ICF International, Inc. Q4 FY2022 Earnings Call

Welcome to the Fourth Quarter and Full Year 2022 ICF Earnings Conference Call. My name is Michelle, and I will be your operator for today's call. 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 2022 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. I refer you to our February 28, 2023, 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 2022 performance. John?

Thank you, Lynn, and thank you all for participating today to review our fourth quarter and full year 2022 results and discuss our outlook for 2023. ICF's fourth quarter was an outstanding finish to 2022, which was a record year for the company across all key financial metrics. There are 5 key takeaways I'd like to highlight. First, our strong year-on-year increases in service revenue up 24% for the quarter and 15.8% for 2022, which reflected double-digit organic growth across our key growth markets in the aggregate was the impact of 2 of our 2 acquisitions that benefited revenues from federal government clients. Second, the substantial margin expansion we achieved, posting an adjusted EBITDA to service revenue margin of 16.3% for the fourth quarter and 14.9% for the year, up from 14.3% in 2021. Third, we had record contract awards for both the fourth quarter and full year, which resulted in a 12-month book-to-bill ratio of 1.32. Fourth, our robust operating cash flow, which supports our capital allocation priorities, and fifth, our 2023 guidance for double-digit revenue growth, improved margin expansion and GAAP and non-GAAP EPS of $4.90 and $6.30, respectively, at the midpoint. These accomplishments are due in large part to the growth strategy we outlined in 2020 and the strategic decisions we've made since then to expand our investments and capabilities in markets in which we anticipated accelerated client spending that ICF already had recognized experience and success. These markets, namely IT modernization, public health, disaster management, utility consulting and climate environment and infrastructure services accounted for approximately 55% of our service revenue at the end of 2020. Since that time, revenues from these markets have grown considerably through a combination of organic investments in people and technology, the completion of 3 sizable acquisitions over the past 3 years and the capture of initial revenue synergies. As a result, these high-growth markets represented approximately 75% of our service revenue as we exited 2022, and we expect this to increase for full year 2023. In addition to driving service revenue growth, these investments have substantially expanded our margins together with various cost reduction actions. Adjusted EBITDA margin on service revenue increased from 13.7% in 2020 to 14.9% in 2022, and our guidance for 2023 anticipates a 15% margin, inclusive of investments to support future growth. The finest growth, we have taken on debt, which is in line with how we've built ICF, as in the past, after we have levered up, we have used strong cash flow to repay debt. In the fourth quarter of 2022, we'll be paid approximately $145 million in debt, bringing our adjusted leverage ratio down to 2.86 at year-end. Additionally, we were able to mitigate the impact of higher interest expense on our financial results. As expected, offsets like lower facility costs, administration efficiencies and effective tax strategies enabled us to report substantial growth in non-GAAP EPS for both the fourth quarter and full year of 2022, and the midpoint of our 2023 non-GAAP EPS guidance points to 9.2% year-on-year growth. Looking across our client categories, there are several highlights worth noting. Revenues from federal government clients increased 45.6% year-on-year in the fourth quarter, comprised of 15.4% organic growth plus the contributions from our Creative and SemanticBits acquisitions. IT modernization and public health, two of our key areas of focus in the federal arena, continue to show strong growth. One of our most notable contract awards in the fourth quarter was a new $160 million task order with the National Institute of Health National Cancer Center that demonstrates the success of combining deep health domain expertise and leading-edge technology solutions plus extensive experience supporting the client. Further, in the fiscal year '23 Omnibus appropriations included significant agency-level IT modernization investments and additional funding for the technology modernization fund. Both our IT modernization and public health work will also benefit from the $9 billion in additional 2023 discretionary appropriations to our largest client, the Department of Health and Human Services as increased funding is going to agencies where ICF is well-positioned, notably the Centers for Disease Control and Prevention, the National Institutes of Health, the Centers for Medicare and Medicaid Services, the Substance and Abuse and Mental Health Services administration, the Administration for Children and Families and the Food and Drug Administration. In addition to the 2023 appropriations, our federal government revenues will benefit from the IIJA and later the IRA, which provide ICF with multiyear growth opportunities to capitalize on our long-standing credentials in clean energy, climate and infrastructure. Revenues from state and local governments increased 7% in the fourth quarter, reflecting year-on-year growth in both disaster management and environmental services in support of infrastructure projects. During the year, our teams in Puerto Rico disbursed more than $1.4 billion in FEMA funding and we were the market leader in issuing CDBG grants to homeowners. As I mentioned last quarter, ICF won a $51.4 million award to continue to support the continuing household recovery on the island, and we're tracking a number of procurements in 2023, where we believe that we are well-positioned and competitive. We're also very active in Texas, and our position there in environmental services has been enhanced by the Blanton acquisition, which we closed in September of last year. Revenues from commercial energy clients increased 17% in the fourth quarter, reflecting substantial growth across all services. We saw robust demand from utility clients for energy efficiency, electrification, flexible load management and distributed energy services programs. Additionally, demand for our energy advisory services related to renewables and clean energy remains strong and will increase with the significant IRA incentives once the associated rules and guidance come out later this year. Revenue comparisons in our international government business in the fourth quarter were impacted primarily by the completion in early 2022 of the short-term project with significant passive revenues and currency translation related to the euro and the British pound. We have continued to win multiyear contracts and have an active business development pipeline, leading us to expect mid-single-digit growth in this client category in 2023. Our climate, environmental and infrastructure services, which cut across all of our client categories, continue to experience positive momentum. The IIJA and IRA have created a uniquely favorable public policy and economic environment that has increased the number and value of renewable power, electric transmission, electric vehicle and innovative fuel projects across the country. These factors can be large and take time to come to fruition, but we expect them to provide significant growth opportunities for ICF in the coming years. After a fourth quarter of record contract awards, we ended 2022 with a business development pipeline of over $8.5 billion, 20% higher than 1 year ago, in part due to revenue synergy opportunities related to the 2 larger acquisitions that we completed in 2022. The pipeline presents a diverse set of opportunities across our government and commercial clients and includes only a modest dollar amount associated with IIJA and IRA-related projects, which we expect to increase as the year progresses. Also in mid-January, we announced the formation of a new group focused on increasing the company's technology capabilities and maintaining our growth momentum in the federal IT modernization arena to be led by Mark Lee as Chief Technology Executive. As part of this, Mark will also oversee a new company-wide Chief Technology Officer organization that will help drive further technology growth and innovation across all of ICF's markets. In summary, our 2022 results demonstrate how well aligned ICF's domain expertise and expanded implementation capabilities are with the spending priorities of government and commercial clients. Additionally, our performance in 2022 and our guidance for 2023 have put us on track to achieve the long-term financial goals we outlined in our May 2022 Investor Day, namely, to achieve high single-digit organic service revenue growth through 2024, driven by our 5 key growth areas for double-digit total revenue growth by adding acquisitions that are a strong cultural fit and offer revenue and earnings synergies. And by the end of 2024, increase adjusted EBITDA to approximately $245 million.

