Tetra Tech, Inc. Stock

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 Investors section of this webcast 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 Roger Argus, Chief Executive Officer and President; Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results, and we'll 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 Investors section of Tetra Tech's website. [Operator Instructions]

With that, I would now like to turn the call over to Roger Argus. Please go ahead, Mr. Argus.

Thank you, Latanya. Good morning, and welcome to our fiscal year 2026 third quarter earnings conference call. We had a strong third quarter with growth primarily driven by our U.S. federal and international end markets, both of which increased at double-digit rates. We received significant new orders during the quarter, including commercial orders for data centers and sediment restoration projects, driving our backlog up by more than $200 million in the quarter. Our performance resulted in our increasing guidance for fiscal 2026.

For the call today, I will begin with an overview of our third quarter's performance and the client markets that are driving our growth. Steve Burdick, our Chief Financial Officer, will provide additional detail on our financial performance and capital allocation.

We delivered a strong third quarter with positive performance across key financial metrics. Net revenue was $1.1 billion for the quarter, exceeding the upper end of our guidance and supported by strong demand for our high-end leading with science approach to water, environment and sustainable infrastructure. Earnings per share of $0.42 also exceeded the upper end of our guidance.

We generated cash flow of $229 million from operations in the quarter and $467 million year-to-date, which is an all-time high for the first 3 quarters of any year. And importantly, our backlog was up for the second consecutive quarter, increasing sequentially by 5% to just under $4.5 billion. Overall, the quarter was in line with our expectations and the increased backlog provides us with good visibility into the fourth quarter and the end of the fiscal year.

Both of our business segments performed well in the third quarter. The Government Services Group, or GSG, grew by 7% in the third quarter on a year-over-year basis and generated a strong margin of 17.5%. Demand remains solid for both of our U.S. federal and state and local government markets, especially in water, environment and defense. The Commercial International Group, or CIG, also performed well, with revenue up 9% from the prior year and an associated margin of 15.1%. CIG's growth was from a diversified mix of clients across water, power and energy and mining markets worldwide.

I would now like to provide an overview of our net revenue by customer. Our international work was up 12% on a year-over-year basis and represented 47% of our business. Revenue growth was driven by water programs in the U.K., Ireland and the Netherlands, an increase in infrastructure work in Canada and growth in mining and digital automation revenues in Australia. In the U.S., our U.S. federal work was up 12% from last year and represented 20% of our business. This growth was driven by our work for the U.S. federal government in infrastructure, planning and environment for defense and civilian clients.

Our U.S. commercial business was up 1% compared to last year and represented 20% of our business. Revenues for energy and transmission-related services continued to increase, accompanied by stronger mining and minerals project activity. However, these gains were partially offset by the decline in renewable energy work, including the cancellation of remaining offshore wind programs along the Atlantic Coast. Our U.S. state and local business grew by 5% this quarter. We continue to see strong growth and longer-term orders in municipal water, including new projects for PFAS treatment, digital systems modernization, water reuse and desalination.

We had a strong quarter for new orders, and our backlog was up $208 million, increasing by 5% sequentially from the prior quarter. As we stated before, we take a conservative approach to backlog. We include only work that is contracted, funded and authorized. This gives us high-quality visibility into future performance and increases our confidence in our project pipeline. Our backlog growth was supported by several important wins across priority markets.

In the United States, we added just under $300 million in contract capacity from the Army Corps of Engineers Mobile and Norfolk districts, where we have worked for decades. The Mobile District includes the critical U.S. Gulf Coast regions as well as supporting international programs in Central and South America. The Norfolk District is a central hub for supporting the world's largest naval base, innovation in coastal resiliency and the critical East Coast shipping channels.

We also added new state and local programs, including being awarded the lead designer role for the largest dedicated municipal PFAS treatment system in the United States located in Dayton, Ohio. And this quarter, we were pleased to see that our U.S. commercial orders were also very strong. Commercial orders were led by digital automation for data centers, power and transmission services and sediment restoration programs.

I will now turn the call over to Steve Burdick, our Chief Financial Officer, to discuss our financial results and capital allocation in more detail. Steve?

Thanks, Roger. As Roger said, I'd like to now provide an update on our reported year-to-date fiscal 2026 GAAP results, working capital, cash flows and capital allocation. So as Roger just discussed in the call, our market-leading focus on the front-end technical design and engineering for water and environmental projects are carrying higher margins across all of our end markets.

As such, even as reported revenue was down from last year due primarily to the decrease in revenue of our USAID customer and the revenues from onetime disasters last year, our operating income increased significantly. And adjusted EBITDA on net revenue for the first 9 months has increased by about 80 points over -- in fiscal '26 compared to fiscal '25. These results further support our long-term strategic goals to improving EBITDA margins by 50 basis points annually.

More often over the last year, I've been asked by our shareholders and others, what our margins look like on a net service revenue or NSR basis, which would be similar to how others in the industry report their margins. I've looked at that question and can tell you that our EBITDA margin would be about 240 basis points higher this year to date on an NSR basis. Now as a result of our ability to enhance our profit margins and further manage our working capital, we were able to increase EPS and come in well above our previous guidance range for the third quarter.

Now regarding our working capital, Cash flows generated from operations for the first 9 months of the year were at a historical record of $467 million, which represents a significant 31% improvement over fiscal 2025. And consistent with each of the last consecutive 21 years, our operating cash flows have continued to exceed net income.

Our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of 56 days, which is similar to last year and an improvement compared to Q2 of this year. This lower DSO metric provides significant insight into our core business as it reflects outstanding work that our project managers lead relative to higher-quality projects and highly satisfied clients in our broad portfolio across all of our end markets and geographies.

Now our debt -- our net debt target is about 1 to 2x, and our actual net debt on EBITDA was at a leverage of 0.88x, which is lower than our leverage ratio 1 year ago when it stood at 0.96x. So as we continue to execute on high-quality 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 now stands at over 20%.

So with that perspective, I'd like to now present our capital allocation strategy and overview. We have a very strong balance sheet and our operating cash flows was $567 million for the trailing 12-month period. Now Roger will discuss our strategic global areas later in the presentation, but I do want to point out that our balance sheet and cash flows provide us with significant liquidity available to invest in organic and acquisitive growth priorities in order to take advantage of these key business opportunities, such as technology and automation, which continues to provide us a dominant position in those markets.

Year-to-date, we have closed acquisitions of technical leaders focused on defense, such as Halvik in the U.S. and Providence in Australia. And regarding our dividend program, I'm pleased to announce that our Board of Directors approved a quarterly cash dividend, which is an 11% increase year-over-year to be paid in the fourth quarter. This is our 45th consecutive quarterly dividend with annual double-digit increases in the amounts paid.

And based on our lower leverage, we have continued our stock buyback program this year. In the third quarter, we increased our buyback to $100 million. And for the first 9 months of 2026, we bought back a total of $200 million. We do have $398 million available from our stock buyback plan that was approved by our Board of Directors as part of our capital allocation strategy.

I'm very pleased to share these strong year-to-date results for fiscal 2026, which has enabled us to increase shareholder value as we can pay increasing dividends, increase our stock buybacks, engage in accretive acquisitions, all the while deleveraging our balance sheet.

I want to thank you for your support. And I will now hand the call back over to Roger to discuss our global opportunities in water for 2026 and beyond.

Thank you, Steve. Across our key regions, our clients are increasing their investment in water-related priorities that align directly with Tetra Tech's core strength. These priorities leverage Tetra Tech's expertise in high-end water treatment, water quality management, hydropower infrastructure, digital systems and cybersecurity.

In the U.S., where we work with over 500 municipal clients, we are seeing clients continuing to plan for modernization and expansion of their facilities while proactively integrating rate increases, bonds and commercial funding sources. We also see new programs in the U.S. to expand hydropower to meet increased demand, such as the Lake Chelan program, which we announced last week.

In the U.K. and Ireland, large regulated investment cycles are supporting growth across our key markets in water quality, leakage management and desalination. The U.K.'s AMP8 cycle includes approximately GBP 105 billion of water sector investment through the year 2030. Across the U.K., Ireland and the Netherlands, we hold over GBP 2 billion in contract capacity to provide differentiated solutions such as our smart sewer systems and our WaterNet leak detection system.

In Canada, federal infrastructure and hydropower investments are supporting demand for our water, environment and infrastructure services. We expect hydropower investments to continue to expand to address increased demand for clean and reliable energy. One of our key clients, Hydro-Quebec, plans to add 11 gigawatts in new capacity, driving new opportunities for us in hydropower, modernization, transmission and water treatment.

And in Australia, water agencies are accelerating deployment of digital automation and cybersecurity to improve operations and prepare for AI-enabled optimization. Market forecasts estimate more than $17 billion of digital water investments in Australia over the next decade. We have provided additional water automation services used today by utilities such as the Water Corporation in Western Australia and for South Australia Water system modernization.

I'd now like to present our guidance for the fourth quarter and the entire 2026 fiscal year. Our guidance is as follows. For the fourth quarter, net revenue guidance is from $1.12 billion to $1.17 billion. Adjusted earnings per share guidance is from $0.45 to $0.48. And for the full fiscal year of 2026, our net revenue guidance is from $4.315 billion to $4.365 billion, and our increased adjusted earnings per share guidance is from $1.56 to $1.59.

The right side of this slide presents the FY '26 net revenue growth, which is up 8% year-over-year at the midpoint, with an associated margin expansion of 70 basis points year-over-year at the midpoint. You can read the FY '26 assumptions on our slide, but I'll highlight a few. Intangible amortization of $34 million, depreciation of $23 million, interest expense of $30 million, and effective tax rate of 27.3%, and this guidance does not include contributions from future acquisitions.

In summary, we had a strong third quarter as demonstrated by our financial metrics in revenue, margin, cash generation and backlog. Demand for Tetra Tech's differentiated leading with science services continues to drive sustained growth for us in water-related work globally. Our focus on water is also bringing us new opportunities in hydropower, digital automation, data centers, mining and resilient infrastructure. Strong cash flows supports our strategy to deploy our cash to grow organically and through acquisition while also returning cash to our shareholders. And with our outperformance in the third quarter, we have raised our guidance for the full fiscal year 2026.

I think we'll now take your questions.

[Operator Instructions] The first question comes from Renee Gagliardo with William Blair.

This is Renee on for Tim Mulrooney. I just have one question about the backlog. You saw the backlog was up year-over-year for the first time in several quarters and up sequentially now for 2 quarters in a row. Can you talk about some of the primary drivers behind that backlog growth? We've seen some announcements recently, particularly on the commercial and federal side. We're hoping to get a little more detail about where you are seeing momentum.

Thanks, Renee. Yes, I'm very encouraged by our continued backlog growth. As you mentioned, the 5% sequential growth was our second quarter in a row of growing backlog. And I'd like to highlight as well that -- for us, backlog includes only contracted, funded and authorized work, which means our project teams can begin work on these projects. So as you mentioned, we highlighted some recent press releases such as the PFAS treatment system in Dayton, digital automation in Los Angeles and also a $27 million award from the FAA for airspace modernization.

So for us, the backlog has grown across all of our end markets. We've highlighted a few specific ones that we felt are of particular interest, including commercial orders. We see the scope of work that we provide for data centers is expanding. We started with more of the engineering, commissioning type work, expanded into feasibility studies as we discussed on our last quarterly call and now doing -- continuing to do the feasibility studies, but also doing work related to power and water supply associated with the development of new data centers.

And we were also encouraged in the commercial sector by new awards late in the quarter for sediment remediation programs. And one of the things that I really especially like about some of the orders that we received in the quarter is that they are really just initial funding for longer term, in some cases, multi-year programs. So it gives us encouragement and really pleased to see the backlog grow.

The next question comes from Sabahat Khan with RBC Capital.

Great. I guess just maybe on a similar line of questioning. I guess, can you talk through -- there were a lot of moving pieces here between last year and early this year around DOS work kind of getting shifted away, DOGE impacts, procurement sort of headwinds across the U.S. government. Can you just maybe -- projects aside, maybe just the operating backdrop, the ability of the government and other U.S. agencies, even just private sector customers to bring work to the market in this environment. Maybe just a bit of background on where we are today versus maybe this time last year.

Thanks, Saba. Great question. I'll start with the U.S. federal government. I mean we did -- last year went through the longest shutdown in history. The government has approved a budget, which they're operating under now. So there were some headwinds early in the year due to that shutdown, obviously. But even with the budget in place, we're continuing to see challenges in the U.S. federal government placing orders and awarding work.

It's due to a number of reasons, the constrained contracting office staff pool, basically DOGE came in last year, and there was a significant reduction in force in terms of staffing for the U.S. federal government, and that created some bottlenecks in terms of issuing task orders and getting work out to the contractors.

So that remains an issue. And I know the government is trying to navigate it, but we haven't really seen any substantial change on our end in terms of the flow of work. I mean we still did work as we've announced, and we've got great backlog growth this last quarter. So it is flowing, but it's still very constrained in that regard.

I think on the commercial side, while they don't have those same constraints, I think that uncertainty in the marketplace around whether it be regulatory enforcement or -- compliance requirements are in place. So those aren't particularly affected, which is most of our work. But I think the general uncertainty around this U.S. administration causes some of the clients to be cautious in their awards of new programs.

Again, we've seen really nice awards in the commercial sector in the last quarter in spite of these headwinds. So we're encouraged by that. But the overall sense of -- I would use the word maybe trepidation hasn't changed because of uncertainty associated with, I would call, geopolitical issues. The war in Iran obviously creates some supply chain issues related to fuel and other things. So there's overall pressures on the market.

Great. And then just based on, I guess, thinking about your medium-term outlook based on how the year has evolved, I think the last commentary we got on that was the company is still committed to sort of the fiscal '30 targets that you laid out. Given where we are in the year, I'm not sure if we can comment directionally anything on fiscal '27, but how are you feeling about the medium-term targets? Just trying to gauge and we're getting questions on do we return to maybe a run rate growth level in fiscal '27. So anything you can share on that front?

Yes. Well, it's early for us to comment on FY '27. We are encouraged by the backlog growth that we experienced in Q3, and we're really focused on Q4 in terms of continuing that trend and building a stable base of work that will carry us into the new fiscal year.

And then one quick one, I guess, on the DOS USA work, some amount of flow-through over the course of this year. Just a view on that. Is that something that could potentially continue into next year? And then if there ends up being sort of a steady-state amount that continues, is that eventually just become a part of the base business? How should we sort of think about that from our end, whether it's modeling or just how management views that business?

Yes. Thanks, Saba. That's a great question. USAID does not exist anymore. Department of State does and will continue on and is a client of ours. So while we have had these year-over-year issues associated with the decline in AID and sort of precipitous drop-off. We do see work with the Department of State continuing. They are going to be a client of ours.

I think that there's a lot of political uncertainty around some of the work that we do with AID, in particular the Ukraine work. So it's hard for us to, at least at this point, give a clear view into the future on that. But it has been continuing for us, and it will continue at some level in the future.

The next question comes from Sangita Jain with KeyBanc Capital.

If I can continue on the Department of State question that was asked previously. Given that Department of State is a customer of yours and you have several other federal agencies who are customers, do you just start holding this into regular GSG revenue and not even discuss it as episodic? Do you think that is possible?

Eventually, yes.

What are the things that you're kind of waiting on before you decide to do that?

Well, I think that for one thing, the predominance of our USA work was completed in Q4 of FY '25. So waiting for that to sunset, I think, is an important factor in our consideration around how we consider Department of State work moving forward. I think that, as I mentioned in the previous response, we've maintained a level of conservatism around what we forecast in terms of the contribution from the remaining Department of State work. I think we will continue to have some conservatism around that. But over time, as we're hopeful that the work there will stabilize and our confidence will increase and then it will be considered a normal part of our business.

Got it. And then if I can ask on U.S. commercial. I know international commercial was pretty strong, has been the last couple of quarters. So can you reference what's going on in the U.S. as you sunset the slowdown in renewables, et cetera, going into next year?

Right. Well, there is still a renewable practice that's ongoing. The offshore wind practice was, decimated is probably the right word. So we do have continuing renewables practice in the U.S. Our power and energy practice in the U.S. is growing. As I mentioned earlier, the data center work as well continues to grow.

And we're receiving orders around sediment restoration now, which includes really front-end work associated with potential long-term implementation around those sediment projects. So also, I mean, data centers for us is relatively small. I think it's around $60 million a year, but we're seeing an expanded scope of services that our clients are coming to. So we're very encouraged by the data center work that we're doing.

The next question comes from Ryan Connors with Northcoast.

So I wondered if we could dive a little deeper into the state and local business, Roger. I think one of the takeaways from the industrial side of the water industry in this earnings season has been that there is a bit of a downshift in the environment there. So I'm wondering how you're seeing that market evolve? Is there -- I know you mentioned it's still pretty solid, but any shift in the cadence of projects or the types of projects or the composition of funding of those projects? Anything you can tell us about how that particular market is evolving here?

That's a great question as well. Last quarter, we sort of signaled that the federal government had proposed some budgets that would include cuts for co-funding of some of the grant money that goes to state and municipal clients for water programs. So we expressed a little caution around that. The final budgets are not complete. I know that the one version of a budget in Congress came back with the state revolving funds funded at the same level or maybe slightly more next year. So the final budgets aren't final in that regard.

