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. Please be advised that today's conference is being recorded. I will now turn the call over to Lynn Morgen of AdvisIRy Partners. Lynn, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to review ICF's third quarter 2025 performance. With us today from ICF are John Wasson, Chair and CEO; and Barry Broadus, CFO. Joining them is James Morgan, Chief Operating Officer. During this conference call, we will make forward-looking statements to assist you in understanding ICF management's expectations about our future performance. These statements are subject to a number of risks that could cause actual events and results to differ materially, and I refer you to our October 30, 2025, press release and our SEC filings for discussions of those risks. In addition, our statements during this call are based on our views as of today. We anticipate that future developments will cause our views to change. Please consider the information presented in that light. We may, at some point, elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so. I will now turn over the call to ICF's CEO, John Wasson, to discuss third quarter 2025 performance. John?

Thank you, Lynn, and thank you all for joining us to review our third quarter 2025 results and discuss our business outlook. This was another quarter of resilient performance for ICF, demonstrating the importance of our diversified business model, our agility in managing costs within a dynamic business environment and the strength of our business development activities. Key takeaways from our third quarter results are: first, the continuing shift in our business mix with revenues from commercial clients, state and local and international government clients increasing by 13.8% and accounting for 57% of the quarter's revenues, up from 46% at the same time last year. Second, the continued robust performance in commercial energy, where revenues increased 24%, reflecting the sustained strong demand for ICF's advisory and implementation services. Third is the strong growth in our higher-margin commercial revenues, which together with our careful cost management resulted in a 10 basis point improvement in adjusted EBITDA margin, in line with our plan to maintain margins despite reduced revenue. And lastly, the value of our contract awards, which surpassed year ago levels, resulted in a book-to-bill ratio of 1.53 for the third quarter. Our year-to-date contract awards of $1.8 billion, together with our $8.4 billion pipeline supports our outlook for a return to growth in 2026. We had expected third quarter revenues to be approximately $15 million higher than reported. This variance was primarily due to delays in the ramp-up of our recently won international government contracts, although that situation is getting progressively better. And another factor was the slowdown in federal government procurement and project activities, particularly in our programmatic public health and human services areas in the latter half of Q3, leading up to the government shutdown. With the federal government on everyone's mind, I will begin my business review with our results in that area and how the government shutdown has affected ICF to date. In the third quarter, our federal government revenues declined 3% sequentially, representing a 29.8% decline from last year's third quarter. The dollar amount of our total 2025 federal revenues impacted by contract cancellations did not change in Q3 as we have not experienced any material new cancellations since our last report on July 31. However, expectations for Q3 federal revenues, as I just mentioned, were affected by the slower pace of program and procurement activity this quarter as things slowed down considerably in advance of the shutdown. There are several good news items to report in our federal government work for Q3. Approximately half of our third quarter contract awards represented work for federal government clients and about half of these wins represented new business, including broadening of scope on current contracts. This new award activity, combined with our high recompete win rates is a good indication of how well ICF's capabilities are aligned with the needs of our federal agency clients. In particular, you can see from today's release that we are winning both our recompete and new work in IT modernization. Our differentiated approach to building agile, flexible and lean engineering and product teams is allowing us to deliver value quicker and more efficiently than competitors. Approximately 80% of the work we currently perform in this area is in agile scrums and sprints and more than half is under fixed price or outcome-based contracts, which is aligned with the shift in federal contract procurement parameters. And we're also seeing growing client interest in ICF Fathom, a new suite of tailored artificial intelligence solutions and services designed specifically for federal agencies. This is a production-ready solution that can integrate seamlessly into existing systems at scale to unlock the full potential of AI to support mission outcomes. We have won a few initial contracts and have seen very positive response to this launch from several of our federal agency clients interested in areas such as citizen engagement, technical assistance, program evaluation and policy modeling. Now to the financial impact of the government shutdown. In the month of October, we estimate that ICF's revenue will be reduced by approximately $8 million and gross profit by approximately $2.5 million as a result of the current government shutdown. Our IT modernization practice has seen relatively few stop work orders. The majority of stop work orders have been related to our public health and human services work. Also, proposal activities have continued in IT modernization, although there has been some slowdown. All in all, the impact on ICF to date has been painful, but manageable, and we view this as a temporary situation. While we have taken steps to reduce costs associated with work that has been curtailed, we currently plan to retain key staff, which will position us to quickly recoup the majority of these revenues in future periods. You will see that we filed an 8-K this afternoon, noting that our named executive officers will take a 20% salary reduction for the length of the shutdown in consideration of the impact of the shutdown and in support of our employees and clients. Now I'll move on to our nonfederal government work, which accounted for 57% of our third quarter revenues and is making a positive difference for us as we navigate dynamic market conditions in the federal space. Revenues from our commercial, state and local and international government