Earnings Call Transcript - TTEK Q3 2025

Operator, Operator

Good morning, and thank you for joining the Tetra Tech earnings call. Tetra Tech is also simulcasting this presentation with slides on its website at tetratech.com. This call is being recorded at Tetra Tech's request, and the broadcast is the copyrighted property of Tetra Tech. Any rebroadcast of this information in whole or part without prior written permission from Tetra Tech is prohibited. With us today from management are Dan Batrack, Chairman and Chief Executive Officer; Steve Burdick, Chief Financial Officer; and Leslie Shoemaker, Chief Innovation Officer. They will provide a brief overview of the results, and then we will 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 due to various risks and uncertainties, including those described in Tetra Tech's periodic reports filed with the SEC. Except as required by law, Tetra Tech does not undertake any obligation to update its forward-looking statements. Additionally, since management will present some non-GAAP financial measures, the appropriate GAAP financial reconciliations are available in the Investors section of Tetra Tech's website. With that, I would like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Dan L. Batrack, CEO

Thank you very much, Kate, and good morning. Welcome to our third quarter earnings call for fiscal year 2025. Overall, we had a robust third quarter, achieving record highs for operating income and earnings per share, which were all-time highs not just for this quarter, but for any quarter in our company's history. The strong performance in operating income and margin was primarily driven by our staff's rapid response to the devastating fires in Southern California earlier this year. This high level of utilization contributed to our revenue and income exceeding our guidance, supporting strong year-on-year growth rates for the quarter. The wind-down of our USAID work has progressed generally as expected, although our revenue was slightly lower than forecasted. A positive note is that we received payments for nearly all outstanding USAID invoices, which enhanced our cash generation and reduced day sales outstanding in the quarter. Our CFO, Steve Burdick, will elaborate on that shortly. While we enjoyed an excellent third quarter, we remain cautious as we navigate changes with the new administration and their near-term impacts. In my opening remarks today, I will address some of these immediate impacts across our markets. Joining me are Steve Burdick, our Chief Financial Officer, who will delve into our financial performance, and Dr. Leslie Shoemaker, our Chief Innovation Officer, who will provide insights on our outlook for federal work and digital automation markets. Now, let's begin with an overview of our financial performance. In the third quarter, excluding USAID and Department of State, our net revenue rose to $1.06 billion, an 11% increase from the same quarter last year. Our operating income reached $159 million, a 37% increase from the prior year, and our earnings per share stood at $0.41 for the quarter, up 46% from last year. Focusing on our Government Services segment, excluding USAID and Department of State, the Government Services Group's revenue grew by 29% year-on-year to $429 million, with a margin of 19.9%, up 230 basis points from the previous year. This impressive margin was due to disaster response work and the reduction of lower-margin USAID and State Department work from previous quarters. The rapid mobilization of staff for fire recovery in California significantly boosted our utilization across all divisions of Tetra Tech. The Commercial/International Group achieved a strong 15.2% margin for the quarter, an increase of 130 basis points from last year. Their revenue was $633 million, showing slight growth compared to the same quarter last year, driven by operations in the UK and EU, offset by declines in U.S. commercial and Australian activities. In terms of our end customer performance, for U.S. federal clients, excluding USAID and Department of State, our federal work rose 46% from the same quarter last year, representing about 25% of our business. Disaster response efforts led by the Army Corps of Engineers added approximately $70 million in revenue for our federal segment. Furthermore, state and local revenue increased 30% year-on-year, and excluding disaster response contributions, our ongoing water programs grew by 18% year-over-year. Our U.S. commercial net revenues decreased by 4%, mainly due to reductions in renewable energy projects, particularly in offshore wind. Our environmental restoration activities remained stable, supported by state and local regulatory requirements, with no federal impact seen in this area. Finally, our international revenues, which now account for 42% of our total revenue, were down 1% year-on-year but showed growth in UK and Irish water programs. If we exclude Australian revenue, Tetra Tech's international activities are up about 5% this quarter. Now, I'd like to discuss our backlog, which is crucial for our contracted and funded work. Excluding USAID and State Department activities, our backlog stands at $4.15 billion, slightly up from the previous quarter. This growth is commendable, particularly since the third quarter is typically not a peak period for backlog growth. In this quarter, we secured nearly $2 billion in new contracts with the U.S. federal government, including significant wins with the Army Corps of Engineers in various locations. Our recent $94 million EPA award focuses on critical emergency response services for incidents like railroad derailments and chemical spills, including responses to extraordinary events such as the East Palestine train derailment. We are also expanding our state contract capacity for disaster response, with a notable $22 million award from the state of Georgia, continuing our work from earlier this year. Additionally, we have just announced a new contract for digital automation from a major water utility in California. Now, I would like to hand the presentation over to Steve Burdick, our Chief Financial Officer, to provide further details on our financials and an update on our capital allocation program. So, Steve?