So we've been cautious and watching very closely, but our municipal water treatment business, for example, was still up double digits year-over-year in Q3. So we haven't seen an impact there. As I mentioned during my prepared remarks, our clients are looking at other sources of funding. The demand remains strong. They have population to serve and provide water. And so they have to find a way to do that, and they've looked at rate increases. I know San Diego, where I lived, had a rate increase and other sources of funding, including some legal settlements that have occurred in recent months.

So we've not seen it in the municipal water treatment area. Where we have seen it, though, is in the flood protection space. And that, in fact, there's been a reduction in federal co-funding around flood protection work. So flood protection is a small part of our U.S. state and local markets, but we have seen an impact there.

And in fact, more than 20 states have filed lawsuits against the federal government because the federal government is withholding promised flood protection funding -- co-funding for their projects. So that's one area where we've seen some impact. Again, it's a smaller part of our overall state and local business, but the municipal water treatment, which is the predominance of work, again, is still up double digits, and we haven't seen any impact.

Got it. Okay. That's really helpful. And then secondly, bigger picture question, but obviously, concerns around AI disrupting your business model have weighed on the stock this year. I want to give you a chance to address that as you continue to learn more and more about what these new AI models are capable of and how they do present risks or opportunities for you? And how are you seeing that evolve in terms of how you view AI in the industry and what kind of risks and opportunities it creates for Tetra Tech?

Thanks. Tetra Tech is a front-end applied science, technical and engineering firm. We provide the very front-end work that requires temporal knowledge of the geology that we work in, the site-specific information, the regulatory framework, the community priorities, all of these things that are -- require local knowledge and knowledge of the specific field conditions that we work in.

For us -- and we use that information and our technical expertise to develop what I call bespoke solutions, custom solutions for our clients' unique problems. So we pride ourselves on our ability to technically solve the most complex problems related to water using that site-specific knowledge and our technical expertise.

For us, AI is an enabler for our technical experts. You'll notice and I described what we do, we are not the downstream commodity design company that has an offshore center of excellence that does routine type design work that is repetitive and potentially displaced by AI. So for us, we view AI as a tool. It's an enabler for our technical experts, and it allows us to provide better solutions to evaluate more alternatives and to assess larger data sets to develop better solutions for our clients, which is what we do.

Tetra Tech has always been a user of the latest technology to support our clients and differentiate us in the marketplace. So in particular, in water, where demand is high, whether it's water supply or water treatment, the challenges are more complicated. Our clients need our technical expertise enabled by AI and other digital tools to address the problems and satisfy the requirements of their projects. So for us, we see AI as an enabler. It's going to help us provide better solutions to our clients and grow market share as well as gain margin expansion on our fixed price projects as well.

The next question comes from Andrew Wittmann with Baird.

A lot of my questions have been asked and answered, but maybe one for Steve. Just as you think about the margin expansion potential in the company, obviously, at the Investor Day, you laid out kind of this view that you could have around 50 basis points a year. And this year, you're obviously doing better than that. I guess the guide here, EBITDA margin is up 70 basis points.

How should we think about that as it relates to '27? Do you feel like some of the benefit that you got this year was maybe pulled forward and maybe next year because it's never going to be a straight line, we should think of it is not a straight line, maybe 2 years is 100, but maybe this year is 70, next year is 30. I'm not trying to get that specific. Just trying to get your way of thinking about it with your knowledge of your current utilization rates and the mix of projects that are in your backlog. I'm just trying to feel you out for how we should be thinking about the margin outlook for the company?

Yes. I think, Andy, good question. And I think you've thought about all the different moving pieces that I think about all the time, too, in terms of -- as we pointed out back in our Investor Day back in 2023, we had already implemented a plan, and we were progressing on that plan very well, where over the last probably 6 or 7 years prior to that, we were improving our margin by about 50 basis points a year on average. And some years, it was a little more, some years it was a little less, but on average.

And we had a plan that we implemented since then to be about 50 basis points a year. And you're right, some years it could be a little less, some a little more. But just to point out from -- in fiscal '23, our margin was where we were. From '23 to '24, we increased it by about 70 basis points. From '24 to '25, we increased it by about 80 basis points. This year, we're about 70. And so everything that we're doing to improve it is working. And next year, we think 50 is about right, but it could be a little less, it could be a little bit more based on history. And I think we'll have a better idea when we provide '27 guidance.

Okay. Fair enough. Just one other quick one. Maybe I missed it. Did you mention how much Ukraine work -- AID work is in the fourth quarter guide? I'm just asking because I know that in the third quarter, it came a little bit above kind of what you're thinking. I'm just wondering, did you -- can you comment on 4Q contribution?

Yes. It's probably about the same as Q3. So Q3 was about $66 million in total. So it's probably in that range for Q4.

And then, Roger, it was interesting to hear you talking about the mining end markets. At one point in Tetra Tech's history, this was a pretty significant portion of what you're doing. And it's been interesting that like commodity prices for copper, gold, 2 key areas of investment have been really high for a while. And I was wondering when we start hearing more about greater investment here. And maybe it's not even for new mines, maybe it's remediation. I don't know what kind of work you're seeing. I know that not just those commodities, but things like uranium have been big things for you in the past.

I just was wondering, kind of, do you feel like this is kind of a blip on the radar? Or do you feel like there's something beginning here where a mining cycle could benefit Tetra Tech more materially than it has really for quite some time again. Just love to get your thoughts about kind of where that business is today and what you think it could be in the next year or 2?

Thanks, Andy. We do have a strong mining practice, and it is global. We work for large multinational mining clients. And I guess my first reaction to your question is for me to predict the commodity prices that wouldn't even venture to go there. And you're right that the work that we're seeing is driven in part by the prices that you mentioned as well as demand for the rare earth elements.

So for us, we've got work in all of those areas, and we continue to work with our clients closely and follow their lead in terms of where they're doing exploration, research as well as new mine development as well and including long-term maintenance of tailings and other aspects of historic mining activities.

So I'd say we're watching it very closely. We're staying very close to our clients. We've got the technical capabilities and the ability to ramp should larger projects start to come to market. So we're encouraged. But I think at this point, I'd be reticent to say that we're seeing the beginning of a larger cycle or anything like that. I don't have that crystal ball.

This will conclude the Q&A session. I will now turn the conference back over to Roger Argus to conclude.

Thank you, Latanya. In closing, I'd like to thank you for your insight, your questions and your interest in Tetra Tech. Recent awards and future opportunities continue to demonstrate the strength of our business and the enduring alignment of our differentiated water services with the priorities of our clients worldwide. I look forward to speaking with you again next quarter. Thank you, and goodbye.

Ladies and gentlemen, this concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may disconnect now.

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 Investors 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 Roger Argus, Chief Executive Officer and President; and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results, and we'll then open 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 Investors section of Tetra Tech's website.

[Operator Instructions] With that, I would now like to turn the call over to Roger Argus. Please go ahead, Mr. Argus.

Thank you, Christine. Good morning, and welcome to our fiscal year 2026 second quarter earnings conference call. I'm pleased to join you today for my first quarterly call as CEO of Tetra Tech. I want to begin by recognizing Dan Batrack's leadership for more than 2 decades. Dan and I have worked together for many years, and I'm grateful for his continued partnership and support as our Executive Chairman. Tetra Tech's success is made possible by our 25,000 employees around the world.

I've had the privilege of working with many of our technical teams across our operations. Their expertise, client commitment and ability to solve complex problems are what make Tetra Tech different. Demand for clean water, environmental quality and resilient infrastructure continues to grow worldwide. Our strategy is not changing. We will continue to focus on high-end solutions that address the complex challenges where our clients need us most.

For the call today, I will begin with an overview of our second quarter's performance and the client markets that are driving our growth. Steve Burdick, our Chief Financial Officer, will provide additional detail on our financial performance and capital allocation. We delivered a strong second quarter with positive performance across our key financial metrics. Net revenue increased by 8% during the quarter on a year-over-year basis, supported by demand for our high-end consulting services in water, environment and sustainable infrastructure. EBITDA of $146 million resulted in a margin expansion of 90 basis points when compared to last year and is an all-time record for a second quarter.

Earnings per share were $0.36, including $0.02 associated with the completion of the divestiture of our Norwegian operations. Our adjusted earnings per share of $0.34 exceeded the high end of our guidance and was also the highest for any second quarter. And importantly, our backlog increased by 8% sequentially and is now $4.28 billion, which illustrates the resiliency of our technically differentiated leading with science approach. Overall, the quarter demonstrated the strength of our business model. We are growing in the right markets, improving margins and entering the second half of the fiscal year with strong momentum.

I would now like to discuss our performance by segment. The Government Services Group, or GSG, grew 5% in the second quarter on a year-over-year basis and generated a margin of 16.3%, up 220 basis points from last year. Demand remains solid for our water, environment, defense and resilient infrastructure services. The Commercial International Group or CIG also performed well with revenue up 10% from the prior year and a margin of 12.2%. CIG's diversified mix of clients across water, environmental, power and energy markets worldwide provided growth across the key geographies that we work in.

I would now like to provide an overview of our net revenue by customer. Our U.S. federal work was up 11% last year and represented 20% of our business. This growth was driven by our work with the U.S. Army Corps of Engineers for resilient infrastructure, including flood protection and inland navigation, defense facility systems modernization and major planning and pruning programs for defense. Our U.S. state and local business grew 9% this quarter on a year-over-year basis and represented 14% of our business. Growth was driven by municipal water projects, primarily in the high-priority regions of Florida, Texas, California and Virginia.

Our U.S. commercial business represented 19% of our business and was down 2% compared to last year. We did see a significant increase in revenues for energy and transmission-related services. However, this growth was offset by a reduction in renewable energy services, especially associated with the wind down of the large offshore wind programs we worked on last year. Our international work was up 12% on a year-over-year basis, driven by revenue growth in water services in the U.K., Ireland and the Netherlands, an increase in infrastructure services in Canada and growth in the digital automation revenues in Australia.

I would now like to discuss our backlog. We had a strong quarter for new orders, and our backlog increased 8% sequentially. This is an important indicator of our increased demand for our services. As we've stated before, we take a conservative approach to backlog. We include only work that is contracted, funded and authorized. This gives us high-quality visibility into future performance and increases our confidence in our project pipeline. Our backlog growth was supported by several important wins across our priority markets.

In the United States, we added more than $650 million in contract capacity from U.S. defense clients for water and resilient infrastructure services. These projects support critical infrastructure needs that align directly with our strengths in water, environmental services, engineering design and digital systems. In Northern Ireland, we added a new GBP 18 million single award contract for water and wastewater treatment services. In the Netherlands, we added a framework contract that significantly expands our capacity in key regions with planned investments to address essential flood protection and infrastructure modernization needs.

At the Port of Los Angeles, we were awarded a master service agreement that supports one of the most important trade and logistics gateways in the United States. And finally, we further expanded high-end solutions for United Utilities in the U.K. with our WaterNet software that provides a comprehensive platform for managing priority water leakage detection and water delivery modernization needs.

I will now turn the call over to Steve Burdick, our Chief Financial Officer, to discuss our financial results and capital allocation in more detail. Steve?

Thank you, Roger. I would like to now provide an update on our reported year-to-date fiscal 2026 results, working capital, cash flows and capital allocation. So as Roger just discussed in this call, our market-leading focus on the front-end consulting and design for water and environmental projects are carrying higher margins across all of our end markets.

As such, even as the reported revenue was down from last year due primarily to the decrease in revenue from USA customers and revenues from onetime disasters this year compared to last year, our operating income increased significantly and adjusted EBITDA on net revenue for the quarter increased by 100 -- yes, for the quarter year-to-date increased by 110 basis points to 14% for the first half of fiscal 2026. These results further support our long-term strategic goals in improving EBITDA margins by 50 basis points annually. As a result of our ability to enhance our profit margins and further manage our working capital, we were able to increase EPS over last year and come in well above our previous guidance range for the second quarter.

Now regarding our working capital, cash flows generated from operations for the first half of the year were a historical record at $238 million, which represents a significant improvement over fiscal 2025. And consistent with the last 20-plus years, our operating cash flows have continued to exceed net income. Our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of 58 days, which is a 9-day improvement compared to Q2 of last year. This lower DSO metric provides a significant insight into our core business as it reflects outstanding work that our project managers lead relative to higher-quality projects and highly satisfied clients in our broad portfolio across all of our end markets and geographies.

Our net debt, it amounted to about $657 million, and the net debt on EBITDA was at a leverage of 1.0x, which is about -- which is a little over 25% lower than our leverage ratio 1 year ago when it stood at 1.36x. As we continue to execute on high-quality operating results with increasing margins, our 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 now stands at over 20%.

So with that perspective, I would like to now present our capital allocation strategy and overview. We have a very strong balance sheet, probably the strongest balance sheet in our history, and our operating cash flow was $688 million for the trailing 12-month period. Now Roger will discuss our strategic growth areas later in this presentation, but I do want to point out that our balance sheet and cash flows provide us with significant liquidity available to invest in organic and acquisitive growth priorities in order to take advantage of these key business opportunities, which includes technology and automation, which also continues to provide us a dominant position in those markets.

And during the second quarter and third quarter to date, we have closed the acquisitions of technical leaders focused on defense, such as Halvik in the U.S. and Providence in Australia. And regarding our dividend program, I'm pleased to announce that our Board of Directors approved the quarterly cash dividend, which is an 11% increase year-over-year to be paid in the third quarter. This is the 44th consecutive quarterly dividend with annual double-digit increases in the amounts to be paid. And based on the lower leverage, we've continued our stock buyback program this year. And in the first half of 2026, we bought back a total of $100 million. We do have $498 million available from the stock buyback plan approved by our Board as part of our capital allocation strategy.

So I'm pleased to share these really strong results for the start of fiscal 2026, which has enabled us to increase shareholder returns as we can pay increasing dividends, increase our stock buybacks and engage in accretive acquisitions, all the while deleveraging our balance sheet.

I want to thank you for your support, and I will now hand the call back over to Roger to discuss Tetra Tech's growth opportunities for '26 and beyond.

Thank you, Steve. I would now like to provide an update for our outlook for the second half of the fiscal year. We are beginning the third quarter with strong backlog and clear growth opportunities across our markets. As a result, we are increasing our forecasted growth rates for the second half of the year for both our U.S. federal and U.S. commercial client sectors to 8% to 12%. Together, these sectors represent 40% of our revenues. We expect U.S. federal to increase as our clients deploy funding to address both domestic civil works programs and defense facility modernization globally.

U.S. commercial's increased growth rates align with the expected demand for water management for mining operations, expansion of domestic rare earth mine development and further acceleration of the upfront work of planning and permitting for power generation and transmission. International work, we expect to grow at a 5% to 10% rate with continued strength in the United Kingdom, Ireland, the Netherlands water and expected marine defense infrastructure spending in the U.K. and Australia. State and local work is expected to be about 15% of our business with a growth rate in the high single digits between 5% and 10%. Our long-term outlook remains strong with state and local spending increasing regionally in alignment with demand.

I'll now discuss our U.S. commercial, U.S. defense and U.S. state and local municipal water business each in a bit more detail. Our U.S. commercial business is being driven by growth in power, data centers and transmission. Electricity demand in the United States is expected to grow significantly over the next decade. Utilities and energy developers are responding by expanding and diversifying energy sources. We are ranked #1 by Engineering News-Record in the U.S. environmental work and have supported over 6,000 energy-related permitting studies. New transmission corridors and upgrades are also needed to connect power generation with fast-growing demand centers.

These projects often across multiple jurisdictions, which create complex planning and environmental requirements. We have permitting experience in all 50 states and bring experience from over 10,000 miles of transmission projects. At the same time, data centers further increased demand for water and power. Across the U.S., we are seeing examples of community resistance to data centers and over 15 states are considering restrictions to data centers. Tetra Tech's front-end feasibility expertise is increasingly valuable for data center developers. Clients need clear answers on water availability, power sourcing, environmental constraints, permitting risk and schedule implications.

For data centers, we currently have more than 20 active feasibility assessments for developers and providers at the earliest stage of their projects, supported by multidisciplinary community of planning, water, environmental and power subject matter experts. For our U.S. federal business, the large budget increases and heightened priority of defense is expanding our opportunities to provide resilient infrastructure and planning services. In the U.S., we have federal contract capacity of $30 billion with coverage across defense agencies and locations domestically and for facilities the U.S. has placed around the world.

For the Army Corps civil works program, we designed critical water infrastructure, including flood protection, dams and reservoirs and navigation systems. For the U.S. Navy, we similarly provide planning, permitting and design services for the modernization of their specialized marine facilities. And for the U.S. Air Force, we also provide the specialized expertise to transition to new firefighting foam technologies and apply our PFAS scrub technology to remove remaining legacy PFAS contaminants. Our state and local business, where we hold contracts with over 500 municipalities remains a strong and stable growth driver for our business.

Across the U.S., we are working with our clients on the early stages of more than $30 billion in capital spending. We are helping our U.S. municipal water clients to mitigate droughts by adding new water supplies that require the design of advanced treatment solutions. In low-lying coastal regions affected by saltwater intrusion, including high population areas of Florida, we designed specialized solutions to inject treated water into groundwater. In the near term, municipal clients are anticipating less reliance on supplemental federal grants by adding new funding resources. They are increasing rates, issuing bonds and restructuring funding to move their essential water projects forward.

States such as California, Texas and Florida and others are stepping up and issuing new funding to support their local water utilities. With strong demand for sustainable water supplies, we expect to see continued growth and significant opportunities to address the regional water challenges in the major California, Texas and Florida markets as well as in the expanding population centers in coastal regions such as Virginia and in the drought-affected areas in Colorado.