clients increased 13.8% year-on-year in the third quarter, led by a 24% increase in revenues from commercial energy clients. Our consolidated third quarter margins benefited from the increased contributions from our fast-growing commercial energy work, which represented 30% of our third quarter revenues, up from 22% in last year's third quarter. Additionally, our long-standing work for commercial clients has given ICF the experience and infrastructure to effectively work in this competitive advantage in today's federal market as federal agencies are being encouraged to adopt a more commercial business model. Third quarter revenue growth from commercial energy clients was led by strong demand from our utility clients for ICF's industry-leading energy efficiency programs and expertise in flexible load management, electrification, grid resilience and affordability, expertise that is closely aligned with the needs of our utility clients as they respond to increased demand for electricity. We are executing on new and expanded programs as well as gaining market share in both residential and commercial energy efficiency program development and implementation. Additionally, in energy advisory, we saw higher demand for our grid engineering, renewable development and transaction services. And in environment and planning, we benefited from increased renewable and transmission permitting, construction monitoring and wildfire restoration projects. We continue to see evidence that our commercial energy business will sustain its strong growth. Despite the lack of support for renewables by the new administration, we believe that renewable and storage development by the private sector on nonfederal lands will continue due to the advanced economics of these technologies and the need to meet the demands of rapid load growth. Additionally, we work across a full suite of resources supported by this administration, including natural gas, nuclear and coal that will also be important in optimally serving emerging needs for power and we have seen an uptick in development and M&A activities in these areas. We continue to benefit from the rapid increase in electricity demand associated with AI, data centers and other large loads by providing a broad range of services necessary to plan, site, permit, connect and manage such facilities. ICF is currently working with utility clients, hyperscalers and independent power and renewable energy firms, providing services ranging from location analysis, transmission planning, distribution engineering and construction permitting through community engagement and workforce development. The major growth challenge, the range of complex technical issues involved and the diversity of stakeholders make ICF well positioned for continued growth in this area. Moving on to state and local government clients. Our revenues increased 3.8% in the third quarter, primarily reflecting year-on-year growth in our technology work in the disaster recovery arena. ICF is currently supporting 95 active disaster recovery projects in 22 states and territories. This includes new contracts in California, Oregon, Virginia and Michigan, which were awarded during Q3. We continue to see HUD-funded procurement opportunities resulting from the nearly $12 billion appropriation to enable long-term recovery from disaster declarations in 2023 and 2024 and are actively positioning to compete for these procurements. Additionally, in response to uncertainty with respect to the future role of FEMA, state governments are showing additional interest in disaster case management, individual assistance as they consider the potential implications of taking on additional responsibility for initial disaster response and recovery efforts. ICF is actively engaged with state emergency management agencies, and we are broadening our partnerships in emergency response, disaster survivor assistance arena as the states prepare for the possibility of additional responsibilities. Our climate, environment and infrastructure services represent the other major component of our work for state and local government clients and revenues in this market have remained relatively stable. As federal emphasis on environmental protection declines, we are seeing many states increase their efforts to fill the gap, creating opportunities for ICF and state planning, rulemaking, stakeholder engagement, permitting and compliance. We're also experiencing increased demand for sectors with strong economic activity, including data centers, fiber networks, minerals extraction and transportation. And we're working on synergies with our disaster management teams in supporting states with recovery efforts, including Florida, New Jersey and others. We continue to benefit from solid revenue growth from international clients in the third quarter. Revenues increased 8% year-on-year. We have won key recompetes and new business. As I mentioned earlier, the ramp-up of the new contracts we've won with the European Commission and the U.K. government late in 2024 and earlier this year has been slower than we originally anticipated as we expected double-digit revenue growth in the second half of this year. We have seen sequential acceleration in the number of task orders being issued under these contracts over the last two quarters, but we now do not expect the full benefit of these contracts until 2026. To sum up, our third quarter performance demonstrated the benefits of ICF's diversified client base, our agility in adapting to challenging market conditions in the federal government and our success in winning recompetes and new business. I'm sure that many of you have seen the release we issued today simultaneous with our earnings announcing that Barry Broadus, our CFO, is retiring, and we have named two of our senior executives to new roles. First, let me say that Barry has been a tremendous asset to ICF. He has strengthened our financial capabilities, built a strong finance team and positioned ICF to take advantage of future growth opportunities. We certainly wish him all the best in his retirement. We are fortunate to have a strong group of talented leaders like James Morgan and Anne Choate to help drive our future growth. We have named James Morgan, currently COO, to take on the additional role of CFO following the publication of ICF's full year 2025 financial results. In addition, Anne Choate, currently Executive Vice President, will take on the role of President of ICF early in 2026. I look forward to working closely with both of them to drive organic and acquisition growth and to implement financial strategies to build our future growth and profitability. So with that, I'll now turn the call over to Barry for a financial review. Barry?