Steven M. Burdick, CFO

Thanks, Dan. So I'd like to now provide an update on our fiscal year-to-date results, working capital, cash flows, and capital allocation. So as Dan discussed earlier on this call, we continue to focus on the front-end consulting and design for water and environmental projects, which are carrying higher margins across all of our end markets. And as such, even as the 2025 revenue was up 9% over last year, our operating income and EBITDA for the year increased at higher rates of 21% and 15%, respectively. These results, on a year-to-date basis, further support our long-term strategic goals to increase net revenue while improving EBITDA margins by 50 basis points annually. I do want to point out that the EBITDA margins on net revenue came in better and increased by over 70 basis points through the first three quarters of this year compared to last year at this time. As a result of our ability to enhance our profit margins and further manage our working capital, we were able to increase the adjusted EBITDA or EPS by 26% over last year. Now on a GAAP basis, in the first half of the year, we did recognize a charge for litigation and non-cash charge relative to the goodwill impairment for our USAID reporting division. So I would please refer you to the appendix of this presentation and our Reg G for any reconciliation. These strong financial and operating results have resulted in the strengthening of our balance sheet and our cash flow position. So cash flows generated from operations for the trailing 12 months were $462 million, which represents a 23% improvement over the previous trailing 12 months. And these cash flows have continued to exceed net income by more than 100%. Our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of 56 days, which is an 11-day improvement from the second quarter of this year. Much of this improvement resulted from our collections of receivables due on USAID projects. And when we include the current outstanding USAID receivables, our DSO is even lower at 54 days. This lower DSO metric provides significant insight into our core business as it reflects the outstanding work that our project managers lead relative to higher-quality projects and highly satisfied clients in the broad portfolio across all of our end markets and all of our geographies. Our net debt amounts to about $620 million, and the net debt on EBITDA was at a leverage of 0.96x, which is lower than our leverage one year ago when it stood at 1.15x. As we continue to execute on high-quality operating 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. And those higher shareholder financial returns are reflected in an improving return on capital employed which stands at close to about 20%, which is among the best in our industry. Now for those following along the presentation, I would like to now present our capital allocation overview. We have a very strong balance sheet, probably the strongest balance sheet in our history with over $1 billion in available liquidity as we revised our capital structure in the last year to take advantage of the credit market to support our strategic growth opportunities. Leslie will discuss those strategic growth areas later in the presentation, but I do want to point out that we have a significant amount of liquidity available to invest in organic and acquisitive growth priorities, and we have a well-balanced mix of both fixed and floating rate debt to mitigate any interest rate risk and take advantage of any opportunities there. Now regarding our dividend program, I want to announce that our Board of Directors approved a $0.065 dividend, which is a 12% increase year-over-year to be paid in the fourth quarter. This is our 41st consecutive quarterly dividend with annual double-digit increases in the amounts paid. And based on the lower leverage that I just talked about, we did reinstitute our stock buyback program this year. So far, in 2025, we have bought back a total of $200 million, which includes $25 million in stock buybacks for the third quarter. We do have $648 million available from the stock buyback plans approved by our Board of Directors as part of our capital allocation strategy. So in conclusion, I'm really pleased to share these financial results so far in fiscal 2025. Thank you for your support. And I will now hand the call over to Leslie to discuss Tetra Tech's future opportunities for the rest of 2025 and beyond. Leslie?

