ICF International, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS O F FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in Item 8.“Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions, such as statements of our plans, objectives, expectations, and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to our actual results differing materially from those anticipated include those discussed in Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K generally discusses 2025 and 2024 items and year-to-year comparisons between 2025 and 2024. Discussions of 2024 items and year-to-year comparisons between 2024 and 2023 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, which was filed with the SEC on February 28, 2025, and is incorporated by reference into this Management’s Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW AND OUTLOOK We provide professional services and technology-based solutions, including management, technology, and policy consulting and implementation services. We help our clients conceive, develop, implement, and improve solutions that address complex business, natural resource, social, technological, and public safety issues. Our services primarily support clients that operate in the following key markets: • Energy, Environment, Infrastructure, and Disaster Recovery; • Health and Social Programs; and • Security and Other Civilian & Commercial. We provide services to our diverse client base that deliver value throughout the entire life cycle of a policy, program, project, or initiative. Our primary services include: • Advisory Services; • Program Implementation Services; • Analytics Services; • Digital Services; and • Engagement Services. Our clients rely on us because we combine broad institutional knowledge with the deep subject‑matter expertise of our highly trained staff, working together in multidisciplinary teams. Many of our client relationships span decades, giving us a nuanced understanding of their objectives and needs. We serve both government and commercial clients. Our government work includes projects for federal, state, local, and international agencies, as well as subcontracted engagements performed for commercial clients whose end customers are government entities. 37 Our largest clients are U.S. federal government departments and agencies. Our federal government clients include every cabinet-level department, most significantly HHS, DoD, DoE, and DoT. Federal government clients generated approximately 43%, 54%, and 55% of our revenue in 2025, 2024, and 2023, respectively. The decrease in U.S. federal government revenue was primarily as a result of terminated contracts in 2025 due to the Administration’s changing priorities and the actions recommended by DOGE, as well as the disruption in the typical U.S. federal government procurement cycle. State and local government clients generated approximately 17%, 16%, and 16% of our revenue in each of 2025, 2024, and 2023, respectively. International government clients generated approximately 7%, 5%, and 5% of our revenue in 2025, 2024, and 2023, respectively. We also serve a variety of commercial clients worldwide, including: airlines, airports, electric and gas utilities, health care companies, banks and other financial services companies, transportation, non-profits/associations, manufacturing firms, retail chains, and distribution companies. Our commercial clients, which include clients outside the U.S., generated approximately 33%, 25%, and 24% of our revenue in 2025, 2024, and 2023, respectively. The increase in commercial revenue was primarily due to higher commercial energy business in 2025. We report operating results and financial data as a single segment based on the consolidated information used by our chief operating decision-maker in evaluating the financial performance of our business and allocating resources. Our single segment represents our core business: professional services to our broad array of clients. Although we describe our multiple service offerings to clients that operate in three markets to provide a better understanding of the scope and scale of our business, we do not manage our business or allocate our resources based on those service offerings or client markets. Rather, on a project-by-project basis, we assemble the best team from throughout the enterprise to deliver highly customized solutions that are tailored to meet the needs of each client. We believe that, in the long-term, demand for our services will continue to grow as government, industry, and other stakeholders seek to address critical long-term societal and natural resource issues due to heightened concerns about the environment and use of clean energy and energy efficiency; health promotion, treatment, and cost control; the means by which healthcare can be delivered effectively on a cross-jurisdiction basis; natural disaster relief and rebuild efforts; and ongoing homeland security