Welcome to the First Quarter 2025 ICF Earnings Conference Call. My name is Karen and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I will now turn the call over to Lynn Morgen of Advisiry Partners. Lynn, you may begin.

Thank you, Karen. Good afternoon, everyone and thank you for joining us to review ICF's first 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 May 1, 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 CEO, John Wasson to discuss first quarter 2025 report. John?

Thank you, Lynn, and thank you all for joining us this afternoon to review our first quarter results and discuss our business outlook. We are pleased to report that our first quarter revenues were in line with our expectations, reflecting the strength of our diversified business model and supporting the 2025 guidance framework we discussed during our February 27 earnings call. There are several key takeaways worth noting. First, our revenues from commercial, state and local and international government clients in the aggregate accounted for 51% of our first quarter revenues, up from about 45%, one year ago. Second, revenues from commercial energy clients increased 21% year-over-year, demonstrating continued strong demand from utility clients. Third, adjusted EBITDA margin on total revenues expanded 10 basis points to 11.3%, reflecting mixed benefits and careful cost management. And lastly, our non-GAAP EPS was up almost 10%, considerably ahead of our first quarter revenue comparisons, and we do expect non-GAAP EPS that outpace revenue performance for the full year as well. I'll now review additional first quarter business trends and then provide further insight into ICF's federal government business in the context of the new administration's directives and spending priorities. To begin, revenues from commercial clients increased 22.1% to account for 29.5% of total first quarter revenues, up from 23.9% in last year's first quarter. Commercial energy was the key driver of the strong performance with revenues up 21% to represent 87% of the commercial client category. This growth was driven by new and expanded energy efficiency, electrification and customer engagement programs for utility clients. We are experiencing continued demand from utilities for energy efficiency, demand response, customer engagement and flexible load management programs as our clients seek to accommodate rapid load growth. The vast majority of these programs are funded by ratepayers as…

Thank you, John, and good afternoon, everyone. I'm pleased to provide additional details on our first quarter financial performance. The change in our business mix, coupled with careful cost management is evident in our first quarter results, where we delivered higher gross margin, increased our adjusted EBITDA margin and grew non-GAAP EPS despite a modest revenue decline. Our results reflect the actions we have taken to adapt our growth and investment strategies to the current business environment and manage the cost structure of the company. First quarter of 2025 yielded a revenue decline of 1.4% year-over-year to $487.6 million, firmly within our guidance range. Adjusting for 1 less workday than in the prior year's first quarter, 2025 revenues have been flat. Revenues for commercial, state and local and international government clients increased 12.6% year-over-year and represented 51% of our first quarter revenues, up from approximately 45% in the comparable period last year. Growth was led by continued strength in our commercial business, where revenues increased 22% year-over-year led by continued significant growth in our energy efficiency business. Commercial revenues accounted for 29.5% of total revenues as we continue to expand our services and solutions amid sustained demand from our utility and other clients. Revenues, excluding subcontractor and other direct costs increased approximately 1% versus prior year. First quarter subcontractor and other direct costs declined 170 basis points to 22.7% of total revenues, compared to 24.4% in the first quarter of 2024, primarily related to a shift in our client portfolio and a decrease in our U.S. federal government pass-throughs that John noted in his remarks. The favorable mix shift, which included an increase in our higher-margin commercial business, a larger percentage of fixed price and T&M contracts and a decrease in subcontracting revenues led to an 80 basis point expansion…

Thanks, Barry. ICF's diversified business model is enabling us to manage through a dynamic federal government business environment while remaining agile to capture future business opportunities, which we expect to evolve given the substantial reduction in the federal workforce. We are maintaining the guidance framework we provided at the time of our fourth quarter 2024 earnings release. Namely, for ICF's 2025 total revenues, GAAP EPS and non-GAAP EPS will see a range from flat to down 10% from last year's levels. The 10% decline representing the floor we foresee from the loss of business primarily from federal government clients during this first year of the new administration. Underpinning this framework is our projection that ICF's revenues from commercial energy, state and local and international government clients will grow at least 15% in the aggregate for the year, offsetting or partially offsetting lower revenues from our federal government clients due to potential funding curtailments and their slower pace of new RFPs. Our first quarter margin performance demonstrates careful expense management, supporting our expectation that we can manage expenses in 2025 to maintain adjusted EBITDA margins similar to those of 2024. Our GAAP and non-GAAP EPS framework for 2025 and is exclusive of the special onetime tax benefit accrued in this year's first quarter, which benefited EPS by $0.13. We appreciate the support of our professional staff. We have shown a strong commitment to ICF and our clients who helped us navigate during this period. The ICF corporate culture has been a key differentiator for us and takes on even greater importance in times of challenging business conditions. With that, operator, I'd like to open the call for questions.