Leslie L. Shoemaker, Chief Innovation Officer

Thank you, Steve. The U.S. federal government spending is realigned each time a new administration is put in place. In the first year of a new administration, new leadership is appointed and often the most significant legislation is passed. It does take time for these changes to percolate through government policies and contracts. Since January, we've seen significant changes in funding priorities, changes in contracting practices, restructuring of entire agencies, and the passage of the One Big Beautiful Bill Act or OBBBA. The new bill just signed on July 4 sets out the administration's new vision and clearly defines new funding for priority programs. The bill and subsequent executive orders do include significant actions that could adversely impact our renewable energy business. But we see clear opportunities that are in Tetra Tech's wheelhouse. I would like to highlight just three areas of particular relevance to us. The bill identifies increases in defense spending of $150 billion, likely to be further augmented by increases in the 2026 budget. The focus on the upgrade of defense facilities aligns with our differentiated services, especially in resilient design, high-performance buildings, automated inspections, and asset management. A generational increase of $25 billion is also included for the Coast Guard. We can quickly ramp up to expand our current work for the Coast Guard and software solutions that they use for emergency responders and coastal monitoring today, as well as support an increase in the evaluation, planning, and design of marine infrastructure. Finally, the bill includes initial funding of $12.5 billion to upgrade our air traffic control systems. This is where Tetra Tech currently holds over $1.5 billion in federal aviation administration capacity and is one of the leading experts in air traffic control, including the ongoing evaluation of new and emerging technologies. I'd now like to cover just a few recent developments in our digital automation sector. We started the digital water initiative at Tetra Tech in 2021. And since then, we've added five firms with specialized expertise in the field of automation. These are firms that work in connecting the instruments, technology, and systems that are needed for the digital transformations of utilities and industry. Today, we're seeing some of the fastest growth in this sector, catalyzed by the increasingly affordable access to generative AI that's used to rapidly interpret information, optimize our client systems, and actually work in real time. Growth projections for this market, also referred to as the new Industrial Revolution or Industry 4.0 are for global expansion to reach over $600 billion by 2030 at a 20% CAGR. From our initial vision to focus on water utilities, which is really the majority of our work today, we've now added work for our commercial clients in oil and gas, mining, and manufacturing. Through the recent acquisition of Sage Automation, we now have significantly broader global resources, we further diversified our clients, and we've added new software and intellectual property. Today, we're cross-selling digital automation to our global customers and broadening our reach in this rapidly growing market that's fueled by the adoption of AI that directly benefits our customers' bottom line. The trends we're seeing support our growth plan to reach $500 million in annual revenues for digital automation by 2030. And now, I'd like to turn the presentation back over to Dan.

Dan L. Batrack, CEO

Thank you, Leslie. I would now like to present our guidance for the fourth quarter and actually our updated guidance for the entirety of fiscal year 2025. So our guidance is as follows. For Q4, fourth quarter fiscal year 2025, our net revenue guidance is for a range of $1 billion to $1.1 billion with an associated earnings per share of $0.38 to $0.43. Our updated guidance for the entire year is for a net revenue range of $4.454 billion to $4.554 billion, with an associated adjusted earnings per share of $1.49 to $1.54. We do have the assumptions for our fourth quarter items included in the webcast and on the slide, but I will make a note. We do anticipate a contribution of work from USAID and Department of State of approximately $40 million to $50 million, which is actually down from what we had anticipated just a quarter ago. So this is continuing to ramp down as an overall contribution to our revenues here at Tetra Tech. In summary, this morning, after 9 months of fiscal year 2025, it's about three quarters through and six months under this new administration, which included the elimination of our largest client, USAID, our revenue is up, and we just delivered the highest income quarter in the company's history. Although there's near-term uncertainty in some of our end markets, we're well prepared to navigate these through our diversified services, through our contract capacity, and by using our balance sheet to be very opportunistic in many different strategic areas. And some of those areas include acquisitions. And as Steve has indicated during his commentary, the buildup of cash can also be used to continue stock buybacks, which is another way of returning value to our shareholders. There's no doubt that the long-term demand and necessity for high-end water, environment, and sustainable infrastructure is unchanged, and the future looks very bright for us. And now I'd like to open the call for questions. Kate?

Operator, Operator

The first question comes from the line of Tim Mulrooney with William Blair.