threats. In the wake of the major hurricanes that devastated communities in Texas, Florida, North Carolina, Louisiana, the U.S. Virgin Islands, and Puerto Rico, and the impact of wildfires in Hawaii, Oregon, and southern California, the affected areas remain in various stages of evacuation, relief, and recovery efforts. We believe our prior and current experience with disaster relief and rebuild efforts, including after hurricanes Katrina and Rita and Superstorm Sandy, and the wildfires in Oregon, put us in a favorable position to continue to provide recovery and housing assistance, and environmental and infrastructure solutions, including disaster mitigation, on behalf of federal departments and agencies, state, territorial, and local jurisdictions, and regional agencies. 38 Our results of operations and cash flows may vary significantly from quarter to quarter depending on a number of factors, including, but not limited to: • Progress of contract performance; • Extraordinary economic events and natural disasters; • Number of billable days in a quarter; • Timing of client orders; • Timing of award fee notices; • Changes in the scope of contracts; • Variations in purchasing patterns under our contracts; • Changes in priorities, especially with the federal government; • Federal and state and local governments’ and other clients’ spending levels; • Federal government shutdowns; • Timing of billings to, and collection of payments from, clients; • Timing of receipt of invoices from, and payments to, employees and vendors; • Commencement, completion, and termination of contracts; • Strategic decisions, such as acquisitions, consolidations, divestments, spin-offs, joint ventures, strategic investments, and changes in business strategy; • Timing of significant costs and investments (such as bid and proposal costs and the costs involved in planning or making acquisitions); • Timing of events related to discrete tax items; • Our contract mix and use of subcontractors or the timing of other direct costs for which we may earn lower contract margin; • Changes in contract margin performance due to performance risks; • Additions to, and departures of, staff; • Changes in staff utilization; • Paid time off taken by our employees; • Level and cost of our debt; • Changes in accounting principles and policies; and/or • General market and economic conditions. Because a significant portion of our expenses (such as personnel, facilities, and related costs) are fixed in the short-term, contract performance and variation in the volume of activity, as well as in the number and volume of contracts commenced or completed during any year, may cause significant variations in operating results from year to year. We generally have been able to price our contracts in a manner that accommodates the rates of inflation experienced in recent years, although we cannot ensure that we will be able to do so in the future. 39 BUSINESS COMBINATIONS A key element of our growth strategy is to pursue acquisitions. During the previous three fiscal years, we completed the acquisitions summarized as follows: CMY Solutions, LLC – In May 2023, we acquired CMY, an engineering and automation solutions provider to utilities and organizations. Applied Energy Group – In December 2024, we acquired AEG, a leading energy technology and advisory services company. CRITICAL ACCOUNTING ESTIMATES AND POLICIES Our discussion of financial condition and results of operations is based on our consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make certain estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses. If any of these estimates, assumptions or judgments prove to be incorrect, our reported results could be materially affected. Actual results may differ significantly from our estimates under different assumptions or conditions. We believe that the estimates, assumptions, and judgments involved in the accounting practices described below have the greatest potential impact on our financial statements and, therefore, consider them to be critical accounting policies. Significant accounting estimates are more fully described and discussed in “Note 2 - Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” of this Annual Report on Form 10-K. Revenue Recognition We generate our revenue by primarily providing services and technology-based solutions for clients. We enter into agreements with clients that create enforceable rights and obligations and for which it is probable that we will collect the consideration to which we will be entitled as services and solutions are provided to the client. Our contracts may be partially funded, often incrementally in annual amounts. We determine the transaction price based on the history of funding, the client’s need for the program, the length of time before funding is available, and the client’s intent and ability to fund and include the unfunded portion of the contract if it is probable that