I'd now like to present our guidance for the third quarter and the entire 2026 fiscal year. Our guidance is as follows: For the third quarter, net revenue guidance is from $1.05 billion to $1.1 billion. Adjusted earnings per share guidance is from $0.38 to $0.41. And for the fiscal year 2026, our increased net revenue guidance is from $4.25 billion to $4.4 billion, and our increased adjusted earnings per share guidance is from $1.50 to $1.58. The right side of this slide represents the FY '26 net revenue growth, which is up 9% year-over-year at the midpoint, with an associated margin expansion of 70 basis points year-over-year at the midpoint.

You can read the FY '26 assumptions, but I'll highlight a few. Intangible amortization of $33 million, depreciation of $24 million, interest expense of $33 million and a steady effective tax rate of 27.5%. And this guidance does not include contributions from future acquisitions. In summary, we had a strong second quarter and first half of FY '26. Our operations continue to generate record cash. Demand for Tetra Tech's differentiated leading with science services in water, environment and consulting to drive -- continue to drive our growth as exemplified by the sequential increase in our backlog and significant wins with defense agencies. Our high-end technical services are well aligned with long-term demand in the United States and internationally. And with our increased confidence, we have raised our guidance for the full fiscal year '26.

I think we'll now open it up for Q&A.

[Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair.

I had a few questions on backlog to start off. I see it was up 8% sequentially. I'm curious if you expect to build on that momentum as you move through the year and crucially, what the margin profile of the backlog looks like?

Tim, thank you for the question. It's a good one. On our last quarterly earnings call, we noted that we expected that once the U.S. federal budget was resolved, we might see influx of new orders or release of new orders. So the budget was largely resolved in early Q2. And as expected, we saw new orders increase from the U.S. federal government. These orders included task orders from defense, including U.S. Army Corps, Naval Facilities Engineering Command, U.S. Air Force Civil Engineering Corps and other federal clients as well.

And as I mentioned in my prepared remarks, we've seen an increase in our defense contract capacity by $650 million just in Q2. We're starting to see task orders under those contracts. Additionally, we received work under our contracts with U.K. and with United Utilities and others from well-supported programs under the AMP8 program as well as new awards in Northern Ireland. And collectively, these resulted in an 8% sequential growth, which gives us great visibility into Q3 and Q4 as we convert the backlog into revenue. I believe that Q2 represents an inflection point for Tetra Tech in terms of our backlog, and we do expect to see continued growth based on new orders through the rest of the fiscal year. So the backlog is consistent with the growth rates reflected in our forecast for the second half that I presented and also support continued margin expansion, I would say, in line with what we've been experiencing in the last couple of years.

Okay. That's really helpful. I also wanted to ask a question about your International business. I heard you talking a lot about the water opportunities in the U.K. and Ireland and the increased spending in some areas in Australia. But I wanted to ask about Canada because we recently saw the Canadian government announced more than $40 billion for development of the Northern and the Arctic regions for new forward operating locations, radar systems, other hubs. And I know you guys do a lot of front-end work for infrastructure development. So I was curious how you're thinking about this opportunity over the next few years.

Yes. We're actually quite excited about the opportunity that, that new funding presents. I do think it is early days, but we are positioning for opportunities for export terminals and marine facilities on the East and West Coast as well as build-out of the Northwest passage for ports and harbors related to not just military use, but also potentially commercial use as well. So for us, our expertise in coastal resiliency, marine facility design, planning and permitting are really well suited on the East and West Coast. And then we have very specialized capabilities and experience in working with the Arctic and designing roads and facilities in that extreme weather circumstances. So we're quite excited about it.

Now in terms of timing, I would just caution that it is early days, and there have been some strong announcements, and there is tremendous growth potential there, but it is early days. So I don't see this as something that's going to impact us in FY '26.

[Technical Difficulty]

I think the resolution of the federal budget, which isn't completely resolved, but the area that's not resolved doesn't really affect our work. So -- but that's very helpful for our clients in terms of visibility for funding for their programs, which has fueled the uptick in backlog that we've seen. And we don't anticipate any government shutdown the rest of this fiscal year. So we see that momentum continuing into Q3 and Q4. And I talked about a number of the other drivers in the nonfederal space as well, power, water, data centers. So the drivers there are very strong in all of our end markets. And so we expect to see continued growth in backlog and associated conversion of that backlog to revenue to drive our results through the rest of the year.

Great. And then particularly as we sort of think about some of your markets outside of the U.S. having seen some of the clarity on the U.S. side, how are you finding the demand backdrop or just the macro view in some of your international markets, whether it's the U.K., Australia, et cetera? Has the demand trends or the demand outlook there followed some of the macro headlines? Or has it been more driven by local needs in markets such as water? Just trying to understand the outlook on demand outside of the U.S. based on the current backdrop.

Yes. I think it's a bit of both, actually. I mean the global geopolitical situation affects all of the geographies that we work in. However, there are local demands for water and power and other items that drive our services as well. And in the U.K., for example, AMP8, as we've reported before, has received double the funding from AMP7, and we continue to see growth in our water services that are funded through that program to the utilities that we work with across the U.K. As I reported in my prepared remarks, new projects awards in Northern Ireland, which continues to fuel growth there based on a variety of demands. We talked a bit about Canada.

With new infrastructure funding, there's a lot of activity and potential opportunity in Canada. It's interesting that the U.S. policy of sort of America first or maybe even America only is fueling work and investment in some of the other geographies we work with most notably Canada. Development of export terminals and the northern front and all of that is in part in response to U.S. policies, I think. So we're very excited about continued growth there. And in Australia, price of gold is still hovering near $5,000 an ounce. And so we see increased mining activities there.

For us, Australia has been kind of an interesting story because post-COVID, there was a bubble of infrastructure investment to really get everyone back to work in the country. And so we've seen a bit of a decline as that work burned off. But we're starting to see, I guess, green shoots in terms of new infrastructure spending. Obviously, mining is fueling activity and projects for us. Defense with some of the shore facilities is driving growth for us. And we're even seeing opportunities with the new infrastructure spending, including for the 2032 Olympics in Brisbane. So we're excited about Australia coming back for us.

Great. And then just one last quick one on the capital allocation. Steve, I think you noticed or noted there's flexibility there, whether it's on dividends, buybacks. Just given where the share price is today, the M&A opportunities ahead, maybe a bit more granularity on how you're sort of prioritizing some of the opportunities given that the balance sheet is getting to a pretty flexible level.

Yes. So I would say that as we look at our different opportunities to grow through acquisitions, we do look at the totality of our balance sheet and our leverage and the dry powder we have available through multiple sources of capital, borrowing from banks or others. You mentioned equity. We've never used our equity, but that -- to do any acquisitions, but that doesn't mean that it's off the table either. So I think our -- between our balance sheet and the equity that we have in our shares, I think we have the opportunity to really invest in the growth areas that we think are going to have the most value for the company and our shareholders over the next couple of years.

Our next question comes from the line of Sangita Jain with KeyBanc.

So can I ask one on the cash flow strength? And now that the business has kind of recalibrated post USAID, maybe if you can help us understand how much further room you think you have on DSO reductions to keep up with this cash flow strength?

Yes. I think as we continue to make improvements in our system as we continue to really enhance how we go to market with our clients, I think you've seen over the last -- go back 10 years, but you go back 4 or 5 years, you've seen a continual improvement in our DSO year-over-year. And now that our DSO is hovering in the mid-50s, I think we have the ability to take that down to closer to 50 days. And I will tell you that our goal is to continue to see that improvement. I think one thing to understand that as we've talked about prior, as our fixed price contracts not only provide us higher margins, but they also provide us a lower DSO in our working capital. So I think as we continue that mix in our projects towards more fixed price work, I think we'll have the ability to also bring our DSO down over the next couple of years.

Great. And then can I ask one on the data centers. Can you tell us exactly what work you're doing for them and how your scope is evolving with time as the data centers get bigger?

Well, for us, our primary work we're doing for data centers, as I explained in my prepared remarks, is feasibility is associated with siting. There was a lot of press releases, announcements of large investments. I think developers started to move forward and then began facing community resistance and concerns around the impacts of a data center in their neighborhood, if you will. What would the effect be on water availability and rates? What would be the effect on power? What would be the effect on environmental conditions, et cetera.

So what we've seen is the developers coming to us because those services are really in our wheelhouse to address these concerns and do feasibility studies that address power considerations and availability, water availability, local regulation, community input, permitting, all of these things. So these are all core competencies within Tetra Tech that we offer in a variety of end markets. And so we see that work. We also do some work within the envelope, SCADA systems, commissioning, other type of high-end engineering work associated with data centers. But the predominance of the work right now is really in the most upfront feasibility studies and supporting siting, permitting and locating the data centers.

Our next question comes from the line of Ryan Connors with Northcoast Research.

I appreciate all the detail. It's been very comprehensive, but I do have a couple of questions. Roger, you laid out the market outlook by market, which was very helpful. But just to kind of probe on that a little bit, you did lower the outlook for state and local to 5% to 10% from 10% to 15%. And you had some comments around municipalities sort of shifting from federal to local funding. Can you just expand on that? It seems like a notable shift from 3 months ago and sort of how that impacts your strategy to really lean harder into that market?

Right. So the municipal water market for us has been one of the staples and steady growth areas for Tetra Tech for many, many years. And what I mentioned, I think, really indicates caution from our clients related to the proposed federal budgets for next year, which include some potential reductions in supplemental grant funding. So for the most part, our projects don't rely on like IIJA money and this kind of thing. But some of the projects, our clients depend on some of the co-funding. So what they -- what our clients have done is in an abundance of caution are looking at alternative methods to keep their projects moving forward.

So that's what I was referring to in the prepared remarks. We still see the market growing and the projects moving forward, but our clients are having to sort of reconsider to make sure that they've got funding for all the things that they want to do. And that's just, I'd say, one factor in us lowering that range. The other, I was actually going to ask Steve to comment on a little bit, which is we've been growing at a high rate and compounding for many years. And Steve, let me let you address that part of it.

Yes. So just as a point of reference, back in 2024, our state and local work on a net revenue basis was about 11% of our total net revenue. We grew that to about 14% last year in fiscal 2025. And this year, it's right around that same 14%-ish, 14%, 15%. So I think the growth that we're seeing is pretty close to the same dollars that we've seen over the last couple of years, but it's just on a higher base. So that's where you see that percentage decrease a little bit for the reasons that Roger pointed out.

Got it. Okay. And then thinking through -- you talked earlier about the budget dynamics on the federal side, which obviously, this is where it relates to what goes on in state and local, but a lot of posturing. I know we had a pretty fiery hearing yesterday where EPA Commissioner was out there making some pretty hyperbole around the budget cuts to EPA and so forth. How do we look at that? Obviously, we have midterms coming up. Is that going to be -- are the midterms really going to be a crucial factor in ultimately how we look at calendar '27 in terms of how that shapes up the next couple of years?

It's a great question. And I'd say our visibility into funding and federal funding in FY '26 is a little limited. We've seen an initial budget from the White House, but it's subject to a lot of debate and compromise probably in Congress, especially in light of midterms. What we saw last year was a similar, I would call it, a very aggressive budget from the White House, which was then muted and mitigated through the discussions and ultimately, the budget being awarded, I think it was February 4 of this year. It took quite a long time. So it's really difficult to speculate.

I will say that we do see strength in our end markets you mentioned EPA, for example, the type of work that we do for EPA is typically associated with the Superfund program, which includes long-term obligations for cleanup and assessments and all the associated activities. Historically, those have been immune to budget cuts because there are legal responsibilities that need to be fulfilled there. So we've seen, again, strong resilience of our end markets in the federal space that might be affected. But it's really too early to comment on where the FY '27 budget might end up and what the implications might be.

Got it. And then I apologize for a third one, but I did -- I just wanted to get your take on the Iran conflict, geopolitics from the standpoint of opportunity. Obviously, it's a water scarce region. In the past, we might have thought about USAID would be involved and there would be some kind of opportunity there for Tetra Tech on the back end of that rebuilding efforts and the like. Is that still the case through other departments like the State Department and things like that? Or is that something that's just not going to be a story going forward with the USAID off the books?

Well, I think the opportunity for us in the Mid East in a post-war scenario has to do with the U.S. Army Corps of Engineers. It's really rebuilding damaged facilities. Over the years, in the past, supporting predominantly the U.S. Army Corps of Engineers. We've supported foreign military sales and other facility development in the Middle East, including bed down areas, hangers, all sorts of other infrastructure and facilities. So a post-conflict opportunity for us would be those types of opportunities. We still have those contracts with the U.S. Army Corps Middle East District. And so we're obviously prepositioning as best we can for post-conflict opportunities. So it does present an opportunity, but not maybe in the way that you might have suggested in your comment -- your question.

Our next question comes from the line of Maxim Sytchev with National Bank.

I wanted to go back to your comment around the fixed price exposure because I think it's up almost 900 basis points kind of year-on-year. And obviously, we're also seeing a pretty significant margin improvements over the same time frame. Can you maybe talk a little bit about that sort of algorithm as that sort of both percentages are going higher and how we should be thinking about the ultimate momentum for both?

Yes. So I'll give you just maybe a historical perspective on how we've progressed our fixed price work back in 2023. So our fixed price work represented about 37% of our total net revenue. So far year-to-date, that is about 48%. And so with that increase in our fixed price work and the kind of fixed price work that we do, we've seen our margins increase over that same time period. I think the other thing, too, you did particularly see that in our GSG margins year-over-year from the standpoint that last year, the fixed price work represented about 29% of our revenue -- our net revenue in GSG last year.

This year, it's about 42%. And as Roger pointed out earlier in the presentation, we saw a significant increase in our margins. So I think our goal is to continue to focus on progressing our contract types, more heavily weighted towards fixed price work. And based on our history, like I talked about earlier, our fixed price work does carry higher margins, and it does carry lower working capital requirements. So we believe that will be a financial benefit and a value benefit on a go-forward basis.

Super helpful. And then I had another, I guess, more of a probably philosophical question around capital allocation and M&A. I mean if we go back maybe 3 years ago, like large-scale M&A was viewed as a kind of net positive for most industry players. Right now, given sort of the new technological developments, I think there was probably a bigger question mark from investors. I'm just wondering where do you land kind of on that spectrum in terms of where to deploy capital in case of M&A?

Well, why don't I start and then Steve can chime in. I think for Tetra Tech, we've always been very disciplined in terms of how we approach M&A in terms of strategic fit, financial accretiveness. You bring up a really good point that in today's world, we've seen impacts from a variety of sources that create uncertainty. And so I think for us, M&A is about fit and timing. So I think that sort of the philosophical response is finding the right time when a deal becomes advantageous to our shareholders. So Steve, you wanted to add?

Yes. I think our priorities are really looking at advanced analytics in terms of water, digital automation in areas where we want to increase our touch points with clients, improve the technology that we can provide our clients and in areas that will help us be a market leader in all of those different geographies where we compete.

Our next question comes from the line of Andrew Wittmann with Baird.

I think my first question has to do with the backlog versus the revenue expectation. And after USAID went away since after that quarter, your backlog ex USAID is up about 2%, but your kind of underlying growth rate is a little higher than that in the forecast released for the back half end of the year. And I was just wondering, Steve, if you could comment, are you seeing like the average duration of the backlog shortened? I think you may have mentioned some of these comments kind of over the last couple of quarters on the federal side. But I was just wondering, generally speaking, if that's kind of the mechanism at play there, if there's something else going on?

No, I would say that with the, I'll call it, backlog decrease from USA, which did have longer-term backlog, for sure, over several years. And with the different federal agencies just starting to ramp back up, as Roger said, getting some clarity in early February, a lot of the backlog is continuing to be fairly shorter term compared to some of the prior years. And so we do see still a bit more book and burn this year versus maybe in prior years. But yes, so that's probably the key driver in terms of -- to address your question.

Okay. Great. And then just kind of 2 other kind of punch list questions here for you, Steve, to just understand the quarter a little bit better. First, what was the FX impact to net revenue for the quarter as well as can you just comment on -- I don't think there was any disaster in the quarter, but maybe you could confirm that. And then just talk about, obviously, the appendix shows the $61 million net revenue from Ukraine in the quarter. Just wondering what your thought is for Ukraine on the back half of the year, if there's anything included in the guide and if there's any change in the guide related to Ukraine as a result of seeing another actually very good quarter of revenue from that. So just those.

Yes. So kind of in order, the FX impact was fairly minimal, not really that material. So we didn't feel the need to call that out, especially compared to where we provided guidance and kind of what those estimates were. So really kind of in line with that. I would say that for the disaster work, there was -- effectively, there was none. There was no onetime disaster revenue that unlike last year, where we had several of the largest hurricanes in Florida and then the fires in Southern California. So this last quarter, there was none of that revenue. And then you're right, in the appendix, we did have about $61 million in USA work that was primarily related to increased activity in Ukraine. And for the rest of the year, we have about $20 million per quarter for both Q3 and Q4 in our guidance estimates right now.

Our next question comes from the line of Tate Sullivan with Maxim Group.

Looking at the commercial CIG operating income margin versus GSG margin and understanding there's some acquisition impacts in the margin for the fiscal second quarter. Is it still -- do you still expect that the CIG margin may approach closer to the GSG margin level? Or is that a changing dynamic, please?

