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 by 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 a highly adaptive workforce, long-standing client relationships that have resulted 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 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 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%, up 330 basis points from the prior year. This performance was driven by strong execution of our water infrastructure and 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'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 the United Kingdom for Portsmouth water with a $23 million contract that you can note on the webcast that we have here. And we won two 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 a 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 provide an update on our fiscal 2025 results, working capital, cash flows, and capital allocation. Before I go into the details, I want to remind everyone of where we started the year. We set our 2025 revenue and earnings guidance in alignment with our long-term 2030 objectives. Despite our largest single client canceling numerous contracts midway through 2025 and facing other challenges, Tetra Tech achieved its highest-ever revenue and earnings. Our strong client relationships and skilled project managers worldwide allowed us to generate record cash from operations, nearing $0.5 billion. I am proud of our team’s performance in 2025 and even more optimistic about our long-term strategy in 2026 and beyond, focusing on our leading services in relation to our clients’ water investment opportunities. As Dan mentioned earlier in this call, our expertise in front-end consulting and design for water and environmental projects is yielding higher margins across our markets. Consequently, our fiscal 2025 revenue grew by an impressive 7% compared to last year, while our operating income rose at a faster rate of 18%, with EBITDA increasing by 13%. This year’s performance aligns well with our long-term goals to enhance net revenues and improve EBITDA margins by 50 basis points annually. Notably, our 2025 EBITDA margins and net revenue improved to 14.3%, which marks an increase of over 80 basis points from last year. As we improved our profit margins and managed working capital efficiently, we grew EPS by 24% year-over-year to $1.56. Regarding working capital, our cash flows from operations for fiscal 2025 reached $458 million, reflecting a 28% improvement over fiscal 2024. As has been the case for the past 20 years, our operating cash flows continue to exceed net income by more than 100%. Our emphasis on working capital and cash flows resulted in an industry-leading DSO of 55.7 days, showcasing our project managers’ ability to deliver high-quality projects and maintain satisfied clients across markets and regions. Our net debt stands at approximately $600 million, with a net debt-to-EBITDA leverage of 0.9x, down from 1.0x last year. With our focus on strong operating results, increased margins, cash flows surpassing net income, and lower working capital KPIs, we are poised to deliver greater returns for our shareholders. This is evident in our improving return on capital employed, which exceeds 20%, positioning us among the best in the industry. I’d like to present our capital allocation overview. We have a robust balance sheet, likely the strongest in our history, with over $1 billion in available liquidity, having restructured our capital to leverage market conditions for strategic growth opportunities. Roger will present our strategic growth areas later, but I want to stress that we have significant liquidity to invest in both organic and acquisition-driven growth strategies to seize important business opportunities. These include technology and automation, ensuring our strong market position and potential acquisitions like SAGE and Carron & Walsh. I’m excited to announce that our Board of Directors has approved the fourth-quarter dividend, which is a 12% increase year-over-year, set to be paid in the first quarter. This marks our 42nd consecutive quarterly dividend with annual double-digit increases. With our lower leverage, we have also continued our stock buyback program this year, repurchasing a total of $250 million in 2025, including $50 million in the fourth quarter. We still have about $598 million remaining in our stock buyback plan as part of our capital allocation strategy. I’m very pleased to share these 2025 financial results, which have allowed us to enhance shareholder returns through increasing dividends, stock buybacks, strategic acquisitions, and reducing our leverage. 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 fiscal year 2026 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 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 two slides, I'd like to highlight two 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. There are 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. Tetra Tech'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 strain. Let me provide you with just one 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 are 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, strengthen 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 one 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 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. I would like to provide an overview of our outlook for fiscal year 2026 by each of our end customers. Each of our customer sectors has relevant growth drivers, as you've heard from Roger and me, and I'll start with our international growth. International growth is projected to grow between 5% and 10% in fiscal year 2026, supported by the $130 billion AMP8 program in the United Kingdom. Programs like the recently passed $200 billion Canadian infrastructure program and spending in Australia for the upcoming Brisbane Olympics are also contributing. Our U.S. commercial work is expected to grow between 5% and 10% in fiscal year 2026, driven by water demand for data centers and advanced manufacturing, along with power-related services to meet increasing U.S. energy demand. Our U.S. state and local work is forecasted to grow at a rate of 10% to 15%, consistent with trends from the past few years, fueled by strong budgets for municipal water supplies and digital water modernization. Finally, our U.S. federal work is anticipated to grow at a rate of 5% to 10%, with expectations of a gradual increase as procurement processes align with new administration priorities and budget increases from the One Big Beautiful Bill Act that recently passed. Now, I'll present our guidance for the first quarter and for the entirety of fiscal year 2026. For net revenue in Q1, we expect a range of $950 million to $1 billion, with earnings per share of $0.30 to $0.33. For fiscal year 2026, our net revenue range is $4.05 billion to $4.25 billion, with earnings per share of $1.40 to $1.55. For those following the webcast, these assumptions include an intangible amortization charge of $27 million, anticipated depreciation of about $25 million, interest expense of $30 million, and an effective tax rate similar to last year's at 27.5%. We also assume there are 264 million shares of Tetra Tech stock outstanding. As before, the guidance numbers for revenue and earnings per share do not account for any expected contributions from acquisitions, but we anticipate these will contribute to the year, and we'll update our guidance as they join the company. In summary, we had a record fourth quarter and a record fiscal year 2025, which positions us well for a strong start to fiscal year 2026. Our focus on high-end consulting for water and environmental priorities aligns with long-term trends in providing clean water, supporting manufacturing, and ensuring a healthy environment for future generations. The company is in its best financial position ever, as Steve Burdick, our CFO, mentioned, and we are well-positioned to support our organic growth and attract top partners in the industry to enhance our growth rates, margins, and competitiveness. With that, I would like to open up the call for questions.