Thank you, John. We say that it's been a pleasure to work at ICF over these past 40 years. ICF is truly an amazing organization with an outstanding team of dedicated and passionate professionals. Serving as ICF's CFO has certainly been the pinnacle of my career. I could not end my career working with a better team of people. That said, I am now pleased to provide you with some additional details on our third quarter financial performance. Third quarter revenues totaled $465.4 million compared to $517 million in the third quarter of 2024 and relatively stable with the $476.2 million reported in this year's second quarter. The year-over-year revenue comparisons reflect ongoing headwinds in our federal government business, partially offset by the continued strength across our commercial, state and local and international client base. On a year-to-date basis, revenues decreased 6.2% and revenues, excluding subcontractor and other direct costs declined 4.3%. Revenues from commercial, state and local and international clients increased 13.8% in the quarter, led by the robust growth in our commercial energy business, which posted a 24.3% year-over-year increase. On a year-to-date basis, our energy business grew approximately 25% and represented 28% of our total year-to-date revenues. The strength in this client category underscores the ongoing demand from our utility clients for ICF's expertise in energy efficiency, flexible load management and grid resilience solutions, capabilities that are increasingly critical as they address our country's growing demands for electricity. The continued strong growth in revenues from our nonfederal government clients offset a significant portion of the 29.8% year-on-year decline in federal revenues in the third quarter, reflecting the continued impact of the contract funding reductions and the procurement delays that John mentioned in his remarks. On a sequential basis, federal revenues declined only 3% as the impact of contract cancellations has remained stable following our second quarter earnings call. To date, we have seen an impact on 2025 revenues of approximately $117 million and a total backlog impact of approximately $420 million from contract cancellations and stop work orders with no material increases since our last call on July 31. Third quarter subcontractor and other direct costs declined 11.8% year-over-year and represented 24.2% of total revenues, down 50 basis points from the 24.7% in the third quarter of 2024. The decline was primarily tied to lower pass-through revenues in the federal business. As a result, a higher percentage of our revenue was tied to ICF direct labor, which generates higher margins. Third quarter gross margin expanded 50 basis points to 37.6%, primarily driven by a continued shift in our business mix towards higher-margin commercial revenues, including the uptick in our energy business. Gross margin also continues to benefit from a higher proportion of ICF direct labor that I mentioned as well as a more favorable contract mix as fixed price and T&M contracts represented 93% of our third quarter revenue, up from 88% in the year ago quarter, while our cost reimbursable contracts accounted for only 7% of third quarter revenues. Indirect costs declined 7.9% to $122.3 million and represented 26.3% of total revenues. As we have discussed on recent calls, we remain focused on managing our indirect costs while continuing to invest in growth areas, expand our capabilities in AI and other technologies and implement systems and tools that increase our efficiency and will support our future growth. As we navigate the current government shutdown, we will continue to be mindful of tightly managing our costs by balancing short-term results with our plans for a return to growth in 2026. Thus, while the shutdown continues, it will impact our fourth quarter margins as we need to maintain a certain level of staffing and core capabilities in order to ramp up quickly once the shutdown is lifted. Third quarter EBITDA totaled $52.8 million, down from $58.2 million in the third quarter of 2024. And adjusted EBITDA was $53.2 million compared to $58.5 million in last year's third quarter. As a percentage of total revenue, adjusted EBITDA margins expanded 10 basis points to 11.4%, reflecting our gross margin expansion as well as our success in executing cost management initiatives. Net interest expense in the third quarter amounted to $7.9 million compared to $7.2 million in last year's third quarter due to a higher average debt balance related to the AEG acquisition in December of last year as well as our repurchase of ICF stock. Our tax rate was 22.7%, above the 13.8% in the prior year quarter. In this year's third quarter, we incurred a one-time negative tax adjustment related in part to certain tax provisions and the new legislation signed into law this past July. As a reminder, last year's third quarter tax rate benefited from tax optimization strategies and several one-time tax benefits the company enjoyed at that time. Additionally, as we discussed in our last call, our full year 2025 tax rate is expected to be approximately 18.5%. And we also estimate that our tax rate for 2026 will be in the range of 21%. From a cash tax perspective, we expect to realize approximately $30 million in cash savings in 2025 and an additional $40 million in 2026, resulting from provisions of the new tax legislation I mentioned. Net income totaled $23.8 million or $1.28 per diluted share compared to net income of $32.7 million or $1.73 per diluted share in the third quarter of 2024. Non-GAAP EPS was $1.67, inclusive of a $0.04 per share impact related to the negative tax adjustment I just noted. Last year's third quarter non-GAAP EPS was $2.13. Our backlog stood at $3.5 billion at quarter end, up approximately $180 million as compared to the second quarter of this year due to the robust book-to-bill total of 1.53 that John previously noted. 52% of our backlog is funded. Our third quarter new business development pipeline stood at $8.4 billion and is approximately 4.3x our trailing 12 months revenues. Third quarter operating cash flow was $47.3 million, up from $25.5 million in the comparable quarter last year. Year-to-date operating cash flow totaled $66.2 million. Days sales outstanding were 82 compared to 80 days in the prior sequential quarter, and third quarter capital expenditures were $5.5 million as compared to $5.2 million in last year's third quarter. We ended the quarter with debt of $449 million, down from $462 million at the end of the second quarter. The third quarter debt reduction was in line with the debt reduction in the same period last year. 39% of our debt carries a fixed rate, and we are tracking to have approximately 45% of our debt at a fixed rate by year-end. Our adjusted leverage ratio was 2.13x at quarter end. And absent any acquisitions, we expect our leverage position to decrease by about 0.25 of a turn by year-end. Our approach to capital allocation remains consistent and disciplined. We are focusing on investing in organic growth, pursuing strategic acquisitions in attractive markets, paying down debt, sustaining our quarterly dividend payments and executing an opportunistic share buyback. As we noted last quarter, we have been prioritizing debt repayments to position ICF for acquisition activities in 2026. Today, we announced a quarterly cash dividend of $0.14 per share payable on January 9, 2026, to shareholders of record on December 5, 2025. For modeling purposes, for the fourth quarter, we estimate the year-on-year percentage decline in revenues and non-GAAP EPS to be similar to what we experienced in the third quarter. This assumes the impact of the government shutdown remains consistent with the estimated reduction of approximately $8 million in revenue and $2.5 million of gross profit for the month of October and that the government shutdown extends through the end of the year. We have also revised our cash flow guidance to a range of $125 million to $150 million from approximately $150 million to reflect the potential collection delays related to the shutdown. In addition, other full year guidance metrics include the following: Our depreciation and amortization expense is now expected to range from $20 million to $22 million, down from $21 million to $23 million. Amortization of intangibles is expected to remain between $35 million and $37 million. We anticipate interest expense to range from $30 million to $32 million. Capital expenditures are now anticipated to be between $23 million and $25 million, down from the prior range of $26 million to $28 million. As we previously noted, our full year tax rate is expected to be approximately 18.5%. And finally, we expect the fully diluted weighted average share count to be approximately $18.6 million. And with that, I will now turn the call back over to John for his closing remarks.