it will be funded based on these criteria. For contracts with multiple performance obligations and for customized solutions in which the pricing is based on specific negotiations with each client, we use a cost-plus margin approach to estimate the standalone selling price of each performance obligation. We generally recognize revenue over time as services and performance obligations are transferred to the client, based on the extent of progress towards satisfaction of the performance obligation. The selection of the method used to measure progress requires judgment and, among other things, is dependent on the contract type selected by the client during contract negotiation and the nature of the services and solutions to be provided. For cost-based contracts, we recognize revenue as a single performance obligation based on contract costs incurred, as we become contractually entitled to reimbursement of the contract costs, plus a most likely estimate of award or incentive fees earned on those costs even though final determination of fees earned occurs after the contractually stipulated performance assessment period ends. For the years ended December 31, 2025, 2024, and 2023, revenue from cost-based contracts totaled $138.2 million, $231.9 million, and $265.1 million, respectively. 40 For performance obligations requiring the delivery of a service or a product for a fixed price, we use the ratio of actual costs incurred to total estimated costs at completion (“EAC”) provided that costs incurred (an input method) represents a reasonable measure of progress towards the satisfaction of a performance obligation, in order to estimate the portion of total revenue earned. Contract costs that are not reflective of our progress toward satisfying a performance obligation are not included in the calculation of the measure of progress. We estimate the EAC by making certain assumptions and judgments such as the level of efforts from internal staff and/or subcontractors and cost of materials needed to complete the tasks. Our cost estimate is based on our prior experience and expertise in delivery of similar services, which allow us to make reasonable assumptions and estimates that are close to actual costs to complete the obligations; however, changes in the scope or complexity of work, availability of materials needed, or performance could cause a change in the EAC. We routinely review EACs for changes that could materially impact our measurement of progress toward completion of the performance obligations and adjust our revenue in the period that the changes occur. For product-delivery contracts in which their EACs exceed their contract value, we recognize the losses in the same period of determination. For the years ended December 31, 2025, 2024, and 2023, our revenue from contracts in which we use EACs totaled $453.8 million, $479.7 million, and $310.1 million, respectively. Our contracts may include variable considerations such as award fees and incentives that may increase or decrease the transaction price. The actual amounts are typically determined and awarded at the end of a performance period and the final awarded amount is based on achieving certain performance metrics, program milestones, or cost targets at the customer’s discretion. We estimate variable consideration primarily by using the most likely amount method based on our prior history in providing the services to the customer or, if no history exists, we constrain the variable consideration until the initial determination by the customer. Fair Value of Acquired Assets from Business Combinations Our consolidated balance sheets as of December 31, 2025 and 2024 include $50.2 million and $88.2 million, respectively, of net intangible assets that were created through business acquisitions. We allocate the purchase price of an acquired business to the tangible assets and separately identifiable intangible assets acquired, less liabilities assumed, based on their respective fair values (except for contract assets and contract liabilities after the adoption of Accounting Standards Update 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers). Such fair value assessment requires us to make assumptions, judgments, and estimates such as, but not limited to, future cash flows, revenue growth, customer retention rates, and discount rates based on information that exists at the date of the acquisition which may subsequently change. We recognize any adjustments to the preliminary amounts that are identified during the measurement period which is twelve months or less from the date of the acquisition. Accounting for Income Taxes Our provisions for federal, state, and foreign income taxes are calculated from consolidated income based on current tax laws and any changes in tax rates from the rates used previously in determining the deferred tax assets and liabilities from temporary differences between financial statement carrying amounts and amounts on our tax returns. We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We evaluate our ability to benefit from all deferred tax assets and establish valuation allowances for amounts we believe are not more likely than not to be realized. We use a more-likely-than-not recognition threshold based on the technical merits of the income tax position taken to evaluate uncertain tax positions. Uncertain tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit recognized in the financial statements. Recent Accounting Pronouncements New accounting standards are discussed in “Note 2 - Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements”. 