Tetra Tech (NASDAQ:TTEK) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.
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The full earnings call is available at https://events.q4inc.com/attendee/145752051
Summary
Tetra Tech reported an 8% year-over-year increase in net revenue for the second quarter, driven by demand for consulting services in water, environment, and sustainable infrastructure.
The company achieved an all-time record second-quarter EBITDA of $146 million, resulting in a margin expansion of 90 basis points compared to the previous year.
The backlog increased by 8% sequentially, reaching $4.28 billion, indicating strong demand for the company’s services.
Tetra Tech’s Government Services Group grew by 5% year-over-year with a margin increase of 220 basis points, while the Commercial International Group saw a 10% revenue increase with a 12.2% margin.
The company reported strong cash flows from operations, with a record $238 million generated in the first half, and a significant improvement in DSO to 58 days.
Tetra Tech increased its guidance for the full fiscal year 2026, raising net revenue expectations to $4.25 – $4.4 billion and adjusted EPS guidance to $1.50 – $1.58.
The company announced an 11% increase in its quarterly cash dividend and continued its stock buyback program, demonstrating confidence in its financial position.
Full Transcript
OPERATOR
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 Investor SECtion of its website and 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 part without the prior written permission of Tetra Tech is prohibited. With us today from management are Roger Argust, Chief Executive Officer and President and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results and will 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 those 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 would like to inform you that all participants are in a listen only mode. At the request of the company, we will open the conference for questions and answers after the presentation. With that, I would now like to turn the call over to Roger Argus. Please go ahead Mr. Argust.
Roger Argust (Chief Executive Officer and President)
Thank you Christine Good morning and welcome to our fiscal year 2026 Second Quarter Earnings Conference call. I’m pleased to join you today for my first quarterly call as CEO of Tetra Tech. I want to begin by recognizing Dan Batrack’s leadership for more than two decades. Dan and I have worked together for many years and I’m grateful for his continued partnership and support as our Executive Chairman. Tetra Tech’s success is made possible by our 25,000 employees around the world. I’ve had the privilege of working with many of our technical teams across our operations. Their expertise, client commitment and ability to solve complex problems are what make Tetra Tech different. Demand for clean water, environmental quality and resilient infrastructure continues to grow worldwide. Our strategy is not changing. We will continue to focus on high end solutions that address the complex challenges where our clients need us most. For the call today, I will begin with an overview of our second 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 second quarter with positive performance across our key financial metrics. Net revenue increased by 8% during the quarter on a year over year basis supported by demand for our high end consulting services in water, environment and sustainable infrastructure. EBITDA of $146 million resulted in a margin expansion of 90 basis points when compared to last year and is an all time record for a second quarter. Earnings per share were $0.36 including $0.02 associated with the completion of the divestiture of our Norwegian operations.. Our adjusted earnings per share of $0.34 exceeded the high end of our guidance and was also the highest for any second quarter. And importantly, our backlog increased by 8% sequentially and is now $4.28 billion which illustrates the resiliency of our technically differentiated meeting with science approach. Overall, the quarter demonstrated the strength of our business model. We are growing in the right markets, improving margins and entering the second half of the fiscal year with strong momentum. I would now like to discuss our performance by segment. The Government Services Group or GSG grew 5% in the second quarter on a year over year basis and generated a margin of 16.3% up 220 basis points from last year. Demand remained solid for our water, environment, defense and resilient infrastructure services. The Commercial International Group or CIG also performed well with revenue up 10% from the prior year and a margin of 12.2%. CIG’s diversified mix of clients across water, environmental, power and energy markets worldwide provided growth across the key geographies that we work in. I would now like to provide an overview of our net revenue by customer. Our US federal work was up 11% last year and represented 20% of our business. This growth was driven by our work with the U.S. army Corps of Engineers for resilient infrastructure including flood protection and inland navigation, defense, facility systems modernization and major planning and permitting programs for defense. Our U.S. state and local business grew 9% this quarter on a year over year basis and represented 14% of our business. Growth was driven by municipal water projects, primarily in the high priority regions of Florida, Texas, California and Virginia. Our US commercial business represented 19% of our business and was down 2% compared to last year. We did see a significant increase in revenues for energy and transmission related services. However, this growth was offset by a reduction in renewable energy services, especially associated with the wind down of the large offshore wind programs we worked on last year. Our international work was up 12% on a year over year basis driven by revenue growth in water services in the UK Ireland and the Netherlands, increase in infrastructure services in Canada and growth in the digital automation revenues in Australia. I would now like to discuss our backlog. We had a strong quarter for new orders and our backlog increased 8% sequentially. This is an important indicator of our increased demand for our services. As we’ve 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 our priority markets. In the United States we added more than $650 million in contract capacity from U.S. defense clients for water and resilient infrastructure services. These projects support critical infrastructure needs that align directly with our strengths in water, environmental services, engineering, design and digital systems. In Northern Ireland, we added a new 18 million British pound single award contract for water and wastewater treatment services. In the Netherlands we added a framework contract that significantly expands our capacity in key regions with planned investments to address essential flood protection and infrastructure modernization needs. At the Port of Los Angeles, we were awarded a Master Service agreement that supports one of the most important trade and logistics gateways in the United States. And finally, we further expanded high end solutions for United Utilities in the UK with our waternet software that provides a comprehensive platform for managing priority water leakage detection and water delivery modernization needs. 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 Burdick (Chief Financial Officer)
