Group 1 - Tetra Tech (NASDAQ: TTEK) has experienced a significant decline in stock price due to concerns regarding USAID spending, which constitutes approximately 10% of the company's revenues [1] - The margins associated with USAID contracts are relatively low because of their cost-plus nature, indicating that the impact on overall profitability may be limited [1] Group 2 - The analyst has a background of over 15 years in investment, focusing on medium-term investing strategies that aim to unlock value or capitalize on downside catalysts [1] - The analyst has primarily analyzed sectors such as industrial, consumer, and technology, suggesting a higher conviction in investments within these areas [1]

Core Insights - Tetra Tech Inc. (TTEK) has demonstrated a robust financial position with a strong balance sheet and resilient revenue base, achieving double-digit revenue growth over the past decade [1] - The company's growth has been primarily driven by strategic acquisitions, which have also facilitated margin expansion while maintaining cost control [1] Financial Performance - Tetra Tech has consistently delivered double-digit revenue growth over the last ten years [1] - The company has successfully expanded its profit margins alongside revenue growth [1]

Core Viewpoint - Tetra Tech Inc. (TTEK) faces financial challenges due to rising operating costs, high debt levels, and foreign currency risks, which may impact its profitability and overall performance [1][4][5][7]. Group 1: Financial Performance - Tetra Tech's total cost of sales increased by 15.5% in the first quarter of fiscal 2025, attributed to rising input costs [4]. - Selling, general, and administrative expenses rose by 5.7% year over year in the same quarter due to increased marketing costs [4]. - The company's long-term debt increased by 29.7% (CAGR) over the last five years, reaching $889 million at the end of the first quarter of fiscal 2025 [5]. Group 2: Market Position - Tetra Tech is headquartered in Pasadena, CA, and is a leading provider of consulting, construction management, engineering, program management, and technical services, focusing on water, environmental, and alternative energy solutions [2]. - The company currently holds a Zacks Rank of 4 (Sell), with its stock losing 15% over the past year, compared to a 2.7% decline in the industry [3]. Group 3: Risks and Challenges - A significant portion of Tetra Tech's revenue comes from U.S. federal, state, and local contracts, which are subject to changes that could negatively impact the business [6]. - The company is exposed to foreign currency risks due to its international operations, with a stronger U.S. dollar likely to depress overseas business results [7].

Core Viewpoint - Tetra Tech's recent earnings report shows strong performance with adjusted earnings and revenues exceeding estimates, but the stock has underperformed the S&P 500, raising questions about future performance leading up to the next earnings release [1][2]. Financial Performance - Tetra Tech reported adjusted earnings of 35 cents per share for Q1 fiscal 2025, surpassing the Zacks Consensus Estimate of 34 cents and management's guidance of 32-34 cents, marking a 25% year-over-year increase [2]. - The company generated revenues of $1.42 billion, reflecting a 16% year-over-year increase, with adjusted net revenues of $1.2 billion, up 18% year-over-year, exceeding management's guidance of $1.09-$1.15 billion [3]. - The backlog at the end of Q1 was $5.44 billion, up 15% year-over-year [3]. Segment Performance - Revenues from U.S. Federal customers, accounting for 34% of total revenues, increased by 32% year-over-year, driven by a strong project pipeline from USAID [4]. - U.S. State and Local sales rose by 47% year-over-year, supported by advanced water treatment and disaster response services [5]. - International sales increased by 4% year-over-year, bolstered by the U.K. water consulting sector [5]. Cost and Margin Analysis - Subcontractor costs totaled $223.3 million, up 4.8% year-over-year, while other adjusted costs of revenues were $975.9 million, up 18.3% [6]. - Adjusted operating income increased by 23.9% year-over-year to $137.5 million, with an adjusted margin of 11.5%, up 60 basis points [7]. Balance Sheet and Cash Flow - At the end of Q1, Tetra Tech had cash and cash equivalents of $248.1 million, an increase from $232.7 million at the end of Q4 fiscal 2024, while long-term debt rose to $888.4 million from $812.6 million [8]. - The company generated net cash of $13.1 million from operating activities, compared to $9.2 million in the prior year [9]. Shareholder Returns - Tetra Tech distributed dividends totaling $15.5 million in Q1 fiscal 2025, up from $13.9 million in the previous year, and repurchased shares worth $25 million [10]. Fiscal 2025 Outlook - For fiscal 2025, Tetra Tech anticipates net revenues in the range of $4.365-$4.765 billion, compared to $4.322 billion reported in fiscal 2024, with adjusted earnings projected at $1.37-$1.52 per share [11]. - For Q2 fiscal 2025, management estimates net revenues of $1.0-$1.1 billion and adjusted earnings of 30-33 cents per share [12]. Estimate Revisions - Estimates for Tetra Tech have trended downward, with a consensus estimate shift of -9.09% over the past month [13]. VGM Scores - Tetra Tech has a Growth Score of B but a Momentum Score of D, with an overall VGM Score of C, indicating a middle-tier position in investment strategy [14].

