Tetra Tech, Inc.

Good morning, and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the investor section of its website at tetratech.com. This call is being recorded at the request of Tetra Tech, and this broadcast is the copyrighted property of Tetra Tech. Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited. With us today, from management, are Dan Batrack, Chairman and Chief Executive Officer, Steve Burdick, Chief Financial Officer, and Leslie Shoemaker, Chief Innovation Officer. They will provide a brief overview of the results and will then open up the call for questions. I would like to direct your attention to the Safe Harbor Statement in today's presentation. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in Tetra Tech's periodic reports filed with the SEC. Except as required by law, Tetra Tech undertakes no obligation to update its forward-looking statements. In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the investor section of Tetra Tech's website. At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. With that, I would like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Thank you very much, Kate, and good morning, and welcome to our third quarter of fiscal year 2025's earnings conference call. Overall, we had a very strong third quarter, hitting new record highs for operating income and earnings per share. In fact, they were, I'll get into these details and Steve will talk about them, but they were all-time highs, not just for a third quarter, but for any quarter in the history of the company. Our operating income and margin that were at these very, very high levels were driven by the utilization of our staff that responded to the devastating fires that took place earlier in the calendar year here in Southern California. This high utilization of our staff drove our increased revenue and income even beyond the high end of our guidance, and it really supported this year on year growth rates that we saw in the quarter. The wind down of our USAID work in the quarter continued to proceed generally as we projected. In fact, the revenue was slightly below what we had forecasted for the third quarter. However, very bright spot is that we did receive payments of essentially all of our outstanding USAID invoices, which contributed to the extraordinarily strong cash generation and day sales outstanding or DSO reduction that we saw in the quarter. And our CFO, Steve Burdick, will talk about that in more detail shortly. While we had an extraordinarily good third quarter, in fact, a record third quarter in many respects, We are still being very cautious and navigating the changes that are coming with this new administration and its near-term secondary impacts. In my prepared remarks here at the beginning of our presentation today, I will discuss some of the short-term impacts that we're seeing across our end markets. Presenting with me today is Steve Burdick, our Chief Financial Officer, who will provide additional details on our financial performance. Dr. Leslie Shoemaker, our Chief Innovation Officer, will provide an update on the outlook for our U.S. federal work and our digital automation markets. So with that, I'd like to start today's call with an update of our financial performance and our overall business. So in the third quarter, excluding our USAID and Department of State business, which is very quickly, in fact, USAID is no longer existing as a entity with the federal government. So I think the best way to look at our business is actually with those removed from our financial numbers. In the quarter, our net revenue increased to $1.6 billion, which is up 11% from the same quarter a year ago. Our operating income is $159 million for the quarter, an increase of 37% from the prior year. And we generated an earnings per share, or EPS, of 41 cents for the quarter, which is up 46% from the prior year. To look at our performance by segment, I'll start with our government services. So excluding when their USAID and Department of State work was only in our GSG segment. So excluding USAID and the Department of State for the third quarter, the government services group or the GSG segment increased its net revenue by 29% year over year to $429 million in the quarter. The GSG segment generated a 19.9% margin in the quarter, which is up Pretty impressive 230 basis points from the prior year. GSD's exceptional margin performance was driven by a combination of disaster response work and the reduction of the lower margin USAID and state work that we had in prior quarters. The very rapid wrap-up of the fire-related recovery work in California drove higher utilization from the mobilization of staff really very broadly across all of Tetra Tech and certainly across the U.S. portions of Tetra Tech that we put those individuals on the fire to respond very quickly. The Commercial International Group, or CIG segment, delivered a very strong 15.2 percent margin in the quarter, up 130 basis points from last year. Now the CIG's segments revenue was $633 million in the quarter and was up slightly from the same quarter last year. With growth in CIG within our United Kingdom, the UK, and European Union operations, and reductions in our U.S. commercial and Australian activities that I'll speak about in a bit more detail on the next slide for the webcast. I'd now like to provide an overview of our performance by our end customers, excluding USAID and Department of State for our US federal clients. Our US federal work was up 46% from the same quarter last year, and that represents about 25% of our business. In the quarter, disaster response work led by the Army Corps of Engineers contributed about $70 million of revenue again, in the quarter to our federal revenues. Our state and local revenue grew 30% year over year. Now, excluding the contribution of our episodic disaster response work, our ongoing water programs for our state and local clients was up 18% year over year. So our state and local work, excluding the episodic disaster contributions, up 18%, continuing a little bit higher than a range that we've sort of anticipated for growth in our state and local work. Our U.S. commercial net revenues were down 4% year on year, primarily driven by reductions in renewable energy work that we do, especially in offshore wind projects. Overall, our environmental restoration work, which is environmental compliance activities, was stable and continued to be equal roughly to the previous year. And that's supported by regulatory-driven requirements that are imposed at the state and local level. There's been really no impact on federal activities for that part of our commercial work. And finally, our international work, which now represents 42% of our revenues in the quarter, and it was down 1% year over year, so I'll call it essentially flat. We did see growth in our United Kingdom and