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. 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. 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 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, 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 gaining share in the 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 funded 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 on 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 will 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 ICF is 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 grid transformation planning, fuel constraint analysis, price forecasting, renewable 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 that regulatory uncertainty has been eliminated and developers seek to meet safe harbor deadlines associated with expiring tax credits for projects already underway. We 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 in additional work areas. This included a new project to increase mineral extraction 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 and 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, Congress appropriated nearly $11.9 billion in CDBG-DR funding to enable long-term recovery from disaster declarations in 2023 and 2024. And in January 2025, the fed released these funds to 46 states and 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 the future role of FEMA, ICF has been actively developing an approach and delivery model to provide disaster recovery support to state and local governments, 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 state and local 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 in state planning, rulemaking, stakeholder 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 were pleased to see a pickup in new task orders being issued under these contract vehicles 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's 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' public health programs. For example, CDC's BioSense syndromic surveillance system and the National Program of Cancer Registries. Likewise, we continue to build a database of substance abuse and mental health treatment facilities, helping families in crisis find care. And our scientists review studies and resources for inclusion in clinicaltrials.gov, so people needing treatment might more easily find a clinical trial. Recently, we've also begun to see new opportunities come out from the Health Resources and Services Administration from NIH, The Administration for Children and Families, and CDC. We believe our expertise in key areas such as nutrition, obesity, suicide prevention, cancer research, and the health risks 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. 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. 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 agile scrums and sprints, and at least half is 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 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. ICF Fathom is built on a proprietary platform and offers a suite of tailored solutions and services and includes a set of intelligent AI agents that can be directly and securely embedded into existing workflows and infrastructures. The agents automate complex tasks, support informed decision-making, reduce waste, and boost productivity. These agents can be configured to support a wide range of functions from software development, cybersecurity, to document processing, grants 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 ICF's 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, 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 non-federal 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 the 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 expanded 160 basis points to 37.3% as compared to the second quarter of last year. This increase in gross margin was attributable to three 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 one-third of our second quarter revenues compared to 24% last year. Finally, we continue to see the favorable shift in our contract mix, as fixed price and time & materials contracts now represent approximately 93% of our total revenues, up from 88% in the prior year quarter, while our cost-reimbursable contracts accounted 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 costs while 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 a higher debt balance. The higher debt balance was due in part to our acquisition of AEG in December of 2024. We also repurchased an additional 11 million shares during the first half of this year 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 one year ago. Backlog at the end of the second quarter was $3.4 billion, which incorporates year-to-date contract cancellations and other changes in 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 from 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. 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 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. We remain focused on funding organic growth initiatives, expanding our capabilities and service offerings, especially those infused with AI, pursuing strategic acquisitions, maintaining our quarterly dividend, and executing opportunistic share repurchases alongside our standard buyback program designed 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. 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 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 non-federal 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 in helping us manage through challenging industry conditions. With that, operator, please open the call to questions.

Our first question comes from 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 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, 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, etc. like that. I would say that with those types 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 in that respect.

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

You mentioned an increase in federal government activity recently, as well as anticipated improvements in certain segments of the federal government business in 2026. Could you provide more details on the specific areas or programs where you are observing this improvement, such as IT modernization, health, or others?

Sure, Kevin. This is John. I want to start by saying that we're encouraged to see that contract cancellations have stabilized and we didn't observe a significant increase in Q2 among our federal clients. In Q2, we have noticed an increase in modifications and additional funds on contracts, happening broadly across our client base. The technology sector has shown initial signs of improvement and has been at the forefront, but we also saw increased activity in our complex program management and domain consulting as Q2 progressed. We've made headway with these modifications and additional funding. Regarding awards and RFPs, the technology area, particularly IT modernization, has displayed more activity, with positive signs emerging first in that sector. Recently, we've also identified encouraging developments in our complex program management opportunities. Looking ahead to 2026, we anticipate that the federal technology sector will return to growth due to the administration's emphasis on technology modernization and AI. We expect growth in that area next year. The complex program management and domain consulting sectors have faced more challenges, which may result in a longer timeline for recovery, but we remain optimistic and confident about a return to growth in federal technology in the upcoming year.

Okay. In your outlook section, you mentioned that you do not anticipate a revenue decline of more than 10% for the full year 2025 compared to 2024. Can you provide any additional insights on how much you have adjusted your expectations regarding the potential decline or if we are aligning more towards the midpoint? Also, any further details on this would be helpful.

Yes. I would first like to remind you that when we provided our guidance in February of 2025, the environment was very dynamic. We indicated that the bottom end of our range was a decline of 10% across the key financial metrics, and that was meant to be a floor. At that time, we shared our analysis of the maximum downside risk with federal clients, emphasizing that it was indeed a floor. We aimed to avoid returning to investors with a larger decline. Based on the visibility we have and what we've observed in Q2, we believe we won't decline by as much as 10% from 2024 levels. It's still too early for us to provide a specific number since we are in Q2, facing ongoing risks, and awaiting developments regarding the 2026 budget and the continuing resolution. There are significant changes occurring within federal government procurement. More information will be provided in future calls, but for now, I’m not ready to offer a specific number. However, I believe we will certainly see a decline of less than 10%. On the earnings side, I think we will be at the high end of our range, supported by strong growth in our commercial energy business and effective cost management. I will leave it at that for now.