41 SELECTED KEY METRICS In order to evaluate operations, we track revenue by key metrics that provide useful information about the nature of our operations. Client markets provide insight into the breadth of our expertise. Client type is an indicator of the diversity of our client base. Revenue by contract mix provides insight in terms of the degree of performance risk that we have assumed. Significant variances in the key metrics tables that are provided below are discussed under the revenue section of the results of operations. Client markets The following table shows revenue generated from client markets as a percentage of total revenue for the periods indicated. For each client, we have attributed all revenue from that client to the market we consider to be the client’s primary market, even if a portion of that revenue relates to a different market. Certain minor revenue amounts reported in the prior years have been reclassified within key market categories based on our current view of the client’s primary market in order to increase the comparability of the current year to prior years. Year ended December 31, 2025 Year ended December 31, 2024 Year ended December 31, 2023 (dollars in thousands) Dollars Percent Dollars Percent Dollars Percent Client Markets: Energy, environment, infrastructure, and disaster recovery $ 979,137 52 % $ 934,399 46 % $ 805,942 41 % Health and social programs 620,731 33 % 765,139 38 % 814,789 42 % Security and other civilian & commercial 272,983 15 % 320,249 16 % 342,507 17 % Total $ 1,872,851 100 % $ 2,019,787 100 % $ 1,963,238 100 % Our primary clients within the client markets are the agencies and departments of the federal government and commercial clients. Most of our revenue is from contracts on which we are the prime contractor, which we believe provides us with strong client relationships. In 2025, 2024, and 2023, approximately 86%, 87%, and 89% of our revenue, respectively, was from prime contracts. Client type The table below shows our revenue by type of client as a percentage of total revenue for the periods indicated. Certain immaterial revenue amounts in the prior years have been reclassified due to minor adjustments and reclassification within client type. Year ended December 31, 2025 Year ended December 31, 2024 Year ended December 31, 2023 (dollars in thousands) Dollars Percent Dollars Percent Dollars Percent Client Type: U.S. federal government $ 809,073 43 % $ 1,088,607 54 % $ 1,084,047 55 % U.S. state and local government 322,956 17 % 316,017 16 % 309,516 16 % International government 119,131 7 % 110,680 5 % 103,446 5 % Government 1,251,160 67 % 1,515,304 75 % 1,497,009 76 % Commercial 621,691 33 % 504,483 25 % 466,229 24 % Total $ 1,872,851 100 % $ 2,019,787 100 % $ 1,963,238 100 % Contract mix Contract mix, which provides insight into the performance risks that we have assumed and, therefore, the predictability of our contract revenues and margins, varies from year to year due to numerous factors, including our business strategies and the procurement activities of our clients. Unless the context requires 42 otherwise, we use the term “contracts” to refer to contracts and any task orders or delivery orders issued under a contract. There are three main types of contracts: time-and-materials contracts, fixed-price contracts, and cost-based contracts. The following table shows the approximate percentage of our revenue for each of these types of contracts for the periods indicated. Certain immaterial revenue amounts in the prior years have been reclassified due to minor adjustments and reclassification within contract mix. Year ended December 31, 2025 Year ended December 31, 2024 Year ended December 31, 2023 (dollars in thousands) Dollars Percent Dollars Percent Dollars Percent Contract Mix: Time-and-materials $ 802,013 43 % $ 855,533 42 % $ 811,911 41 % Fixed-price 932,659 50 % 932,353 46 % 886,200 45 % Cost-based 138,179 7 % 231,901 12 % 265,127 14 % Total $ 1,872,851 100 % $ 2,019,787 100 % $ 1,963,238 100 % Payments we received on cost-based contracts with the federal government are provisional payments subject to adjustment upon audit by the government. Contract revenue for subsequent periods has been recorded in amounts that are expected to be realized on final audit and settlement of costs. 