Revenue Growth - In Q1 fiscal 2025, revenue increased by 15.7% year-over-year, totaling $1.42 billion, driven by growth across all client sectors, particularly U.S. federal and state/local governments [123]. - U.S. federal government revenue grew by 31.3% to $501.8 million, primarily due to increased international development and IT system modernization activities [125]. - U.S. state and local government revenue rose by 34.5% to $203.0 million, largely due to disaster response activities related to Hurricanes Helene and Milton [126]. - U.S. commercial revenue increased by 5.0% to $233.6 million, attributed to heightened demand for environmental services and high-performance buildings [127]. - International revenue grew by 2.0% to $482.1 million, reflecting ongoing projects and contracts outside the U.S. [124]. - The Government Services Group (GSG) accounted for 52.9% of total revenue, up from 46.8% in the prior year, indicating a shift towards government-related services [114]. - The Government Services Group (GSG) segment revenue grew by 30.7% to $751,782, primarily due to increased U.S. federal government activities related to international development [137]. - The Commercial/International Group revenue rose by 2.9% to $688,235, reflecting increased water consulting services in the UK [139]. - The revenue growth excluding acquisitions was 13.1%, demonstrating strong organic growth in the company's core operations [123]. - Total revenue for the first quarter of fiscal 2025 was $1,420,561, an increase of 15.7% compared to $1,228,267 in the same quarter of fiscal 2024 [130]. Acquisitions and Integration - The company acquired LS Technologies and Convergence Controls & Engineering, enhancing its capabilities in advanced data analytics and cybersecurity [120]. - Revenue from recent acquisitions contributed $31 million to overall revenue growth, indicating successful integration of new businesses [123]. Income and Expenses - Net income attributable to Tetra Tech decreased to $747, down 99.0% from $74,972 in the prior year, largely due to a $115 million legal contingency charge [130]. - Adjusted income from operations increased by 23.8% to $137,526, excluding the non-recurring legal contingency charge [133]. - The effective tax rate for the first quarter of fiscal 2025 was 94.9%, significantly higher than 26.1% in the prior year, influenced by the legal contingency charge [135]. Cash Flow and Financial Position - Cash and cash equivalents at December 29, 2024, totaled $248.1 million, with an additional $724.3 million available under the credit facility [143]. - The backlog as of December 29, 2024, was $5,435 million, slightly up from $5,376 million on September 29, 2024 [142]. - The company generated $13.1 million in cash from operations during the first quarter of fiscal 2025 [143]. - As of December 29, 2024, cash and cash equivalents increased to $248.1 million, up by $15.4 million or 6.6% from $232.7 million on September 29, 2024 [144]. - Net cash provided by operating activities for the first quarter of fiscal 2025 was $13.1 million, an increase of $3.8 million or 41.3% compared to $9.2 million in the prior-year quarter [144]. - The company reported a net cash increase of $15.4 million for the quarter, down 48.4% from $29.9 million in the same period last year [144]. - Capital expenditures for investing activities remained consistent at $3.4 million for both the first quarters of fiscal years 2025 and 2024 [145]. - Net cash provided by financing activities was approximately $19 million, similar to the prior-year quarter, with net borrowings increasing by $10 million to fund $25 million in share repurchases [146]. Debt and Borrowing - The company has a total borrowing capacity of $1.55 billion, with $325 million in outstanding borrowings under the Amended Credit Agreement as of December 29, 2024 [151]. - The weighted-average interest rate on outstanding borrowings under the Amended Credit Agreement was 5.98% for the first quarter of fiscal 2025 [151]. - As of December 29, 2024, the company had $325 million in outstanding borrowings under the Amended Credit Agreement, consisting of $250 million under the New Term Loan Facility and $75 million under the Amended Revolving Credit Facility [166]. - The applicable margin for borrowings under the Amended Credit Agreement is based on the company's Consolidated Leverage Ratio, calculated quarterly [166]. Shareholder Returns - In the first quarter of fiscal 2025, the company repurchased 600,007 shares at an average price of $41.67 per share, totaling $25 million [155]. - The Board of Directors declared a quarterly cash dividend of $0.058 per share, payable on February 26, 2025 [156]. Foreign Exchange and Risk Management - For the first quarter of fiscal 2025, 33.9% of the company's consolidated revenue was generated by its international business, compared to 38.5% in the first quarter of fiscal 2024 [168]. - The effect of foreign exchange rate translation on the consolidated balance sheet for the first quarter of fiscal 2025 resulted in a decrease in equity of $108.8 million, compared to an increase of $63.1 million in the prior-year period [168]. - The company is exposed to interest rate risk under its Amended Credit Agreement, with borrowing options based on a Eurocurrency rate or a base rate for loans in U.S. dollars [166]. - The Amended Credit Agreement matures on February 18, 2027 [166]. - The company attempts to minimize currency exposure by matching revenue and expenses in the same currency for contracts [167]. - Foreign currency gains and losses were immaterial for the first quarters of fiscal 2025 and 2024 [167]. - The company has foreign currency exchange rate exposure primarily due to currency translation related to its foreign subsidiaries [168].