Timothy Michael Mulrooney, Analyst

So two questions here on the backlog. Firstly, can you just dig into the backlog a little bit more? I mean it looks like it was essentially flat year-over-year, excluding USAID and the Department of State. Are there things happening here on the federal government side where the cadence is a bit different than what you normally see? I'm curious if we should be thinking about the slowdown in backlog growth as being indicative of slower revenue growth or if the procurement cycle has just shifted somewhat as maybe the agencies are taking a little bit longer to send out the RFPs or task orders?

Dan L. Batrack, CEO

That's a good observation, a good question, Tim. There's two aspects with respect to the work that we do for the federal government. I would say that over this last quarter, one area we've not seen a change in is the cadence and timing and issuance of contracts. And as I commented in my prepared remarks, our backlog with the federal government increased by nearly $2 billion. So the actual issuance of contracts, scope of work, really none of that has seen any changes from what we anticipated and what we've seen earlier in the year and frankly, from even prior to this administration. But what we have seen a difference in is actually the conversion of the contracts to issuance of task orders that go into our backlog. Now I think part of this is actually an artifact of Tetra Tech itself. We do only report our backlog if we have a contract, which we've seen those announcements, but they've funded it, which they have the funding for it from Congress with the bill. And then they've actually authorized us to go to work. And what we've seen is there's been a lot of early retirements, people downsizing different departments within the government. And that has included a lot of senior individuals in the contracting officer ranks. So we've seen a slowdown between contract issuance and task order delivery. Now many of our peers, and others that work for the government report their backlog differently than Tetra Tech. They actually have what they call hard backlog, which would be ours or funded backlog, funded and authorized. And then they also include a percentage of the amount of the contract that's issued. And in fact, if we did that, you'd see our backlog actually reporting significant increases associated with the issuance of these contract vehicles. So we have always held ourselves to an unusually, in fact, uniquely high standard on these, and we've seen that slow down through the changes with this new administration. And you really do need all of the contracting officers and all of the different mechanisms in place to make that work smoothly. I think what it means, I don't think that the contract capacity is an issue. I don't think that the existing task orders we have in hand will at least from our perspective now have an impact on our revenue. It's just that there'll be shorter visibility with respect to how far out you see with the task orders through this new environment. So this is something that is different. We're about a month into our fourth quarter. And one thing I'll note that as long as I've been with the company, which goes back quite a while, when the federal government, the fourth quarter has always been an issuance quarter for the government. It's the end of their fiscal year. There's a bit of use it or lose it. Anything that wasn't expended earlier, they issue and push out. And I'll tell you, we're a month in, and we're not seeing that phenomenon or that annual seasonal distribution. So it does look like this is going to be more of a book and burn issuance on task orders from the federal government. So maybe we'll have a better view on that at the end of the fourth quarter. But issuance and the growth of the backlog may actually be less but not affecting the revenue that's coming out of the contracts that we have. I know that's a long explanation, but it's a big part of the business. And I want to put in context before we get to the end of the fourth quarter, what we are seeing today and what it might look like at the end of the quarter.

Timothy Michael Mulrooney, Analyst

No, that's really helpful, Dan. It sounds like the $2 billion contract with the federal government is very much still intact. It's just about the conversion of task orders, which seems more like a delay rather than anything being lost. I appreciate that clarification. As my follow-up, sticking with the backlog,

Dan L. Batrack, CEO

Operator, Kate, I think we may have had a bit of an interruption on his last question.

Timothy Michael Mulrooney, Analyst

Dan, can you hear me okay?

Dan L. Batrack, CEO

I've got you loud and clear, Tim. I hear you quite clearly now.

Timothy Michael Mulrooney, Analyst

Okay. I apologize about that. Just my follow-up question was just simply how you think about the margin profile of your backlog today relative to where it was this time last year, excluding USAID and the Department of State.