Our first question comes from 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 USAID, so it feels 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 an excellent question. We actually anticipated this decoupling during our last investor call three months ago. In that call regarding our previous quarterly results, we noted that we expected our backlog to remain flat or potentially decline. However, the fact that it came out flat is at the higher end of our expectations. When examining the backlog, there are a few factors to consider. Firstly, the U.S. federal government's backlog and their funding timelines have become much shorter. Instead of being funded for a longer term, we are now receiving funding on a more incremental basis, almost like a book and burn, one quarter at a time. This has affected our visibility with the U.S. federal government, but not the actual revenue spending. We are just receiving work in smaller and more frequent quarterly task orders. If we reported our backlog like many others in the industry do, we would see a significant increase. This has been a remarkable quarter for new contracts from the federal government, leading to a substantial increase in our contract capacity, which has grown by about 15%. We have secured over $1 billion in new contracts with the Corps of Engineers, though the task orders are smaller and of shorter duration. You would expect that if the rest of our business was static, the backlog would decrease. However, our backlogs in state and local work, as well as in U.S. commercial and international sectors, have been growing rapidly. They've grown enough to keep our overall backlog flat sequentially, as reflected in our results. This is evident with the growth of 5% to 10% in U.S. commercial, 10% to 15% in state and local, all while maintaining a growing backlog. This growth has offset the decreased duration of task orders from the federal government. This highlights the decoupling. While it may seem detailed, we've been observing this trend since the new administration took office. We've seen the backlog decrease in relation to federal government international development, but revenue remains strong. We are just receiving more smaller task orders within larger contracts we have maintained. I realize this was detailed, but I believe this decoupling will persist for a significant part of fiscal year 2026. As the U.S. federal government establishes a more stable process for issuing contracts and the cadence of task orders improves, we expect to see larger task orders from them as the year progresses. The strength in commercial, state and local markets is already robust, so the anticipated improvement will primarily come from a return to a more consistent contracting approach with the U.S. federal government. There are many aspects to consider that demonstrate our strong organic growth and how it is not directly linked to backlog, which has traditionally been the case. However, this new administration has altered that perspective due to changes in federal government 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 three business lines in a little more detail here, where you saw strength and how you're thinking about the three main geographies as you move through fiscal 2026?

