Tetra Tech (TTEK) Q1 2026: International Revenue Climbs 13%, Margin Expansion Signals Resilient Water Demand
Tetra Tech’s first quarter delivered robust international growth and margin gains, despite a historic U.S. government shutdown that pressured backlog and federal order flow. The company’s focus on high-margin water and environmental consulting, paired with disciplined capital allocation, positions it for continued outperformance as global infrastructure and climate resilience investments accelerate.
Summary
- International Acceleration: Water programs in the UK, Ireland, and Canada drove outsize growth and backlog quality.
- Margin Expansion: Shift toward front-end consulting and digital automation boosted profitability across both segments.
- Strategic M&A Firepower: Balance sheet flexibility and leadership transition support larger, transformational acquisitions.
Performance Analysis
Tetra Tech’s Q1 2026 results showcased resilience and operational discipline as the company navigated the longest U.S. government shutdown in history. Net revenue grew 8% year-over-year, with international operations now comprising 48% of total revenue and expanding at a 13% rate. Operating income rose 12% year-over-year, reflecting strong execution and a favorable sales mix toward higher-margin consulting and design work. Segment-level, the Government Services Group (GSG) posted 5% revenue growth and 18% margins, while the Commercial & International Group delivered a 10% revenue increase and 13% margins, both up 40 basis points from the prior year.
U.S. federal revenue rose 7% despite shutdown headwinds, driven by advanced planning and major wins with the U.S. Army Corps of Engineers. State and local markets remained robust, up 10% on digital water modernization. U.S. commercial was slightly down, as expected, due to a pullback in renewables, though high-voltage transmission partially offset the decline. Cash flow from operations improved sharply, up $59 million year-over-year, with days sales outstanding (DSO) reaching an industry-leading 51 days. Net leverage fell to 0.86x EBITDA, giving Tetra Tech ample headroom for capital deployment.
- International Mix Shift: UK and Ireland water programs and Canadian infrastructure drove double-digit growth and backlog visibility.
- Margin Structure Strengthened: Front-end consulting and digital automation work lifted enterprise margins by 140 basis points.
- Cash Generation Surged: Operational cash flow rose to $72 million, reflecting project quality and client satisfaction.
Backlog remained stable but flat, as U.S. federal orders slowed during the shutdown while state, local, and international wins improved backlog quality and embedded margins.
Executive Commentary
"Even with the government shutdown, we grew our revenue 8%. We expanded our margins by 140 basis points on a gap basis. And we improved the quality of our backlog by winning more front end work and increasing the embedded margins that we have in the new projects that we've been awarded just this last quarter."
Dan Batrak, Chairman and Chief Executive Officer
"Our market leading focus on front end consulting and design for water environmental projects are carrying higher margins across all of our end markets. As such, even as the first quarter revenue was down from last year due to the decrease in revenue from our USA customer and virtually no revenues from hurricane disasters this year compared to last year, our operating income increased significantly, and EBITDA on net revenue for the quarter increased by 140 basis points to 14.2% in the first quarter of fiscal 2026."
Steve Burdick, Chief Financial Officer
Strategic Positioning
1. Global Water and Environmental Leadership
85% of Tetra Tech’s business centers on water and environmental services, spanning government and commercial clients. The company’s “leading with science” approach supports high-margin, front-end consulting for large-scale water infrastructure, digital automation, and environmental stewardship. Recent wins in New York, Texas, and Colorado underscore Tetra Tech’s positioning as a partner of choice for municipalities facing drought, contamination, and modernization needs.
2. International Growth Engines
International operations are now nearly half of total revenue, led by UK and Ireland water programs (AMP8 cycle), Canadian infrastructure, and a stabilizing Australia. UK and Ireland are delivering double-digit growth, propelled by multi-billion dollar utility capex cycles and digital water management software. Canada’s Arctic infrastructure and defense investments are ramping, while Australia is rebounding from prior declines, aided by mining and defense projects.
