Tetra Tech Q2 Earnings Call Highlights

Key Points

• Q2 results: Net revenue rose 8% year-over-year, EBITDA was $146 million with a 90-basis-point margin expansion (an all-time Q2 record), and adjusted EPS of $0.34 topped guidance.
• Backlog and guidance: Backlog climbed 8% sequentially to $4.28 billion with >$650 million in added U.S. defense capacity and international contract wins, and management raised second-half growth expectations and reiterated FY2026 guidance of $4.25–4.4 billion in revenue and $1.50–1.58 in adjusted EPS.
• Balance sheet & capital allocation: Record H1 operating cash flow of $238 million (trailing 12‑month $688 million), net leverage ~1.0x, an 11% dividend increase, $100 million of buybacks year-to-date and $498 million remaining under the repurchase authorization.

Tetra Tech NASDAQ: TTEK reported fiscal 2026 second-quarter results that management said reflected rising demand for high-end consulting and design services across water, environmental, and sustainable infrastructure markets, while also delivering margin expansion and record cash flow in the first half of the year.

Roger Argus, who is leading his first quarterly earnings call as chief executive officer, said the company’s strategy is unchanged and remains focused on “high-end solutions that address the complex challenges where our clients need us most.” Argus also recognized former CEO Dan Batrack’s leadership and said he is continuing as executive chairman.

Second-quarter performance and segment results

Argus said net revenue increased 8% year-over-year in the second quarter, while EBITDA totaled $146 million and represented a 90-basis-point margin expansion from the prior year. He called it “an all-time record for a second quarter.”

Earnings per share were $0.36, which included $0.02 tied to the completion of the divestiture of Norwegian operations. Adjusted EPS was $0.34, which Argus said exceeded the high end of guidance and was the company’s highest for any second quarter.

By segment, Argus said the Government Services Group (GSG) grew 5% year-over-year and generated a margin of 16.3%, up 220 basis points from the prior year, driven by demand across water, environment, defense, and resilient infrastructure. The Commercial International Group (CIG) posted 10% year-over-year revenue growth and a 12.2% margin, with Argus citing a diversified client mix in water, environmental, power, and energy markets.

During Q&A, management addressed the gap between the segment margins. Argus said CIG typically has seasonal weakness in the second quarter due to winter fieldwork constraints in parts of the Northern Hemisphere and holiday patterns in Australia, but he and CFO Steven Burdick said they expect CIG margins to improve through the balance of the year and that the two segments’ margins could move closer together.

Client market trends: federal strength, commercial mixed, international up

Argus broke down net revenue performance by customer type:

• U.S. federal work rose 11% year-over-year and represented 20% of the business, supported by U.S. Army Corps of Engineers work in flood protection and inland navigation, defense facility modernization, and planning and permitting programs for defense clients.
• U.S. state and local work increased 9% and represented 14% of the business, driven by municipal water projects, particularly in Florida, Texas, California, and Virginia.
• U.S. commercial represented 19% of the business and declined 2% year-over-year. Argus said growth in energy and transmission-related services was offset by reduced renewable energy services as large offshore wind programs from the prior year “wind down.”
• International work increased 12% year-over-year, driven by water services in the U.K., Ireland, and the Netherlands, infrastructure services in Canada, and digital automation revenues in Australia.

On international demand, Argus told analysts that the outlook reflects both geopolitical and local drivers. He highlighted AMP8 funding in the U.K., which he said is “double the funding from AMP7,” as well as activity in Canada tied to infrastructure funding and a recovery in Australia supported by mining, defense shore facilities, and potential opportunities connected to infrastructure spending ahead of the 2032 Brisbane Olympics.

Backlog rises sequentially as budget clarity supports orders

Argus said backlog increased 8% sequentially to $4.28 billion, which he described as demonstrating the resilience of the company’s “Leading with Science” approach. He emphasized Tetra Tech’s conservative backlog methodology, stating the company includes only work that is contracted, funded, and authorized.

Key backlog wins cited by Argus included:

• More than $650 million in added contract capacity from U.S. defense clients for water and resilient infrastructure services
• A GBP 18 million single-award contract in Northern Ireland for water and wastewater treatment services
• A framework contract in the Netherlands to expand capacity for flood protection and infrastructure modernization
• A master service agreement at the Port of Los Angeles
• An expansion of work with United Utilities in the U.K. tied to Tetra Tech’s WaterNet software for leakage detection and water delivery modernization

In response to questions about backlog momentum, Argus said the resolution of much of the U.S. federal budget in early Q2 drove an uptick in new federal task orders, including work from the U.S. Army Corps of Engineers, Naval Facilities Engineering Systems Command, and the Air Force Civil Engineer Center. He said management views Q2 as “an inflection point” for backlog and expects continued growth through the rest of the fiscal year.

