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…

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…

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…

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.