Yes, it's interesting that the growth was driven by a change in one geography. I'll start with our strongest areas. The water programs have been the biggest drivers in the United Kingdom and Europe, particularly in Ireland and the Netherlands, growing at about a 10% rate, which has been the strongest. The water component of our U.K. and Europe operations has even performed at a higher rate. This trend has continued with some changes from previous quarters, making it our top growth area among international geographies. Canada has also performed well and I believe it will improve further, based on discussions I've had at various conferences. Relative to other regions, Canada might be one of the biggest drivers. While recent tariffs between the United States and Canada caused some disruption, I am confident Canada will remain a significant trading partner globally. If it can't trade south, it will trade east, west, and even north along the newly opened Arctic routes. Canada has recently passed significant infrastructure spending bills totaling USD 200 billion, which bodes well. The growth rate in Canada has been strong at around 5% to 6%. However, the notable change this last quarter has been in Australia. Australia had previously seen a revenue decline of 10% to 15%, but it seems to have reached a bottom, and now year-on-year comparisons are moving closer to flat. A small percentage came from the SAGE acquisition in the fourth quarter, which didn’t impact fiscal year 2025 significantly, but the stabilization in Australia is a major development. Transitioning from a decline to flat growth accounts for much of the 9% increase we noted. I believe that fiscal year 2026 will show further improvement in Australia, as a market at its lowest point usually doesn't have many places left to go but up. Additionally, we are seeing an upswing in funding and infrastructure projects related to the upcoming Olympics set for Brisbane. Our firm will be engaged early in the planning, permitting, geotechnical work, and initial design for various venues and transportation projects. I expect this will yield positive results for us, with Australia being the key driver of change in this last quarter.

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?

Certainly. For revenue growth, I'll begin with the midpoint of 5% to 10%, which is around 7.5%. This is applicable to international, U.S. commercial, and U.S. government segments. For municipal, we expect a range of 10% to 15%, estimating about 12.5%. Excluding disasters from the last quarter shows a growth of 13%. Thus, the midpoint growth gives us a forecast of slightly over $4.1 billion for fiscal year 2026. There may be variances in this expectation. For example, the U.S. commercial segment saw a decline of 2% last quarter, and I anticipate it will stay below the 5% to 10% growth rate in the first quarter of fiscal year 2026 due to a surge in renewable energy projects last year, notably offshore wind, which have faced significant challenges due to policy changes. The toughest year-on-year comparisons will be in Q1 and Q2. However, our rapid growth in high-voltage transmission and other U.S. programs, as mentioned by Roger regarding water supply for manufacturing sectors, including data centers and chip fabs, is promising. I expect us to achieve growth closer to the high end of that range in the latter quarters of the year. For the U.S. government sector, we have experienced some disruption, such as a 6-week shutdown, which is factored into our guidance. This shutdown impact is estimated around $15 million to $20 million, mostly during the latter weeks. As the federal government resumes operations, I expect a ramp-up in this segment. So, we will start at a growth rate between 5% to 6% and aim to reach 10%. Internationally, we are currently at the higher end, and the same goes for state and local projections. More clarity on international trade policies and tariffs could drive us higher, ideally aiming for a baseline growth rate of 8% to 10%. Quick deployment of authorized infrastructure projects in Canada will also be crucial. Additionally, while we have not factored in significant earnings from the U.S. State Department, any increase in funding for areas like Ukraine could push us towards the upper end. On the flip side, the recent continuing resolution extending into January may hinder our growth if re-evaluated. Though the recent shutdown had a limited financial impact, we must consider surprises like recessions or prolonged shutdowns, which could affect our projections. Clarity on tariffs could also spur growth in reshoring and international activity for manufacturing, which might significantly bring us to the high end of the range.

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 two-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, etc.? Has that been a headwind? And where do we stand on that now on the EPA front?

Yes, that's a good question. I would say that when we look at discretionary revenues from the federal government, they tend to recover slowly. However, most of our revenues have shifted to essential services because of what happened in fiscal year '25. We didn’t experience much being put on hold by the federal government, as a significant portion of our revenues is driven by the Department of Defense. So, when asking whether it will ramp back up, I would note that it didn't really ramp back down, so we didn’t perceive that as an impact. The federal government won’t likely face much disruption from the fluctuations. Regarding permits from the EPA, we don’t rely heavily on work that requires their approval before proceeding. There are some cases where compliance needs both federal and state sign-offs, which has impacted some dollars, but it's been relatively minor for us. Interestingly enough, we might see more effects in state and local projects. You might think that a government shutdown wouldn’t affect state and local initiatives since they aren't directly tied to the federal government, but many projects have co-funding from the federal government. For instance, large grants from the Department of Transportation can be critical for project advancement. When those grants are stalled or require additional approvals, it can lead to delays in those projects until government workers return. So, we experienced an impact as federal workers were unavailable during the first half of our Q1. With Thanksgiving and Christmas approaching, it's not just a short six-week shutdown, but rather we're entering a holiday period. Thus, the perception of backlog or issuance of task orders could be affected in Q1, though primarily it’s a matter of optics since we have ample backlog to maintain revenue through this period. If you're inquiring about the impact of the slow recovery, I think you might observe some changes in how we perceive our backlog and potentially some short-term effects on funding from state and local entities. As for permitting approvals for commercial clients, it’s minimal, as there aren't many programs, apart from superfund, that necessitate federal EPA approval. While it may seem significant, the impact is not as great as it might appear.

