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's 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 in federal procurement activity. Taken together with our strong second quarter book-to- bill ratio of 1.3, these factors give us confidence and 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, flexible load management and customer engagement programs for utility clients as they address rapid load growth. ICF is the market leader in designing, developing and implementing residential energy efficiency programs, and we are progressively…

Thank you, John, and 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, 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 from 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 from recompetes and contract modifications. 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…

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 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 pauses and funding modifications to existing contracts or new procurements. Our increased confidence in ICF's 2025 year-on-year comparison is underpinned by our expectation for continued robust demand from our commercial 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's 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 shown tremendous commitment to ICF and to our clients, and have been instrumental to helping us manage through challenging industry conditions. With that, operator, please open the call to questions.

[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?

Sam, thanks for the question. 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 the 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, too, 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 the 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 of the federal government's fourth quarter?

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 of activations and getting to work. 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 on 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 reiterating, obviously, we're pleased to see that the contract cancellations have flattened 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 here, we've seen a pickup in modifications and plus-ups on contracts. And I would say we've seen those broadly across our clients, and 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 complex program 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, I mean again, I think the technology area, IT modernization, has certainly shown more life 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 of this administration 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 and domain into 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 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 when 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 it, so we did not have to come back to investors leaving here with a 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. And I think it's a little too early for us to hold a specific number on that. It's Q2, there's still risk, and we're 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 Marc Riddick with Sidoti.

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 that's 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 services -- 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 what the impacts of FEMA's role could be on future disaster recovery and what the federal or state or local [ role ] will be. And let me just say unequivocally, I don't have a crystal ball on where this is going to land. And I guess I have a couple 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 declaration approvals. While the approvals are moving more slowly, we did have one recent request from the state of Maryland that was denied. And we haven't seen -- in terms of the day-to-day operation, with disasters 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 lame-duck session at the end of 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 relief fund at FEMA has a $14.7 million balance right now. I talked about the CDBG opportunities, the housing opportunities that are playing out. 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 responsibility is pushed to the states, I think we'll be in a good position to support them [ if I'm ] playing a larger leadership role. And so I think -- and so those discussions continue, the business day-to-day 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 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 made any shifts, and maybe sort of how you're feeling about what's out there today versus beginning of the year?

I would say that from an acquisition standpoint. First of all, acquisitions -- we've been acquisitive over the years, and it's been a key element of our strategy. And I think from a long-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 what 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, additional geographic scope or client scope, or would be kind of the next concentric circle out from the work we do across through energy programs, grid modernization, advisory consulting, environmental and planning consulting for 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 unprecedented change. 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 client sets we serve in terms of the budgets and where budgets and all that will land, and procurement uncertainty. There's not a lot of activity in the markets we're in, and I think the valuations are uncertain. 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 long 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, is we're pretty focused on energy, although we'll certainly look at disaster recovery in other areas if an interesting opportunity arises.

Great. And then the last one for me, maybe we 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. They're very focused on efficiency, reducing waste, fraud and abuse, increasing automation. And so ICF Fathom that I discussed is really our platform, so 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 before 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 there'll certainly be more to come here in the coming weeks on it. We have begun using this platform with several of our clients. I think it is allowing us to do rapid prototyping very quickly in a 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 finally get this launched and to be out in 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 this budget flush season from lower staffing levels for contracting officers?

I would say 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, it's our best quarter and it's the end of the government fiscal year, and we would certainly expect that to be the case this year again based on what we're seeing. I do think there is -- to your point, there has been a lot of folks retiring and change of procurement staff and change on 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 procurement front, there is some risk there. I think the good news is we are seeing some pickup here. I mean we can see the RFPs moving. We can see new opportunities entering the pipeline. So I think we'll be stronger, but the procurement -- the turnover on the procurement front, with the reorganizations going on, have created 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 those forecasts kind of keep increasing?

I mean I think that the growth in electricity demand associated with data centers in the next decade, it is unprecedented. I think ICF put out a report looking at our views on what electricity demand is going to be in North America through to 2030 and I think 2050. 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, how it's going to be transmitted, the 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 this demand, it's -- the solution has to be -- every form of generation has to be maximized, whether it's natural gas, whether 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 investments, significant change. So I think this is a 10- to 20-year more challenge, and it's going to create an enormous opportunity 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, the dog days of summer. Take care.

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