TETRA TECH INC Q2 FY2025 earnings call

• Quarterly Results: Second quarter was a record for revenue, operating income, and EPS. Net revenue reached $1.1 billion, up $51 million YOY. Operating income was $130 million, up 11% YOY. EPS was $0.33, up 18% YOY.
• Backlog: Updated backlog is $4.31 billion, with $220 million in USAID work for Ukraine energy. Contract capacity over $30 billion in the U.S. federal government and $100 million in UK water utilities.
• Financials: Year-to-date revenue up double digits, operating income and EBITDA increased. Strong cash flows, delevered balance sheet. New credit facility provides $1.5 billion liquidity. Dividend increased 12%, stock buyback program with $673 million approved.
• Strategic Growth Areas: Focus on water/environment projects with higher margins, high-end data centers, and digital systems/automation (acquisition of SAGE Group).

Government Services Group (GSG): Revenue was $521 million, up 12% year-over-year (YOY). Margin was 13.8% (inclusive of non-reimbursable costs; without these, margin would have been higher by 30-50 basis points). Revenue growth driven by state and local government work in water, environment, and disaster response. Commercial/International Group (CIG): Revenue was $597 million, up ~2%. Margin was 13.2%. Growth in U.S. commercial environmental restoration and UK water programs, offset by a 10% reduction in Australia infrastructure work.

• Third Quarter 2025: Net revenue guidance ranges from $1.1 billion to $1.2 billion, with adjusted EPS range of $0.35 to $0.40.
• Full Year 2025: Net revenue guidance ranges from $4.4 billion to $4.765 billion, with adjusted EPS range of $1.42 to $1.52. Midpoints show 6% net revenue growth and 17% adjusted EPS growth.

• Volatility in Federal Funding: Uncertainty in USAID and Department of State funding, especially related to Ukraine work.
• International Trade and Tariffs: Impact on international commercial work due to trade policy uncertainties.
• Regulatory Changes: Potential impacts from proposed EPA regulatory changes, though current contracted work not significantly affected.

Q: Impact of Trump admin's federal expenditure cuts on state and local business?

A: No immediate pressure seen; state and local revenues growing, with multiyear projects unaffected.

Q: EPA regulatory changes?

A: Watching closely; most work is state/local driven, with federal superfund work outside proposed changes.

Q: Margin progression post-USAID cancellations?

A: Baseline margin higher, expecting faster margin growth than pre-AID projections.

Q: Backlog and visibility post-USAID?

A: Excluding USAID, backlog is ~$4.09 billion, with strong visibility in long-term projects.

Q: Capital allocation between buybacks and M&A?

A: Ability to do all, with focus on dividend growth, buybacks, and strategic acquisitions.