Burdick added that with USAID-related backlog reductions (which he said tended to be longer-duration), a greater portion of the remaining backlog is now shorter-term, contributing to more “book and burn” activity than in prior years.

Cash flow, capital allocation, and contract mix

Burdick said that while reported revenue was down year-over-year due to lower USA customer revenue and the absence of one-time disaster work, operating income increased and first-half adjusted EBITDA on net revenue expanded 110 basis points to 14%. He said this supports the company’s long-term goal of improving EBITDA margins by 50 basis points annually.

For the first half, Burdick reported record operating cash flow of $238 million. He also said days sales outstanding improved to 58 days, a nine-day improvement from the prior year period. Burdick reported net debt of about $657 million, with net leverage at 1.0x EBITDA, down from 1.36x a year earlier. He also said return on capital employed is now “over 20%.”

On capital allocation, Burdick said the company’s balance sheet is “probably the strongest” in its history and cited trailing 12-month operating cash flow of $688 million. He said Tetra Tech has closed acquisitions of defense-focused technical leaders, including Halvik in the U.S. and Providence in Australia.

Burdick also announced the board approved an 11% year-over-year increase in the quarterly cash dividend to be paid in the third quarter, marking the 44th consecutive quarterly dividend with annual double-digit increases. The company repurchased $100 million of stock in the first half of fiscal 2026 and has $498 million remaining under its authorization.

Several analysts asked about working capital and contract mix. Burdick said the company believes it can reduce DSO closer to 50 days over the next two years and noted that fixed-price contracts tend to carry both higher margins and lower working capital requirements. He said fixed-price work rose from about 37% of net revenue in 2023 to about 48% year-to-date, and in GSG from about 29% last year to about 42% this year.

Outlook: raised guidance and higher second-half growth expectations

Argus said management is increasing its forecasted growth rates for the second half for both U.S. federal and U.S. commercial clients to 8% to 12%, noting those sectors represent about 40% of revenue. He said federal growth is expected as funding is deployed for domestic civil works and defense facility modernization globally. Commercial growth is expected to be supported by mining water management, rare earth mine development, and front-end planning and permitting for power generation and transmission.

International work is expected to grow 5% to 10% with strength in U.K., Ireland, and Netherlands water and marine defense infrastructure spending in the U.K. and Australia. Argus said state and local work is expected to be about 15% of the business with growth of 5% to 10%.

Argus addressed the lower state and local growth range versus prior expectations, saying municipal clients are acting cautiously around potential reductions in supplemental federal grant funding and are looking to alternative funding methods—such as rate increases, bond issuance, and funding restructuring—to keep projects moving. Burdick added that the growth is occurring on a higher base after the state and local share of net revenue rose from about 11% in 2024 to about 14% in fiscal 2025.

For guidance, Argus provided the following ranges:

• Q3 net revenue: $1.05 billion to $1.1 billion
• Q3 adjusted EPS: $0.38 to $0.41
• FY 2026 net revenue: $4.25 billion to $4.4 billion
• FY 2026 adjusted EPS: $1.50 to $1.58

Argus said the midpoint of the full-year net revenue outlook implies 9% year-over-year growth, along with 70 basis points of margin expansion at the midpoint. He also cited several guidance assumptions, including intangible amortization of $33 million, depreciation of $24 million, interest expense of $33 million, and an effective tax rate of 27.5%. He said the guidance does not include contributions from future acquisitions.

During Q&A, Burdick said foreign exchange impact in the quarter was “fairly minimal,” and he confirmed there was effectively no one-time disaster revenue in Q2 compared with the prior year’s hurricanes in Florida and fires in Southern California. He also said the company recorded about $61 million of USAID work in the quarter, primarily related to increased activity in Ukraine, and that guidance assumes about $20 million per quarter in Q3 and Q4.

Argus concluded by saying the company is entering the second half with strong backlog and that demand for its differentiated services continues to drive growth, leading management to raise full-year fiscal 2026 guidance.

About Tetra Tech NASDAQ: TTEK

Tetra Tech, Inc is a leading provider of consulting and engineering services with a focus on water, environment, infrastructure, resource management and energy sectors. Headquartered in Pasadena, California, the company delivers end-to-end solutions that encompass planning, design, engineering, program management and construction management. Tetra Tech's multidisciplinary teams integrate science, technology and advisory services to address complex challenges in areas such as water resources, environmental remediation, sustainable infrastructure and renewable energy.

The company's core offerings include environmental assessments and cleanup, water treatment and reuse, coastal and marine engineering, climate resilience planning, and engineering design for transportation and built environments.

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