Thank you, John, and good afternoon, everyone. I will now provide an overview of our strong fourth quarter and full year performance that resulted in a record year for ICF and review our 2023 guidance. Our fourth quarter total revenue increased 22.6% to $475.6 million, and our service revenue was up 24% to $339.1 million, which led by a strong year-over-year revenue performance from our federal, state, local and commercial energy client categories. Pass-through revenue for the fourth quarter accounted for 28.7% of total revenue, which was in line with our expectations and slightly lower than the 29.5% in the fourth quarter of 2021. Gross margin expanded 50 basis points year-over-year to 36.9% on total revenue and on service revenue, improved 10 basis points to 51.8%. Indirect and selling expense decreased 280 basis points as a percentage of service revenue to 34.9%, down from 37.7% in the same period last year on an adjusted basis. This improvement reflects the benefit from our work to reduce facility-related expenses and increased scale as our indirect expenses increased by 19.4% on a year-over-year basis, which was at a slower pace than our year-on-year service revenue growth of 24%. Our fourth quarter interest expense was $9.2 million, $6.8 million above last year's level, reflecting both our higher debt balances related to our recent acquisitions and higher interest rates. As I mentioned on our last call, we continue to successfully offset a significant portion of its higher interest expense through various cost reduction initiatives, including lower facility costs, prior utilization, managing our other non-direct billable expenses and executing on our tax efficiency strategies. EBITDA for the fourth quarter was $36.9 million, an increase of 38.9% from the fourth quarter of 2021. Our adjusted EBITDA was $55.2 million, which is 45.1% above 2021's fourth quarter. Primarily for the same reasons I just mentioned, we delivered a fourth quarter adjusted EBITDA margin on service revenue of 16.3%, 240 basis points ahead of the comparable period last year. Our fourth quarter 2022 net income was $8.9 million or $0.47 on a per diluted share basis. This number includes $13.6 million or $0.72 per share in tax-effective charges, mainly reflecting our strategic decision to reduce the office space associated with our commercial marketing services business. In last year's fourth quarter, we reported net income of $12.1 million or $0.63 per diluted share, inclusive of $0.43 in tax-effected special charges. Conversely, this year's fourth quarter non-GAAP EPS increased 31.1% to $1.56, up from $1.19 per share in the fourth quarter of 2021. I will now briefly review our full year 2022 results. Service revenue increased 15.8% to $1.29 billion, and total revenue was up 14.6% to $1.78 billion. On a constant currency basis, total revenue would have been approximately $14 million higher or up nearly an additional 1%. Adjusted EBITDA was $191.8 million, representing a 20.6% increase over the $159 million in 2021. The 2022 adjusted EBITDA margin on service revenue increased 60 basis points to 14.9% compared to the 14.3% in 2021. GAAP EPS totaled $3.38 per diluted share and included $24.9 million or $1.31 per share in tax-affected special charges, which primarily consisted of facility, severance and M&A-related costs. And 2021 GAAP EPS was $3.72 per diluted share, including $0.63 of tax-affected special charges. For full year 2022, our non-GAAP EPS increased 19.7% to $5.77 per share. We're very pleased with our success in enhancing our profitability. In addition to the actions I mentioned earlier, we're implementing multiyear tax strategies that we anticipate will allow us to maintain an annual tax rate of approximately 23.5%. Our full year operating cash flow was $162.2 million as we benefited from approximately $30 million related to the timing of collections and disbursements. For 2023, we estimate our operating cash flow will be approximately $150 million. Our full year capital expenditures totaled $24.5 million, in line with our expectations and reflects our investments in facilities, technology and software. Day sales outstanding for the quarter improved to 71 days as compared to 76 days in last year's fourth quarter, that is better from the timing I previously mentioned. We're able to utilize our robust cash flow to make significant reduction in our debt balance in the fourth quarter. We ended the year with $556.3 million of debt, a reduction of $145.4 million from our third quarter debt balance of $701.7 million. This reduction brought our adjusted leverage ratio down to 2.86 at year-end. This represents an improvement of approximately 1 turn since last quarter. Additionally, given this debt reduction and the additional hedges we've put in place since the end of the year, our fixed versus floating debt ratio equates to approximately 50% of our year-end debt balance. ICF's capital allocation strategy remains the same. We will continue to prioritize debt repayment while maintaining our dividend policy and repurchasing shares to offset the impact of our employee incentive programs. In 2022, we repurchased 176,375 shares at an average price of $96.18 per share. As of year-end, we had $112 million remaining under our share repurchase authorization program. Today, we also declared a quarterly cash dividend of $0.14 per share on April 13, 2023, to shareholders of record on March 24, 2023. I will conclude my remarks with providing additional guidance metrics for 2023 to assist you with your modeling. Our depreciation and amortization is expected to range from $23 million to $25 million. Amortization of intangibles should be approximately $36 million. Interest expense will range from $32 million to $34 million. As I mentioned, our full year tax rate will be approximately 23.5%, with the first half of 2023 being approximately 28%. We expect a fully diluted weighted average share count of approximately 19.1 million, and our capital expenditures are anticipated to be between $26 million and $28 million. And with that, I will turn the call back over to John for his closing remarks.