I'll start and then Steve could actually comment further on this. I mean, for us, Q2 is probably the weakest quarter for CIG because of a lot of the geographies that we support through that segment are in the Northern Hemisphere, a very Northern Hemisphere. So there -- the wintertime, we tend to have lower utilization, et cetera, because there's no field work. And then in Australia, you have a lot of holidays and vacations. So it's kind of a seasonal effect. And I think this year was maybe a little more than what we would have expected. However, we do expect through the balance of the year for the CIG margins to improve and come back to normal levels. Steve, do you want to add?

Yes. No, I agree with Roger. I think when you look at the projects and the revenue that are in our backlog, we can see the increased margins, primarily in CIG more so than in GSG. So we do see those 2 getting closer together.

Okay. And last for me is the Port of L.A. work you called it out in the backlog slide. You had a press release at the end of March about it. Was it a meaningful contributor to the backlog increase? Or are you doing much more in the Port of L.A. in the next 3 years compared to batches of the 3 years historically?

Well, I think Port of L.A. has been a long-term client for us. So we're excited about the renewal of the MSA, and we expect to continue to do work and grow that portfolio. So yes, it's impactful for us. In terms of size compared to the total corporation, it may not be material, but it's exciting for us to continue that work. And we feel like it's one of the premier ports in the U.S. and illustrates our capabilities and differentiated services that we get selected for a prestige opportunity like that.

Our next question comes from the line of Michael Dudas with Vertical Research Partners.

This will conclude the Q&A session. I will now turn the conference back over to Roger Argus to conclude.

Thank you, Christine. In closing, I'd like to thank everyone for your insight, questions and interest in Tetra Tech. Tetra Tech is addressing our clients' most complex challenges in water, environment and sustainable infrastructure using our leading with science approach. As CEO, my focus is to build on the foundation that has made Tetra Tech successful. I look forward to speaking with you again next quarter, and have a great day. Goodbye.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may disconnect now.

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 Investors 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 Roger Argus, President and CEO Designate. They will provide a brief overview of the results, and we'll 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 the 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 Investors 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 now like to turn the call over to Dan Batrack. Please go ahead, Mr. Burdick.

Thank you very much, [indiscernible], and good morning. and welcome to our fiscal year 2026 First Quarter's Earnings Conference Call. I'm glad to report this morning that we had a very strong first quarter and beginning to our 2026 fiscal year. During this past year, we had many different points to navigate. And as last quarter, we now had a new one, the longest U.S. government shutdown in history. But during all of these challenges, both during this last year and during the first quarter of this year, we've remained very focused on the enduring markets of water supply, water treatment, flood control and environmental stewardship, all of which remain in very high demand.

And yes, water is not going out of style. Now as you're going to hear this morning, even with the government shutdown, we grew our [ revenue 8%. We ] expanded our margins by 140 basis points on a GAAP basis. Steve Burdick will talk more about this in a bit. And we improved the quality of our backlog by winning more front-end work and increasing the embedded margins that we have in the new projects that we were awarded just this last quarter. Now today, Steve Burdick, our Chief Financial Officer, will provide additional details on our financial performance on a full GAAP basis Roger Argus, Tetra Tech's President and CEO Designate, will provide an update on our growth markets and market outlook.

And with that, I'd now like to share with you an update on our financial performance and business. as we both performed in the first quarter and as we see ourselves moving forward into the rest of 2026. I'll start with, again, we began 2026 with a strong first quarter, as I just indicated. We had a net revenue of $987 million in the quarter, which is up 8% from the prior year. In the quarter, we generated $131 million in operating income which is up 12% from the prior year. And finally, our earnings per share was up even more, up 17% from the first quarter of last year resulted and an adjusted earnings per share of $0.34 for the quarter. And as an adjustment down from our GAAP number, our actual GAAP earnings per share was $0.40 in the quarter.

And Steve Burdick will go through a bit more of that and the Chief Financial Officer's presentation in just a few moments.

I would like to present our performance by our segment. We do have 2 segments, the Government Services segment and a commercial and international group segment. The Government Services Group segment delivered a strong quarter with margins of 18%, up 40 basis points from last year. In the first quarter, our Government Services Group net revenue was $382 million, which grew 5% from last year, and that was during a quarter where the U.S. government was shut down for about 6 weeks of that period or about half of the entire quarter. Our Commercial and International Group segment also delivered a strong first quarter.

The Commercial International Group's revenue was up 10% to $605 million. driven by growth in the United Kingdom and in Ireland with strong water programs in both geographies and with new digital automation programs in Australia. Our Commercial International Group's margin for the first quarter was 13%, which was also similar to GSG, up 40 basis points from the prior year. Our commercial international groups benefited from strong performance in the United Kingdom, in Canada and an improving business in our Australian activities.

I'd now like to provide an overview of our performance by our end customers. This quarter, our federal work was up about 7% from the prior year. primarily for work with the U.S. Army Corps of Engineers designing [indiscernible] structures, upgrades to locks and dams and design of new inland waterway navigation systems. Overall, our U.S. federal work was about 18% of our overall business in the first quarter. In the United States, our state and local markets continue to be very strong. with a 10% growth rate driven by municipal water treatment and digital water modernization, especially in the water stress regions of Texas, Florida, California and Colorado, which Roger Argus will speak more to here in just a few moments.

Our U.S. commercial work was actually down slightly, but this is pretty much as we expected. It was driven by reductions in renewable energy work this first quarter of 2026 compared to a very strong renewable energy practice that we had a year ago. This reduction in our renewable energy work was partially offset by growth in high-voltage transmission and permitting and engineering work that we're doing here in the U.S. Our international work was 48% of our overall business or our overall revenues or net revenues, and it grew at a 13% rate during the quarter. .

International growth included strong increases in the United Kingdom and Ireland, as I've mentioned earlier, primarily around the water businesses. We also saw growth in our Canadian infrastructure programs which we see strengthening really all across Canada and has been one of the strong lights for us. And actually an improving business in our Australia activities where we actually saw the reductions abate during the first quarter.

I'd now like to discuss our backlog, which held steady during a strong revenue quarter that included, as I've mentioned a few times, a U.S. federal government shutdown. Overall, we see the quality of our backlog much higher than before as measured by the proportion of front-end work that we have embedded in our backlog, which also brings higher embedded margins. .

As you can imagine, we did see a slowdown in our U.S. federal client orders in the first quarter due to the government shutdown that began on October 1 and continued for the first 6 weeks of the fiscal year. And even with the federal government reopening on November 12, the start-up for the government was still pretty slow because it started up in November right before Thanksgiving and [indiscernible] continue through the holiday season.

So we never saw it fully return to a level that we would have either expected or hoped for. While new project orders from the U.S. government were slow in the first quarter, new contract awards, task orders and project start-ups were very strong from our U.S. state and local clients, commercial clients, international clients collectively resulting in an overall stable, a pretty flat backlog from what we saw from the first quarter of last year.

As we look forward, we expect that with more clarity on U.S. federal budgets and appropriations, the pace of U.S. federal orders will increase beginning late in the second quarter and continuing through the second half of our fiscal year. .

Now I'd like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present more details on our financials for the first quarter. Steve?

Thank you, Dan. I'd like to now discuss an update of our reported first quarter fiscal 2026 results, working capital, cash flows and capital allocation. So as Dan just provided in our management analysis, our market-leading focus on front-end consulting and design for water, environmental projects are carrying higher margins across all of our end markets. As such, even as the first quarter revenue was down from last year due to the decrease in revenue from our USA customer and virtually no revenues from hurricane disasters this year compared to last year. Our operating income increased significantly, and EBITDA on net revenue for the quarter increased by 140 basis points to 14.2% in the first quarter of fiscal 2026.

Now excluding our USAID and Department of State activities in both periods, then our margin was up about 80 basis points. As a result of our ability to enhance our profit margins, we were able to increase EPS over last year as the $0.40 reported and the $0.35 as adjusted came in better, due to the outperformance in the growth of our international business. You can find a reconciliation with the divestiture and earn-out gains in the appendix of this presentation and in our Reg G reconciliation. Now regarding our working capital, cash flows generated from operations in the first quarter were $72 million, which represents an improvement of $59 million over fiscal 2025, excluding the impacts of U.S.A. and Department of State business, our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of 51 days, which is the lowest this key metric has been in over 10 years.

Now this lower DSO metric provides significant insight into the core business as it reflects the outstanding work that our project managers lead relative to higher-quality projects and highly satisfied clients in our broad portfolio across all of our end markets and geographies. Our net debt amounted to about $565 million, and the net debt on EBITDA was at a leverage of 0.86x, which is 20% lower as compared to our leverage 1 year ago. Now 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, we will continue to provide higher returns for our shareholders and improve our industry-leading return on capital employed.

So for those following along in the presentation, I wanted to share a bit of our recent historical results relative to our net leverage and our current borrowing capacity. As I just reviewed, our strong balance sheet and healthy cash flows, we've continued to bring down our leverage from a high point when our net debt stood at over back in the second quarter of 2023 when we acquired RPS. As of the first quarter of fiscal '26, our net debt is less than the low end of our target range and this provides a significant room to use our balance sheet for investing in growth and providing for higher returns to shareholders. For example, we could lever up to take on an additional $2 billion in debt capacity for larger acquisitions. With that perspective in mind, I'd like to now present our capital allocation strategy and overview. We have a very strong and healthy balance sheet and our operating cash flow was over $500 million for the trailing 12-month period. Our balance sheet and cash flows provide us with significant available liquidity as we have revised our capital structure in the last year to take advantage of the credit market to support our strategic growth priorities.

Roger will discuss our strategic growth areas later in this presentation, but I do want to point out that we have a significant amount of liquidity available to invest in organic and acquisitive growth priorities in order to take advantage of these key business opportunities. And these opportunities include technology and automation, which continue to provide us a dominant position in the market and for acquisitions of technical leaders focused on defense such as halving in the U.S. and Providence in Australia.

Now regarding our dividend program, I'm pleased to announce that our Board of Directors approved a quarterly cash dividend, which is a 12% increase year-over-year to be paid in the second quarter. This is our 47th consecutive quarterly dividend and the increased dividend is in line with our practice of annual double-digit increases in the amounts paid. Based on the lower net leverage, we've continued our stock buyback program this year. And in the first quarter of 2026, we bought back an additional $50 million. We do have $548 million available from stock buyback plans that have been approved by our Board as part of our capital allocation strategy.

Overall, I'm very pleased to share these really strong results for the start of 2026, which has enabled us to increase shareholder returns. And since the second quarter of fiscal 2023, when we completed the acquisition of RPS. We have increased our annual dividends every quarter and distributed a total of $180 million. We increased our stock buybacks and and repurchased a total of $300 million, and we completed several accretive acquisitions, investing a total of $400 million. And we did this all while deleveraging our balance sheet and moving our net debt on EBITDA from more than 2x to less than 1x.

I want to thank you all for your support, and I will now hand the call over to Roger to discuss Tetra Tech's future opportunities for 2026 and beyond.

Thank you, Steve. 85% [indiscernible] business is to provide water and environmental related services for our government and commercial plans. Today, I'd like to highlight some of the key market drivers for our municipal water and [indiscernible] business globally. In the U.S., our clients continue to invest in water infrastructure to meet long-term demand and to protect from droughts and contamination.

This last week, New York State announced a $3.75 billion investment in statewide water infrastructure programs. And today, Tetra Tech is providing front-end water services in support of more than $22 billion in water and wastewater capital expenditure programs. Our services begin at the earliest stages of the program with planning, alternative analysis digital automation assessment and progress to first-of-a-kind designs to optimize water supply and wastewater treatment systems.

One of the new emerging growth areas in municipal water is Colorado, where they are facing widespread concerns over water supplies. We are working with our clients in the region to investigate high-end alternatives to transform formerly unusable source wire into long-term supplies. Digital automation provides another avenue for increasing efficiency in water delivery. In Texas, we are working with the Coastal Water Authority to optimize water systems that today deliver water to more than 2 million residents in the region.

In the U.K., we are seeing a continued ramp-up in water investments and contracts supporting the AMP cycle as well as increased investments in irons and the Netherlands. In fact, Irish Water has recently doubled their projected investments to [ EUR 11.8 billion ]. The front-end services we provide throughout the region include modernizing water supply systems and protecting water quality. As noted on the slide, we've added new contracts with 4 U.K. water utilities to provide these services.

And in the Netherlands, we were awarded a contract to support the Netherlands [indiscernible] framework cooperative agreements in modernizing their critical water management infrastructure. We also provide our clients with software to advance their programs. In the U.S. and internationally, our CSO subscription software is used by water utilities to optimize water systems to protect water quality and in the U.K., our Water net software is widely adopted to manage water systems and reduce leakage, a high priority for water utilities under AMP.

During our last earnings call, I highlighted the increased funding levels for defense in the U.S., U.K. and Australia. These funding increases will be used to expand and modernize defense facilities, including strengthening coastal resiliency and flood protection as well as expanding port facilities and infrastructure modernization. We continue to expand our contract capacity for coastal resiliency for programs in the U.S., U.K. and Australia.

We were recently selected for a $48 million single-award contract as part of the Texas coastal protection program to help develop what will be one of the largest search barriers in the world. Other recent awards in the U.S. include contracts with the Army Corp Baltimore and Portland districts, which will be used to support critical postal infrastructure design, inland waterway upgrades and court expansions. And just after the quarter, we announced the addition of Halbe, further expanding our high-end consulting services to U.S. defense programs. Their data analytics and AI capabilities will expand our resources to support the optimization of infrastructure facilities and resource management systems.

In the U.K., we are seeing increased budgets and expanding programs to address coastal protection and maritime facilities. Most recently, the U.K. announced a new $4 billion pound program to fund the modernization of ports. In Australia, our defense practice has been awarded 2 new programs. Both of these awards support extensive maritime upgrades in coastal zone management in Western Australia. After the first quarter, we also announced the definitive agreement to acquire Providence, a high-end advisory firm specializing in supporting Australian defense programs.

Their advisory services complement our existing advisory and program management expertise [indiscernible] new contract capacity and new clients. In summary, we are very excited about the opportunities of these major market drivers and recent acquisitions present. I would now like to provide an overview of our outlook for FY '26 by customer. each of our customer sectors have growth drivers directly aligned to Tetra Tech's strengths. International growth is forecasted to have a 5% to 10% rate. This growth is supported by the water programs in the U.K. and Ireland as well as high priority defense spending in the U.K. and Australia. We are also seeing expanding investment in Canadian infrastructure and some improvement in Australian markets fueled by mining and infrastructure. U.S. commercial is forecasted to grow at a 5% to 10% rate supported by water demand for data centers and advanced manufacturing and growth in the U.S. power-related advisory, consulting and engineering services. U.S. state and local is forecasted to grow at 10% to 15%, supported by increasing investments by municipalities and water supplies expansion and upgrades and new initiatives for digital water automation. U.S. Federal was forecasted to grow at 5% to 10% rate, driven by higher spending and priorities focused on defense and critical water infrastructure.

I would now like to turn the presentation back to Dan to present our increased guidance for the second quarter and FY 2026.

Thank you very much, Roger. As Roche indicated, I'd like to present our guidance for the second quarter and our updated guidance for the entirety of fiscal year 2026. Our guidance is as follows. For the second quarter, our guidance for net revenue is for a range of $975 million to $1.025 billion, with an associated adjusted earnings per share of $0.30 to $0.33. .

For the entire year, our updated and increased guidance for net revenue is for a range of $4.15 billion to $4.3 billion with an associated adjusted earnings per share of $1.46 to $1.56. I will note, if you're following along on the webcast note on the right portion of the page. This does impute or calculate to the midpoint of the guidance range of a 9% increase in net revenue for the entirety of fiscal year 2026 and and an 80 basis point expansion of EBITDA margins for the rarity of the year.

Some of the assumptions included in this guidance, both for the quarter, second quarter and for the entirety of the year is that it does include intangible amortization of $34 million, it does include depreciation of $25 million for the year. That does include interest expense of $34 million, a tax rate of 27.5%. We do estimate at this time, a $263 million average diluted shares outstanding. And as in the past, it does exclude this guidance for the second quarter and the year does exclude contributions from future acquisitions. And it does include Providence that was just mentioned by Roger, we have signed a definitive agreement, and we do anticipate it will close towards the end of the second quarter, and we'll update our guidance as we move forward.

And I will note, and you'll see that the reconciliation tables referenced by our Chief Financial Officer, that this guidance does include the impact from the current disposition and less any gain on the sale.

With that, I'd like to move to close our prepared remarks with stating in summary, we had a really good first quarter and an excellent beginning to our 2026 fiscal year. And Tetra Tech's high-end consulting for water and environmental services continues to have strong demand and resilience through this rapidly changing geopolitical and economic landscape that we have today. Our leading with science approach to addressing water and environment priorities is well aligned with the long-term demand here in the United States and really all around the globe and internationally.

And with our strong balance sheet, which I think Steve did a great job of presenting today, Tetra Tech is in an excellent financial position to invest in acquisitions to further advance our strategies and to move us and to continue moving our leadership in the industries that we're competing.

And with that, Diego, I'd like to open the call up for questions.

[Operator Instructions] The first question comes from Tim Mulrooney with William Blair.

I wanted to ask about your federal business first. It looks like it grew 7%, excluding the Department of State work. Pretty good, I think, considering the government shutdown and kind of right in line with what you're targeting for the year. So I was curious if you could just talk a little bit more detail about some of the areas where you are seeing strength that's helping drive that performance.