Irish water programs, so UK and our EU work was up. up for single digits. But this growth was offset by continued decrease in infrastructure work in Australia. If we actually take the Australia revenues out of our international revenues, you would see the rest of Tetra Tech's collective international activities are up about 5% in the third quarter. So that gives you an idea of the impact of that reductions in Australia. I'd now like to discuss our backlog, which represents and I think this is quite important, contracted, funded, and authorized work that we've received from our clients. Excluding USAID and State Department activities, our backlog is $4.15 billion, which is up slightly from the second quarter. And I think this is actually a great attribute and deserves recognition by our staff that we've really seen excluding aid, the backlog not only be stable, but actually grow in the third quarter. And that's typically not one of our big backlog growth quarters. In the quarter, we did add, though, nearly $2 billion in new contract capacity with the U.S. federal government. We press release these, and they include contract wins with the Army Corps of Engineers in Huntsville, Europe, and in Honolulu. So geographically, very broad globally. Our recent $94 million Environmental Protection Agency, or US EPA, award is singularly focused on providing essential emergency response services. These are contracts that are activated for chemical spills, derailments of the railroad cars, and extraordinary events such as the East Palestine-Ohio train derailment that happened in 2023. So it's for that type of work that requires extraordinary response. We continue to build our state contract capacity for disaster response services, and we did have a nice award with the state of Georgia for approximately $22 million that continues to build on work we've been doing there before. In fact, earlier in the year for hurricanes, Milton and Helena. And most recently, we announced the award of a new contract for digital automation from a very large water utility just here in California. At this point, I'd like to now turn the presentation over to Steve Burdick, our Chief Financial Officer, who will provide us additional details on our financials and give us an update on our capital allocation program. So, Steve.

Hey, thanks, Dan. So, I'd like to now provide an update on our fiscal year-to-date results, working capital, cash flows, and capital allocation. So, as Dan discussed earlier on this call, we continue to focus on the funding consulting and design for water and environmental projects which are carrying higher margins across all of our end markets. And as such, even as the 2025 revenue was up 9% over last year, our operating income and EBITDA for the year increased at higher rates of 21% and 15% respectively. These results on a year-to-date basis further support our long-term strategic goals to increase net revenue while improving EBITDA margins by 50 basis points annually. And I do want to point out that the EBITDA margins on net revenue came in better and increased by over 70 basis points through the first three quarters of this year as compared to last year at this time. As a result of our ability to enhance our profit margins and further manage our working capital, we were able to increase the adjusted EPS by 26% over last year. Now, on a GAAP basis, in the first half of the year, we did recognize a charge for litigation and non-cash charge relative to the goodwill impairment for our USAID reporting division. So, I would please refer you to the appendix of this presentation and our Reg G for any reconciliation. These strong financial and operating results have resulted in the strengthening of our balance sheet and our cash flow positions. So cash flows generated from operations for the trailing 12 months were $462 million, which represents a 23% improvement over the previous trailing 12 months. And these cash flows have continued to exceed net income by more than 100%. Our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of 56 days, which is an 11-day improvement from the second quarter of this year. Much of this improvement resulted from our collections of receivables due on USAID projects. And when we include the current outstanding USAID receivables, our DSO is even lower at 54 days. This lower DSO metric provides a significant insight into our core business as it reflects the outstanding work that our project managers lead relative to higher quality projects. and highly satisfied clients in the broad portfolio across all of our end markets and all of our geographies. Our net debt amounts to about $620 million, and the net debt on EBITDA was at a leverage of 0.96 times, which is lower than our leverage one year ago when it stood at 1.15 times. As we continue to execute on high-quality operating results with increasing margins operating cash flows in excess of net income, and lower working capital KPIs, we will continue to provide higher returns for our shareholders. And those higher shareholder financial returns are reflected in an improving return on capital employed, which stands at close to about 20%, which is among the best in our industry. Now, for those following along the presentation, I would like to now present our capital allocation overview. We have a very strong balance sheet, probably the strongest balance sheet in our history, with over $1 billion in available liquidity as we revised our capital structure in the last year to take advantage of the credit market to support our strategic growth opportunities. Leslie will discuss those strategic growth areas later in the presentation, but I do want to point out that we have a significant amount in liquidity available to invest in organic and inquisitive growth priorities, and we have a well-balanced mix of both fixed and floating rate debt to mitigate any interest rate risk and take advantage of any opportunities there. Now, regarding our dividend program, I want to announce that our Board of Directors approved a 6.5-cent dividend, which is a 12% increase year-over-year to be paid in the fourth quarter. This is our 41st consecutive quarterly dividend with annual double-digit increases in the amounts paid. And based on the lower leverage that I just talked about, we did re-institute our stock buyback program this year. So far in 2025, we have bought back a total of $200 million, which includes a $25 million in stock buybacks for the third quarter. We do have $648 million available from the stock buyback plans approved by our board of directors as part of our capital allocation strategy. So in conclusion, I'm really pleased to share these financial results so far in fiscal 2025. Thank you for your support. And I will now hand the call over to Leslie to discuss Tetra Tech's future opportunities for the rest of 2025 and beyond. Leslie?