Dan L. Batrack, CEO

Great, great question. One time, we went into a fair amount of detail in actually our Investor Day, which was just a little bit over a year ago, so a year ago, May. And we had actually talked about a long-term goal of increasing our margins by 50 basis points per year. And that was exclusive of AID. We didn't anticipate that AID would have contributed any increase. And we're actually seeing that. In fact, we're seeing it a little bit even slightly above that level. The reasoning is two items that are driving that. Number one, we're actually looking to shift the business to higher-value services that we're providing to our clients. So we're moving more to the front end. We're moving more to consulting, more to qualifications-based. And so we're moving that upfront portion of the business that we have and shifting the mix to a higher value delivery, which actually carries higher margins in and of itself. And the second piece is our fixed price. So we are increasing the percentage of fixed-price work we have within the company, which actually carries higher margin. And so embedded in our backlog, it actually is increasing and is supportive of that 50 basis points per year or more target of margin expansion. So it needs to be put into the bids or the types of rates that we put to our clients in the backlog before it converts to earnings and margin expansion, and that's what's happening right now. So yes, it's for those two reasons, change in contract type, the fixed price and services provided, which is moving to even higher value services that we're providing to our clients.

Operator, Operator

Our next question comes from the line of Sangita Jain with KeyBanc Capital Markets.

Sangita Jain, Analyst

So Dan, if I can ask you on the previous question about the book and burn cadence of the federal work right now. Based on your experience, how does that set you up for 2026? Do you think there's going to be like pent-up orders coming? Or do you think it's going to be a continuation of this book and burn type situation?

Dan L. Batrack, CEO

That's a great question. At this moment during the call, it appears that we're leaning towards a book and burn approach. The necessary actions for various agencies take time, potentially extending beyond a day, a week, or even a month. With only about 60 days remaining until the end of our fiscal year, I believe that as we finish this quarter and look ahead to 2026, it will likely be more of a book and burn situation on the federal government side than we've previously experienced. However, I'm open to learning more as we go along, and there might be developments that differ from our expectations. Nonetheless, we believe it will trend towards book and burn, and there's a possibility that our backlog could remain flat or even decline by the end of the fourth quarter, but this wouldn't affect our revenue outlook. It just means there will be less clarity about the timeline.

Sangita Jain, Analyst

Got it. Appreciate that. And then just a kind of housekeeping question. How should we think about disaster recovery revenue in fiscal fourth quarter?

Dan L. Batrack, CEO

Well, for the communities, it's a really good story. We've largely completed the support work of recoveries down in the flooded and impacted areas in Florida and Georgia and the Carolinas. So we'd see that as essentially over. And I will say that the long-term target or the initial target, I should say, was to have the fire clearance of all debris and materials for rebuilding to start. The original target was to have it all finished in the year. And thanks to the Army Corps of Engineers, phenomenal leaders at the core, and of course, the cities and the state of California and the cities there. Most of that work has all been completed here by the end of July, essentially now. So I expect it to be very minimal contribution in the fourth quarter for those two events. Now it's early, but we haven't included in our guidance much contribution from what we call these response activities. Now we do have plenty of design work and planning work for emergency activities that will continue, but we would say that's relatively consistent year-over-year. But for this episodic, it should be quite minimal in the fourth quarter.

Operator, Operator

Our next question comes from the line of Sabahat Khan with RBC Capital Markets.

Sabahat Khan, Analyst

You provided quite a bit of color through the slides on some of the demand drivers here. But we've been getting a lot of questions within this sort of volatile backdrop, kind of what is the water market growth relative to infrastructure? So hoping maybe to give you an opportunity to maybe just lay out some of the drivers across sort of the U.S., U.K., and Australia that you're seeing just broadly across commercial and federal within the specific end markets that you're playing in and more around sort of how do the rates of growth in water demand maybe compare to underlying just infrastructure demand? Any color would be great.