Financial Data and Key Metrics Changes - Tetra Tech achieved record net revenue of $1.2 billion for Q1 2025, an 18% increase from the prior year, marking the highest revenue for any quarter in the company's history [14] - Operating income rose to $138 million, a 24% increase year-over-year, also setting a record for the first quarter [14] - Earnings per share increased by 25% to $0.35, exceeding both internal guidance and market consensus [15] - The backlog grew to $5.44 billion, up 15% from the previous year [16] Business Segment Performance - The Government Services Group (GSG) segment reported revenue of $601 million, a 36% year-over-year increase, with a margin of 13.9% [17] - The Commercial International Group (CIG) segment had net revenue of $596 million, a 4% increase year-over-year, with a margin of 13% [20] - U.S. federal client work increased by 32%, while state and local revenues surged by 47%, driven by hurricane response activities [22][23] Market Data and Key Metrics Changes - International work accounted for over a third of revenues, including projects in the UK, Canada, and Australia [25] - The company won several contracts with the Army Corps of Engineers, focusing on civil works and sustainable water infrastructure [26] Company Strategy and Industry Competition - Tetra Tech is focusing on high-demand areas such as water services, disaster response, and infrastructure modernization, aligning with government priorities [38][49] - The company plans to continue investing in strategic initiatives, including acquisitions in the water and environmental sectors [34][85] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the recovery of USAID contracts post-review, emphasizing the importance of development work for national security [66][71] - The company anticipates strong demand for disaster response services, particularly in light of recent hurricanes and wildfires [42][49] Other Important Information - Tetra Tech's Board approved a 12% increase in dividends, marking the 39th consecutive quarterly dividend [35] - The company has a strong balance sheet, with net debt to EBITDA at 1.33 times, allowing for continued investment in growth [33] Q&A Session Summary Question: Can you walk us through what's assumed at the midpoint of your guidance range for USAID work? - Management assumed approximately $400 million worth of USAID work for the entire year, with $200 million already completed in Q1 [54][56] Question: How much incremental revenue do you expect from disaster response? - Management expects $40 million to $50 million of incremental revenue from disaster response activities, which will offset any reductions from the USAID hold [78][80] Question: Can you discuss your M&A pipeline and acquisition strategy? - The company has a robust acquisition pipeline focused on technical leadership in water and environmental sectors, aiming to enhance capabilities rather than just increase size [85] Question: What are your expectations for the civil and DoD segments for the rest of the year? - Management expects continued growth in the DoD segment at a rate of 5% to 10%, with strong backlog and funding in place [90][92] Question: Can you quantify the amount of USAID work booked in backlog? - Management indicated that USAID work typically represents about 10% of revenue, with approximately $600 million expected for the current year [120]