43 RESULTS OF OPERATIONS The following table sets forth certain items from our consolidated statements of comprehensive income for the years ended December 31, 2025 and 2024 and expresses these items as a percentage of revenue for the periods indicated and the period-over-period rate of change in each of them. Our discussion of the items for the years ended December 31, 2024 and 2023 can be found in our Annual Report on Form 10-K for the year ended December 31, 2024, which was filed with the SEC on February 28, 2025. Years Ended December 31, 2025 and 2024 (dollars in thousands) Year Ended December 31, Year to Year Change 2025 2024 2025 2024 2024 to 2025 Dollars Percentages Dollars Percent Revenue $ 1,872,851 $ 2,019,787 100.0 % 100.0 % $ (146,936 ) (7.3 )% Direct Costs: Direct labor & related fringe benefit costs 722,849 775,239 38.6 % 38.4 % (52,390 ) (6.8 )% Subcontractors and other direct costs 453,986 506,777 24.2 % 25.1 % (52,791 ) (10.4 )% Total Direct Costs 1,176,835 1,282,016 62.8 % 63.5 % (105,181 ) (8.2 )% Operating Costs and Expenses Indirect and selling expenses 492,404 518,453 26.3 % 25.7 % (26,049 ) (5.0 )% Depreciation and amortization: Depreciation and amortization 21,140 20,484 1.1 % 1.0 % 656 3.2 % Amortization of intangible assets acquired in business combinations 37,007 32,992 2.0 % 1.6 % 4,015 12.2 % Total Depreciation and Amortization: 58,147 53,476 3.1 % 2.6 % 4,671 8.7 % Total Operating Costs and Expenses 550,551 571,929 29.4 % 28.3 % (21,378 ) (3.7 )% Operating Income 145,465 165,842 7.8 % 8.2 % (20,377 ) (12.3 )% Interest, net (30,833 ) (29,590 ) (1.6 )% (1.5 )% (1,243 ) 4.2 % Other (expense) income (2,639 ) 1,806 (0.1 )% 0.1 % (4,445 ) (246.1 )% Income Before Income Taxes 111,993 138,058 6.0 % 6.8 % (26,065 ) (18.9 )% Provision for Income Taxes 20,405 27,888 1.1 % 1.4 % (7,483 ) (26.8 )% Net Income $ 91,588 $ 110,170 4.9 % 5.5 % $ (18,582 ) (16.9 )% Year ended December 31, 2025 compared to year ended December 31, 2024 Revenue. The decrease in revenue was driven by a reduction of $279.5 million from our U.S. federal government clients, primarily as a result of terminated contracts in 2025 due to the Administration’s changing priorities and the actions recommended by DOGE, as well as the disruption in the typical U.S. federal government procurement cycle. This decline was offset by increases of $117.2 million, $8.5 million, and $6.9 million from our commercial, international government, and U.S. state and local government clients, respectively. The following were changes in revenue from our various client markets: • Energy, Environment, Infrastructure, and Disaster Recovery client market revenues increased $44.7 million, or 4.8%, driven by increases of $106.8 million, $5.6 million, and $5.0 million from our commercial, international government, and U.S. state and local government clients, respectively, offset by a decrease of $72.7 million from our U.S. federal government clients as described above. • Health and Social Programs client market revenues decreased $144.4 million, or 18.9%, driven by a decrease of $156.6 million from our U.S. federal government clients as described above, offset by increases of $8.2 million, $3.2 million, and $0.8 million from our commercial, international government, and U.S. state and local government clients, respectively. • Security and Other Civilian & Commercial client market revenues decreased by $47.3 million, or 14.8%, driven by decreases of $50.2 million and $0.4 million from our U.S. federal government, as described above, and international government clients, respectively, offset by increases of $2.2 million and $1.1 million from our commercial and U.S. state and local government clients, respectively. Revenue for the year ended December 31, 2025 includes subcontractor and other direct costs, which 44 decreased $52.8 million, or 10.4%, and totaled $454.0 million and $506.8 million for the years ended December 31, 2025 and 2024, respectively, and the margin on such costs. Direct costs . The decrease in direct costs was primarily a result of terminated U.S. federal government contracts during 2025. For the years ended December 31, 2025 and 2024, direct labor and related fringe benefit costs were 61.4% and 60.5% of total direct costs, respectively, and subcontractors and other direct costs were 38.6% and 39.5% of total direct costs, respectively. The total direct costs as a percentage of revenue was 62.8% for the year ended December 31, 2025 compared to 63.5% for 2024. Indirect and selling expenses. The decrease in indirect and selling expenses was due to a reduction of $21.8 million in general and administrative costs and $4.2 million in indirect labor and associated fringe benefit costs. The reduction in costs was a result of our cost-reduction and operational efficiency initiatives to align our cost structure with current business conditions. As a percentage of total indirect and selling