Dan L. Batrack, CEO

I believe our state and local work is one of the best indicators for the water infrastructure market. This primarily involves upgrading or constructing new water treatment plants, wastewater treatment facilities, and, in some cases, coastal protection, much of which is for our state and local clients. Historically, we've indicated growth expectations of 10% to 15%. However, for several consecutive quarters, we have exceeded that, with the last quarter showing nearly 20% growth even when excluding special disaster response funding. The 18% growth rate is similar to the previous quarter. Many have asked whether the actual figure is closer to 20%. It can be at times, but I would estimate that the water infrastructure work we undertake, including both chemistry and investigative assessment, averages around the 10% to 15% range, though it may occasionally surpass that. This is not unique to the United States; we also see significant growth in Ireland and the United Kingdom, particularly through municipal water utility work related to framework contracts, where growth is also in the mid-teens. Other sectors in these regions are growing more slowly, around 7% to 9%. However, water infrastructure, such as supply and treatment, is a key driver of growth, especially concerning water conveyance and the protection of surface waters for recreational and public safety purposes. For instance, the issue of sewer overflows, known as combined sewer overflows in the U.S., is a major growth driver in the U.K., with rates exceeding 10%. Canada is experiencing similar trends. There have been various areas where budgets are supporting this growth. A frequent question I’ve received recently is whether changes in federal government priorities will affect local and state funding for growth rates. My previous comments stand; I don't expect this to happen since alternative funding sources, including rate payers, customers, bonds, and robust state budgets are available. However, there is one caveat. While I haven’t seen any impacts on our water programs yet, we do other projects for state and local clients involving hydraulics, drainage, and stormwater management, as well as transportation. Recently, I observed that matching funds from the U.S. Department of Transportation were canceled for a significant transportation project we were involved in, which was already funded. So, despite not expecting federal budget changes to affect state and local water projects, the situation has raised concerns regarding transportation funding.

Sabahat Khan, Analyst

Okay. Great. And then maybe just following up on a comment you made earlier around doing more front-end advisory consulting work. I think you already have a pretty average sort of mix of front-end work. If you can maybe just dig a little bit deeper into maybe what are some of the regions, types of customers, or types of work where you do see an opportunity to maybe push that front-end work penetration somewhat higher?

Dan L. Batrack, CEO

It's interesting to note that our energy development customers are benefiting from tax incentives due to the Inflation Reduction Act, leading them to invest in renewable energy. Our role primarily involves front-end consulting, advisory services, and technical evaluations. This raises the question of how we can adapt our work to accommodate investments in more conventional energy sources and fossil fuels. For instance, how can we develop power generation using alternative resources, such as natural gas, and connect them to the grid? We need to explore how energy developers can achieve their power generation targets while transitioning from renewable sources like offshore wind to supporting LNG in marine environments, including offshore terminals. The technical evaluations we conduct, particularly regarding grid upgrades, also play a crucial role. It's important to determine if grid and transmission projects can advance with respect to permitting. We are observing an increase in projects due to reduced regulatory requirements, which may mean less work per project but a greater total number of projects overall. Adjusting our calculations accordingly can result in a larger total. However, each project requires careful evaluation of permitting requirements and timelines. Additionally, the economics of raw materials and other construction costs at the outset are becoming increasingly important, and we are actively involved in addressing these factors.

Operator, Operator

Our next question comes from the line of Andy Wittmann with Baird.

Andrew John Wittmann, Analyst

Dan, I was reviewing the CIG segment results, specifically the revenue, which your slide indicates has increased by 2%. It's notable that while most customers in the commercial industrial group have seen a decline, the overall segment revenue has risen. Could you clarify how that discrepancy occurs?

Dan L. Batrack, CEO

That's a great question. How can two negative numbers result in a positive number? You have a decrease of 4% in our U.S. commercial segment and a 1% decline in international, yet it still adds up positively. While our Commercial/International includes both U.S. commercial and international contracted work in our CIG segment, there are also some entities in the U.S. that primarily serve state and local clients. Interestingly, alongside serving a commercial client, there may be simultaneous work for a state and local client, and that contribution has actually increased significantly. In fact, the performance of our state and local work has been strong. Therefore, when discussing the CIG segment's U.S. commercial figures, it's important to note that it's not solely composed of commercial work—some of it overlaps with the CIG segment. So when examining CIG, you observe a 2% increase. However, when considering U.S. commercial separately, that growth includes a portion of the state and local growth embedded within the CIG segment, which is sufficient to convert those small negative figures into a slight positive outcome.

Andrew John Wittmann, Analyst

Okay. That makes sense. I guess just as I look at the two segments and think about the outlook from here, with renewables being one of the reasons that's down, and you can talk about Australia and see if you're seeing any green shoots of that coming back. But I guess the assumption here into the fourth quarter and then probably into '26 is that at least for the next few quarters that the government segment is probably the horse that's probably got the better growth potential over the CIG segment. Is that the correct way of thinking about it? Like I guess the renewables are going to be kind of a tough comp for a while. So that's going to make that segment a little harder is what I'm thinking. But kind of just want to bounce that off of you and take if I'm thinking about it the right way.