[Operator Instructions]. Our first question comes from Tim Mulrooney of William Blair.

Hey John, very good afternoon. Thanks for taking my questions, I've got a few here. The first is on the guidance, please do correct me if I'm wrong, but I believe when you provided your guide last quarter, it was your expectation that the second quarter would kind of be peak DOGE impact, so to speak, with the potential for that to lessen in the back half of the year. With the visibility into the business today, is that still your expectation or are you thinking about that a little bit differently now?

I would say, well first, I think that the environment in the federal arena remains fluid and unsettled. I would say that I would expect to see continued activity from DOGE over the next several quarters. But I think, Q2 I think would still -- Q2 and Q3 will continue to see activity. I don't think they're going to be -- it's hard to say that they'll be significantly more impactful or impact us more in Q2 relative to Q1. I would say that we'll see Q2 similar to Q1, but not be more impactful from DOGE.

Okay. That's really helpful, John. I know it's difficult to say exactly. So I just appreciate the color at all. Along those lines, I think you gave an update on stop work orders. I noticed in your K, which I think was published on February 25, that you'd received notice for termination of convenience of approximately $276 million. Can you update us on where that figure stands today?

Yes and this is Barry. The number is now about $375 million.

$375 million. okay. And Barry, did you give an estimate for how much Applied Energy Group contributed to the quarter to revenues?

I don't think we broke Applied Energy revenues out separately. I think we...

We don't disclose that separately, but suffice it to say, we're very pleased with the integration and the performance of AEG and they're performing very well.

Yes. And I think we said at the time of the deal that they were about $30 million of revenue and would grow about 15%. So that -- you can do the math, and I think you get to what we'd expect there.

Okay.

And Tim, I would like to clarify 1 point on the $375 million, that is a number that is over a long period of time. It's not a 1-year impact backlog perspective. So typically, our contracts will range anywhere from 3 to 5 years. So that number would be spread over a number of periods, not just this year.

Okay. That's helpful color. One more for me, and then I'll hop back in queue. I just wanted to touch on your IT modernization business. I mean, I believe your guidance called for growth for the year. Please correct me if I'm wrong on that as well. But since you last reported, there's been news that DOGE has taken a more critical eye towards some of the more broader software and IT contracts that the government entered into. I'm wondering if you've been impacted at all by that focus. And if you could just remind me what your expectation is for that business for this year.

Sure. So the IT modernization business, I think absolutely what we said last quarter is that we expected that business to be down 5% to 10% for the year, primarily driven by delays in awards due to the fact that DOGE was obviously doing the projects reviews on the existing contract base in the federal government and that, that would lead to delays in procurement. And so I think we're thinking 5% to 10% down for this year. We really haven't seen material cuts in our IT modernization contracts to date. And so I think there is more an issue of the pace and speed of new opportunities.

Okay, got it. That’s very helpful, thank you. Thank you very much for the time.

Thank you. Our next question comes from Joe Vafi of Canaccord Genuity. Your line is now open.

Hey guys, good afternoon. Thanks for the opportunity for the questions here. Just first, I know, John, you provided some good color on what's implied in the guidance for the commercial business? I just wanted to double-click on that a bit and focus on commercial energy in there. Would you say that the guide for the year implies the kind of metrics for energy we saw in this quarter in terms of revenue and margins? Or is there anything else there that we should be aware of? And then I'll have a few follow-ups.

No, I think you -- it assumes that commercial energy will continue to be the outstanding performer in that as the business and the margins there are very strong. And so we certainly expect to continue that throughout the remainder of the year on the energy side. I think as we reported, we had 21%, 22% growth there in commercial energy. As you know, Joe, that's our highest margin business.

Sure, absolutely. And then kind of switching over, I know we kind of talked about some of these, the stop works and the contract terminations. It might be helpful to get your view on the stop work orders and if you believe that those stop work orders in any way, shape or form could be temporary or how do you kind of look at the difference between a termination and a stop work order relative to why they weren't actually terminated, the stop works weren't terminated, and if there is an outlook for the future on those?