3. Capital Allocation and M&A Readiness
Tetra Tech’s net leverage of 0.86x and $2B+ debt capacity provide flexibility for both organic investments and larger, strategic acquisitions. The company continues to execute on its capital return strategy, with a 12% dividend increase and $50 million in share repurchases in Q1. Recent acquisitions (Halvik, Providence) expand technical depth in U.S. and Australian defense consulting, while the divestiture of Norway operations improves portfolio focus.
4. Backlog Quality and Embedded Margins
Backlog composition is shifting toward higher-margin front-end work, even as total backlog remained flat due to federal delays. State, local, and international wins are embedding higher profitability into future revenue streams, supporting margin expansion and earnings visibility.
5. Leadership Transition and Strategic Vision
CEO Dan Batrak’s transition to Executive Chairman marks a shift toward pursuing transformational M&A and industry partnerships. Incoming CEO Roger Argus inherits a business with strong operational momentum and a mandate to accelerate growth in core water, defense, and digital automation markets.
Key Considerations
Tetra Tech’s first quarter demonstrates the durability of its water and environmental consulting model, with growth levers distributed across geographies and end markets. The company’s capital allocation discipline and margin focus set a high bar for returns, while its leadership transition signals a willingness to pursue larger, more strategic moves.
Key Considerations:
- International Outperformance: UK and Ireland water programs, plus Canadian Arctic and defense work, are outpacing U.S. commercial activity.
- Margin Expansion Sustainability: Front-end consulting and digital automation are structurally lifting margins, but the mix shift must persist as backlog replenishes.
- Federal Order Flow Recovery: U.S. government shutdown delayed federal orders, but management expects a late-Q2 and H2 rebound as appropriations stabilize.
- M&A Optionality: Ample liquidity and low leverage support both bolt-on and transformational deals, with recent acquisitions offsetting divestitures for a more focused portfolio.
Risks
Federal funding volatility remains a risk, with future shutdowns or appropriations delays potentially impacting backlog and revenue cadence. International growth is subject to geopolitical and funding uncertainties, while execution risk rises as Tetra Tech contemplates larger M&A. Commercial end markets, especially renewables, could remain soft if macro or policy headwinds persist.
Forward Outlook
For Q2, Tetra Tech guided to:
- Net revenue of $975 million to $1.025 billion
- Adjusted EPS of $0.30 to $0.33
For full-year 2026, management raised guidance:
- Net revenue of $4.15 billion to $4.3 billion
- Adjusted EPS of $1.46 to $1.56
Management cited assumptions including full-year inclusion of Providence, $34 million in amortization, $25 million depreciation, and a 27.5% tax rate. Federal order flow is expected to accelerate in H2. Guidance excludes future acquisitions but incorporates current portfolio adjustments.
- Late Q2 and H2 federal order recovery expected as appropriations resolve
- International and state/local strength underpin mid- to high-single-digit growth rates
Takeaways
Tetra Tech’s Q1 2026 results reinforce its status as a premium play on global water infrastructure and climate resilience. The company’s ability to expand margins, generate cash, and execute on both organic and inorganic growth is underpinned by a high-quality backlog and a diversified geographic footprint.
- Water Megatrend Resilience: Global demand for water infrastructure and environmental consulting continues to drive growth, with digital automation and front-end work lifting profitability.
- Portfolio Discipline and M&A Capacity: Divestitures, targeted acquisitions, and a strong balance sheet position Tetra Tech for both bolt-on and transformational deals as leadership transitions.
- Federal and Commercial Watchpoints: Backlog quality is improving, but federal funding volatility and commercial market softness remain key variables for 2026 performance.
Conclusion
Tetra Tech’s first quarter highlights the strength of its water and environmental consulting platform, with international markets and margin expansion offsetting federal headwinds. The company’s capital allocation discipline and leadership transition set the stage for continued outperformance and strategic evolution in a structurally growing market.
Industry Read-Through
Tetra Tech’s results signal robust infrastructure and water demand across developed markets, with digital automation and front-end consulting commanding premium margins. Competitors in engineering, consulting, and environmental services should note the shift toward recurring, high-value software and advisory work, as well as the growing importance of international diversification. Federal funding volatility remains a sector-wide risk, but structural tailwinds in water, defense, and climate resilience are likely to persist for the foreseeable future.