expenses, indirect labor and associated fringe costs were 73.9% and 71.0%, respectively, and general and administrative costs were 26.1% and 29.0%, respectively, for the years ended December 31, 2025 and 2024. As a percentage of revenue, indirect and selling expenses were 26.3% and 25.7% for the years ended December 31, 2025 and 2024, respectively. Depreciation and amortization . The increase in amortization of intangible assets acquired in business combinations was primarily due to the amortization of intangible assets acquired in our acquisition of AEG in the fourth quarter of 2024. Interest, net . The increase in interest, net was primarily due to our higher average debt balance of $513.3 million in 2025 compared to $474.0 million in 2024. The average interest rate was 5.6% in 2025 compared to 6.6% in 2024. Interest from our debt facilities was $29.2 million for the year ended December 31, 2025, compared to $31.8 million for 2024. We utilize floating-to-fixed interest rate swap agreements to hedge the variable interest portion of our debt, which decreased interest by $1.2 million and $6.2 million for the years ended December 31, 2025 and 2024, respectively. Inclusive of the impact of the swap agreements, our interest rate was 5.4% and 5.3% for years ended December 31, 2025 and 2024, respectively. Other (expense) income . The change in other (expense) income was primarily due to $2.0 million of gains from divestiture of our commercial marketing business recognized during the year ended December 31, 2024, and the net impact of foreign currency losses of $2.5 million for the year ended December 31, 2025 compared to $0.2 million net gains for the same period in 2024, resulting from depreciation of the U.S. dollar against the Euro and British pound, the principal currencies in which we transact. Provision for income taxes . The effective income tax rate for the years ended December 31, 2025 and 2024 was 18.2% and 20.2%, respectively. The decrease in provision for income taxes in 2025 was primarily due to tax benefits related to U.S. federal tax regulations promulgated under Section 987 of the Internal Revenue of 1986, as amended, which took effect in 2025 and which govern governing pre-transition period foreign exchange gains and losses derived from translation of operations, assets, and liabilities of non-U.S. qualified subsidiaries partially offset by valuations allowances established on certain equity-based compensation assets and excess foreign tax credits. NON-GAAP MEASURES The following tables provide reconciliations of financial measures that are not calculated in accordance with generally accepted accounting principles in the U.S. (“non-GAAP”) to their most comparable U.S. GAAP measures. While we believe that these non-GAAP financial measures provide additional information to investors and may be useful in evaluating our financial information, they should be considered supplemental in nature and not as a substitute for financial information prepared in accordance with U.S. GAAP. Other companies may define similarly titled non-GAAP measures differently and, accordingly, care should be exercised in understanding how we define these measures as similarly named measures are unlikely to be comparable across different companies. 45 EBITDA and Adjusted EBITDA Earnings before interest, tax, and depreciation and amortization (“EBITDA”) is a measure we use to evaluate operating performance. We believe EBITDA is useful in assessing ongoing trends and, as a result, may provide additional visibility in understanding our operations. Adjusted EBITDA is EBITDA further adjusted to eliminate the impact of certain items that we do not consider to be indicative of the performance of our ongoing operations. We evaluate these adjustments on an individual basis based on both the quantitative and qualitative aspects of the item, including their size and nature, as well as whether or not we expect them to occur as part of our normal business on a regular basis. EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow as these measures do not include certain cash requirements such as interest payments, tax payments, capital expenditures, and debt service. The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods indicated. Year ended December 31, 2025 2024 2023 Net income $ 91,588 $ 110,170 $ 82,612 Interest, net 30,833 29,590 39,681 Provision for income taxes 20,405 27,888 13,935 Depreciation and amortization 58,147 53,476 60,738 EBITDA 200,973 221,124 196,966 Impairment of long-lived assets (1) — 3,583 7,666 Acquisition and divestiture-related expenses (2) 492 1,313 4,759 Severance and other costs related to staff realignment (3) 5,863 1,535 6,366 Charges and adjustments related to facility consolidations and office closures (4) (138 ) 464 3,187 Pre-tax gain from divestiture of a business (5) — (2,013 ) (5,712 ) Total adjustments 6,217 4,882 16,266 Adjusted EBITDA $ 207,190 $ 226,006 $ 