I think if you look at the number of terminations for convenient for stop work orders, I think the stop work orders are much smaller number. I'll tell you that we've had a few of those turned on and off in the last several weeks and months and some more than once, but at the end of the day, I think in our guidance, Joe, we're assuming that the stop work records will ultimately result in termination and will not come back this year. If they do, that would be great, and that would be upside, but and as I say, the vast majority of the contract impacts are in the termination of [indiscernible].

Got it. And then maybe just one other quick one. It might be interesting to get a little more insight into the pace of award activity. Obviously, I believe it would be no surprise if it's down here in Q1 as well as through the month of April. I was just wondering if you could provide color on the kind of work that is actually getting awarded or renewed and kind of how is that pace of activity versus pre-DOGE? Thanks a lot.

Yes. I think I said in my remarks, I would say that we are pleased. We have seen pickup in activity, both in terms of modifications to existing contracts and RFPs are beginning to move in the federal arena. So that's a positive sign. I would say it's not where we would like it, and it's not where it was pre -- part of this administration assuming office, so there's still a way to go there. I would say that there's more activity around modifications on existing contracts, more activity around recompetes, I would say, the newer opportunities. We've seen a little activity there. But honestly, it's still very early. Many of the key the key political figures are just getting into their agencies and selling the agenda. So I would say there's still a way to go on new opportunities certainly in the federal arena.

Got it. Fair enough. Thanks for that color John.

Thank you. Our next question comes from Tobey Sommer of Truist Securities. Your line is now open.

Thanks. I wanted to start with commercial energy. Years ago, the energy efficiency projects were almost exclusively the big ones that you got, but I'm curious if some of the things that you talked about at Investor Day a number of years ago have matured and increased in size, so that your commercial energy customers are in some cases maybe buying multiple projects of size in different parts of their business. Maybe if you could contextualize that, that would be great.

I would say that certainly, the energy efficiency component of our utility programs continues to be the largest component. As you know, over the last 3 or 4 years, going back to our Investor Day. I think we've talked about the fact that utilities are looking at additional programs given the ongoing changes in their business, including the shift to distributed energy more recently, including the significant spike in power demand. I think that over the last three or four years, it has driven interest in additional programs. And I think we've talked about these flexible load management, electrification, battery storage programs. And so we are now implementing those increasingly for utilities, many of them have been in a pilot phase. I think we've talked about that, that we're running pilot programs. And if they're -- as we demonstrate success with those, we would expect them to scale materially over time. And so we're looking for many -- we have many utility class where we're now supporting two or three of those types of programs in addition to the energy efficiency programs. I think there's still -- I wouldn't say they are at the scale of energy efficiency, but we're growing. It's becoming a larger component of our portfolio. I think that we believe in the long run, those will drive significant growth for us in the next three to five years.

Thanks. In the state and local business, you talked about lower pass-throughs. Do you still have the same growth outlook for that for the year? I know there's been some news around rejiggering the way FEMA works and perhaps even the community development block grant mechanism. So I'm curious what your perspective is for the year.

I mean, I think that we -- I think our outlook and view of the disaster recovery business remains positive, and we think it'll certainly grow this year and grow to our expectations for the year. We do have a robust pipeline there. I think I talked about the opportunities wildfire opportunities in California. There's opportunities in Florida, Carolinas and Georgia from the hurricanes more recently that should play out later this year. And so I think we're generally believe that will continue to be growth area. As you know, there is a discussion about the future role of FEMA, how these disaster recovery programs may evolve. But I think we still believe that there will be the need for disaster recovery, particularly around significant disasters and that whether FEMA plays a lead role or the states play a greater lead role, that business will be there, and there'll be opportunity for us. So for this year, we're still counting out to be a growth market. And given the pipeline, I think we feel confident with that.

Thanks. Last one from me. Could you discuss the industrial logic between that sort of ties together your federal work for the DOE and other agencies, and your commercial energy business. Just curious with the growth rate that you have in commercial energy, wondering if there's an opportunity to ever kind of separate that or spin it off and unlock value that way.