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 influence that either up or down in terms of the opportunity set or seller willingness?

I’ll start with a high-level overview, and then Steve can discuss the financial aspects. The changes and instability in the markets due to the new administration have caused some companies to feel the impact more than others. For some firms, navigating this volatility has made them want to partner with larger companies that offer more stability. We’ve noticed that smaller and mid-sized firms are now more open to transactions than before. If they were hesitant to sell previously, uncertainty around the federal government, state policies, or commercial conditions might push them to seek larger partners with broader platforms and access to clients that are more stable or outside the U.S. Tetra Tech is an attractive option for those looking to join a leading firm in the technical field, providing a safe and prosperous environment to advance their businesses while minimizing risk. Consequently, there are greater opportunities available now. Additionally, for those considering a sale, it can be seen as a step to enhance their operations rather than a final decision, making Tetra Tech an ideal choice. Our pipelines look promising, potentially larger than before. As the market consolidates, there are fewer big firms, which drives a scarcity premium for those. We will remain opportunistic in pursuing suitable opportunities that align with us. Steve can share insights on any possibilities outside our typical scope that we might consider.

Yes. As I mentioned earlier, we have a very strong balance sheet that enables us to pursue acquisitions we believe will yield long-term benefits. When I consider the capital markets and our financing options, we have a bank credit facility with full availability on our revolver and the possibility of increasing the amount beyond what is currently offered. Additionally, we entered into convertible debt two years ago, and the capital from that is available under better terms now than it was then. Therefore, we have various capital markets and funding options to consider that could be beneficial for Tetra Tech, whether it's smaller, medium-sized, or larger firms that may join us.

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. We are concluding several deliverables related to our disaster response efforts, which resulted in very high utilization in GSG, driving it up to nearly 23% for the quarter. Another key factor has been our increase in fixed-price work, which has been a goal for us for some time. Historically, about 35% of our work has been fixed-price, but over the last few years, we have focused on increasing that percentage as we've developed tools that enhance our efficiency. This allows us to provide our clients with better pricing and higher margins. Last quarter, we achieved about 50% of our revenue from fixed-price work, which is the highest level we’ve seen in many decades. Additionally, we have been adjusting our project mix. We have time and materials contracts that come with competitive rate structures, but we are trying to shift more towards earlier design work, which tends to offer higher margins. Specifically, we are reallocating our efforts from lower-margin detailed design work that competes with offshore design centers to higher-margin consulting and advisory roles. Overall, the three main drivers for our margin expansion are a shift in project mix towards higher-margin work, an increase in fixed-price contracts, and high utilization that reduces indirect costs, thus boosting our margins significantly this past quarter. Looking ahead, I believe there is still considerable upside for our margins. While we reached our target of 50% fixed-price work, I want to maintain that level for a few quarters and aim to raise our target to 60%. Additionally, we see opportunities for further margin expansion by utilizing more digital tools, including AI and various SaaS products. By executing more efficiently on fixed-price contracts, we expect to enhance 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 would say that among the areas where we are experiencing changes, the transition we are undergoing is notable. We previously focused heavily on full-scale permitting for things like site selection, construction oversight, and permit compliance for renewable energy projects, particularly offshore wind, which involves marine vessels and other components. Roger highlighted that we are aiming to expand our work in data centers, especially in high-voltage engineering, which now involves less emphasis on environmental compliance—previously a significant aspect of our renewable energy projects—and more focus on design for commercialization and bringing different facilities online. This marks a difference in our approach. In high-voltage transmission, we are engaged in high-voltage engineering, including the design of transformer stations and interconnects. This is a specialized field with limited practitioners, and we are among those few. Consequently, I believe the margins in this area are slightly better due to the scarcity of personnel capable of handling such work in grid and high-voltage transmission. Our involvement in data centers is just beginning; while many are rushing to create detailed designs for data center buildings, most of that work is being standardized internally, creating similarities across data centers. It may seem like there are more builders than opportunities, but the real challenge is how to secure adequate water supply for these large data centers, which currently comes from municipalities. As water scarcity increases, municipalities will need us to explore alternative dedicated water sources such as groundwater, surface water, and recycling methods. Thus, we are transitioning towards opportunities with higher margins and, in reality, 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.