213,232 (1) Represents impairment of operating lease right-of-use and leasehold improvement assets associated with exit from certain facilities, and an intangible asset associated with exit of a business. (2) These are primarily third-party costs related to acquisitions and integration of acquisitions. (3) These costs are due to involuntary employee termination benefits for (i) our officers and (ii) a group of employees who have been notified that they will be terminated as part of a business reorganization or exit. For 2025, severance expense includes employee termination benefits as a direct result of contracts terminated for convenience during the year pursuant to executive orders issued by the Administration or actions recommended by DOGE and for which the Company was not reimbursed, or will not be reimbursed, by our federal government customers for these amounts. (4) These charges and adjustments are related to a previously exited leased facility which we will continue to pay until the contractual obligations are satisfied but with no economic benefit to us, and the closure of certain international offices. (5) Pre-tax gain related to the 2023 divestiture of our U.S. commercial marketing business which includes contingent gains realized in the first and third quarters of 2024. Non-GAAP Diluted Earnings per Share Non-GAAP diluted earnings per share (“Non-GAAP Diluted EPS”) represents diluted U.S. GAAP earnings per share (“U.S. GAAP Diluted EPS”) excluding the impact of certain items noted above, and the impact of amortization of intangible assets and the related income tax effects. While these adjustments may be recurring and not infrequent or unusual, we do not consider these adjustments to be indicative of the performance of our ongoing operations. We believe that the supplemental adjustments provide additional information to investors. 46 The following table presents a reconciliation of U.S. GAAP Diluted EPS to Non-GAAP Diluted EPS for the periods indicated: Year ended December 31, 2025 2024 2023 U.S. GAAP Diluted EPS $ 4.95 $ 5.82 $ 4.35 Impairment of long-lived assets — 0.19 0.40 Acquisition and divestiture-related expenses 0.02 0.07 0.25 Severance and other costs related to staff realignment 0.32 0.08 0.33 Charges and adjustments related to facility consolidations and office closures (1) (0.01 ) 0.06 0.24 Pre-tax gain from divestiture of a business — (0.11 ) (0.30 ) Amortization of intangible assets acquired in business combinations (2) 2.00 1.74 1.87 Income tax effects of the adjustments (3) (0.51 ) (0.40 ) (0.64 ) Non-GAAP Diluted EPS $ 6.77 $ 7.45 $ 6.50 (1) These are office closure charges and adjustments previously included in Adjusted EBITDA and accelerated depreciation related to fixed assets for planned office closures. (2) The amortization of intangible assets acquired from business combinations totaled $37.0 million, $33.0 million, and $35.5 million for the years ended December 31, 2025, 2024, and 2023, respectively. (3) Income tax effects were calculated using the effective tax rate, adjusted for discrete items, if any, of 22.2%, 20.2% and 22.8% for the years ended December 31, 2025, 2024, and 2023, respectively. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Borrowing Capacity . Short-term liquidity requirements are created by our use of funds for working capital, capital expenditures, debt service, dividends, and share repurchases. We expect to meet these requirements through a combination of our cash and cash equivalents at hand, cash flow from operations, and borrowings. Our primary source of borrowings is from our Credit Facility, as described in “Note 8 - Debt” in the “Notes to Consolidated Financial Statements” in this Annual Report on Form 10-K. As of December 31, 2025, we had $550.0 million of unused borrowing capacity available under the Credit Facility to fund our ongoing operations, future acquisitions, dividend payments, and share repurchase program. Should the need arise, we intend to further increase our borrowing capacity in the future to provide us with adequate working capital to continue our ongoing operations. We have entered into floating-to-fixed interest rate swap agreements for a total notional value of $175.0 million to hedge a portion of our floating-rate Credit Facility. The interest rate swaps will expire in 2030, but we may consider entering into additional swap agreements prior to the expiration of these existing hedges. As of December 31, 2025, the percentage of our fixed-rate debt to total debt from our Credit Facility was 43%. We provide support services to the U.S. federal government and a prolonged federal government shutdown of non-essential functions may affect our ability to generate cash from that business to certain degrees. There are other conditions, such as the ongoing wars in Ukraine, instabilities in the Middle East, and volatility in global trade (including the imposition of tariffs), that create uncertainty in the global economy, which in turn may impact, among other things, our ability to generate positive cash flows from operations and our ability to successfully execute and fund key initiatives. However, our current belief is that the combination of internally generated funds, available bank borrowing capacity, and cash and cash equivalents on hand will provide the required liquidity and capital resources necessary to fund ongoing operations, customary capital expenditures, quarterly cash dividends, share repurchases, and organic growth. Additionally, we continuously analyze our capital structure to ensure we have capital to fund future strategic acquisitions. 