Thanks, Barry. Our year-to-date results have put us squarely within the guidance framework we provided for 2025 at the beginning of this year, and we stated that a 10% decline in revenues, GAAP EPS and non-GAAP EPS from 2024 levels was the maximum downside risk we foresaw from the loss of business primarily from federal government clients during this transition year. At that time, we also noted that our guidance framework did not consider the potential impact of an extended government shutdown. As I previously mentioned, in the month of October, we estimate that the shutdown will reduce ICF's revenues and gross profit by approximately $8 million and $2.5 million, respectively. Based on this monthly impact continuing, we are pleased to be able to maintain our original guidance framework for revenues and non-GAAP EPS even if the government shutdown extends through the end of the year. Looking ahead, we continue to be confident in our ability to return to revenue and earnings growth in 2026. This outlook is supported by the continued growth from our nonfederal government clients, improvement from portions of our federal government business, recent contract wins and the large pipeline of opportunities. Also, as Barry mentioned, we are keeping our powder dry as we consider potential acquisitions in 2026 that will provide additional growth momentum, and we have substantial authorized capacity for share repurchases. Our professional staff across all markets and geographies have been instrumental in helping us navigate difficult business conditions and their ongoing commitment to ICF and our clients underpins our ability to drive long-term growth. With that, operator, I'm pleased to open the call to questions.