I think that we -- I mean, our energy business, we work across, obviously, we work for commercial utilities, we also work for state energy agencies, we work for the federal government on energy issues, DOE, some of our energy efficiency work has been in other federal agencies, and so I would say that it's an integrated set of capabilities that we sell across federal, state and local and commercial. Commercial is the largest, but state and local is the second largest component of that business. Federal is actually the smallest. And so I think -- we think there's value from that integrated portfolio. And we think there's -- certainly on the state energy side, we'll continue to see growth. So that's how we think about the business, I think.

Thank you. Our next question comes from Kevin Steinke of Barrington Research. Your line is now open.

Great. Thank you. I just wanted to follow up on IT modernization. As you noted, your expectations for a 5% to 10% decline this year. And then in response to an earlier question, you talked about maybe it's a little too early to see new awards coming out of this administration in the federal arena. Does that also apply to IT modernization because I think you had kind of thought this is a transition year for that business and maybe you start to see some opportunities in IT modernization flow at some point in 2025 kind of setting up 2026 for that business.

Yes, I would say -- well, first of all, I do think with the IT modernization and technology side of the house in federal that I do think this administration is going to continue to invest in that area. It's going to be AI led. They're clearly looking for additional efficiency. They're also focused on waste, fraud, and abuse, and they're going to want to leverage technology more broadly across agencies and across the federal government to get additional efficiencies. But I think it will continue to be an area of opportunity. I think we're -- in my assumption, so I do assume that there will be opportunities there. I think that they will -- there'll certainly be more of a second half opportunity. And I think to the extent that we see them and the words occur, I think they'll set us up. It's more about what's the potential growth for 2026. I think for 2025, we're -- as I've said, we're assuming a 5% to 10% reduction. We're assuming that it's going to be due to awards not moving as quickly and so we're not counting on significant new contracts in 2025 to get there.

All right that makes sense. Thanks for taking the question.

Thank you. Our next question comes from Marc Riddick of Sidoti. Your line is now open.

Good evening. I wanted to ask within Health and Human Services. I was wondering if you could get a sense of have you heard to this point, any communication as far as shifts of priorities or kind of where, are there any areas that may pick up in messaging or what have you, where the administration wants to go that might present upside opportunities for you there.

Yes. I think as I indicated in my remarks, I think that there are -- there is a potential for new opportunities for us at HHS. I think -- the new administration has literally indicated they'll focus on children's health. They're very interested in issues around pesticide and food, food additives, and so those types of issues are going to create a new organization within HHS around making America healthy and improving American Health. And so I think there'll be opportunities there. I would say the same thing. I think it's -- those will -- we hope to get clarity on those in the second half of the year. But there will certainly be opportunities. We have expertise in chronic health issues for children, we have expertise in pesticides, we have expertise in food additives and so some of the things that have been discussed around those issues areas that we could certainly support and we're watching it very carefully.

And do you get the sense of, I think you had prepared remarks in last quarter's call around the acquisition pipeline. Do you get the sense that there may be some services or opportunities that might lead you to pursue inorganic talent acquisition, or how should we think about that?

I mean obviously on the acquisition front, I mean it's obviously it's been a key element of our strategy over many, many years. I think that if we were going to do anything, I think it would most likely be in the energy arena. It would be similar to an AEG type acquisition where we do some smaller tuck-in acquisition. I think in the federal arena, there's obviously a lot of uncertainty I think we're unlikely to get scale or anything at all in the federal arena for the remainder of this year. So I mean, we certainly are looking at the opportunities out there. But I think we would focus on energy and it would be more of a tuck-in acquisition if we were to pull the trigger. I don't know, Barry, if there's anything, you want to add?

And I think from a capacity perspective, if something interesting does come along, and we have plenty of capacity to execute an acquisition and we're comfortable from a leverage perspective as well as a debt perspective. So I think we're in good shape on that.

Do you get the sense, Barry, as far as acquisition multiples, maybe where they are vis-a-vis 6 months ago, have they changed much for some of those types of targets?

Well, I think it depends on the market. And I would say, from a federal market perspective, obviously, the activity has slowed, we're just not really seeing anything from folks, sending books around. I think that sellers are holding what they got right now. They've got an interesting property. I would say that from the other parts of the business that we're interested in, as John said, the energy market and other parts of the business. I'd say that those valuations remain similar fashion to what they have been in the past. And so just like any acquisition, we look at what the capabilities and the contracts and customers that -- can they would have. And if the culture fits and if it'd be accretive to your organization, then we certainly would take a good look at it.

Great, thank you very much.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to John Wasson for concluding remarks.

Thanks for participating.