TETRA TECH INC Q1 FY2025 earnings call

• Impact of fires and hurricanes: Tetra Tech staff were affected by fires in Pasadena and Palisades, with some evacuated. Disaster response and recovery are integrated into services, with phases including immediate response, damage assessment, and long-term engineering design. • Financial performance: First quarter net revenue was $1.2 billion, up 18% year-over-year. Operating income was $138 million, up 24% year-over-year. Earnings per share increased 25% to $0.35. Backlog grew to $5.44 billion, up 15% from the prior year. • Capital allocation: Board approved a 12% increase in dividend to $0.058 per share. Reinstated stock buyback program worth $25 million. Focus on working capital and cash flows, with DSO at 55.9 days. • Growth markets: Strong demand for water services, disaster response, and infrastructure modernization. Use of AI and software solutions in water systems, and involvement in large-scale projects like inland waterways lock and dam upgrades.

The Government Services Group (GSG) segment had revenue of $601 million, up 36% year-over-year, with a margin of 13.9%. Excluding Ukraine work, GSG's margin was about 15.4%. The Commercial International Group (CIG) segment had net revenue of $596 million, up 4% year-on-year, with a 13% margin. GSG's revenue growth was driven by work in Ukraine for USAID, while CIG's growth was more balanced. Both segments contributed significantly to the overall strong performance.

• Second quarter net revenue guidance: $1.0 billion to $1.1 billion, with adjusted earnings per share $0.30 to $0.33. • Fiscal year 2025 net revenue guidance: $4.365 billion to $4.765 billion, with adjusted earnings per share $1.37 to $1.52. The upper end of EPS guidance increased due to higher margin disaster work offsetting potential reductions from USAID contract review.

• 90-day review of USAID contracts: Uncertainty around whether contracts will be continued, extended, or terminated during the review period. • Executive order impacts: Potential impacts on federal contracts, including U.S. federal clients' work, with some programs put on hold. • Uncertainty around other government initiatives: Potential rollback of programs like PFAS rules or IRA components, though Tetra Tech has been conservative in accounting for such risks in revenue forecasts.

Q: Can you remind us of the targets put forth last May's Investor Day?

A: Expect organic growth between 6% and 10% from now to 2030, and anticipate expanding operating margin by 50 basis points. These targets are still relevant and not impacted by recent noise.

Q: Do you think capital allocation could lean more towards investing in Tetra Tech shares given the balance sheet leverage?

A: Board is committed to dividend and stock buyback. Reinstated stock buyback program, and will be constructive with stock buybacks depending on price point, with acquisitions ahead if highly accretive.