I can clarify and define the question. Our digital products are part of our recurring revenue or SaaS. Just to clarify.

Yes.

It's interesting that we have faced challenges in what used to be one of our growth areas, which is the smallest part of our revenue. Back in May 2024, our subscription revenue from software products for our clients was about $25 million a year, with an EBIT margin around 50%. Unfortunately, 1.5 years later, that revenue is still approximately $25 million, with margins remaining similar. The main disruption for us has come from the new administration, which has impacted our strategy to market software products primarily developed for U.S. government clients. Fortunately, this $25 million represents a small fraction of our total revenues, which are over $4 billion. However, it has delayed our progress by about a year from our initial expectations. We are quickly adapting our go-to-market strategy to what we now consider our new Plan A, targeting ports, harbors, and stakeholders who need to assess the impact of environmental incidents, rather than focusing solely on federal agencies. This shift is also applicable to our software packages like FusionMap and Volans, which we are deploying internationally, including Europe. While the federal government space may have slowed, we are making strides in other areas and expect significant growth in the coming years. It's important to note that this is a minor aspect of our overall revenue, but it has caused a delay from what we had hoped to achieve by now.

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?

If we look at Tetra Tech's history, our acquisitions have typically been medium-sized, contributing around 2%, 3%, or 7% to revenue each year when combined. However, in recent years, we've also acquired larger public companies, which required more creative financing and regulatory approvals. We successfully integrated these companies into Tetra Tech, and their performance has improved significantly compared to when they operated independently. Our strategy encompasses a range of targets, from small to medium-sized companies, as well as larger public or private equity firms. Given our current balance sheet, bank credit facilities, and available capital markets, we have many options, including opportunities larger than our largest acquisition, RPS, from three years ago.

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

I remember that about a year and a half ago, we held your Investor Day in New York, and a lot has happened since then. I would like to know if you could provide a bit of an update. Considering your targets for 2030, how has your confidence changed given all the disruptions you've experienced and successfully addressed during fiscal year 2025? Additionally, do you think acquisitions have become more crucial for meeting your long-term goals compared to 18 months ago, given your current balance sheet and the opportunities available?

That's a great question. I've been asked similar questions since February this year, especially with the new administration and the elimination of USAID as a federal agency. Some have even asked if I regret setting the 2030 targets. While I’m not sure about raising those targets yet, this year has certainly been interesting. There’s an old saying about living in interesting times, and this year has truly epitomized that. Despite the challenges, I'm proud of our management team at Tetra Tech and all our employees for navigating through the changes, which present opportunities. While USAID has completely closed, we are finding new opportunities that are larger than the ones lost. The margins have actually increased from these new opportunities compared to those we lost with USAID. Regarding our 2030 plan, while total growth has been impacted, we've seen a potential increase in our margin growth from 50 basis points to possibly 60, 70, or even 80 basis points per year instead. So, while we faced some challenges, the margin situation has actually become more favorable. On the top line, having $550 million less is undoubtedly challenging, especially considering the complexities of compounding. It's crucial to close that gap quickly, and we've only seen a modest contribution from mergers and acquisitions thus far. However, we have strong access to capital, thanks to our prudent financial management, which puts us in a great position for acquisitions. We currently enjoy a much lower interest rate of about 2% due to our previous financial decisions, allowing for greater capability in acquisitions compared to what we initially projected for the 2030 plan. Closing the gap created by the loss from USAID doesn't worry me; it may require increased focus on M&A, but there are still viable companies available at reasonable price points. I believe that pursuing M&A opportunities can help us meet our targets without compromising our organic growth aspirations, which remain between 6% and 10%. Despite the current turmoil, we are currently achieving an organic growth rate of around 8%. So, while we'll likely increase our M&A activities, I do not foresee any financial or opportunity constraints in achieving our goals.

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 of 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 in nearly every field. As I just indicated in this last question come, 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 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.