Steve, well hey, thank you Roger. I would like to now provide an update on our reported year-to-date fiscal 2026 results, working capital, Cash Flows and Capital Allocation so as Roger just discussed in this call, our market leading focus on the front end consulting and design 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 from USAID customers and revenues from one-time disasters this year compared to last year our operating income increased significantly and adjusted EBITDA on net revenue for the quarter increased by 100 or for the yeah for the quarter year to date increased by 110 basis points to 14% for the first half of fiscal 2026. These results further support our long term strategic goals in improving ebitda margins by 50 basis points annually. As a result of our ability to enhance our profit margins and further manage our working capital, we were able to increase earnings per share (EPS) over last year and come in well above our previous guidance range for the second quarter. Now, regarding our working capital, Cash flows generated from operations for the first half of the year were a historical record at $238 million which represents a significant improvement over fiscal 2025 and consistent with the last 20 plus years, our operating cash flows have continued to exceed net income. Our focus on working capital and cash flows has resulted in our Days Sales Outstanding (DSO) reflecting an industry leading standard of 58 days, which is a nine day improvement compared to Q2 of last year. This lower Days Sales Outstanding (DSO) metric provides a significant insight into our core business as it reflects outstanding work that our project managers lead relative to higher quality projects highly satisfied clients in our broad portfolio across all of our end markets and geographies. Our net debt is amounted to about $657 million and the net debt on EBITDA was at a leverage of 1.0 times which is about which is a little over 25% lower than our leverage ratio one year ago when it stood at 1.36 times. As we continue to execute on high quality operating results with increasing margins, our operating cash flows in excess of net income and lower working capital KPIs we will continue to provide higher returns for our shareholders and those higher shareholder financial returns are reflected in an improving return on capital employed which now stands at over 20%. So with that perspective I would like to now present our capital allocation strategy and overview. We have a very strong balance sheet, probably the strongest balance sheet in our history, and our operating cash flow was $688 million for the trailing twelve month period. Now Roger will discuss our strategic growth areas later in this 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, which includes technology and automation which also continues to provide us a dominant position in those markets. During the second quarter and third quarter to date, we have closed the acquisitions of technical leaders focused on defense such as halvik in the U.S. providence in Australia. And regarding our dividend program, I’m pleased to announce that our board of Directors approved the quarterly cash dividend which is an 11% increase year over year to be paid in the third quarter. This is the 44th consecutive quarterly dividend with annual double digit increases in the amounts to be paid and based on the lower leverage, we’ve continued our stock buyback program this year and in the first half of 2026 we bought back a total of $100 million. We do have 498 million available from the stock buyback plan approved by our board as part of our capital allocation strategy. So I’m pleased to share these really strong results for the start of fiscal 2026, which has enabled us to increase shareholder returns as we can pay, increasing dividends, increase our stock buybacks, engage in accretive acquisitions, all the while deleverage our balance sheet. I want to thank you for your support and I will now hand the call back over to Roger to discuss Tetra Tech’s growth opportunities for 26 and beyond.
Roger Argust (Chief Executive Officer and President)
Thank you, Steve. I would now like to provide an update for our outlook for the second half of fiscal year. We are beginning the third quarter with strong backlog and clear growth opportunities across our markets. As a result, we are increasing our forecasted growth rates for the second half of the year for both our US Federal and US Commercial client sectors to 8 to 12%. Together, these sectors represent 40% of our revenues. We expect US Federal to increase as our clients deploy funding to address both Domestic civil works programs, Defense Facility Modernization Globally, US Commercial’s increased growth rates align with the expected demand for water management for mining operations, expansion of domestic rare earths mine development and further acceleration of the upfront work of planning and permitting for power generation and transmission. International work we expect to grow at a 5 to 10% rate with continued strength in the United Kingdom, Ireland, the Netherlands, water and expected marine defense infrastructure spending in the UK and Australia. State and local work is expected to be about 15% of our business with a growth rate in the high single digits between 5 and 10%. Our long term outlook remains strong with state and local spending increasing regionally in alignment with demand. I’ll now discuss our U.S. commercial, U.S. defense and U.S. state and local municipal water business each in a bit more detail. Our US Commercial business …
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