Well, thank you, Barry. As noted in our earnings release, we expect 2023 to be a year of record performance for ICF supported by a backlog of $3.9 billion and a robust business development pipeline. We expect full-year service revenue to be in the range of $1.405 billion and $1.465 billion, representing year-on-year growth of 11.6% at the midpoint. And as I said earlier, we expect our key growth markets to continue to increase as a percentage of service revenue. Pass-through revenues are anticipated at approximately 27% of total revenue of 2023, implying total revenue of $1.93 billion to $2.00 billion. These numbers take into account the $13 million in revenue associated with the commercial marketing business we exited in the 2022 third quarter. EBITDA is estimated to range from $210 million to $220 million, and adjusted EBITDA margin on service revenue is expected to be approximately 15%. GAAP EPS is projected at $4.75 to $5.05 exclusive of special charges, and non-GAAP EPS is expected to range from $6.15 to $6.45, representing increases of 45% and 9.2%, respectively, over 2022 at the midpoints. As we noted in our earnings release, ICF received several important recognitions in 2022, of which we're very proud, being included in Forbes' list of America's Best Management Consulting Firms, America's Best Employers for Diversity, America's Best Employers for Women, reinforces ICF's culture and has helped us to attract the talent we need to effectively execute on our growth strategy. We have a highly engaged workforce, and we recognize the importance of maintaining a collegial culture and offering leadership development programs to provide growth opportunities across our diversified business disciplines. And with that, operator, I'd like to open the call to questions.