Our first question comes from 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. 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?

We did not provide a Q4 estimate for the decline in our government business. As of the end of the third quarter, our year-to-date numbers show a decrease of about 22.7%. With the government shutdown, we anticipate a further decline in the fourth quarter. Barry, I'm not sure if...

I would say that without the government shutdown, we expect our fourth quarter federal revenues to decline more than in the third quarter. However, when factoring in the government shutdown and its effects, the decline would be significantly greater than what we saw in the third quarter.

Yes, that makes sense. You provided your total revenue assumption, so we are trying to analyze it. In your guidance, you mentioned anticipating an $8 million revenue loss per month from the shutdown, which seems to be lower than our expectations. Are many of these projects still moving forward without government involvement? Is there something we might be missing regarding the dynamics of this business?

I believe it's a combination of factors. We have definitely put some projects on hold, which began early in October, leading to noticeable impacts almost immediately. This resulted in an $8 million impact for October. For the quarter, we anticipate a $25 million impact on revenues and a $7.5 million impact on gross profit based on these figures. We feel confident about these estimates because the effects were felt early in the month and there's been no significant change since then. Part of our government business remains unaffected by the shutdown, although some areas have been impacted. In certain instances, we can continue working on fixed-price contracts with available funding and appropriate technical direction, while experiencing a slowdown in other areas. Therefore, we believe the $8 million monthly impact and the $25 million quarterly revenue impact are reasonable estimates. However, there is some uncertainty due to the administration's ongoing changes. Overall, we feel optimistic about these figures and think they represent the likely consequences of the government shutdown if it extends until 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 in 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 would say a couple of things. For the work affected by the shutdown, the $25 million typically means that in previous shutdowns, once the work resumes, we will complete that work. So it's a delay. Based on past experiences, we would recoup that foregone revenue over the remaining life of the contract in future years. We expect this to happen again. It seems like a delay with the impacts we've observed. Also, if the shutdown continues into the end of the year for those clients experiencing these effects, it will likely impact awards and potential modifications. This could have implications early next year regarding the level of business if the awards are delayed or if the modifications are expedited. Ultimately, I expect that most of the revenue from the shutdown will be postponed and we will recover it over the life of the contracts.

