Tetra Tech's Q4 2025 Earnings Call: Contradictions in USAID Work, Disaster Response Revenue, and State/Local Funding Impacts

Date of Call: November 13, 2025

Financials Results

• Revenue: $1.07B (Q4), up 10% YOY; FY2025 revenue up ~7% YOY (company stated FY revenue rose 7% vs prior year)
• EPS: $0.44 (Q4), up 29% YOY; FY2025 EPS $1.56, up 24% YOY

Guidance:

• Q1 FY2026 net revenue $950M–$1.0B; EPS $0.30–$0.33.
• FY2026 net revenue $4.05B–$4.25B; EPS $1.40–$1.55.
• Guidance assumptions: $27M intangible amortization, ~$25M depreciation, $30M interest expense, 27.5% tax rate, 264M shares outstanding.
• Guidance excludes anticipated contributions from acquisitions; management will update as deals close.
• Q1 guidance embeds an estimated ~$15–$20M impact from the recent government shutdown.

Business Commentary:

• Record Financial Performance:
• Tetra Tech reported record net revenue of $1.07 billion for Q4 2025, up 10% year-on-year.

• The growth was due to strong execution in water infrastructure, digital automation work, and reduction in low-margin work.

• Segment Performance and Margin Expansion:

• The Government Services Group (GSG) segment revenue grew by 17% in Q4, with margins improving to 22.9%, a 330 basis point increase from the previous year.

• This was driven by strong execution in water infrastructure and digital automation work, and a reduction in low-margin USAID work.

• International and U.S. Market Growth:

• International work contributed 45% of Tetra Tech's overall business in Q4, with growth driven by strong performance in the UK and Canadian clean energy practice.

• The growth was supported by increased demand for water management and sustainability solutions in these regions.

• Backlog and Contract Awards:

• Tetra Tech ended the quarter with a backlog of $4.14 billion, despite shorter federal funding cycles.
• The backlog increase was supported by significant new contract awards, particularly from U.S. defense agencies and international projects.

  Sentiment Analysis:

  Overall Tone: Positive

  • Management emphasized "record net revenue, record operating income and earnings per share" and "highest margins in more than 30 years." CFO highlighted record operating cash flow ($458M) and reduced leverage (0.9x EBITDA). Guidance for FY2026 and active M&A/capital-allocation plans were presented optimistically, citing strong backlog quality and >$1B liquidity to pursue growth.

Q&A:

• Question from Benjamin Luke McFadden (William Blair & Company L.L.C., Research Division): Backlog was roughly flat YOY but guidance implies ~8% organic growth mid-point; why is revenue growth decoupled from backlog this year?
  Response: Decoupling is driven by shorter-duration federal task orders (more frequent 'book-and-burn' quarterly awards) despite large federal contract wins (> $1B); state/local, commercial and international backlog growth offset federal visibility shrinkage; expect federal task orders to lengthen across FY26 improving visibility.

• Question from Benjamin Luke McFadden (William Blair & Company L.L.C., Research Division): For international (which outperformed), can you walk through puts and takes across your geographies and the three business lines?
  Response: International strength was led by UK/Europe water programs (~10% growth), Canada solid (~5–6% and should improve), and Australia moved from mid-teens declines to roughly flat—Australia's bottoming (plus SAGE contribution and Olympics-related work) drove the quarter's improvement.

• Question from Sabahat Khan (RBC Capital Markets, Research Division): How did you build the FY26 guidance range — what are the main top-line vs EPS puts and takes and what would push you to the low vs high end?
  Response: Midpoint based on segment midpoints (international/U.S. commercial/federal 5–10%; state/local 10–15); downside risks include timing/re-pricing from federal procurement, weak renewables comps and prolongued shutdowns; upside from clearer tariff/international outcomes, accelerated State Dept/federal funding and stronger international deployment.

• Question from Sabahat Khan (RBC Capital Markets, Research Division): Post-continuing resolution, does government reopening typically turn everything on smoothly? Any EPA permitting headwinds?
  Response: Most revenue was deemed essential (DoD) so shutdown had limited revenue impact; permitting/EPA delays have been minimal for Tetra Tech; some state/local co-funded projects paused awaiting federal sign-offs so effects are mostly optical on backlog/task-order timing, not material revenue loss.

• Question from Sabahat Khan (RBC Capital Markets, Research Division): On M&A pipeline and whether the shutdown changed seller willingness?
  Response: Volatility increased seller willingness among small/mid firms and moderated valuations; pipeline expanded; Tetra Tech has strong liquidity, a fully available revolver and convertible-debt capacity, enabling opportunistic small-to-large acquisitions.

• Question from Sangita Jain (KeyBanc Capital Markets Inc., Research Division): GSG margins — aside from reduced USAID exposure, what drove margin expansion and how should we think about margins in FY26?
  Response: GSG margin upside came from high utilization on disaster-response work, a shift to fixed-price (~50% this quarter vs historical ~35%), and mix-shift toward higher-end front-end consulting; management targets ~60% fixed-price and expects further margin gains via digital/efficiency tools.

• Question from Sangita Jain (KeyBanc Capital Markets Inc., Research Division): On U.S. commercial — is what you're losing in renewables similar in scope and margin to what you're gaining in transmission and data centers?
  Response: Renewables losses were concentrated in permitting/compliance and marine services (e.g., offshore wind); replacement work in high-voltage transmission and data-center water/design is more engineering-heavy, scarcer in supply and generally higher-margin with less competition.