Our first question comes from Tobey Sommer with Truist.

I was hoping you could give us your current thoughts for the timing of the contract awards and financial impact related to the infrastructure bill, and maybe what your current expectations are related to climate-related spending activity at federal and local customers?

Sure. So I think as we've discussed previously, on the infrastructure bill, IIJA, we're beginning to see opportunities there. I think we've reported sales of about $40 million in 2022 on IIJA-related activities. I think we have a pipeline of north of $100 million to $150 million of opportunities in our pipeline. I think we expect those to ramp up in the second half of the year and certainly present material growth opportunities for ICF in '24 and '25. And so that's the IIJA set of activities. I would say on the IRA front, as we've discussed previously, I think there will be significant opportunity there. I think that's going to take a little longer for that money to flow. And so we've begun to see some opportunities, but I really would expect that to be more material in 2024 and beyond. But obviously, we're watching that carefully and paying close attention to it. More broadly, I would say that our climate and resilience business is obviously one of our key 5 growth drivers. It cuts across all of our markets, federal, state and local, commercial work with utilities and our international business. It's been, as we said, those 5 growth drivers in the aggregate have been growing north of 10%. And I fully expect that climate and resilience will see robust growth there, robust double-digit growth over the next several years on that front, both given what's being appropriated and when clients are spending but also with the tailwinds from IIJA and IRA as we look down the road over the next couple of years.

With respect to IT modernization, when you look at your closest and largest customers, where would you say they are in terms of migrating their systems to the kinds of commercial systems that you could help in terms of a transition, either the baseball analogy or some sort of measure as to how far their progress is in this regard?

Yes, sure. So as you know, our IT modernization business is, again, one of our 5 growth drivers. I would say it's the first among equals of those 5 growth drivers. We have a $500 million business that, as you know, Tobey, has been growing 15% a year for the last couple of years. I think we have high confidence we can maintain double-digit growth as we look forward. We're primarily focused on civilian clients, given our portfolio. I would say we see significant opportunity across those client sets. Obviously, HHS is our largest client, north of 20% of our total revenues. And as I mentioned in my opening remarks, I mean, we won a $160 million new task order within HHS within NCI to undertake IT modernization opportunities. So we're certainly seeing a lot of opportunity there, a lot of opportunity within CMS, particularly given the SemanticBits acquisition. And so from a baseball analogy standpoint, I would say we're in the third or fourth inning here of modernization efforts with these clients. This is going to take, this is a multiyear effort, and I think it will continue to drive significant growth for ICF over the next 5-plus years.

I wanted to drill into one aspect of sort of the push in climate towards green energy. I’ve seen some media reports of kind of queues accumulating of new energy generation plants and sources that are having trouble connecting to the grid. Could you speak to that in broad terms and maybe what that means for the company over time?

Sure. So you're certainly correct. There is a significant backlog in the ability of developers to connect to the grid and a backlog on interconnection studies and approvals that are impacting developers of renewable power projects. I do think the government is trying to address this. I know the Federal Energy Regulatory Commission has taken steps to better plan and streamline the process around interconnections. There are a variety of interagency task forces addressing the issue. And so it's certainly impacting developers of these types of clean energy projects. I will say for ICF, we have not seen a slowdown in our advisory business related to renewable projects and are doing a significant amount of work on interconnection issues. I think it's more, and so for us, even with the challenges and the queue here that developers are experiencing, there's only a limited number of players that can provide these capabilities, and we're fortunate to be among those limited players. And so even as some of these projects are delayed, we still are very busy at quite a significant pipeline. I do think over time this will get resolved, but it's more of an impact for the developers as opposed to, as I say, we remain quite busy on these types of issues.

If I may sneak in two numbers questions. Cash flow from ops improved nicely, about, I think, 80%, 81% conversion from EBITDA up from 70% a year ago. Do you have any thoughts for what that will be in '23? And then conversely, the adjustments to EBITDA were more significant this year as a percentage of the total number than the year before. Do you have an expectation for whether that trend will continue in '23?