Yes, it's a good question. I would say that was an area that we were extremely focused on coming into our first quarter. Maybe as I describe the first quarter, maybe I'll just reflect just a little bit. I notice that -- you may have noticed in fiscal year 2025, we had an entire series very large wins with the U.S. Army Corps of Engineers. In fact, I think we had something in the order of 1 to 2 dozen very large awards that actually saw task orders come out late in 2025, so the months of August and September, and they really continued through our first quarter, which was October, November and even December. We did see the shutdown or the likelihood of it coming into the quarter with the U.S. federal government. It was somewhat telegraphed or indicated that, that was a possibility. So we work very closely with our clients, particularly with the Department of Defense to U.S. Army Corps of Engineers to have task orders and projects put in place that would carry us through the first quarter.

And we -- that was successful for, I would say, a little over 30 days. we were really unimpacted to really most of our programs, but I'd say most notably, we did a good job with our clients, anticipating authorizations that would carry us through the first quarter. So what sustain that 7% growth was one, advanced planning. We have seen a shutdown time or 2 in the past; and two, working very closely with our clients to have critical programs that really would save the government a lot of expense without having to go through a demobilization and restart ups. So it was actually financially in the best interest of our clients and actually supported that 7% growth for the first quarter. but the primary driver was through the U.S. Army Corps of Engineers, which has now become the company's largest client. And of course, that shows up in U.S. Federal. And that was really the underpinning for the 7% growth in the quarter.

That's good extra color. I assume many of those programs will be ongoing throughout throughout fiscal '26. But I do actually just want to pivot to your international business, which continues to accelerate. It's obviously very strong this quarter. I know you touched on it in your prepared remarks, but I was hoping you could walk through each of your 3 main geographies, just talk about where you're seeing traction? I mean, how much of that growth is being driven by strength in the U.K. versus maybe getting more traction in Canada or seeing more of a stronger recovery in Australia? Just any detail there?

Well, I'm going to ask for the 3 of the 3 primary international markets for us because that is how we look at it here at Tetra Tech. The area that has been the strongest going back for the -- more than the last year, 1.5 years, has been the United Kingdom. And we traditionally have said the European Union, but really, it's been primarily Ireland. So I'll call it the U.K. and Ireland. Those programs have been very strong for us. Growth has been well into double digits. It's what's driven the numbers in the past. In fact, I have made comments when you've seen our international growth at 5%, 6%, 7%. My comments have been -- the U.K. and Ireland are being underrepresented or unrecognized to the public with respect to their contributions because they've been well into the double budgets, and they continue to be. And of course, as you've heard in my prepared remarks, I think I hope in say it too many times, driven by large water programs, larger spouse, I've spoken of them, and it's certainly been a common theme now for many quarters. .

So those 2 are double digit. We have great visibility, good backlog, and they're really, in many instances, first-of-the-kind programs, but the priority on the asset management program or the AMP8 program in the U.K. and similar programs in Ireland. So I would say if you -- that's the -- I want to say that's the hot or that's the biggest up driving it. Canada has actually done quite well for us. There was a little bit of a -- I don't want to call it a stumble, but a little bit of a pause during the -- roughly a year ago during the initial tariff discussions between the U.S. and Canada that caused, I would say, a fair amount of disruption.

In Canada, we saw those growth rates come down to sort of middle to just slightly below that growth, still growing, still quite profitable. But I'm very impressed with what Canada has done with respect to responding for alternative trading, continue negotiating with the U.S. and investing a very large committed amount for infrastructure to commit to ports Harbors. I've seen recently is a significant investment coming out of the Canadian government, both for their defense and civil agencies across the Arctic, of course, Greenland being in the topic over the past few months has taken much more discussion with respect to national security of North America and much of it is being going to be directed towards that area, which is the entire Arctic interface on the coastal area, where we have a very large presence, and we've actually seen some early planning work coming out of that. And so that's been, I would say, contributing well. It's sort of in the middle to upper single digits, quite where the U.K. and Ireland are, I would say, very strong in the upper end of the range that we have established. In Australia, you've heard words we're using like recovery, strengthening.

I will say that it's been difficult. And not just for Tetra Tech, I have looked at other consulting and engineering firms and it's been -- have their own challenges across the Australian and New Zealand activities. I would say a year ago, we were looking at sort of a minus 15% type numbers. So it was really offsetting a lot of the strength in the U.K., Ireland and even a bit of Canada. We've seen that as predicted. It actually come back. Now I wouldn't say we're in a growth mode there yet. But going from minus 15% to 0, being flat, feels pretty good. Now we may not be in the sunshine yet, but we're headed there. But when you go from minus 15% to 0, one, I like the trend, and said it the right way; and two, it's now actually not a headwind. And so if you take those altogether, that's what where we put for the quarter. I think we're going to see similar and improving performance out of Australia. I expect Canada is going to stay where it's at and maybe improve a bit more. And we don't have an expectation that we're going to be running -- I'm not going to call it red hot, but had really high levels out of the U.K. and Ireland because these much higher performance numbers will annualize, and you'll still see nice growth, but it should put us in a good position for performing well within that 5 to 10 growth rates that we forecasted. Rocepercentage just a few moments ago for international. I hope that's not too much detail, Tim.

No, Dan, I could talk to you all day about this, I want more detail. I want to learn more about what's happening in Canada, that sounds like a lot of exciting opportunities. I mean, I guess the in the Arctic? Is that -- what kind of work would you be doing there? Is that like work around the ports and harbors and export terminals? Or what kind of -- sorry, I know this is the third question I'm only supposed to ask, too, but I'm just very curious.

Yes, I'll just make a comment. I've said this before. I have to go back a few years in my career, my first year working with Tetra Tech, I worked in the Arctic. That was my first 2 years as an employee in Coltec I was mostly on the Alaska Arctic, but I went over to the Canadian as far as [indiscernible], but there are no ports and harbors for navigable waterways for refueling or anything across the Arctic anywhere. You can go shore a little bit in a skip or something but this will actually be planning winter roads that will go up to the North Coast. By the way, the ice road truckers television series, which highlights Tetra Tech's ice road clearance work. That's the work we do on a geotech work.

So if you see very closely some of those blogs, you'll see Tetra Tech or our field divisions logos there. So this will be providing access roads up to the north and then building out ports and harbors and infrastructure facilities to allow navigational support across the Canadian and Alaskan Arctic. That's the type of work we'll be doing. And it's not just for Civil, but of course, it's for trading routes, but it's also become -- if you listen to the news recently, concerns regarding threats in the Arctic regarding naval facilities. And so all of a sudden, even in the last 30 days, we've seen Canadians put more priority on defense facilities across the Arctic. And other than the defense early warning systems, the early do-line sites there's nothing up there, and that was all air fly in. So all of this build out, I think, is dead center for Tetra Tech and has left me pretty bullish on Canada.

And your next question comes from Sabahat Khan with RBC Capital Markets.

Great. Maybe just taking that commentary you just shared on the setup across the various regions. And how have you reflected the range of potential outcomes within your guidance? It sounds like at the very least, some of the markets are stabilizing, others might be accelerating. But just if you think about the range you've provided for full year revenue and earnings. What have you reflected in those assumptions across the range? Maybe just to bring all that together.

Well, I would say, midpoint, which I'm pleased to say is at the 9% that you saw on the revenue growth. would assume the -- roughly the midpoint of the growth rates that Roger presented in each of our key core client end markets. So -- and I think that's about what we see. Now what would take us to the low end obviously, our guidance is in a single point as a range, but we've not what would be embedded in the low point, what could cause it to be at the low end of that.

Well, I regret to say that still possible we'll have a shutdown here within the next few days. We still don't have a bill pass. Although I will say our guidance has contemplated. It's certainly less than our range in Q2, as I speak to you today, that if there is a shutdown, it would take us to the lower end. I think the shutdown, if it does happen, it will only be a partial shutdown. I'm pleased to say in the past few weeks, we've actually had appropriations signed off on a number of areas. So even though it's been impacted materially, EPA has been funded gone out through the year.

A number of others have been funded out through the year. The ones that have not been funded are defense and a few others. And we think that if there's a shutdown, it would only be partial. And much of the partial is not even 4 areas that we work in. So Homeland Security and others are really not affected by our client set. The areas we do do work for defense are often considered essential services. And so even if they do shut down, we'll still remain at our post and at work. But nevertheless, I would say and things that would take us from low end could be a shutdown or any other major disruption from this administration, whether it's a shutdown or I'd say continued significant volatility in things like tariffs are trading or things that actually are causing slowdown of decisions even on the commercial we see a little impact on our state and local with respect to these federal activities and little on international. But still, that represents the low end. On the high end, it would be -- we could have some bipartisan support.

Now I know that may seem like a trip to Mars tomorrow. But hey, it is what we're hoping for. It is what we're expecting. And any type of bipartisan support on any of these large clients would put us, I think, toward the upper end. I think that would help accelerate our commercial work. with respect to reshoring. I think it would help certainly with visibility that we expect coming in the year for a federal government, state and local, I expect to continue. And by the way, state and local has actually been funded from the federal government at a relatively full level, and it's been an area of speculation and discussion that federal funding to state and local would be minimized or otherwise reduced. We've not seen that. In fact, this really come out at a full level. And so -- and that includes state revolving funding includes WiFi or the water infrastructure funding avenue. So any of those pickups, I think, would take us to the high end. And while we're not counting on it, we do have -- I don't want to use a call it a wildcard, but we do have a card in our hand that continues to see funding. And it was one of the items that drove us well over the top end of our own guidance, which is funding on U.S. state department work specifically means Ukraine. So it is possible that, that could actually see more work on the power engineering side, which is what we do there. And that could actually take it and drive it to the upper end or even higher.

Right. And then there's a bit of discussion on this call in your slide deck about the balance sheet capacity, the focus on M&A. If you can maybe just talk about whether there's maybe a bit more of a enhanced focus on the inorganic opportunities is your sort of new role that you're transitioning to maybe a bit focus on them. Maybe just talk us through the views on M&A type inside of assets you might be interested in your potential involvement on sort of the strategic stuff, I mean you're in the role that [indiscernible]

Yes. That's a good question, Saba. So Steve has generated a bank account for me to check boat. And I will say, this would be the last call that I'll be presenting as the Chief Executive Officer, CEO, responsible for day-to-day operations for the company and strategy and vision and direction. I personally want to make just a brief comment on this through my journey starting here as a field technician and field engineer to my role today.

I've never felt that as a core for an obligation to work on the details of the project. Frankly, that's my first love. If I can go out on the project side or meet with a client. I still call and talk to individuals on a daily basis. and we'll continue to do that up until February 19 to our shareholders meeting. But I will say that, that level of extreme detail in the day-to-day operations of the company, I am transitioning to Roger. And Raj has been doing much of that for a while now. And what I'm hoping to do then is through my tenure in this role, which is now in its 21st year, I actually do have a lot of colleagues and friends in the industry from teaming partners and competitors and even individuals that growth in similar positions as I did that are now CEOs and Chairman of other key companies. And I hold many of them in the highest regard. And I actually would like to spend more of my time on what I would consider needle moving trying not to use the word big game hunting because it's not a predatory move, but how we can actually partner with some of our biggest peers out in the market to change the market by them joining Tetra Tech, and finding things that finding combinations that are good under strategy that will help transform this industry that will make Tetra Tech and our partners better than ever and actually set a new high bar that nobody has envisioned yet.

And that's what I'm going to focus my time on. And Steve's establishment of -- by the way, the $2 billion is what we can go -- essentially get tomorrow with just within our revolver. The actual ceiling is substantially higher if you begin considering access to equity and other financing means that are available to Tetra Tech. And so I want to spend my time actually more on vision and direction and combinations with other partners out there that will help transform this industry. And that's where I'm excited about it. I haven't had as much time to spend in that area as I think I could or should have. Nobody does everything perfect all the time. And I would think that acquisitions that have made a difference for Tetra Tech, like coffee and White Young Green, WIG and RPS, I would hope it would only be the beginning of what we can see in our future.

Your next question comes from Sangita Jain with KeyBanc Capital Markets. .

Dan, I have to follow up on that M&A discussion that you just had. As he pointed out, you've rarely ever gone about like 2 turns even with RPS. So seems very high. I just want to understand what type of opportunity would take you would make you feel comfortable going that high? And are we thinking a single opportunity that's $2 billion or a secret of transactions that takes you up to 4x.

Well, I think it could be either, although I would say, generally speaking, I anticipate something that would take us up to the 4 the leverage of 4 would be for something that is larger than actually required more of a more capital available. Now I will say that if you begin thinking about two. This is interesting. Most of the opportunities that we've identified are sourced through our Tetra Tech teaming partners, subcontractors, JV partners.

And I think that we have well within the 1 to 2, the ability to continue with the bolt-ons that we've been doing. So we've targeted, Steve, specifically targeted in our Investor Day of May of 2024 a 4% to 5% revenue contribution, which we can do that through M&A and really stay at a 1 or even below. I think we've talked about because of the USA removal from our portfolio, again, not because of anything we've done, but we could take that number and move it up to essentially double that up to 6%, 7%, even 8% and and still be within the 1 to 2.

What I'm talking about, what we're talking about is something that would be strategic and actually help change the direction and frankly, valuation for our shareholders. And I would expect it to be accretive. And any time we would get anywhere toward the upper end of 4, I think you would see it very similar to Steve's chart during the prepared remarks that we deleveraged quite quickly. So it's not a new location that we would resign for very long, but it is something we could do very easily with almost no time expended in that. whereas if you're talking about a lower leverage, now you're talking about -- which seems to be pretty common in the industry, but not with Tetra, we haven't diluted our shareholders at all. We've done many, many different acquisitions, including those ones toward $1 billion in annual revenue and not issued any equity or diluted our shareholders, and we brought the leverage down. So I would expect the scenario that Steve had outlined in his presentation, is simply how we would use cash, which is the lowest cost of capital for our shareholders particularly at the interest rates that exist today. So no, it's not turning up a lot more small ones. I think the smallest will continue as you've seen.

And I'm glad to report that since our last investor call, which was I don't know just a little over 60 days ago because the last call was the end of our fiscal year. So it wasn't really that long ago. We've announced 2 acquisitions. And I think some have asked, well, do you actually have anything in play and said, well, we'll announce them when they're there. But I'm glad to announce -- have had 600 people. You've got Providence that just over 100 people -- and so those fit right in our numbers that we've talked about between 100 and 1,000 people and expect that type of cadence to continue. But that is not what's going to drive us up to before. It would be something more material. And I don't want to go so far as to say transformational, but I'll use the word something more material.

Got it. Helpful. And then on the [indiscernible] and Providence acquisitions, on your cash flow statement, I see that you also divested some assets. But I just kind of want to understand what you sold and if there was any revenue associated with that sale? And what's the purchase price for those 2 transactions.

Yes. So in the first quarter, as we announced back in the fourth quarter, we held for sale or we had for sale our Norway operation that came to us with the RPS acquisition. And we determined that it was noncore and really didn't fit with the rest of Tetra Tech in in a meaningful way. So we sold our Norway operation in early December. And that's what you see in terms of what's sitting on the cash flow statement. .

Yes, I'll just make 1 comment on that, Sangita. As we see it, that was closed right before Christmas. I'll also make a note that our backlog that you saw was down 1.8% year-over-year. Also included are taking out the backlog that was included in the Norway operation. So it's not all apples and apples, that reduction wasn't -- if you actually added that in for a fair comparison from a year ago because our nonoperation was included in it last year. So -- but the -- if you take a look at what Holding, which came in, in January, mid- to late January, and you take a look at the Norwegian operations with respect to the contribute revenue yes. And in fact, the annual numbers are pretty close. So we see that the withdraw of our Norwegian operation and the put of Hovick roughly offset each other. So don't get too much into our consensus number for Halvick because we do have the offset for Norway.

Your next question comes from Andy Wittmann with Baird.

Roger, congratulations on the promotion. And Dan, it's been a pleasure. I know you're not going far, but since we won't have you on this call, you will be missed. So my question, I guess, is a clarification, just kind of building off the last question. My first impression here was that your guidance on an organic basis was largely unchanged. And my thought was that you beat the quarter or it was over the you beat the revenue, the guidance, you beat the EPS guidance, and it kind of felt like you passed that through to the year, but the balance of the year kind of felt unchanged was my original assessment.

I don't know if that's right or wrong. So I was hoping you could address that. I thought the avec acquisition was explained most of the revenue delta beyond the the beat in the quarter. But maybe, Steve, you want to address that one? And if I'm wrong here, please do clarify. Any other contributors to the significance of the contributor of Ukraine would also be interesting to know, at least its impact on the quarter and how you're thinking about that in your consideration for guidance.

Yes. You got that about right, Andy. It's -- our revised guidance for the year, which increased in terms of net revenue and EPS did take into account our Q1 beat and that's the adjusted EPS, not to $0.40 with the onetime gains from the sale and other stuff. So the net revenue does reflect our Q1 beat. And as Dan talked about, some of that came from more USA work, but also from -- more from our international business. And then on a go-forward basis, we did account for a little bit of that increase from public a little bit, but as Dan also discussed, we had a disposition that that took our net revenue down a little bit from the sale of our Norway operation. So I think what you see in terms of our guidance for net revenue and EPS is higher than what we originally came out with. And -- but within that range, pretty much encompasses a lot of the things that Dan was talking about earlier and then this Q&A with some of the different puts and takes that we're -- we still need to consider for the rest of this year.

