TETRA TECH INC Q4 FY2026 earnings call

• Strong Financial Finish: Tetra Tech reported record operating income and earnings per share for fiscal 2026. Fourth-quarter net revenue reached $1.15 billion (up 5%), with EBITDA margins expanding 90 basis points to support a long-term goal of 50 basis points annual improvement.
• Backlog Growth: The company ended the year with $4.7 billion in funded backlog, a 13% increase year-over-year, supported by three consecutive quarters with book-to-bill ratios above 1.1x.
• Strategic Contract Awards: Significant new contract capacity was secured, including a $1.4 billion NASA enterprise-wide technical support contract, $145 million for U.S. Navy infrastructure upgrades, and over $220 million in additional capacity with the U.S. EPA.
• Operational Efficiency: Operating cash flow improved 14% to $523 million, maintaining a 21-year streak of exceeding net income. Days Sales Outstanding (DSO) remains industry-leading at 60 days, reflecting high-quality project execution and client satisfaction.
• Capital Allocation: The Board approved an 11% dividend increase. The company executed $300 million in stock buybacks for the year and maintains approximately $798 million in authorized buyback capacity, alongside a leverage ratio of 1.0x on EBITDA.

Government Services Group (GSG): Revenue was $513 million, an 8% increase from the prior year, with a strong margin of 18.8%. Growth was driven by municipal water programs and federal infrastructure projects for the U.S. Army Corps of Engineers and U.S. Navy. Commercial International Group (CIG): Revenue was $640 million, up 3% year-over-year, with a margin of 16.2%, expanding by 140 basis points. Growth was primarily fueled by UK and Irish water programs, Digital Automation, Defense work in Australia, and infrastructure programs in Canada.

• First Quarter 2027 Net Revenue: Guided between $1.04 billion and $1.08 billion.
• First Quarter 2027 EPS: Guided between $0.36 and $0.38.
• Fiscal Year 2027 Net Revenue: Guided between $4.425 billion and $4.625 billion.
• Fiscal Year 2027 EPS: Guided between $1.65 and $1.80.
• Key FY27 Assumptions: Includes $24 million in intangible amortization, $25 million in depreciation, $30-$35 million in interest expense, and a 27.5% effective tax rate. Guidance excludes contributions from future acquisitions.

• Political and Administrative Transition Risks: The upcoming U.S. midterm elections and potential shifts in congressional leadership may delay or alter federal funding priorities and program allocations, particularly affecting disaster preparedness grants.
• USAID Uncertainty: With the apparent shuttering of USAID, there is significant uncertainty regarding future development work; while the Department of State remains an active client, near-term resurgence of USAID-funded projects is not expected.
• Disaster Funding Volatility: U.S. state and local growth is muted due to reliance on federal disaster response funding, which is sporadic and dependent on the occurrence of major natural disasters (e.g., hurricanes).
• Renewable Energy Headwinds: Regulatory roadblocks by the federal government are currently muting potential growth opportunities in sectors like offshore wind.

Q: Analyst asked about drivers of the 13% backlog growth and whether Ukraine-related Department of State revenue is treated as a headwind in the FY27 guidance.

A: Management confirmed broad-based awards across all markets, including resilient infrastructure and municipal water. Regarding Ukraine, management clarified that they now report 'all-in' figures without breaking out specific geopolitical programs. They acknowledged that while Department of State remains an active client, the exclusion of specific Ukraine breakdowns implies it is not additive to the core growth narrative in the guidance assumptions.

Q: Analyst questioned why FY27 revenue growth (~5-10%) appears modest compared to the 13% backlog growth, and sought details on the flat outlook for U.S. state/local work.

A: Management explained that backlog includes multi-year projects with gradual ramp-up rates rather than immediate full burn. For state/local, the flat forecast is driven by a lack of major disasters in the prior period, which reduced access to earmarked federal disaster planning funds. However, municipal water programs continue to grow at double-digit rates.

Q: Analyst asked about the impact of political transitions on USAID and cybersecurity trends driving commercial growth.

A: Management stated that USAID effectively does not exist currently, so no near-term resurgence is expected despite political rhetoric. On cybersecurity, management noted it is an embedded driver for digital automation and system modernization. Concerns over hacks and espionage prompt industrial and water clients to upgrade SCADA and control systems, making cybersecurity a co-driver with efficiency gains.

Q: Analyst inquired about international growth prospects and potential upside beyond the 5% target, specifically regarding commercial vs. government work.

A: Management highlighted strong growth in UK/EU water programs and unprecedented infrastructure funding increases in Canada. Asia Pacific mining activity is also picking up. Digital automation is identified as a key cross-segment growth driver across federal, municipal, and commercial clients globally, providing a solid foundation for the 5% international growth target.