Our next question comes from 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 that our federal business can be divided into two parts. About half of it is focused on IT modernization technology. In that area, the procurement environment and our ongoing work have continued without much disruption. We haven't experienced the same significant impact as we have in the programmatic segment. Some of the awards you see in Q4 are certainly in IT modernization, and we expect those to ramp up along with ongoing modifications. Therefore, I am not overly concerned about a slowdown or disruption in those efforts. The main impacts of the government shutdown are on our programmatic work at Health and Human Services, where many agencies are affected. This has also impacted procurements in that sector, so that part of the business may take longer to recover post-shutdown. This is reflected in our outlook for Q4 and our guidance. As we consider our return to growth next year, we clearly expect to grow in 2026, likely at least a low single-digit rate. A significant portion of our business, around 58% to 59%, is growing robustly, and we anticipate that trend to continue. For our federal business, we expect our IT modernization segment to return to growth next year, while the programmatic half will not see growth until 2027 due to tougher comparisons, requiring more time to recover. However, with this mix, we are confident in achieving growth next year.

Okay. Let's switch gears a bit and maybe we can talk 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?

That's a great question, Tobey. As you're aware, our commercial energy business has been experiencing significant growth, with around 70% to 75% of it focused on designing and implementing utility programs, energy efficiency, electrification, and load management. We've been successful in winning new contracts, gaining market share, and securing recompetes. Given the growing demand for electricity, we anticipate that implementation of utility programs will remain strong. Additionally, our energy advisory business, which involves front-end advisory work for utilities covering a range of topics such as generation, transmission, demand forecasting, and grid modernization, is also seeing robust growth due to the high demand for energy. We project double-digit growth for our energy advisory business next year. The only area facing challenges is in renewables, particularly with offshore wind and projects on federal lands, which are affected by the current administration's lack of support. However, this impact on our overall energy business is minimal, with potential annual losses estimated at up to $10 million. Despite this, we retain capabilities in areas that the administration does support, such as natural gas, nuclear, and coal, which continue to present opportunities for us.

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 experienced any material impacts, and I'm not aware of any shutdowns on our Department of Energy contracts. Honestly, I think the impacts we saw in the Department of Energy were primarily due to contract cancellations related to DOGE and GSA earlier in the year. The work that remains is generally continuing, and we haven't faced any issues from a stop work perspective.

Our next question comes from Marc Riddick with Sidoti. No, we haven't experienced any significant impacts. I'm not aware of any shutdowns related to our DOE contracts. The only impacts we saw in DOE were due to contract cancellations earlier in the year. The remaining work is generally ongoing, and we haven't encountered any stop work issues.

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 discuss the growth areas we are focusing on as we approach next year. I understand you are entering the planning phase, but I'm curious about the non-federal areas that are currently experiencing growth. Can we talk about your capacity in those areas considering the growth you've already seen and the potential growth in the near term? Additionally, what investments in personnel or technology are you considering to capitalize on these opportunities?

We are making significant investments in key growth markets to fully leverage the opportunities available. This includes recruiting new talent to enhance our capabilities and develop new skills, as well as investing in technology, software, and artificial intelligence to expand those businesses. Our investment focus is currently on these areas. We are heavily investing in talent recruitment to ensure we remain competitive. Looking ahead to next year, we anticipate strong double-digit growth across commercial sectors, including a robust performance in commercial energy, where we have an effective recruiting strategy and are leaders in the market. Our internal talent helps us attract the best external candidates, which will aid in retaining and recruiting skilled personnel. We expect strong double-digit growth in our international business as our international projects continue to progress next year, and our recruitment efforts for this segment are off to a good start. The same applies to state and local sectors. We believe we are making the right investments to secure the talent we need. We have a strong pipeline of candidates, which means we can quickly turn incoming work into revenue without delays. Overall, we are confident in our ability to convert contract wins into revenue efficiently.

That's helpful. There were some comments regarding potential inorganic investments and prioritization of cash usage in the prepared remarks. I know you will be revisiting these topics in your planning process. Could you share your current views on the acquisition pipeline? What does the pipeline look like in terms of volume? We're observing an increase in M&A activity in general, but I'd appreciate your insights on attractive opportunities and current valuation levels.

