Tetra Tech 2026 Q3 Earnings Call

Thank you, Latonya. Good morning, and welcome to our fiscal year 2026 third quarter earnings conference call. We had a strong third quarter with growth primarily driven by our U.S. federal and international end markets, both of which increased at double-digit rates. We received significant new orders during the quarter, including commercial orders for data centers and sediment restoration projects, driving our backlog up by more than $200 million in the quarter. Our performance resulted in our increasing guidance for fiscal 2026. For the call today, I will begin with an overview of our third quarter's performance and the client markets that are driving our growth. Steve Burdick, our Chief Financial Officer, will provide additional detail on our financial performance and capital allocation. We delivered a strong third quarter with positive performance across key financial metrics.

Net revenue was $1.1 billion for the quarter, exceeding the upper end of our guidance and supported by strong demand for our high-end Leading with Science approach to water, environment, and sustainable infrastructure. Earnings per share of $0.42 also exceeded the upper end of our guidance. We generated cash flow of $229 million from operations in the quarter and $467 million year to date, which is an all-time high for the first three quarters of any year. Importantly, our backlog was up for the second consecutive quarter, increasing sequentially by 5% to just under $4.5 billion. Overall, the quarter was in line with our expectations, and the increased backlog provides us with good visibility into the fourth quarter and the end of the fiscal year. Both of our business segments performed well in the third quarter.

The Government Services Group, or GSG, grew by 7% in the third quarter on a year-over-year basis and generated a strong margin of 17.5%. Demand remained solid for both of our U.S. federal and state and local government markets, especially in water, environment, and defense. The Commercial International Group, or CIG, also performed well, with revenue up 9% from the prior year and an associated margin of 15.1%. CIG's growth was from a diversified mix of clients across water, power and energy, and mining markets worldwide. I would now like to provide an overview of our net revenue by customer. Our international work was up 12% on a year-over-year basis and represented 47% of our business. Revenue growth was driven by water programs in the U.K., Ireland, and the Netherlands, an increase in infrastructure work in Canada, and growth in mining and digital automation revenues in Australia.

In the U.S., our U.S. federal work was up 12% from last year and represented 20% of our business. This growth was driven by our work for the U.S. federal government in infrastructure, planning, and environment for defense and civilian clients. Our U.S. commercial business was up 1% compared to last year and represented 20% of our business. Revenues for energy and transmission-related services continued to increase, accompanied by stronger mining and minerals project activity. However, these gains were partially offset by the decline in renewable energy work, including the cancellation of remaining offshore wind programs along the Atlantic Coast. Our U.S. state and local business grew by 5% this quarter. We continue to see strong growth and longer-term orders in municipal water, including new projects for PFAS treatment, digital systems modernization, water reuse, and desalination.

We had a strong quarter for new orders, and our backlog was up $208 million, increasing by 5% sequentially from the prior quarter. As we stated before, we take a conservative approach to backlog. We include only work that is contracted, funded, and authorized. This gives us high-quality visibility into future performance and increases our confidence in our project pipeline. Our backlog growth was supported by several important wins across priority markets. In the United States, we added just under $300 million in contract capacity from the U.S. Army Corps of Engineers' Mobile and Norfolk Districts, where we have worked for decades. The Mobile District includes the critical U.S. Gulf Coast regions, as well as supporting international programs in Central and South America. The Norfolk District is a central hub for supporting the world's largest naval base, innovation in coastal resiliency, and the critical East Coast shipping channels.

We also added new state and local programs, including being awarded the lead designer role for the largest dedicated municipal PFAS treatment system in the United States, located in Dayton, Ohio. This quarter, we were pleased to see that our U.S. commercial orders were also very strong. Commercial orders were led by digital automation for data centers, power and transmission services, and sediment restoration programs. I will now turn the call over to Steve Burdick, our Chief Financial Officer, to discuss our financial results and capital allocation in more detail.

Steve? Well, hey. Thanks, Roger.

As Roger said, I'd like to now provide an update on our reported year-to-date fiscal 2026 GAAP results, working capital, cash flows, and capital allocation. As Roger just discussed in the call, our market-leading focus on the front-end technical design and engineering for water and environmental projects are carrying higher margins across all of our end markets. As such, even as the reported revenue was down from last year, due primarily to the decrease in revenue of our USA customer and the revenues from one-time disasters last year, our operating income increased significantly. Adjusted EBITDA on net revenue for the first nine months has increased by about 80 points in fiscal 2026 compared to fiscal 2025. These results further support our long-term strategic goals to improving EBITDA margins by 50 basis points annually.

More often over the last year, I've been asked by our shareholders and others what our margins look like on a net service revenue, or NSR basis, which would be similar to how others in the industry report their margins. I've looked at that question and can tell you that our EBITDA margin would be about 240 basis points higher this year to date on an NSR basis. As a result of our ability to enhance our profit margins and further manage our working capital, we were able to increase EPS and come in well above our previous guidance range for the third quarter. Regarding our working capital, cash flows generated from operations for the first nine months of the year were at a historical record of $467 million, which represents a significant 31% improvement over fiscal 2025.

Consistent with each of the last consecutive 21 years, our operating cash flows have continued to exceed net income. Our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of 56 days, which is similar to last year and an improvement compared to Q2 of this year. This lower DSO metric provides significant insight into our core business as it reflects outstanding work that our project managers lead relative to higher quality projects and highly satisfied clients in our broad portfolio across all of our end markets and geographies. Our net debt target is about 1 to 2 times, and our actual net debt on EBITDA was at a leverage of 0.88 times, which is lower than our leverage ratio one year ago when it stood at 0.96 times.

As we continue to execute on high-quality results with increasing margins, operating cash flows in excess of net income, and lower working capital KPIs, we will continue to provide higher returns for our shareholders. Those higher shareholder financial returns are reflected in an improving return on capital employed, which now stands at over 20%. With that perspective, I'd like to now present our capital allocation strategy in overview. We have a very strong balance sheet, and our operating cash flows was $567 million for the trailing 12-month period.

Now, Roger will discuss our strategic global areas later in the presentation, but I do want to point out that our balance sheet and cash flows provide us with significant liquidity available to invest in organic and acquisitive growth priorities in order to take advantage of these key business opportunities, such as technology and automation, which continues to provide us a dominant position in those markets. Year to date, we have closed acquisitions of technical leaders focused on defense, such as Halvik in the U.S. and Providence in Australia. Regarding our dividend program, I am pleased to announce that our board of directors approved a quarterly cash dividend, which is an 11% increase year-over-year to be paid in the fourth quarter. This is our 45th consecutive quarterly dividend with annual double-digit increases in the amounts paid.