolutely -- you have to have it. We're very focused on efficiency, reducing waste fraud of use, increasing automation and so I see a Fathom that I discussed is really our platform that we can use Agentic AI approaches to help modernize federal technology systems and to also development applications to support specific areas that are critical to their mission and what they do, whether -- and so it's really -- that's what we're really focused on.

I think we've just begun announcing it this week and it will certainly be more to come here in the coming weeks on it. We have been -- we have got -- you've seen this platform with several of our clients. I think it is allowing us to rapid prototyping very quickly in natural way to demonstrate value very quickly, so the clients can get a very quick sense of what the power of AI could be in terms of their specific programs and needs. And so we're pleased to get this launched and to be able the market with it.

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

It's Henry on for Tobey. Just a quick one to start on the procurement environment for this coming quarter. Do you guys see any risk kind of on the flush season from lower staffing levels for contracting officers?

I would say that a couple of things there. First of all, I know you folks know, I mean the third quarter is usually our strongest quarter for sales. And I would expect the third quarter will be seasonally is our best quarter and [indiscernible] fiscal year, and we would certainly expect that to be the case this year again based on what we're seeing.

I think there is, to your point, there has been a lot of folks retiring and change of procurement staff and change all the procurement front. And so I think there's a risk there that, that could have some impact. I do think at the end of the day, we still believe we'll have -- the third quarter will be quite a strong sales quarter. But the question to your question about the risk on the [indiscernible], there is some risk there. I think the good news is we are seeing some pickup here. I mean we can see the we can see new opportunities entering the pipeline. So I think we'll be stronger [indiscernible] the turnover on the [indiscernible] front, the organizations going on [indiscernible] at some uncertainty.

And switching to the commercial energy side. How much do you see data centers, the growth there driving that segment growth kind of this year and maybe in some out years. Are utilities growth plans for data centers kind of stabilizing now? Or do you see the forecast kind of keep increasing?

I mean I think that there are both in electricity demand associated with data centers in the next decade, it is unprecedented. I think ICF, we put out a report looking at our views on what electricity demand is going to be in North America or through 2030, I think 2050. And I think it's an enormous step up, enormous step up. The demand for how they're going to meet this load, how it's going to be generated. It's going to be transmitted, it's transmission. How they're going to manage their businesses to meet it. I mean it's pretty -- I'd say it's unprecedented.

And while it's certainly the most significant driver, it's not the only driver. I think with all this going on to meet demand it's -- the solution has to be -- every form of generation has to be maximized whether it's natural gas, what sort -- in the long run, it's nuclear, it's hydrogen, it's renewables, it's energy efficiency, you need all of the above, and you need as much as you can. And so I think in our view, this is a long-term problem, and there's just going to be tremendous opportunity in this sector because of that. In addition to the data centers, crypto requires significant power generation to mine that, the economic growth.

And as part of this, the industry is also undergoing a change to more distributed less centralized structure which is also driving significant investment, significant change. So I think this is a 10- to 20-year more challenge, and it's going to create an enormous opportunity for certainly in this industry.

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, thank you for participating in today's call. We look forward to connecting at upcoming conferences and events and have a good rest of the summer. [indiscernible] days of summer. Take care.

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