I'll discuss M&A while Barry can focus on cash flow. M&A continues to be a key element of our overall strategy. Historically, ICF has been active in acquisitions, which have significantly contributed to our growth. Currently, we are primarily looking for opportunities in the energy sector that could enhance our scale, geographic reach, or essential capabilities in the core markets we serve, both in our advisory and program implementation businesses. We are actively exploring these options and would certainly consider any suitable opportunities that align with our strategic and cultural objectives. Given the recent dynamics in the energy sector, valuations are notably high, but we are pursuing leads there. We are also examining potential opportunities related to fast recovery initiatives and infrastructure work within state and local markets, where we see potential. However, in the federal market, we are less inclined to pursue new acquisitions due to its challenging nature and uncertain valuations. We are still evaluating opportunities in IT, but the federal market presents inherent challenges. Our main focus remains on energy, asset management, and infrastructure. Now, Barry, would you like to share your insights on broader investment matters?

I would say, as I mentioned earlier, we are continuing to prioritize paying down debt. We expect that by year-end, our leverage will be below 2x. This will give us the capacity to pursue various assets that we believe are appropriate. We will maintain our focus on this goal and continue to pay down debt as we have in the past, while also looking at opportunities to effectively utilize our available resources.

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 believe there are significant opportunities for us ahead, including new chances to capture business from competitors. As we secure recompetes, we expect to broaden the scope of our services. The overall market exceeds $2 billion, so we're not limited by its size. Our strengths lie in residential and commercial energy efficiency, and I estimate our market share is around 10% to 15%. I'm confident that we are not constrained by either the market size or our current market share, and we have a strong history of effectively competing for this work and providing integrated solutions. Therefore, I see a considerable additional opportunity for us.

Okay. Great. In your second quarter call, you mentioned that with the slowdown in contract cancellations with the federal government, you likely wouldn't be at the low end of the guidance framework for 2025. Is that still true since you haven't observed any further cancellations in the federal sector? Does the shutdown impact the possibility of that full range?

I would say that when we provided our guidance at the beginning of the year, we did not factor in a federal government shutdown. In our second quarter call, we indicated a potential decrease of 10% in revenues. Before the shutdown, we had a solid expectation of being down 6% for the year, and we felt confident about that throughout a significant part of Q3. However, as it became evident that a government shutdown was likely, we began noticing impacts in our procurement activities and specifically within our Health and Human Services sector. Now, with the shutdown in effect, we expect to end up at the lower end of our range. Barry has shared guidance on that. The shutdown will affect our revenues and profits, pushing us toward the lower end. I want to emphasize that we are proud to have managed the business effectively within the original range we set without considering a shutdown. Our profitability remains intact compared to levels prior to this administration, and even with the shutdown, we will hold to that range. We had established our initial guidance back in February, and it has proven resilient despite the challenges posed by the new administration's policies, GSA activities, and changes in federal employee status. We have a strategy to navigate the shutdown, and we believe we can deliver results while remaining within that range. Our business segments outside of federal contracts continue to grow at double digits. So, while I appreciate the lengthy response to your question, we are still positioned within the range amid this government shutdown, which will have a temporary impact. I believe that revenues will recover over the duration of the contracts, whether that occurs in the year ahead or within 18 months. Overall, I am optimistic about how we’ve managed through this situation.

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 permanent arrangement with both a dual COO, CFO role? Or would you eventually...

I would say a couple of things. First, James served as CFO for eight or nine years during his initial time at ICF and has spent the last five or six years as COO. Having experience in both roles makes him uniquely qualified to take on this combined position. Given the current size, scale, and maturity of the firm, along with the strength of the team supporting Barry, it makes sense to merge these roles. James' new title will be Chief Operating and Financial Officer, and while I haven't decided if this will be permanent, I am pleased he can step into this role. At the same time, Anne Choate, who has excelled in growing our energy business and has been with ICF for 30 years, will take on the management of our operating groups and business development function. She will focus on translating our strategy into growth, ensuring client satisfaction, and driving business development. This presents great opportunities for both James and Anne and allows me to concentrate on strategy during a period of significant change, including M&A activities, developing future leaders, and representing ICF externally. I believe we have the talent in-house to manage this transition effectively, and we have done well in providing career growth opportunities at ICF. Anne’s promotion will also create additional responsibilities for several key leaders in our energy business, which I am excited about, and we will continue to foster this kind of development moving forward.

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.