Tobey, this is Barry. I think that I will answer the second question first. We did have a number of unusual onetime charges that were related to the facility closures, and that was mostly related to the commercial market services business. So I don't expect that to repeat, though. We are always looking for ways to improve our facility footprint and lower expenses. But I would say that that was certainly a onetime charge. As far as the conversion on the cash, I would expect it to be in a similar fashion in 2023 as we had in 2022. I don't see anything that would be a headwind on that.

To clarify the situation regarding the facility charges, I fully agree with Barry. We've taken some additional charges to close out 2022, but I anticipate that these will significantly decrease in 2023 and in the future as we proceed.

Our next question comes from Joseph Vafi with Canaccord.

Very nice results, nice outlook. Congrats on all the great execution here in 2022. I was wondering if we could drill down following some of Tobey's questions on IT modernization. If you could perhaps walk us through this large joint win to the extent you can with an IT component and a subject matter expertise component. I guess the line of question I was thinking of is, was there an opportunity to do a consultative type sell here a little bit before the RFP was issued. And to the extent that, that kind of opportunity exists across your client base to help the client to do their own transformations with your help even before the RFPs are issued. And then I have a couple of follow-ups.

I would say, in general, Joe, on the IT modernization front. I think we're at our best and can really differentiate ourselves when we are engaged with a client on both their domain-oriented efforts and kind of understand the types of questions they're answering and the issues they're addressing, leveraging our domain expertise. And then also, as they look to modernize their system, we can bring our top-notch technology skills. So I think we found when we're supporting clients on both sides and both sides of the client's house is engaged around IT modernization. So the individuals who are driving the mission, bringing the domain expertise and those typically in the CIO shop focusing on the technology side, we can really differentiate ourselves, and we can connect the dots between those sides of the house and work in that white space to really help them make sure that the modernization efforts answer the questions that they're trying to address today as opposed to what they were trying to address 30 or 40 years ago. And also bring top-notch technology. So certainly, to the extent that where we can really differentiate, we can separate ourselves from the competition in terms of how we approach the deals is opportunities where we're bringing our domain and we're bringing our leading-edge technology. In terms of the specific National Cancer Institute, I know we're working on both sides of the house in that agency. So I'm sure it helped us, and that is kind of the unique value proposition that I think can bring in this market, and it is certainly driving very significant synergistic pipeline opportunities and very synergistic sales wins for us, even that we can bring both of those sets of skills in a variety of civilian client arenas.

Sure. And then just kind of another follow-up on the IT business. If perhaps you could give us a sense there, I'd suspect that it's probably your service revenue is growing a little faster there than perhaps some of your other key focus areas. And I suspect that potentially the margins may be a little bit higher there as well, just trying to get a feel for the trajectory of that business as we look into '23.

I believe we have previously mentioned that our five growth drivers generally yield higher margins in their respective markets. Specifically, within the federal sector, IT modernization tends to exhibit strong margins. This work often operates on a fixed-price basis, which is favorable for us. Additionally, we rely less on subcontractors for IT modernization compared to our disaster management and infrastructure projects, which are also part of our growth strategy. I concur with your assessment that IT modernization maintains higher margins, and it significantly contributes to our service revenue growth due to a lower level of pass-throughs.

Sure, that's great. Barry, you mentioned that you're focused on offsets in infrastructure and tax that can mitigate the interest expense headwind we're facing. I'd like to explore that further and understand how sustainable you believe that will be if we remain in a high-interest rate environment throughout the year, which seems likely.

Yes. Thanks for the question. I do think that a couple of things on the interest rate. We have put in place some additional hedges to help us manage the interest expense impact on the company. So if you look at where we were at the end of 2022 with the new hedges, we're at about 50% hedged. So that will help manage some of that. There are things that we are doing. For example, I mentioned the work on the tax strategies that can certainly help offset a good portion of that. I do think that based on the work that we've done that, that is sustainable for 2023 and 2024. And I think that we've got a lot of visibility on that, and we feel very confident that we'll be able to remain at that tax rate through this year and next year, which will certainly help us offset some of the higher interest rate costs.

Sure. That's great. And then maybe just one final one, kind of on a similar subject here. You did bring debt down by a turn and you'd probably be back in a nice position to maybe go acquisition hunting again, maybe on a larger scale. But given interest costs here, just wondering how you're making the trade-off here relative to further debt paydown versus M&A. And I'd also probably expect that the interest rate environment is perhaps helping bring target prices down as well. Any color on how you're balancing all of that? Congrats again on a nice year.

