TTEK

Overall Financial Performance

• Net revenue for Q3 FY26 was $1.1 billion, exceeding the upper end of prior guidance, with adjusted EPS of 42 cents, also above guidance.
• Year-to-date operating cash flow hit a record $467 million, a 31% improvement over FY25, and backlog grew 5% sequentially to just under $4.5 billion, marking the second consecutive quarter of backlog growth.
• Adjusted EBITDA margin has expanded ~80 basis points year-to-date, outpacing the long-term target of 50 basis points of annual margin growth.
• Days Sales Outstanding (DSO) is 56 days, an industry-leading metric, and net debt to EBITDA leverage is 0.88x, below the 1-2x target range. Return on capital employed exceeds 20%.

Capital Allocation

• The company maintains a strong balance sheet with $567 million in trailing 12-month operating cash flow, supporting organic investment, acquisitions, and shareholder returns.
• Year-to-date, the company has closed two acquisitions of technical defense-focused firms: Halvik (U.S.) and Providence (Australia).
• The board approved an 11% year-over-year increase to the quarterly dividend, marking 45 consecutive quarters of dividends with annual double-digit increases.
• The company repurchased $100 million in stock in Q3 and $200 million year-to-date, with $398 million remaining in authorized buyback capacity.

End Market & Strategic Growth Highlights

• Growth is driven by global water-related investment aligned with Tetra Tech's core expertise in treatment, quality management, hydropower, digital systems, and cybersecurity.
• In the U.S., municipal clients are moving forward with facility modernization and expansion using rate increases, bonds, and private funding; PFAS treatment, water reuse, and desalination projects are seeing strong demand.
• The UK and Ireland's AMP8 regulatory cycle includes ~105 billion pounds in water sector investment through 2030, and Tetra Tech holds over 2 billion pounds in contracted capacity for smart water solutions.
• Canada's federal infrastructure and hydropower investments, including Hydro-Québec's planned 11 gigawatts of new capacity, are driving demand for Tetra Tech's services.
• Australia is accelerating digital automation and cybersecurity investments for water utilities, with an estimated $17 billion in digital water spending forecast over the next decade.

• Q4 FY26 Guidance: Net revenue is projected to be between $1.12 billion and $1.17 billion, with adjusted EPS between 45 cents and 48 cents. Ukraine-related USAID/Department of State revenue is expected to be roughly the same as Q3's ~$66 million.
• Full Year FY26 Guidance: Net revenue guidance is raised to $4.315 billion to $4.365 billion, representing 8% year-over-year growth at the midpoint. Adjusted EPS guidance is raised to $1.56 to $1.59, with 70 basis points of year-over-year margin expansion at the midpoint.
• The full-year guidance assumes $34 million in intangible amortization, $23 million in depreciation, $30 million in interest expense, and a 27.3% effective tax rate, and excludes any contribution from future acquisitions.
• Management reaffirmed the long-term target of 50 basis points of annual margin expansion, noting that annual growth will vary around this average (FY26 is tracking 70 basis points of expansion, and 50 basis points is a reasonable baseline for FY27).
• No formal FY27 guidance was provided, as management remains focused on executing Q4 to build a stable work base for the next fiscal year.

Tetra Tech operates two core business segments, both of which delivered positive year-over-year growth in Q3 FY26:

1. Government Services Group (GSG): GSG generated 7% year-over-year revenue growth, with a segment margin of 17.5%. Demand is solid across U.S. federal, state, and local government markets, particularly for water, environment, and defense services. GSG contributes 40% of total net revenue (20% from U.S. federal, 20% from U.S. state and local).
2. Commercial International Group (CIG): CIG generated 9% year-over-year revenue growth, with a segment margin of 15.1%. Growth comes from a diversified client base across global water, power and energy, and mining markets. International work makes up 47% of total net revenue, and U.S. commercial work makes up an additional 20% of total net revenue, all included in CIG's performance.

• U.S. federal government contracting remains constrained by staffing reductions from the previous administration, creating ongoing bottlenecks for task order issuance and award timelines.
• General market uncertainty from geopolitical tensions (including the conflict in Iran) and U.S. regulatory policy is causing some commercial clients to act with caution when awarding new programs.
• Political uncertainty around ongoing foreign aid programs (including Ukraine aid) makes future Department of State revenue contribution difficult to forecast accurately.
• Offshore wind renewable energy work in the U.S. has been fully canceled, offsetting gains in other U.S. commercial end markets, and U.S. commercial overall grew only 1% year-over-year in Q3.
• Proposed federal budget cuts could reduce grant co-funding for U.S. state and local water projects; while municipal water work remains strong, flood protection projects have already seen reduced activity from funding delays, with over 20 states suing the federal government over withheld promised funding.

Q: Backlog has grown sequentially for two quarters, the first year-over-year growth in several quarters. What are the key drivers of this momentum across markets?

A: All end markets contributed to growth, with particularly strong gains in commercial and federal segments. Standout wins include the large PFAS treatment project in Dayton (Ohio), FAA airspace modernization work, and expanded scope for data center projects (from initial engineering to feasibility and power/water infrastructure work). All backlog consists only of contracted, funded, and authorized work, and many new awards are initial funding for multi-year programs, supporting long-term visibility.

Q: How has the U.S. government operating backdrop changed from last year, and what are current constraints on award flow?

A: After last year's historic government shutdown, the current approved budget has reduced near-term shutdown risk, but staffing reductions in federal contracting offices have continued to create bottlenecks for issuing task orders. Commercial clients also have lingering trepidation from broader geopolitical and policy uncertainty. Despite these constraints, Tetra Tech still won meaningful new commercial awards in Q3, so the market is still active, just slower than normal.

Q: AI disruption concerns have impacted the stock this year. How does management view AI's risks and opportunities for Tetra Tech's business model?

A: Tetra Tech provides bespoke, site-specific custom solutions for clients that rely on local geological knowledge, regulatory context, and technical expertise for complex water and infrastructure problems, rather than commodity design work. AI is an enabling tool for Tetra Tech's experts, allowing them to analyze larger datasets and deliver more efficient, higher quality solutions. Management sees AI as a competitive advantage that will support market share gains and margin expansion, not a disruptive threat to the business model.

Q: U.S. commercial growth has been slow as offshore wind work sunsets. What is the outlook for U.S. commercial into next year?

A: The U.S. offshore wind practice has been eliminated, but Tetra Tech retains a broader renewable energy practice, and its overall U.S. power and energy practice is growing. Data center work (currently ~$60 million annually) is growing with expanding service scope, and new sediment restoration awards are also contributing to activity. While growth remains modest, these new end market gains are offsetting the loss of offshore wind work.