47 We continuously monitor the state of the financial markets to assess the availability of borrowing capacity under the Credit Facility and the cost of additional capital from both debt and equity markets. At present, we believe we will be able to continue to access these markets on commercially reasonable terms and conditions if we need additional capital in the near term. Material Cash Requirements from Contractual Obligations . As of December 31, 2025, contractual obligations that require a material use of cash include payments of interest on our Credit Facility and operating lease obligations for facilities and equipment. At December 31, 2025, our outstanding Credit Facility balance, net of unamortized debt issuance costs, was $401.4 million, which is expected to be refinanced prior to it becoming due upon maturity in 2027. We borrow funds under the Credit Facility at interest rates based on both the SOFR (i.e., 1, 3, or 6-month rates) and a fluctuating Base Rate (see “Note 8 - Debt” in the “Notes to Consolidated Financial Statements” in this Annual Report on Form 10-K). Assuming that our interest rate on the Credit Facility is the same as on December 31, 2025, we anticipate our interest payments on the debt to be approximately $20.7 million annually in 2026 and for each year thereafter. The estimates do not consider future drawdowns and repayments on the debt or changes in the variable interest rate, and actual interest may be different. As of December 31, 2025, we have operating leases for facilities and equipment with remaining terms ranging from 1 to 13 years. Our current and long-term operating lease liabilities of $158.7 million at December 31, 2025 represent the present value of the minimum payments required under the non-cancellable leases, and the actual cash payments total $191.5 million. The operating lease payment obligations by year are further discussed in “Note 7 - Leases” in the “Notes to Consolidated Financial Statements” in this Annual Report on Form 10-K. As of December 31, 2025, we also have finance leases for equipment and furniture with lease payment obligations through 2029 as discussed in “Note 7 - Leases” in the “Notes to Consolidated Financial Statements” in this Annual Report on Form 10-K. The current and long-term finance lease liabilities at December 31, 2025 of $11.3 million represent the present value of the minimum payments totaling $12.0 million. Inflation. Our business and results of operations have not been materially affected by inflation and changing prices during the period presented and we do not expect to be materially affected in the future due to the nature of our business as a provider of professional services with contracts that can be negotiated with new prices. Dividends. Cash dividends declared in 2025 were as follows: Declaration Date Dividend Per Share Record Date Payment Date February 27, 2025 $ 0.14 March 28, 2025 April 14, 2025 May 1, 2025 $ 0.14 June 6, 2025 July 11, 2025 July 31, 2025 $ 0.14 September 5, 2025 October 10, 2025 October 30, 2025 $ 0.14 December 5, 2025 January 9, 2026 48 Cash Flows . The following table summarizes our cash flows from the years ended December 31, 2025, 2024, and 2023. Year ended December 31, (in thousands) 2025 2024 2023 Net cash provided by operating activities $ 141,870 $ 171,544 $ 152,383 Net cash used in investing activities (21,511 ) (74,805 ) (3,673 ) Net cash used in financing activities (84,307 ) (86,898 ) (152,588 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash 1,455 (473 ) 359 Net change in cash, cash equivalents, and restricted cash $ 37,507 $ 9,368 $ (3,519 ) Net cash provided by operating activities for the year ended December 31, 2025 decreased by $29.7 million compared to 2024 primarily due to profitability of our contracts, our ability to invoice our customers and subsequent collection of cash, and the timing of vendor payments. Net cash used in investing activities for the year ended December 31, 2025 was lower than 2024 by $53.3 million primarily due to our acquisition of AEG during the 2024 fiscal year. The change in net cash used in financing activities was primarily due to higher net borrowings from our debt facilities, in part to fund additional share repurchases during the 2025 fiscal year.