Okay, great, Joe. I'll make a few comments and then ask Barry to provide his thoughts on acquisitions. Clearly, acquisitions have been essential to our long-term growth strategy. Considering the three deals we focused on integrating in 2022 to form SemanticBits and Blanton, along with our relatively high debt burden, we will prioritize paying down debt in the first half of 2023, especially with the increase in interest rates. While interest rates remain high and we've started to see some decrease in valuations, I wouldn't say the drop has been significant. We aim for our acquisitions to be accretive immediately, so right now, we're mainly concentrating on debt repayment and managing cash flow. Barry, do you have anything to add?

I agree. We are focused on debt repayment and reducing our leverage throughout 2023. If a good acquisition opportunity arises, we would consider it, but our primary focus is on managing debt right now.

Our next question comes from Marc Riddick with Sidoti. I think we remain out in the market, but we're primarily focused right now on debt repayment and cash flow management. Barry, do you want to add anything? I agree. We are laser-focused on debt repayment and reducing our debt levels, which we aim to continue through 2023. If a good acquisition opportunity arises, we would certainly consider it, but our main focus is on these priorities right now.

I noticed that many of my questions have already been answered. I would like to explore a few other areas. I'm curious about talent availability; could you share your current situation? Are there specific roles you'd like to fill? Additionally, what should we expect in terms of your progress compared to historical utilization? I have a few more questions to follow up on after this.

I would say that, obviously, we're a professional services business. So it's all about the quality of the gray matter between our people's two years. If we're going to grow, we need to be adding people. I think I've said before, if, for example, we're growing organically 10%, we're going to need to add 9%, 9.5% headcount to meet that growth. We're always looking to reduce utilization a little bit and continue to focus on that. I think we have a track record of doing that. But we absolutely need to be adding the talent for us to meet our growth objectives, and I think we've been doing a good job on that. We've been investing significantly in recruiting. We have a strong culture. We obviously pay attention to the market and the compensation trends and things of that nature. So I would say we've generally been able to find the talent, add the talent and deliver the growth. The market has gotten a little better in terms of being able to identify and onboard the talent, but it's still very challenging. You have to make the investment in recruiting and in human capital, and you have to do what you have to do to keep current on the compensation and wage front, and we're certainly doing that. As I said, the good news is we have a strong culture. We're growing. We're offering people a lot of opportunity, and we do a lot of really interesting work, which helps us attract the talent too. So we're certainly working hard on it.

I was wondering if you could discuss whether you are starting to see an increase in face-to-face activity related to your go-to-market needs. Are you also anticipating a rise in travel and entertainment expenses? Additionally, could you share your current situation regarding this?

I want to share a few insights. Firstly, post-pandemic, travel has certainly increased, although it's still below our pre-pandemic spending levels. Currently, we are probably spending about 50% to 60% of what we used to spend on travel. We've transitioned to a hybrid work model for those who were previously in the office full-time, with employees now typically going into the office one to two days a week. While we are meeting with clients face-to-face more frequently, I don't think we'll return to our previous levels of travel and entertainment spending. The new pace will be different, and we will continue to operate in a hybrid environment moving forward. Our focus is on optimizing the company and ensuring we maintain our competitive edge and company culture while continuing to grow in this new landscape.

Great. I know this doesn't apply to you as much as some of your peers, but I wanted to ask if you have noticed any changes in client behavior, client activity, or project-based work due to the current recessionary environment. While you may not see as much as others, are there any specific areas or trends worth mentioning?

I believe we've previously discussed the effects of a recession or an uncertain economy on ICF, and we generally consider ourselves to be quite recession-proof. Approximately 85% to 90% of our revenues come from end markets that typically remain unaffected by recessions. This includes our government businesses and a significant portion of our commercial energy business, which is funded through taxes on electricity and energy efficiency programs. Therefore, we haven't observed any significant impacts across our operations in terms of recession or clients being hesitant to spend. I would expect us to continue being relatively recession-proof in that regard, and this has not posed an issue for us so far.

I show no further questions at this time. I would now like to turn the conference back to John for closing remarks.

Okay. Thank you all for your participation. We sort of look forward to staying in touch through calls and meetings, and upcoming conferences. So thanks for participating.

This concludes today's conference call. Thank you for participating. You may now disconnect.