Tetra Tech, Inc. Q2 FY2026 earnings call

• Roger Argus starts by recognizing Dan Batrack's leadership and thanks employees. Mentions strong second quarter performance with net revenue up 8% y-o-y, EBITDA of $146 million (all-time Q2 record), earnings per share $0.36, adjusted earnings per share $0.34 (exceeding guidance), and backlog up 8% sequentially. • Discusses segment performance: GSG grew 5% y-o-y with 16.3% margin; CIG up 10% y-o-y with 12.2% margin. • Talks about net revenue by customer: U.S. federal up 11% (20% of business), U.S. state and local up 9% (14% of business), U.S. commercial down 2% (19% of business) with energy and transmission growth offset by renewable energy reduction, international work up 12% (driven by various regions). • Highlights backlog growth supported by wins in U.S. defense, Northern Ireland, Netherlands, Port of Los Angeles, and UK with WaterNet software. • Steve Burdick discusses financial results: Year-to-date operating income increased, adjusted EBITDA margin up 110 basis points to 14% for first half of fiscal 2026, working capital cash flows at historical record of $238 million, DSO at 58 days (9-day improvement y-o-y), net debt $657 million with net debt on EBITDA at 1.0 times (lower than one year ago), return on capital employed over 20%. • Capital allocation strategy: Strong balance sheet, cash flow of $688 million trailing 12 months, closed acquisitions of defense-focused technical leaders, approved 11% increase in quarterly cash dividend, continued stock buyback program with $498 million available from plan. • Outlook for second half of fiscal year: Increase forecasted growth rates for U.S. federal and U.S. commercial client sectors to 8-12%, international work expected to grow 5-10%, state and local work expected to be about 15% of business with growth rate in high single digits. Discusses U.S. commercial, U.S. defense, and U.S. state and local municipal water business in detail.

Government Services Group (GSG) grew 5% y-o-y in Q2 with a margin of 16.3% (up 220 basis points from last year). Commercial International Group (CIG) had revenue up 10% y-o-y with a margin of 12.2%. U.S. federal work was up 11% y-o-y, representing 20% of business. U.S. state and local business grew 9% y-o-y, representing 14% of business. U.S. commercial business was down 2% y-o-y, but saw increase in energy and transmission related services offset by reduction in renewable energy services. International work was up 12% y-o-y, driven by water services in UK, Ireland and Netherlands, infrastructure services in Canada, and digital automation revenues in Australia. Backlog increased 8% sequentially to $4.28 billion.

• Third quarter net revenue guidance: 1.05 to 1.1 billion. Adjusted earnings per share guidance: 38 to 41 cents. • Fiscal year 2026 net revenue guidance: 4.25 to 4.4 billion (up 9% y-o-y at midpoint). Adjusted earnings per share guidance: $1.50 to $1.58. Intangible amortization $33 million, depreciation $24 million, interest expense $33 million, steady effective tax rate of 27.5%. Guidance does not include contributions from future acquisitions.

Q: 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.

A: On last quarterly earnings call noted expected influx of new orders once US federal budget resolved. Budget resolved in early Q2, saw new orders increase from US federal government including task orders from defense, received work under contracts with UK's United Utilities and others, resulting in 8% sequential growth. Expect continued growth based on new orders through rest of fiscal year, backlog consistent with forecasted growth rates and supports continued margin expansion.

Q: Asked about international business, specifically Canada.

A: Excited about opportunity from Canadian government's new funding, positioning for export terminals, marine facilities, and build out of Northwest Passage. Expertise in coastal resiliency, marine facility design, planning, permitting on east and west coasts, and specialized capabilities in Arctic. But it is early days and not expected to impact FY26.

Q: Asked about demand backdrop in international markets outside US.

A: Global geopolitical situation affects geographies, but local demands for water, power, etc., drive services. In UK, AMP 8 funding fueling water services growth. Canada has new infrastructure funding opportunity. Australia has increased mining activities and defense shore facilities driving growth, with potential from 2032 Olympics in Brisbane.

Q: Asked about capital allocation, prioritizing opportunities.

A: Look at totality of balance sheet, leverage, and dry powder available from multiple capital sources. Consider growth areas that will have most value for company and shareholders over next couple of years.

Q: Asked on cash flow strength and DSO reduction.

A: Continual improvement in DSO year over year, DSO hovering in mid-50s, goal to take it down to closer to 50 days. Fixed price contracts provide higher margins and lower DSO in working capital, goal to continue mix towards more fixed price work to bring DSO down.

Q: Asked about work for data centers.

A: Primary work is feasibility associated with siting, addressing concerns around water availability, power, environmental conditions, local regulation, community input, permitting. Also do some work within envelope like SCADA systems, commissioning, but predominance is upfront feasibility studies.

Q: Asked to expand on state and local outlook shift from 10-15% to 5-10%.

A: Municipal water market staple for Tetra Tech. Clients cautious due to proposed federal budget reductions in supplemental grant funding, looking at alternative methods to keep projects moving forward. State and local work still growing, but at higher base, leading to percentage decrease.

Q: Asked about Iran conflict geopolitics opportunity.

A: Opportunity for Tetra Tech in post-war scenario related to U.S. Army Corps of Engineers rebuilding damaged facilities, still have contracts with U.S. Army Corps Middle East District and pre-positioning for post-conflict opportunities.

Q: Asked about fixed price exposure and margin improvements.

A: Fixed price work represented about 37% of total net revenue in 2023, year to date about 48%. GSG fixed price work last year 29% of revenue, this year 42%. Goal to continue focusing on progressing contract types more heavily weighted towards fixed price work as it carries higher margins and lower working capital requirements.

Q: Asked about capital allocation and M&A.

A: Disciplined in approach to M&A, focusing on strategic fit and timing. Priorities include advanced analytics in water, digital automation in areas to increase touch points with clients and be market leader.

Q: Asked about backlog versus revenue expectation, FX impact, disaster revenue, and Ukraine.

A: Backlog decrease from USAID with longer term backlog, federal agencies ramping back up, backlog fairly shorter term compared to prior years. FX impact minimal. No disaster revenue in quarter. Ukraine had $61 million net revenue in quarter, with about $20 million per quarter expected for Q3 and Q4 in guidance.

Q: Asked about commercial CIG operating income margin versus GSG margin.

A: Q2 is weakest quarter for CIG due to seasonal effects (wintertime, holidays/vacations in Australia), expect CIG margins to improve and come back to normal levels through balance of year.

Q: Asked about port of LA work.

A: Port of LA is long-term client, renewal of MSA is impactful, excited to continue work and grow portfolio, illustrates capabilities and differentiated services.