Tetra Tech, Inc. Q3 FY2025 earnings call

• Dan Batrack noted a very strong third quarter with record operating income and EPS, driven by staff utilization for California fires. Wind down of USAID work continued, with nearly all outstanding invoices paid. - Steve Burdick discussed financial performance, cash flows ($462M trailing 12 months, 23% improvement), DSO at 56 days (industry-leading), balance sheet strength, and capital allocation including dividend increase and stock buybacks. - Leslie Shoemaker discussed U.S. federal work changes with new administration, including impacts on renewable energy, but opportunities in defense, Coast Guard, and air traffic control. Also highlighted digital automation growth, with five acquisitions and market projections to $600B by 2030.

In the third quarter, excluding USAID and Department of State business: The Government Services Group (GSG) segment saw net revenue increase 29% year-over-year to $429 million, with a 19.9% margin, up 230 basis points. The Commercial/International Group (CIG) segment had revenue of $633 million, slightly up YOY, with a 15.2% margin, up 130 basis points. U.S. federal work was up 46%, state and local revenue grew 30% (excluding episodic disaster, ongoing water programs up 18%). U.S. commercial net revenues down 4% due to renewable energy reductions. International work was flat, with growth in U.K. and Irish water programs offset by Australia infrastructure reductions.

Fourth quarter net revenue guidance: $1.0 billion to $1.1 billion, EPS $0.38 to $0.43. Full year 2025 net revenue guidance: $4.454 billion to $4.554 billion, adjusted EPS $1.49 to $1.54. Anticipates USAID/State Dept contribution of approximately $40 million to $50 million in the fourth quarter, continuing to ramp down.

Potential impacts from new administration changes, including slower backlog growth due to government staff downsizing and changes in contracting practices. Also, secondary impacts on federal funding affecting some state and local projects.

Q: Can you dig into the backlog a bit more, especially regarding federal government cadence and margin profile?

A: Dan Batrack said backlog with federal government increased by nearly $2 billion, but slowdown in task order delivery due to government staff changes. Margin profile improving due to shift to higher-value services and increased fixed-price work.

Q: How should we think about disaster recovery revenue in fiscal fourth quarter?

A: Dan Batrack said disaster recovery work from Florida, Georgia, Carolinas floods and California fires is mostly completed, minimal contribution expected in Q4.

Q: What about the water market growth relative to infrastructure and front-end work opportunities?

A: Dan Batrack said state and local water work growth above 10-15% range, front-end advisory consulting work opportunities in energy development and grid upgrades with reduced regulatory requirements.

Q: Explain CIG segment revenue movement and Ukraine humanitarian support?

A: Andrew Wittmann asked about CIG segment revenue, Dan Batrack explained small positive due to some state/local work embedded. On Ukraine, said they have contract capacity but no current task orders, but potential upside exists.