Okay. Great. Then just for my follow-up, I wanted to ask about the opportunities in really the 3 submarkets, so 1 question, 3 parts. But these are all topical areas that I think the investment community is thinking a lot about today. So the things that I was hoping you could address, Dan, would be nuclear permitting. We saw that there was a press release that you announced that came out for helping permit nukes along with Westinghouse kind of terms of agreement there. Just wondering kind of time frame opportunity set there. Been a lot of talk -- you guys have been a very good provider for the FAA over the years. And obviously, with the modernization that's going on out there. I was just wondering if Touche you think that [indiscernible] a credible chance at a role as a subcontractor now that the Prime has been announced there. And then also, I think people are wondering about the Shield contract that went out there and what kind of scope and role are on track, please?

Well, fortunately, [indiscernible] quite familiar with all 3 of those contracts. So the first one, let me just clarify, that was a press release sent not out by us by Westinghouse. So that was not a Teradek press release at all. Now we were very flattered that they included us prominently in this -- this is work for Canada. It's a memorandum of understanding an MOU between us and Westinghouse because a couple of other parties also part of this. And this is for really a continuation, including new build for nuclear power generation as far the clean energy in Canada. And in Ontario, we've had a great relationship with the actual power generation owners like the Bruce and OPG and others up there.

And I think this is going to continue what we've been doing because we do do the engineering, not just the permitting, but we actually do the engineering portions for cooling systems and other items with respect to water handling, pumps, valves and other items associated with the water movement systems up there.

And so this is new activities with respect to new build, and I think it will just continue what we've been doing up there with an incremental upside. So that's what that is. So I would say, yes, don't take a look for -- don't look for a huge step function. No, we're not going to go from -- what's not going to materially change our outlook in 2026. But it's going to continue to support our outlook in 2026, and we'll see how it grows even more FAA, the integrator contract, we were never a prime. We do a lot of work on the communication system. We're very close in the meetings with the integrator. And of course, where we sit as a technical adviser to the FAA on this type of work. They have committed funds for radar and other hardware and systems that have now been deployed or put in place by the FAA [indiscernible] the integrator contract. It does take time to produce those. We are -- we would be a great choice to actually assist in the implementation and deployment of those. I know we won't be driving the trucks to hold them out to the locations but we will actually be helping with respect to how are they going to be integrated, how are they going to be plugged in, so to speak, how are they going to have power to them? How are you going to have security access to all these facilities because we're at all these locations. And in fact, we did some of the rollout of some of the space-based telecommunication systems in Alaska going back about a year ago that were put out as sort of a first trial. So that's an example where FAA came directly to us. So it seems to us we're a great choice. We're there. But I think you're not going to do that until such time as the hardware is available for deployment. And while I'm not -- we're not familiar with the exact time schedule of that we think that's not a 2026 at least our fiscal year '26 item, but we do think it's a good opportunity for 2027. I have been asked, don't you get started today in 2026. and do all of the front-end work, so it can be ready to go when it shows up in '27. We've had those discussions -- and if you're not going to do it the way of does it if it's going to be a new day with the integrator contract with somebody who's new to the process, a lot of it becomes just-in-time planning so that you can be very efficient with respect to your spending. So it's not, let's start now 9 months in advance or a year in advance. Let's do it as it gets closer to delivery.

So I expect that opportunity to be more material for us and potentially material in numbers, too. But I think it's a 2027 fiscal year item. And finally, the shield, we issued a press release 3 weeks ago. on the Shield contract is $151 billion, I'll call it, down payment on what might be a golden done. There are -- let me put this in context -- the U.S. government has issued these contracts to individuals and companies that could possibly support this activity in any and all areas and the number of contracts that people hold, the number ranges in excess of 2,000 -- so first of all, is the Petrotec, no, are we 1 of 10, No. We're 1 of 2,000, and I think it's close to 210 or 2,200. Now the work we would do, and we've done this for the Department of Defense and the government in the past, we, frankly, are the upfront planners in the environmental permitters -- and I would call it, overall the environmental stewards of any plan that might be put in place. whether or not something is deployed or not, time will tell.

But the first thing that would have to be done is if you're going to have remote sensing or remote monitoring or remote locations. It starts with a planning document. And where would it be? And is it going to go across the wetland -- is it going to go across National Park as you even have access to it, how would you get there? All of those have environmental impacts, both to local communities, state and federal. And frankly, in some instances with us, even international implications because of the stretch of covering much of North America, there's issues that you would need to have big presence in places like Canada and the North. It sounds like you're talking about Tetra Tech. So we would do a lot of work. And in fact, I was commenting to somebody here at Tetra Tech our Chief Engineer here at Tetra Tech, you can see them on our website, Dr. Bill Rowley, Ph.D., Caltech world famous civil engineer. I was our program manager back in the 1980s when he led that program. He's still here. I actually did some work on it on a mobile Rail-Garrison program. was Tetra's biggest contract by far, and it's where we did the environmental assessment, monitoring potential environmental impacts. Nothing ever got deployed, but it was an enormous contract. And there's a lot of aspects of this program that could be similar long before it ever gets deployed. So I think it is something that has to get out of contemplation. But if it moves forward, I think Tetra Tech could be from an environmental stewardship perspective, 1 of the first to participate in the program. And offline I can give a lot more detail on all 3, although I think I probably went too long on those 3 already.

And your next question comes from Michael Dudas with Vertical Research Partners.

And Dan on a historic run you to put forth, congratulations.

Just quickly, just a follow-up on your discussion on M&A and capital allocation moving forward. talking about all this capacity and all the opportunities, the pipeline seems pretty full, and there's a lot of chances. As you think about your business mix of revenues with 45% international and the mix you have in the other custom basis, and also in your exposure in the water and water-related areas. As you evolve in the next few years, are those going to change dramatically? Do you feel like you need less or more international exposure? Does it -- are you agnostic towards it? And also on your exposure with the growing global TAM of water there other areas you want to be more and less involved. And I just want to get a sense of that as we monitor your actions over the next several quarters.

Yes, that's a great question. I will, first of all, start with the word agnostic. I am not overly partial to U.S. over the U.K. over Canada, over Australia over Ireland or New Zealand. We really want to follow our clients where their priorities are and where we can make a difference, and we can provide them solutions that nobody else can. And for some have asked me legitimately there's been so much volatility with the U.S. federal government.

Why don't you just go international and get away from the volatility and the uncertainty that seems to have been present including your government shutdown this last quarter. And my comment is it's still the largest client in the world by far, by a little bit by far. So I don't expect -- and we've been a support. We are agnostic with respect to geographies and, frankly, political parties. We're here to solve the problems for our clients where we're an expert. And our job is to actually further their successes in areas associated with clean water, flood control, clean environment, sustainable infrastructure, and I would add to where it's resilient, so that it doesn't get knocked down the next fire, flood, tornado live storm that is unimpacted. And much of the work -- and I would tell you our resume, when we go there, it's not just our price.

Our [indiscernible] is the inner harbor navigational channel that we designed, the largest sea barrier, flood barrier, the United States has ever constructed and in fact, 1 of the largest in the world, has now withstood a dozen starts including those approaching or equal to the size of Katrina and protected New Orleans. Our resume is our work product, and that supports everyone in any of those locations. So if they have it a priority as a government, we want to work for them, the 45%, I know we were 48% this last quarter. International that seems to feel about right. I don't necessarily seeing it going over 50%. But if, in fact, if more funds are put toward that type of work and places like I will call it at this time in the very large English-speaking commonwealth countries. So Australia, Canada, the U.K., Ireland, I know [indiscernible]. will be there to support them. and, frankly, for better outcomes for them, including the United States. So extremely agnostic. We want to follow our clients who put these as a priority for them and have funding that we'll have better outcomes for their communities in their countries.

I do think we're going to stay water, my comment on water so going out of style. I really believe that. I really, really believe that. You've heard me going back to our Investor Day 2024 in May. And I talked about these being trends or macro trends that are measured in decades, not years. And so any volatility that we would see here we're going to navigate as we have this last year. And -- but I'll tell you, in the long term, I believe the supply of water, the protection of our coastlines and the environmental landscape, both for our current citizens and for the children are going to be of higher demand than ever before.

And for those, I would say, I see this administration or I see that's given geopolitical decision is deemphasizing it. My comment is that just means there's more to clean up and more to provide for tomorrow. So I've had this item on coastal protection all the way back in Katrina when I was in this role was you can pay me now or you can pay me later. And I prefer that we do the work now to protect our citizens in our communities. But if you don't want to do it, I'll tell you what, it's still going to have to be done later. And I don't see a substitute for that at all. So I think we're in the right spot built on a legacy of 60 years now. And 1 thing for sure about -- and I am talking too long, but the people you're going to talk to after me are better, brighter, smarter, more energetic and more forward-looking than I. So the best years of Tetra Tech for sure are to come.

This will conclude the Q&A session. I will now turn the conference back over to Dan Batrack to conclude.

Well, thank you very much, Diego, and thank you all for attending the call today. Both those asked questions, and it just attended to listen in. Thank you very much for each of the questions from our analysts. I think great questions, and thank you for allowing me to answer them for you today. While I won't be leading this call, you may heard me back on this call in the future, but I am not going anywhere. I'm staying here at Tetra Tech as Executive Chairman and doing my absolute best to contribute to the success of the future. of the company. And I'll tell you it could not be in better hands on the day-to-day operations with the exceptional talent that we have in the company, including Rogers and so, frankly, and 25,000 others that are just the best in the industry. And with that, I know we all here at Tetra Tech look forward to talking to you again next quarter. And thank you very much. Bye. .

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may disconnect now.

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 Investors 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 in 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 Roger Argus, President. They will provide a brief overview of the results, and we'll then open 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 these 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 Investors section of Tetra Tech's website.

At this time, I'd like to inform you all that participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Thank you very much, Melissa, and good morning, and welcome to our fourth quarter and fiscal year 2025 earnings conference call. And I'd like to start this morning with sharing with you that I'm very glad to report that we had an excellent fourth quarter and record financial performance for all of fiscal year 2025.

But before I actually get to the numbers, I'd like to take just a moment here at the beginning to discuss how we successfully navigated this extraordinary year and ended up with these record results. By staying focused on our high-end consulting and our leadership in water, we've built an enduring competitive advantage and a long-term client base of trust with our end clients that we work with.

Our leading with science approach has provided us with a significant competitive advantage and highly adaptive workforce, long-standing client relationships that have ended up resulting in sustained demand for our services over decades. It is this focus that has allowed us to successfully navigate the recent changes in the U.S. federal government's priorities and emerge with financial records and financial performance for fiscal year 2025.

More importantly, as I look into fiscal year 2026 and beyond, I see our high-end water services in higher demand and more critical than ever, the fastest-growing markets in the United States and internationally. Today, Steve Burdick, our Chief Financial Officer, will provide additional details of our financial performance, both in the quarter and the year. And I'd also like to welcome today with us Roger Argus, our newly appointed President here at Tetra Tech who I personally have worked with for over 30 years here at Tetra Tech directly. Obviously, Roger goes back in the market and industry even farther than that. He brings a great understanding of our clients and our business worldwide and he's spearheading some of our highest opportunity growth initiatives that we have in the company today. Roger will provide an update of our water-focused growth markets during this presentation this morning.

And now I would like to share with you an update of our financial performance and our business. We had record results for the fourth quarter and for the entirety of fiscal year 2025 with record highs across the board for net revenue, operating income and earnings per share. The fourth quarter results provided us with strong momentum as we exit the fiscal 2025 fiscal year and enter fiscal year 2026. These results are very broad-based, demonstrating the strength across all of our business sectors and our markets globally.

We finished fiscal year 2025 with a strong fourth quarter, resulting in record net revenue, record operating income and significant operating margin expansion. We had record net revenue of $1.07 billion, which is up 10% from the prior year. We significantly expanded our margins to the highest level in more than 30 years, which results in our operating income being up 23%, more than double the rate of revenue growth and reaching $168 million for the first time. And finally, the growth rate for earnings per share was even higher, up 29%, reaching $0.44 for the quarter.

I'd like to present our performance by our segment or our client segments. The Government Services Group had an excellent year and delivered an extraordinary fourth quarter. In the fourth quarter, our GSG segment revenue grew by 17%, rising to $396 million compared to $338 million last year. GSG segment also set a new record for margin performance at 22.9% or up 330 basis points from the prior year. This performance was driven by strong execution of our water infrastructure and our digital automation work for state and local clients, high utilization across our U.S. operations during the completion of our fire disaster response work, and the reduction in our low-margin USAID work.

The Commercial/International Group also delivered a strong fourth quarter and a strong year. Our Commercial/International Group's fourth quarter revenue was up 7% to $676 million, and the CIG or Commercial/International Group's margin, excluding Australia, was up about 60 basis points in the quarter.

Now I'd like to provide an overview of our performance by our end customers. In the fourth quarter, international work was about 45% of our overall business and growing at a 9% rate. International organic growth included increases in the United Kingdom's water business and strong growth in our Canadian clean energy practice. In the United States, our state and local markets continue to be very strong with a 19% growth rate driven by municipal water treatment and digital water modernization, especially in the water-stressed regions of Texas, Florida and California. Without the contribution of the disaster work in the quarter, our state and local work was up 13% year-over-year.

The U.S. commercial work overall was down slightly. Driven by reductions in renewable energy work, but partially offset by growth in other sectors. Our U.S. commercial work includes some sectors that had extraordinary growth rates in the quarter. For example, our high-voltage transmission work in the United States is rapidly growing due to expanding energy demand, which is often associated with data centers. And finally, our U.S. federal work is now 21% of our business compared to 31% a year ago. This quarter, our federal work was up 22% from the prior year, primarily for work with the U.S. Army Corps of Engineers designing flood protection structures and providing disaster response services.

I'd like now to discuss our backlog. We had a strong quarter of contract awards, ending the quarter with $4.14 billion in backlog during a record revenue quarter. As I've stated previously, we use a highly conservative approach to backlog reporting by including only work that is contracted, funded and authorized. The backlog we have today is of higher quality than ever before with higher embedded margins and with a higher portion of fixed price contracts, which gives us even more opportunity for margin expansion.

This quarter, we were awarded over $1.2 billion in new contracts with U.S. defense agencies that cover both U.S. domestic and international operations. We announced another great win with United Kingdom for Portsmouth water with a $23 million contract that you can note on the webcast that we have here. And we won 2 new awards for high-voltage transmission work in the United States and Ireland both areas where data centers are driving investments in power generation and transmission. Our U.S. high-voltage transmission practice is now growing their backlog at 120% rate year-on-year here in the U.S.

At this point, I'd like to turn the presentation over to our Chief Financial Officer, Steve Burdick to take us through the financials for fiscal year 2025. Steve?

Thank you, Dan. I'd like to now provide an update of our fiscal 2025 results, working capital, cash flows and capital allocation. But before I dive into these results, I want to point out and remind us all where we started the year.

We initiated our 2025 revenue and earnings guidance in line with our longer-term 2030 goals. Now despite having our largest single client cancel hundreds of contracts midway through 2025 and other headwinds that could have knocked out to anybody else, Tetra Tech delivered all-time high revenue in earnings. And because of our high-quality clients and talented project managers across the globe, we generated a record setting cash from operations that approached $0.5 billion. Not only am I proud of our team's ability to execute on our 2025 results, I'm even more positive on our team's ability to execute on our long-term strategy in 2026 and beyond where our market-leading services are focused either directly or as a first derivative to our clients' water investment opportunities.

Now as Dan discussed earlier on this call, our market-leading focus on the front-end consulting and design for water and environmental projects are carrying higher margins across all of our end markets. As such, even as the fiscal 2025 revenue was up a solid 7% over last year, our operating income increased at a higher rate of 18% and EBITDA for the year increased 13%.

These results for the year further support our long-term strategic goals to increase net revenues while improving EBITDA margins by 50 basis points annually. I do want to point out that, as you can see here, our 2025 EBITDA margins and net revenue came in at a better 14.3%, which is an increase of over 80 basis points for this year as compared to last year. As a result of our ability to enhance our profit margins and further manage our working capital, we were able to increase EPS by 24% over last year to $1.56.

Now regarding our working capital. Cash flows generated from operations for fiscal 2025 were $458 million, which represents a 28% improvement over fiscal 2024. And consistent with the last 20 years, these operating 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 55.7 days. This lower DSO metric provides 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 our broad portfolio across all of our end markets and geographies.

Our net debt amounted to about $600 million, and our net debt on EBITDA was at a leverage of 0.9x, which is lower than our leverage 1 year ago when it stood at 1.0x. 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. Both higher shareholder financial returns are reflected in an improving return on capital employed which stands at over 20%, which is among the best in the industry.

For those following along in 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 well over $1 billion in available liquidity as we have revised our capital structure in the last year to take advantage of the credit market to support our strategic growth opportunities.

Now Roger will discuss our strategic growth areas later in this presentation, but I do want to point out that we have a significant amount of liquidity available to invest in organic and acquisitive growth opportunities in order to take advantage of these key business opportunities. These opportunities include the technology and automation, which continues to provide us a dominant position in the market and for acquisitions of technical leaders such as SAGE and Carron & Walsh.

Regarding our dividend program, I want to announce that our Board of Directors approved the fourth quarter dividend, which is a 12% increase year-over-year to be paid in the first quarter. This is our 42nd consecutive quarterly dividend with annual double-digit increases in the amounts paid. Based on the lower leverage, we have contributed -- we have continued our stock buyback program this year. In 2025, we bought back a total of $250 million, which includes $50 million in stock buybacks in the fourth quarter. We do have about $598 million available in the stock buyback plan approved by our Board as part of our capital allocation strategy. I'm really pleased to share these financial results for fiscal '25, which has enabled us to increase shareholder returns as we pay -- we're paying increasing dividends, increasing our stock buybacks, engaging in accretive acquisitions, all the while deleveraging our balance sheet.