Core Viewpoint - Tetra Tech, Inc. reported strong financial performance for the first quarter of fiscal 2025, with adjusted earnings and revenues exceeding expectations, driven by robust growth across all segments [1][2]. Financial Performance - Adjusted earnings per share for the first quarter were 35 cents, surpassing the Zacks Consensus Estimate of 34 cents and management's guidance of 32-34 cents, marking a 25% year-over-year increase [1]. - Total revenues reached $1.42 billion, reflecting a 16% year-over-year increase, and adjusted net revenues were $1.2 billion, up 18% year over year, exceeding management's guidance of $1.09-$1.15 billion [2]. Backlog and Segment Performance - The backlog at the end of the fiscal first quarter was $5.44 billion, representing a 15% year-over-year increase [3]. - Revenues from U.S. Federal customers, which accounted for 34% of total revenues, increased by 32% year over year, while U.S. Commercial sales rose by 7% [4]. - U.S. State and Local sales surged by 47% year over year, and international sales grew by 4% [5]. Margin and Cost Analysis - Subcontractor costs totaled $223.3 million, up 4.8% year over year, while other adjusted costs of revenues were $975.9 million, an 18.3% increase [6]. - Adjusted operating income increased by 23.9% year over year to $137.5 million, with an adjusted margin of 11.5%, up 60 basis points [7]. Balance Sheet and Cash Flow - At the end of the fiscal first quarter, cash and cash equivalents were $248.1 million, up from $232.7 million at the end of the previous quarter, while long-term debt increased to $888.4 million from $812.6 million [8]. - The company generated net cash of $13.1 million from operating activities, compared to $9.2 million in the prior year, with capital expenditure remaining stable at $3.4 million [9]. Shareholder Returns - Tetra Tech distributed dividends totaling $15.5 million in the first three months of fiscal 2025, an increase from $13.9 million in the previous year, and repurchased shares worth $25 million [10]. Fiscal 2025 Outlook - For fiscal 2025, Tetra Tech anticipates net revenues in the range of $4.365-$4.765 billion, with adjusted earnings projected at $1.37-$1.52 per share [11]. - For the fiscal second quarter, management estimates net revenues of $1.0-$1.1 billion and adjusted earnings of 30-33 cents per share [12].

Financial Performance - Tetra Tech reported quarterly earnings of $0.35 per share, exceeding the Zacks Consensus Estimate of $0.34 per share, and up from $0.28 per share a year ago, representing an earnings surprise of 2.94% [1] - The company posted revenues of $1.2 billion for the quarter ended December 2024, surpassing the Zacks Consensus Estimate by 8.85%, compared to $1.02 billion in the same quarter last year [2] Earnings Outlook - The current consensus EPS estimate for the upcoming quarter is $0.33 on revenues of $1.15 billion, and for the current fiscal year, it is $1.45 on revenues of $4.66 billion [7] - The estimate revisions trend for Tetra is mixed, resulting in a Zacks Rank 3 (Hold), indicating expected performance in line with the market in the near future [6] Industry Context - Tetra Tech operates within the Zacks Pollution Control industry, which is currently ranked in the bottom 40% of over 250 Zacks industries, suggesting potential challenges for stock performance [8] - The performance of Tetra's stock may be influenced by the overall outlook for the Pollution Control industry, as empirical research indicates that top-ranked industries outperform lower-ranked ones significantly [8]