Dan L. Batrack, CEO

Yes, I think that's correct. For now, I'll focus on the U.S. commercial sector. Our renewable energy efforts in the U.S. have declined by nearly 30% year-over-year this quarter, which is significant. However, there is still a considerable amount of work in progress. I anticipate continued reductions in the upcoming quarters, and it will certainly be a challenging year-on-year comparison for the U.S. commercial sector. Looking internationally, Australia has two potential paths for improvement: it can secure more work, although it remains quite soft right now. However, there is a hidden benefit due to last year's significant decline. The year-on-year comparisons in Australia will appear better because they were much lower last year. While I expect some moderation, it won't significantly drive our top line figures. I believe our growth will primarily come from state, local, and federal work, mainly in defense. We have decent visibility there. The main driver for our top line growth will likely be government contracts in the U.S. I would also say that our international government work is performing quite well. Nonetheless, I anticipate several challenging quarters ahead for the commercial sector.

Andrew John Wittmann, Analyst

Yes, that makes sense. For everyone’s benefit, the U.S. renewables business accounts for only about 2% or 3% of our revenue. It's worth verifying that number. You mentioned that a 30% decrease is significant, but it's not an overwhelmingly large part of the overall business, correct, Dan?

Dan L. Batrack, CEO

Yes, that's correct. We mentioned that on a company-wide basis, we are around $250 million, and approximately half of that. So to put real numbers to it, prior to this reduction, we were discussing about $125 million, which is a relatively small portion of the overall business.

Andrew John Wittmann, Analyst

I have one last question for you, Dan. The stance of the U.S. towards Ukraine seems to have changed over the past few months, with weapons supplies resuming and other developments. While I recognize that USAID is currently inactive, I’m curious if there are systems still in place. Are you aware of any potential humanitarian support for the grid work you’re involved in possibly starting again? With the administration's shift in approach, it feels like there might be a possibility. I could be overthinking it, but I’d appreciate your insights.

Dan L. Batrack, CEO

No, that's a great point, and I haven't included that as a significant factor to potentially increase our numbers. However, it's true that there has been a shift from not supporting Ukraine to becoming supportive. One positive aspect is that we are currently operating in Ukraine. When I mentioned that our work with USAID was slightly less than expected, I estimated around $100 million in revenue, primarily from Ukraine, but we actually achieved about $91 million. To clarify, we did $91 million instead of $100 million. For the fourth quarter, our initial expectation was also about $100 million, but that figure has been adjusted to around $40 million to $50 million, which aligns with my guidance. We also have enough contract capacity to handle significantly larger amounts—if they reached out to us, we could take on $100 million or $200 million in a quarter. This has occurred in the past when we were called on short notice to respond to urgent needs, resulting in nearly $100 million in just a few weeks. While I don't want to liken it to a lottery, there is potential for upside. We don’t have to enter a competitive bidding process since we have a single-awarded contract to Tetra Tech, so it’s feasible that we could see a substantial contribution from this work.

Operator, Operator

This will conclude the question-and-answer session. I will now turn the conference back over to Dan Batrack to conclude.

Dan L. Batrack, CEO

Well, thank you very much, Kate. And I want to thank all of our investors and stakeholders. And I'll tell you, most importantly, I want to thank all of the Tetra Tech employees. This has been a period of a lot of change. It's been a lot of new items coming to us, navigating both the direct and indirect impacts of the new administration, which is here in the U.S., which has really had impacts globally and both keeping backlog up, supporting the collection of receivables, driving margins up, which is actually sort of delivering on our forecast or our assessment that we actually have higher margins embedded in the business as we go forward. And I think this last quarter, the third quarter was an excellent example of that, and we see more to come. And in fact, if you do the math on the guidance, a simple math, you'd actually see our margins are even higher imputed in the fourth quarter guidance that we just provided today. And I really look forward to providing you all the results for our fourth quarter and probably most importantly, our guidance for fiscal year 2026 when I talk to you in 90 days and report our results for the fourth quarter and all fiscal year 2025. And with that, I hope you all have a safe and enjoyable rest of the week. Thank you very much. Bye.

Operator, Operator

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may disconnect now.