So I want to thank you for your support. And I'll now hand the call over to Roger to discuss Tetra Tech's future opportunities in 2026 and beyond.

Thank you, Steve. I'd like to highlight today's major growth drivers that will fuel Tetra Tech's growth in FY '26 and beyond. For those of you following along on the webcast, I'd like to first draw your attention to the center of the slide. Greater than 85% of Tetra Tech's business is providing water services to our clients. Our high-end water services cover the full life cycle of water use from sourcing and management to reuse and treatment.

These services also include coastal resilience for flood protection, expansion of ports and harbors, digital automation and control systems to optimize water management and efficient use as well as water for mining, power generation and manufacturing. The drivers shown here represent large global investments in water-reliant infrastructure and share a few common characteristics. These drivers represent a total addressable market for Tetra Tech services measured in hundreds of billions of dollars.

Tetra Tech is already performing work in each of these markets, and is well positioned to benefit from these growing investments. In fact, Tetra Tech currently holds that contracts, master service agreements and frameworks with more than $30 billion in capacity to perform these services for our clients. Global investment in each of these markets supports the demand for Tetra Tech's high-end water services and is driving Tetra Tech's growth.

In the next 2 slides, I'd like to highlight 2 of the fastest-growing areas and illustrate how Tetra Tech is capitalizing on these trends. First, I'd like to talk about the data center market. Their estimates as high as $1 trillion to be invested over the next 10 years to expand data center processing capacity to address the needs of AI. The water demand for these systems is enormous. A large data center, for example, consumes about 5 million gallons of water per day. This sector's growing water footprint is reshaping how and where communities invest in water-related infrastructure. This slide illustrates that the data center market is not just the building housing the chip stacks. In fact, many data center operators are using in-house template designs for these buildings.

More importantly, the data center market includes resource management needs for water and power, which are geographically specific for each facility. Petrotech's high-end water expertise and geographic footprint allow us to address these requirements, which are unique for each data center. As we look at this figure from left to right, first, it's important to note that more than 97% of water used by major data center operators is currently purchased from municipal drinking water systems, many of which are already under stream.

Let me provide you with just 1 example of how water demand for data centers is driving growth for Tetra Tech. Just last week, it was announced that Texas will make the largest investment in its water supply in the state's history. Voters approved a proposition authorizing $20 billion to be spent on water systems, including water supply projects to address the growing requirements of data centers. Tetra Tech currently holds more than 60 state and local contracts in Texas. We are already working with these clients, providing our full suite of water services, and we will directly benefit from this new funding.

In addition, within the data center itself, Tetra Tech provides water handling, digital control system automation and commissioning services directly to the building operations. In fact, we currently hold contracts with more than a dozen of the major data center hyperscale and colocation operators to provide these services. And ultimately, these facilities require our expertise for water reconditioning for reuse or treatment for disposal. This work will be done through contracts with data center operators or with local municipalities to expand their wastewater management capacity.

Defense budgets in each of our major geographic markets is up significantly. The U.S. is up $150 billion, the U.K. is up $4 billion, and Australia is up $4 billion on already large annual budgets. These funding increases will be used to expand defense facilities, including ports and harbors, strengths in coastal resiliency in flood protection and address water contaminants of concern such as PFOS. The expansion of naval facilities is included as a key focus of this funding. This will result in the growth of Tetra Tech's work in ports and harbors, including evaluation, planning and design of marine infrastructure. We currently provide these services to our defense clients in the U.S., U.K. and Australia through contracts with an aggregate available capacity of more than $10 billion of the $30 billion I referred to earlier.

I'd like to provide 1 brief example of how Tetra Tech is benefiting from this increased funding. In fiscal year '25, the Australian Department of Defense awarded Tetra Tech a $67 million contract to support infrastructure upgrades to facilities along the Northern shore of Australia. The scope of this contract includes front-end studies, analytics and project management to support governmental, regulatory and community approvals for these critical upgrades, which will ensure safe, secure and resilient operation of these defense facilities.

Coastal resiliency work, which includes flood protection to strengthen the facilities and safeguard the lives of military and civilian populations will also receive additional funding. Tetra Tech has long been a leader in flood protection. And in fact, in the fourth quarter, we've been awarded about $1 billion in new contract capacity from the U.S. Army Corps of Engineers. Additionally, these increased defense budgets will provide greater funding to Tetra Tech's ongoing defense contracts to eliminate sources and clean up water contamination related to PFAS and other persistent chemicals in the environment. In the fourth quarter, we were awarded a new $240 million contract with the Navy, which is intended to focus on assessment of contamination in water that enable installations, including PFAS.

In summary, we are very excited about the opportunities these growth drivers present and the resulting growth that Tetra Tech can achieve. I will now turn the presentation over to Dan.

Thank you, Roger. Thank you very much. I'd now like to provide an overview of our outlook for fiscal year 2026 by each of our end customers. Each of our customer sectors have growth drivers relevant to our business, as you've heard from Roger and myself, and I'll start with our international growth.

International growth is forecasted to grow at a rate between 5% and 10% in fiscal year 2026, supported by $130 billion in AMP8 program in the United Kingdom. Programs like the $200 billion Canadian infrastructure program has just recently been passed. And in Australia, the spending in preparation for the Olympics that are going to take place in Brisbane.

Our U.S. commercial work is forecasted to grow in fiscal year 2026 at a rate between 5% and 10%, supported by water demand for data centers and advanced manufacturing and power-related services to address the U.S. energy demand that is increasing so quickly. Our U.S. state local work is forecasted to grow at a 10% to 15% rate, which is very consistent to what we've seen over the past several years. That's being driven by strong and sustained budgets for municipal water supplies and digital water modernization. And finally, our U.S. federal work is forecasted to grow at a 5% to 10% rate and is expected to ramp up over this range throughout the year as the procurement processes align with the new priorities of the new administration and budget increases are implemented that are associated with the One Big Beautiful Bill Act that's passed just recently.

Now I'd like to present our guidance for the first quarter and for the entirety of fiscal year 2026. Our guidance is as follows: for net revenue, for Q1, it's for a range of $950 million to $1 billion with an associated earnings per share of $0.30 to $0.33. For the entirety of fiscal year 2026, our net revenue range is $4.05 billion to $4.25 billion with an associated earnings per share of $1.40 to $1.55.

Now if you're following along on the webcast, you can see these assumptions, and I'll highlight them very briefly. It is assumed within this guidance, a charge for intangible amortization of $27 million, we anticipate depreciation of approximately $25 million, interest expense of $30 million, an effective tax rate quite similar to this last year of 27.5%. And does assume that we have 264 million shares of Tetra Tech stock outstanding. And as in the past, these guidance numbers, both for revenue and earnings per share do not include any anticipated contributions for acquisitions, but they will be -- we do expect them to contribute to the year and we'll update our guidance accordingly as they join the company.

In summary, we had a record fourth quarter and record fiscal year 2025, which most importantly, has positioned us for an excellent beginning to the 2026 fiscal year. Our focus on high-end consulting for water and environmental priorities is absolutely aligned with the long-term trends of supplying clean water to our communities, water supply for manufacturing and a healthy environment for our children, all of which are enduring drivers and are not measured in years but are measured in decades.

The company has never been in a better financial position as Steve Burdick, our CFO, just outlined, and we're in an excellent position to support our organic growth and to invest in having the best partners out in the industry actually come join us here at Tetra Tech actually improving our growth rates, improving our margins and making Tetra Tech even more competitive in the future.

And with that, Melissa, I'd like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair.

This is Luke McFadden on for Tim. So it looks like your backlog was about flat year-over-year. Your guidance calls for organic growth of 8% at the midpoint for fiscal 2026. Both of these figures exclude USA, so it fuels apples-to-apples. So can you maybe just help us understand in a little more detail why you'd expect revenue growth to be so decoupled from backlog growth this year?

That's a great question. That's actually a really good question. In fact, we began the foresight and expectation of that decoupling actually in our last investor call 90 days ago. I think in the call we had on the previous quarterly results, we actually indicated that expected backlog to be flat, in fact, even down. And with it coming out flat, in a certain extent, it actually was at the upper end or surpassed our expectations. And if you take a look at the backlog, there's a couple of things going on.

Number one, the U.S. federal government's backlog or the funding of their tasks have become much shorter. So instead of being funded for a quarter or for 6 months or for a full year, we're being funded for almost like a book and burn 1 quarter at a time. So we're seeing the visibility actually shrink with the U.S. federal government, but not the actual spending of revenue. We're just getting the work in smaller pieces and more frequent quarterly task orders.

I will say that if we actually tracked and reported our backlog similar to most others in this industry, our backlog would be up very, very significantly. It's been an amazing federal government quarter of new orders -- of new contracts that have been awarded. And so our contract capacity has gone up a lot. In fact, we've seen it grow by about 15%. And I think the comments I had earlier that we had well over $1 billion in new contract awards with the Corps of Engineers, although the task orders coming out are much smaller, shorter duration and a quicker burn.

Now you think that if that was the case and the rest of our business was static, you'd actually see the backlog go down. But we've seen our state and local work and our U.S. commercial and international backlogs actually growing fast. In fact, they've grown enough to keep our backlog flat sequentially, which is what you've seen in the results, as you've just indicated. So that's why we're actually seeing growth in, as I've just indicated, 5% to 10% in U.S. commercial, in international, 10% to 15% in state and local, all with growing backlog. And in fact, that growing backlog has been enough to offset the reduction in the duration of the task orders we've been getting from the federal government.

So that's where you see the decoupling. And it sounds like a lot of detail but it's something we've seen coming since this new administration has been in. We've been watching the backlog drop irrespective of international development with the federal government, but it doesn't mean less revenue. It just means that we're getting more smaller task orders on larger contracts that we've actually had. So I know that's a bit of detail. But I think that decoupling is going to be for a good portion of this fiscal year 2026. But I think as the U.S. federal government gets its sea legs under it with respect to our contracting officers in place, gets the cadence of task orders that actually come out a little bit longer duration, you're going to watch the federal government's task orders get larger through the year, and you'll actually watch that begin to climb, not driven so much by commercial, state and local and international because they're already very strong but actually returning a contract cadence with the U.S. federal government.

I know there's probably a lot of detail, but there's a lot of pieces we're looking into that, that actually underpin how we're seeing very strong organic growth, but it's not being seen as directly correlated to the backlog, which we've seen the case for many, many decades here, but this new administration has really changed that because of the U.S. federal government's task order issuance.

That's really helpful color. Appreciate it. And maybe pivoting to performance in your international business for my follow-up, which came in stronger than we were expecting for the fourth quarter and had a nice pickup from the third quarter as well. Can you walk us through some of the puts and takes on each of your 3 business lines in a little more detail here, where you saw strength and how you're thinking about the 3 main geographies as you move through fiscal 2026?

Yes, it's interesting. It's really that, that growth was really driven by a change in one geography, but I'll start with the strongest areas for us. The water programs, those have been the biggest underlying drivers for our United Kingdom and Europe, which is primarily Ireland and Netherlands operations. That's been growing at about a 10% rate has been the strongest. And in fact, the water component of our U.K. and Europe operations have been even at a higher rate than that. So that's continued. I would say there's been a little change in the previous quarters. So that's really been our top growth rate and top performer of our international geographies.

Canada has been good, and I actually think it's going to get better for those that I've spoken with at different conferences and seminars. I think on a relative basis, Canada may be the biggest -- one of the biggest drivers. And I think that the short-term disruption of tariffs between the United States and Canada, have caused some disruption. I am totally convinced that Canada is going to remain a major trading partner with global economies. And if it can't come down south, it's going to go east and west and in fact, north to the Arctic trading routes that are now open. And you saw that Canada just passed its largest infrastructure and spending bills at USD 200 billion, Canadian of course, much larger numbers. And Canada is growing as it has been at about 5%, 6%. That's been very strong for us.

But the item that's been -- that was a change this last quarter has really been Australia. And Australia had gone from shrinking or reducing its revenue contribution by 10% to 15%. I think we've seen it kind of bottom out. And so on a year-on-year comparison, it's getting closer to flat. We did have a couple of percent contributed by the SAGE acquisition that came in, in the fourth quarter. So it really didn't add much at all for fiscal year 2025 a little bit for the fourth quarter, but Australia actually hitting the bottom with respect to reductions as that is the big change. So if you go from a minus 10 or 15 in Australia and you move that to a 0, that largely accounted for that 9% increase.

And I actually think that during the year, fiscal year 2026, is going to start ramping up, now one, in Australia specifically because that one, when you're at the bottom, there's not really too many directions to go from there, I hope. And two, as we're seeing more funding and actually infrastructure projects moving forward at the very front end for the Olympics that are going to take place in Brisbane. And so who's the firm that would be engaged in it very early on? That's upfront planning, permitting, geotech, all the initial design, technology selection for all the different venues, transportation and others. So I think that's going to be a good number for us. And it was Australia was the change in the quarter that drove that number.

Our next question comes from the line of Sabahat Khan with RBC Capital Markets.

Great. Just kind of following on the same line of questions along the outlook. I guess, just given some of the moving pieces in the backdrop, how did you sort of build out that range for the fiscal '26 guidance, more thinking on the top line versus the EPS line. If you can just maybe walk through as it kind of relates to disaster relief, some of the other moving pieces, how should we think about the low end versus the high end? Or what needs to happen for you to come somewhere in the middle of that range? If you can just share some of the puts and takes that you consider as you build out that range for the top line?

Yes. So top line or revenue growth. I'll start with what's sort of the midpoint. So I would say that the numbers I just ran through, 5% to 10%. So if you want to pick a midpoint of that 7.5% I'd say that's sort of the number we're looking at for international, U.S. commercial and for U.S. government. And the 10% to 15% for municipal, you pick a sort of 12.5%. If you took out disasters for this last quarter, they were at 13%, so right there. So we -- so the midpoint is actually the midpoint of those growth. And if you take those numbers from this last year, imply those growth rates, you'll find that we actually get to that midpoint or just over $4.1 billion for fiscal year 2026.

Now what could cause us to deviate up and down from that? It's not going to be perfectly linear. I will say that the U.S. -- let me use an example of the U.S. commercial. You saw this last quarter, we were at minus 2%. I expect that it's going to remain very low. It's going to be below that 5% to 10% rate in the first quarter or to a fiscal year 2026. Because a year ago, we had a lot of renewable energy work. And some of the biggest projects were offshore wind. Now these areas have been significantly impacted by policy and executive orders and other items. And so the big headwind or the difficult year-on-year comparisons are Q1 and Q2. Now we've got a very fast-growing transmission, practice high voltage transmission other programs that we have here in the U.S. that I thought Roger did a great job of outlining with respect to water supply for different manufacturing, which includes data centers, chip fabs and other reshoring.

So I think we'll be at the high end of that 5% to 10% in the latter quarter, so quarter 3 and 4. So look for that to ramp. I think the same is going to be true with the U.S. You've had, call it, some dysfunction. Obviously, a 6-week shutdown here with the U.S. government in Q1, which has already been included in our guidance for Q1. And some of the questions I've had are what's the impact of the shutdown and life got a little bit easier on that forecasting with the government opening up just last night. And so we had a small impact that's actually embedded in our guidance, both for the quarter and the year. For us, it was probably $15 million to $20 million, and most of it came in the latter part of that 6-week shutdown. We were really unaffected early on. So I think you'll watch a federal government ramp also during the year.

So we've got our 5% to 10%, and I would say we're not going to start with a 0 like commercial up to 10%, but we'll start at 5% ,6%, and we'll end up at 10%. International, you've already seen, we're at the upper end and same is true with the midpoint on state and local. What would drive us to the high end of this, I would say actually a little bit more clarity on international. I think international could move to the high end, and I'd like to see the baseline be 8%, 9%, 10% and actually, the performance come out above that. And I think it will just be clarity with respect to tariffs and trading so that individuals can select what they're going to move forward with respect to their manufacturing. And I would say in case of Canada, how quickly they can actually deploy what's just been authorized with their infrastructure work.

I would say what would also could take us to the high end. We've not included really any material dollars for the U.S. State Department. And we are still present, although I would say close to dormant in places like Ukraine specifically. But if that actually became more constructive or more funding came through it, that certainly could push it to the upper end. With respect to what could bring us to the low end? Well, they passed a continuing resolution to the end of January. And if we're right back here at the end of January and that they want to eclipse the new record they just set for the past 6 weeks is something we'd have to take a look at. And that's not really been much of a financial impact to us. This first 6 weeks of shutdown, but you have to take a look at each one of these as they come and what's impacted.

So I think unusual things like recessions and unusual things like a prolonged shutdown could drive us to the low end. Things that could drive us to the high end is a little bit more clarity on tariffs, which will help both on acceleration of U.S. commercial for reshoring here in the U.S. And honestly, a lot of activity internationally with respect to what they're going to move forward with, with respect to their own manufacturing. And is it going to come to the U.S. irrespective of the price increases on the tariffs, or are they going to have other trading partners. So a little more clarity on that. I'm not saying that high or low tariffs make a big difference, just clarity of what the number is that actually make a very positive construct for moving us to the high end.

Great. And then sort of just continuing on that discussion kind of post this continuing resolution. Is it I guess based on your past experience with such government closures is a 2-part question. One, is it usually a smooth sort of turning on of all the functions that were stopped? And then secondly, we've been hearing some commentary about with the EPA just taking a while or just kind of shutting down on issuing permits, et cetera? Has that been a headwind? And where do we stand on that now on the EPA front?