Revenue and Growth - Record revenue of $1.42 billion, up 16% year-over-year[1] - Record net revenue of $1.20 billion, up 18% year-over-year[1] - Total revenue for 2024 was $5,198.7 million, up from $4,522.6 million in 2023, representing a growth of approximately 15%[25] - Net revenue for the GSG segment reached $1,910.0 million in 2024, compared to $1,635.5 million in 2023, indicating a growth of about 16.8%[25] - Adjusted EBITDA for the year 2024 was $584,032 thousand, an increase from $481,096 thousand in 2023, reflecting a growth of approximately 21.4%[26] Financial Performance - Adjusted operating income increased 24% year-over-year to $138 million[5] - Net income for the three months ended December 29, 2024, was $778 thousand, a significant decrease from $74,980 thousand in the same period of 2023[24] - Net cash provided by operating activities increased to $13,063 thousand from $9,246 thousand year-over-year[24] Backlog and Contracts - Record backlog of $5.44 billion, up 15% year-over-year[1] - Added over $1 billion of new contract capacity in the first quarter[6] Guidance and Expectations - Full year guidance for net revenue expected to range from $4.365 billion to $4.765 billion[10] - Adjusted EPS guidance for fiscal 2025 expected to range from $1.37 to $1.52[10] Shareholder Returns - Quarterly dividend increased by 12% year-over-year to $0.058 per share[7] - Repurchased $25 million of common stock in the first quarter[7] - The company repurchased $25,000 thousand of common stock during the period, indicating a commitment to returning value to shareholders[24] Cash and Capital Management - Cash and cash equivalents at the end of the period increased to $248,104 thousand from $198,689 thousand, marking a rise of about 24.9%[24] - Proceeds from borrowings amounted to $90,000 thousand, down from $125,000 thousand in the previous year[24] - Capital expenditures remained stable at $3,433 thousand, consistent with the previous year[24] - The company paid $14,489 thousand in income taxes during the period, a decrease from $43,297 thousand in the same quarter of the previous year[24] Operational Efficiency - Industry-leading Days Sales Outstanding (DSO) of 55.9 days[5]

Core Insights - Tetra Tech, Inc. (TTEK) is experiencing strong order growth across various sectors, particularly benefiting from its Government Services Group segment, which saw a 12% year-over-year increase in net sales in Q4 of fiscal 2024 [1] - The company anticipates revenues between $1.09 billion and $1.15 billion for Q1 of fiscal 2025, reflecting a 10% year-over-year increase at the midpoint [2] - Tetra Tech is actively pursuing acquisitions to expand its customer base and service offerings, including the recent acquisition of Convergence Controls & Engineering [3][4] - The company is committed to returning value to shareholders, having increased its dividend payouts by 12.9% year-over-year in fiscal 2024 [5] Financial Performance - The Government Services Group segment's net sales increased by 12% year-over-year in Q4 of fiscal 2024 [1] - The Commercial/International Services Group segment's revenues rose by 5% year-over-year in the same quarter [2] - Tetra Tech paid out $58.8 million in dividends in fiscal 2024, up from $52.1 million in fiscal 2023 [5] Acquisitions and Growth Strategy - The acquisition of Convergence Controls & Engineering enhances Tetra Tech's capabilities in integrated automation solutions for water and energy sectors [3] - The acquisition of LS Technologies in February 2024 expanded the federal IT practice within the Government Services Group [4] - The RPS Group buyout in January 2023 strengthened Tetra Tech's position in the UK water practice and renewable energy sectors [4] Cost and Expense Challenges - Total cost of sales increased by 13.2% in Q4 of fiscal 2024 due to rising input costs [8] - Selling, general, and administrative expenses rose by 20% year-over-year in the same quarter, primarily due to increased marketing costs [8] Market Performance - Tetra Tech's shares have gained 29% over the past year, outperforming the industry growth of 27.7% [7]