• Question from Maxim Sytchev (National Bank Financial, Inc., Research Division): Update on digital initiatives — where is adoption highest and what's the client take-up/velocity?
  Response: SaaS/recurring revenue (~$25M) has stalled due to a federal moratorium on new software buys; management is pivoting GTM to nonfederal buyers (ports/harbors, airports, European customers) to accelerate adoption—expect recovery but roughly a one-year delay versus original plan.

• Question from Maxim Sytchev (National Bank Financial, Inc., Research Division): Any guardrails on acquisition size appetite given the strong balance sheet?
  Response: Historically mid-size deals added low-single-digit revenue; appetite spans small/medium up to larger public/private targets; available liquidity, revolver capacity and favorable capital markets permit materially larger transactions than recent deals.

• Question from Michael Dudas (Vertical Research Partners, LLC): Given 1.5 years since Investor Day and recent disruption, are you more/less confident in the 2030 targets and does M&A need to play a bigger role?
  Response: Management remains confident on margin/2030 targets (margins improved after AID exit); top-line gap from AID will be partly closed with increased M&A backed by low-cost capital and strong balance sheet while organic growth targets (mid-single digits to high-single digits) remain intact.

Contradiction Point 1

USAID Work and Fiscal 2025 Guidance

It involves changes in expectations regarding USAID work and its impact on fiscal 2025 guidance, which are critical for understanding the company's financial performance and revenue projections.

Why is revenue growth expected to be decoupled from backlog growth this year compared to prior guidance? - Benjamin Luke McFadden (William Blair & Company L.L.C.)

2025Q4: We have assumed that approximately $400 million worth of USAID work would be completed annually. We did about $200 million in the first quarter and expect another $200 million over the next three quarters. - Dan Batrack(CEO & Chairman)

What assumptions are built into the midpoint of your guidance range for USAID work, and what supports your confidence that some of this work will resume after the 90-day review? - Timothy Mulrooney (William Blair)

2025Q1: Approximately $400 million worth of USAID work would be completed annually. For the first quarter, we did about $200 million, expecting another $200 million over the next three quarters. - Dan Batrack(Chairman & CEO)

Contradiction Point 2

Disaster Response Revenue and Fiscal 2025 Margin Expansion

It involves changes in expectations regarding disaster response revenue and its impact on fiscal 2025 margin expansion, which are critical for understanding the company's financial performance and profitability.

Can you explain the performance and growth trends of your international business by region? - Benjamin Luke McFadden (William Blair & Company L.L.C.)

2025Q4: Disaster response revenue in the fourth quarter was approximately $60 million, up from $13 million in the fourth quarter of fiscal year 2024. - Dan Batrack(CEO & Chairman)

Can you clarify how disaster response revenue is included in your upper guidance range? - Sangita Jain (KeyBanc Capital Markets)

2025Q1: We expect around $40 million to $50 million in incremental revenue from disaster responses, primarily due to fires. This revenue will offset the temporary hold on USAID work. - Dan Batrack(Chairman & CEO)

Contradiction Point 3

State and Local Funding and Impact of Federal Policies

It concerns the potential impact of federal policies on state and local funding for Tetra Tech's projects, which could affect the company's revenue and growth prospects.

Why is revenue growth expected to decouple from backlog growth this year, given previous guidance? - Benjamin Luke McFadden (William Blair & Company L.L.C.)

2025Q4: We’re seeing a lot of strength in state and local, and that’s really been the key driver throughout this year. - Dan Batrack(CEO & Chairman)

Will the Trump administration's federal spending cuts affect state general funds and negatively impact your state and local business? - Tim Mulrooney (William Blair)

2025Q2: Actually, we received the flip side of that same question years ago with the IIJA funding, expecting state funds to increase. - Dan Batrack(President and CEO)

Contradiction Point 4

State and Local Funding and Impact of Government Shutdowns on Operations

It involves the potential impact of government shutdowns on Tetra Tech's operations, particularly in terms of federal government work and state and local projects.

What were the impacts of the government shutdown on your operations, especially EPA permit issuance? - Sabahat Khan (RBC Capital Markets)

2025Q4: The shutdown did impact state and local projects with co-funded federal grants on hold. - Dan Batrack(CEO & Chairman)

What do your discussions with federal partners indicate about visibility and confidence for the second half of this year through 2026? - Sabahat Khan (RBC Capital Markets)

2025Q2: Minimal impact on federal government work as most were already essential services. - Dan Batrack(President and CEO)

Contradiction Point 5

Backlog and Federal Contracting

It involves differing explanations of backlog trends and the factors affecting federal contracting, which could impact revenue projections and investor expectations.

Why is revenue growth expected to decouple from backlog growth this year despite previous guidance? - Benjamin Luke McFadden (William Blair & Company L.L.C.)

2025Q4: Dan Batrack described that while the backlog was flat, it was due to a change in the U.S. federal government's funding approach, which reduced the duration of funding for contracts. - Dan Batrack(CEO & Chairman)

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2025Q3: The issuance of contracts and scope of work haven't changed, but there's a slowdown in converting contracts to task orders. Early retirements and downsizing of contracting officials have impacted this process. - Dan L. Batrack (CEO)