Yes, good question. I would say that when we're in what I would call discretionary revenues from the federal government, it ramps back up slowly. But most of our revenues now have actually transitioned because of what took place in fiscal year '25 to essential services. So we really didn't have that much of it put on hold for the federal government because a lot of our revenues being driven by Department of Defense. So you say, is it going to ramp back up? My comment would be it didn't ramp back down. So we didn't really see that as an impact. So I think the federal government is not going to see much of a disruption from having gone down and back up.

Now with respect to permits coming out of EPA. We don't do a lot of work that is driven by petrol regulation that requires EPA or national U.S. federal either headquarters or region approval before it goes forward. There's a little bit of it where they're co-regulated to compliance, both at the federal and state level, and you need sort of 2 sign-offs, so that's actually affected some of the dollars. But for us, it's been pretty small. But I would say the one that's been -- it's going to be seen a little bit more interestingly enough is actually in our state and local. And you would think that a government shutdown would not impact state and local. What do they got to do with the federal government?

There's a lot of projects that have co-funding with the federal government. And I would say Department of Transportation, where you have large grants or other funding incremental funding as part of projects to go forward. When those grants and other things are completely put on hold or you had to go back for sign-off or next milestones, you saw those projects put on pause that are on hold until the government workers were actually back in place. So I think the impact for us is going to be the federal government workers weren't there during the first half of our Q1 or the federal government's Q1 with respect to pushing out orders.

And last I looked at the calendar, we're only a couple of weeks away from Thanksgiving here and then we're going into Christmas. So it's not like you did a 6-week shutdown and then you're moving into blue skies. You're moving into holiday time. So I think the optics of backlog or task order issuance could be impacted in Q1. And again, I think that's mostly optics because we've got plenty of backlog to drive revenue right through this. But if you'd ask what are you going to see from the impact of this slow comeback. I think you're going to see the optics on your backlog, and you may see some optics or short-term impact on funding through state and local for us. Permitting approvals for commercial clients and others, de minimis, de minimis. There just aren't that many programs, except for super fund that are driven by the federal government EPA approval process. So I think it sounds like it's a big driver, not so much.

And just one last quick one on sort of capital allocation and M&A you've highlighted M&A as a focus, firms call it, in the medium-sized range. But can you talk about the general pipeline of those opportunities that meet your criteria? And then does things like the government shutdown influenced that either up or down in terms of the opportunity set or seller willingness?

Well, I'm going to -- I'll just say a few words on the -- from a 100,000 foot sort of on the landscape, and then Steve can talk about the financial dollar satisfied. But well, this -- the disruption and the volatility that's taken place in the markets because of the new administration have sent some shock waves through some firms have impacted them more than others. And I think for some, they've actually felt that through this volatility, a place that's safer is on a bigger ship. So if I'm in a small robot or middle-sized boat and the waters get really choppy. Maybe I want to get on a bigger vessel. So we've actually seen these small firms or even middle-sized firms actually come to market and be more transactable.

So if they were not selling -- for sale before and all of a sudden, you don't know what's going to happen either on your federal government, state or commercial. Maybe I'm going to go join a bigger partner who has a bigger platform, has access to clients that are maybe outside the U.S. or that are more stable. And no doubt, Tetra Tech, if you're looking to join a technical leader and a market leader and you're in the fields that we're interested in, we're about as safe and as prosperous of a firm to join to progress where you're at and actually make your business even better and reduce your risk. So I'd say there's more opportunity today because of this.

And the other thing is that there's more available and for those that are looking for the sale, not to be their last move but their next move to become better, Tetra Tech is the right home for them. So I think pricing has become more moderated, our valuations have come down a bit. I would say that the investment bankers are still asking for an unbelievable dizzying valuations if you're in power or if you're in data centers. But other than those 2, I think valuations have gotten quite more modest. And the number of firms that are small to midsize have actually grown quite a bit. So I think our pipelines actually look bigger than we've seen before. No doubt, with consolidation in the market, there are fewer large firms, the ones that, of course, the scarcity premium for these really large firms. But when those fit right for us, we'll look at those, we'll be opportunistic. If it fits right, we'll look at it. And maybe Steve can just say a word about -- is there anything outside our range or with respect to the ability that we could become constructive on?

Yes. So I think as I talked about in my earlier comment, we've got a really strong balance sheet and we're going to be able to use our balance sheet to make acquisitions that we think are going to have a long-term benefit. When I look at the capital markets and how we want to finance that, we have a bank credit facility that has 100% dry powder on our revolver and it has options to increase it beyond what's in the facility now. So that's available. And outside of the bank market, you see that we -- 2 years ago, we entered into a convertible debt. That capital is available at probably better terms today than 2 years ago. And so there are various capital markets and funding vehicles for us to really address anything that makes sense for Tetra Tech either small, medium or even larger firms in terms of who can join Tetra Tech.

Our next question comes from the line of Sangita Jain with KeyBanc Capital Markets.

So one, I want to ask about GSG margins. Outside of the elimination of USAID, can you tell us if there are other factors contributing to that margin expansion? Maybe it's an evolution of the mix of projects or more fixed price work that is driving that? And how we should think about it for '26?

Yes. It's -- well, no doubt, as you commented, we're finishing up a number of deliverables and items for the disaster response, which drove really high utilization in GSG. So that was, I would say, the single figures driver that drove it up near 23% in the quarter. But the other 2 are just what you said is, one, we have more fixed price work. One of our goals for a while has been to take our fixed price amount of the work that we have. It has historically been, if you follow Tetra Tech or investor reports that we have online and attached to our press release. Historically, we've been around 35%, a little more than 1/3 fixed price. It's been a really focus over the past 2, 3 years to move that to more fixed price as we've actually develop more tools that will make us more efficient.

So we can get our clients a better price point with respect to performing the work and gives us higher margins. So we did hit essentially 50% of the revenue that we had this last quarter was fixed price. That's the highest we've seen in I don't know I want to say ever, but certainly in many decades. So that actually was a big contributor to it. And the other is mix. It is that we have time and materials contracts on where there's a very competitive rate structures. We do a bit of upfront design work. Actually, about 30% of it is very high-end upfront design but when we move into what I'll call a more detailed design, we end up being compared on a price point to some of these low-cost offshore design centers. And those carry lower margin, and we've been migrating out of doing that and moving our design work to earlier in the project execution cycle. And those that are already early, we're moving them into consulting or even advisory.

So it is mix shift. We are moving to where it's higher margins for the work, more differentiated work. Work is not generally competed. It's sole sourced. It's we're under existing contracts and frameworks. And then the work that is closer to being commoditized, we're moving it more to the front end. So mix, number one. Number two, more fixed price. And then the third, of course, is when we do have very high utilization driving lower indirect cost, it then shows up in our margins, which was like the firework by this last quarter. So those are sort of the 3 big drivers.

I will say we still have a lot more upside with respect to margins. One of it, I had aimed 50% for a target for fixed price work, even though we'd hit that this last quarter, I want to see us stay there for a few quarters in a row because some of that's individual project driven. But I think we're going to move our target from 50% up to 60% since that will be our next milestone we'll move. So we have more margin expansion there. And I think there's still a lot more margin contribution opportunity by using more of these digital tools. And yes, that includes AI and yes, it includes different SaaS products we have. But I think the next phase that will contribute is being much more efficient. And if we can apply more efficient execution to a fixed price contract, I think that means more margin expansion for the company and its shareholders.

That's super helpful, Dan. And if I can follow up on the U.S. commercial business and the puts and takes that you talked about renewables kind of like becoming a little bit softer in data centers and power transmission picking up. Can you compare for us if the scope of what you're losing on the renewable side is similar to what you're picking up on the power and data center side and if also the margin profiles are similar?

Yes. I will say of any of the areas that we have flex or change taking place. That's one of them that we're still -- we're sort of in the middle of this transition. So the -- we were doing much more full-scale permitting for siting, construction oversight, for permit compliance, for these renewable energy projects. And I'd say one of the examples, of course, is offshore wind, where we have marine vessels and many other items. I thought Roger did a really good job of identifying that the work that we're looking to grow our data center work, in particular, and I would say the high-voltage engineering is much less on environmental compliance, which was being driven by -- which was what we were doing for renewable energy and much more for design for the commercialization in getting these different facilities online. So I think that's the difference.

So on high-voltage transmission, we're actually doing the high-voltage engineering. We're doing the actual design of the transformer stations and the interconnect. So we're actually doing what I would call very high end. It's limited in service availability in the marketplace. There just aren't that many people that can do this. We're one of them. And so that's what I would say is different margins. I think, are actually a little better because of the scarcity of people doing this type of work for the grid and for high-voltage transmission. And I would say that it's just emerging now with our engagement in the data centers, which is not in the building itself. I thought Roger made a good point. The gold rush to do detailed design for the data center buildings itself. There's a lot of people rushing to that gold strike. But a lot of that work is being done internal. And a lot of it has been standardized so that all of the data centers are similar.

And maybe that there's more miners than there are gold in that area. But actually, those selling the products in order to go mine for that gold is how do you get 5 million gallons per day for a large data center where do you get that from? And as Roger commented right now, it's from the municipal -- municipalities. As water becomes more scarce, they're going to be looking for us to find other water -- dedicated water supplies. Groundwater, surface water, water reuse, water recycling. So I think it's going to carry higher margins. So what we're migrating into is higher margins and, frankly, less competition.

Our next question comes from the line of Maxim Sytchev with National Bank Capital Markets.

I was wondering if it's possible to get a bit of an update on your digital initiatives. And maybe if you can talk about the clients where the adoption rates or the velocity is a little bit higher? And why that potentially could be the case? Maybe any color there would be much appreciated.

Well, the -- I can just clarify and define the question because if it's -- our digital products is in our recurring revenue or SaaS. If -- just to clarify.

Yes.

It's interesting. That's been the one area that I would say we have been stymied or that has -- it's the smallest area of revenue that was one of our growth areas. I will say that if you went back to May of 2024, our SaaS or recurring revenue or our software products for subscription by our end clients. We've reported was about $25 million a year at, I think, on an overall EBIT margin of about 50%. I regret to say that 1.5 years later, there's still about $25 million and where the margins are about the same. I will say what's been disruptive for us is our #1 strategy was to take the software products, which were developed for our U.S. government clients, primarily the government was the subscription, and I would say U.S. federal government. I would say the new administration has actually created more of a disruption there than anywhere else for us.

The good news is it's $25 million out of our total revenues at well over $4 billion. So it's the smallest of small revenue numbers. But I will say our strategy to actually take it and to bring in unique products that would help the government in these areas dramatically has actually been put essentially on hold. There's been an essentially a moratorium on new software packages for being purchased or leased or subscribed to at the federal government. We are retooling very quickly our go-to-market strategy to go to what we had called Phase 2, which has now become -- so Plan B has now become Plan A, which is for things like OceansMap instead of having it placed with the U.S. Coast Guard and the Navy and other specialty agencies within the federal government. We're going to ports and harbors and individuals who actually have requirements to understand what's the impact of an oil spill or of builds discharge or anything else of man overboard actually in the local port and harbor environment.

So there's a lot more of them. It is a different approach for us. And I'd say that's also true where we've been placing software packages with Department of Defense for our FusionMap. And I could go through FAA with respect to our Volans environmental air traffic approach lanes. So we are moving to what I would call secondary, which were originally our Phase 2 but we've been taking things like Volans for the FAA, and we're now actually having it deployed across Europe. And we're using it in places like Heathrow right now and other major cities across Europe. So I will say that just because it looks like this road has -- the federal government has slowed or not gone through right now. We've -- we are taking, I'd say, 2 steps back, 1 over and 3 or 4 steps forward. So I expect that to be much more productive and have some better growth rates here over the next year or 2. But I would say the good news is it's only a small part of our revenue. In fact, the smallest of small. But the bad news is it has pushed us back, I would say, at least a year from what we expected to be at this point.

Sure. That's very helpful. And maybe one quick one if I can squeeze on for Steven. In terms of obviously, the balance sheet is extremely healthy and delevered. In terms of the desire to do anything more or of size relative to your history, do you mind maybe providing some guardrails in terms of how we should be thinking about that?

Well, I think if you look over the Tetra Tech's history, we've -- our acquisitions have been kind of that medium size add 2%, 3%, 7% of revenue per year when you add them all up. But what you have noticed also over the last couple of years is we have acquired other public companies that were larger than normal. That took a bit more creative financing, regulatory approvals. And we brought them into Tetra Tech and turned them around and they're performing at much better rates than they ever were as their own public companies. And those were on the much larger size comparatively speaking. So I would say that our strategy and appetite is anywhere from the small to medium-sized companies to the larger public or private equity health companies that -- and I believe that both with our current balance sheet, our current bank credit facilities and the capital markets that are available to us. We have a lot of different choices with at significantly bigger sizes than even RPS, which was our largest acquisition in the history of the company just 3 years ago.

Our next question comes from the line of Michael Dudas with Vertical Research Partners.

I guess, 1.5 years ago, we had your Investor Day in New York, how much has happened since then and how much has happened since then. Just wanted -- maybe you can share a little reset. As you look out your 2030 targets, I'm more confident, less confident are you given all the disruption that you've witnessed and successfully overcoming during fiscal year 2025. And as we think about that, does because of where your balance sheet is and the opportunities, does acquisitions become a little bit more important to achieving those longer-term goals and maybe it would have been 18 months ago?

That's a great question. So I've been asked that question in many different ways really since probably February of this year with the new administration coming in and with USA actually being eliminated as a federal agency and I bet even asked as directly as you regret having come out with those targets for 2030. And a nice reversion of that is, do you want to do a reset and actually put your number at different set of numbers up there.

My comment is well, I don't know if I should put a bigger numbers quite yet. But I will tell you that there's no doubt that it's been an interesting year. And what's the old adage, the Chinese proverb, progress, "may you live in interesting times." This has been the most interesting of times. But what interesting times do get us, and I'll tell you one thing I'm so proud of the management team here at Tetra Tech and all of the employees that we've lived through in change, change represents opportunity. And for each door that's gotten closed and one has been completely closed with AID, we didn't close the door, someone closed it on us. I'll tell you, those same staff have actually been able to find new opportunities or new windows that have opened, and the windows are actually larger than the doors that were closed.

For instance, the margins that we -- the doors that was closed in AID, has actually been opened. The windows that have been opened have new opportunities that have much higher embedded margin, in fact, double, even triple the number that we had. So there was 2 numbers on the 2030 plan. One was the total growth and no doubt that's been impacted, and I'll come back to that, which is top line. But the second was margin basis points. And Steve Burdick very eloquently presented how we were going to expand 50 basis points per year over the 5 years from that time of the presentation to 2030, I don't know, someone else closing out U.S. AID for us actually took us almost a 50 basis points jump on a baseline up.

And then on top of that, we've said we now look like we're going to grow more like 60, 70, 80 basis points. So as far as the margin goes, I think it wasn't actually a headwind. It actually became a tailwind and somebody gave us a boost up on that. With respect to top line, no doubt, someone says if you just had $550 million subtract from you and the rule of compounding is going to make that even more difficult on you, my comment would be that the rule of compounding all is going to hurt me if I don't actually close that gap in the next couple of years. And we only had a 4% to 5% contribution from M&A for our mergers and acquisitions, and I'll focus on acquisitions, people joining us.

Steve just went over, we have more this vernacular dry powder, which is access to capital. I'll comment that while you'd say, if you go to market right now and you have excellent credit rating, you'll get 4%, 5%, 6% interest rates thanks to Steve's foresight, Tetra Tech had a 2% interest rate because of the convert that we put in place 1.5 years ago. So we have the lowest cost of capital. We have -- we could actually do acquisitions at half again or double the 4% to 5% presented in the 2030 plan that we presented in May of 2024. So we could do double that number and not actually go outside the range of 1 to 2 leverage that we identified.

So with respect to closing the gap that's just created, I don't see that as an issue. Yes, it means that we'll turn up our M&A a bit. But as my comments on an earlier question on this, this call is -- are there actually firms available that in as a price point? I think I answered that, I hope, in enough detail to say, absolutely, and even at a better multiple -- and by the way, someone who's going to join Tetra Tech isn't getting a lower multiple. They're getting a better home. And so I think that, yes, M&A will become a bigger part, and I think we can get to that number without having put any additional pressure on our organic growth targets, which is 6% to 10%. I think you've seen even in this period of great turmoil or may live in interesting times, we're coming right out of the gate, we're right at the middle of that range organically at 8%. So yes, M&A will have to be a bit larger. But I don't see financially or opportunity availability being an issue for that.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Batrack for closing comments.

Great. Thank you very much, Melissa, and thank all of you for joining us on the call today. Thank you for being supporters of the company through all the fiscal year 2025. I'd like to reiterate that I could not be prouder of the performance of the Tetra Tech employees all around the world and really how we navigated 2025. And I can't see a better demonstration of how that performance actually was other than the all-time records, nearly every field.

As I just indicated in this last question came, how is it looking with all the changes? I do think that there's more opportunities there for Tetra Tech, particularly in the market leadership positions we're in to make 2026 just a fantastic year. And I really look forward to reporting back to all of you in roughly 90 days from now or at the end of Q1 to report how we started out in fiscal year 2026.

And with that, I hope you all have a safe and a successful day today. I will likely not talk to you collectively before the holidays. So I hope you have a great holiday wherever you happen to be located. Thank you very much, and have a great week.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.