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

I wanted to ask if you could share your insights on state and local activity. Are you noticing any transfer of responsibilities from the federal level? If so, could you highlight a few areas or specific services or regions where you are observing this trend?

There has been considerable discussion regarding the future role of FEMA and its potential impact on disaster recovery, as well as the roles of federal, state, and local governments. I want to clearly state that I cannot predict how this situation will evolve. However, I can share a few observations. Despite the speculation, we have not seen a decline in federal funding for FEMA programs, nor a notable drop in the number of federal disaster declarations. Although the approval process is slower, there was a recent denial for a request from the state of Maryland. In terms of daily operations during ongoing disasters, we have not experienced any changes in how work is conducted. It's important to note that Congress allocated an additional $29 million for the disaster relief fund during the lame-duck session at the end of 2024 as part of the continuing resolution for storms in '23 and '24. Currently, the disaster relief fund at FEMA has a balance of $14.7 million. We are also looking into CDBG and housing opportunities and remain active in our work. Additionally, we are preparing to assist state agencies if more responsibilities are transferred to them. Those discussions are ongoing, daily efforts continue, and regardless of the outcome, disasters will occur, and recovery will be needed. There will be funding available, and we will maintain our position as a market leader in this field.

Okay. And then I was wondering, shifting gears here, maybe you could talk a little bit about what you're seeing as far as the acquisition pipeline that's out there. 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 the beginning of the year?

From an acquisition standpoint, we have been active over the years, making acquisitions a key part of our strategy and that will continue in the long term. Right now, our focus is on the significant growth in our commercial energy business, where we are a market leader in several areas. We are actively evaluating other companies that could serve as potential acquisition targets, which would enhance our scale, geographic reach, or client base, or expand our work in energy programs, grid modernization, advisory consulting, and environmental planning for utilities. We are closely examining this market, and if the right opportunity arises, we will certainly consider it. The market is undergoing unprecedented changes, presenting significant opportunities, and we believe that expanding our scale and geographic presence would be beneficial. This is our top priority, and we are currently exploring options. In the federal sector, we do not anticipate taking any action this year or early next year due to prevailing uncertainties regarding client budgets and procurement. There is currently little activity in our markets, and valuations remain unclear, so we are unlikely to engage in federal acquisitions in the near term. Regarding disaster recovery, we see similar uncertainty. While we believe that the frequency and severity of disasters will continue to rise and funding will be available in the long term, short-term uncertainties are high. In summary, our primary focus remains on energy, although we will evaluate opportunities in disaster recovery and other areas if they present themselves.

Great. And then the last question for me, could you discuss some of the competitive advantages and dynamics related to Fathom and provide more details about that rollout?

Sure. It's clear that this administration is focused on using technology with an AI-first approach in the federal government. Therefore, having advanced AI skills is essential. They are concentrating on improving efficiency, minimizing waste, fraud, and abuse, and enhancing automation. ICF Fathom, which I mentioned, is our platform that enables us to apply AI techniques to modernize federal technology systems and create applications that support critical mission areas. We have just started announcing this recently, and more updates will be shared in the upcoming weeks. We are already using this platform with several clients, which allows us to rapidly prototype solutions in a natural manner to showcase the potential value of AI for their specific programs and needs. We are excited to have this launched and to be present 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 mention a couple of points. Firstly, as you probably know, the third quarter typically has our highest sales. I anticipate that this third quarter will follow the seasonal trend as our best quarter, coinciding with the end of the government fiscal year, and we expect that to hold true again this year based on current observations. Regarding your concern, there have indeed been a number of retirements and changes in procurement staff, which could pose a risk for us. Nonetheless, we still believe that the third quarter is likely to yield strong sales. However, in relation to your question about the procurement challenges, there is certainly some risk involved. On the positive side, we are noticing some improvements, with RFPs progressing and new opportunities entering the pipeline. So while we remain optimistic, the turnover in procurement and ongoing reorganizations have introduced a degree of 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?

The growth in electricity demand from data centers in the next decade is unprecedented. A report from ICF outlines expectations for electricity demand in North America through to 2030 and potentially 2050. The increase is substantial, and the challenges of meeting this demand, including generation, transmission, and business management, are remarkable. While this is a major driver, it's not the only factor. To meet growing demands, it's essential to maximize all forms of generation, such as natural gas, nuclear, hydrogen, renewables, and energy efficiency. All these sources will be necessary. This is a long-term issue that presents great opportunities in this sector. Additionally, the crypto industry requires significant power for mining, contributing to economic growth. The industry is also shifting towards a more distributed structure, prompting significant investments and changes. This is a challenge that will span 10 to 20 years and will create substantial opportunities within the 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.