Tetra Tech, Inc.

Good morning, and thank you for joining the Tetra Tech earnings call. By now, you should have received a copy of the press release. If you have not, please contact the company's corporate office at 626-351-4664. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the investor section of its website at www.tetratech.com. This call is being recorded at the request of Tetra Tech, and this broadcast is the copyright 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 Dan Batrack, Chairman and Chief Executive Officer, and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results and will open up the call for questions. I'd like to direct your attention to the safe harbor statement in today's presentation. Today's discussion contains forward-looking statements about future growth 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 takes 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 investor section of Tetra Tech's website. At this time, I'd like to inform you that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. With that, I would like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Thank you very much, Laura, and good morning, and welcome to our fiscal year 2021 first quarter earnings conference call. We had a strong first quarter, delivering results ahead of our guidance for both revenue and and earnings. Our performance was attributable to our focus on high-end consulting services, which resulted in increased margins for both of our operating segments. Our leading the science approach is fundamental to our success, and we're increasingly leveraging our suite of proprietary technologies and tools that we call the Tetra Tech Delta. With a new administration leaving the United States and their appointees being put in place throughout the federal agencies, we're anticipating an increased focus on water, environment, and the related climate change priorities. I'll now begin with an overview of our performance and customers, followed by Steve Burdick, our Chief Financial Officer, who will provide a more detailed review of our financials and capital allocation. I'll then address our customer outlook and earnings guidance for fiscal year 2021 and for our second quarter. We had a strong first quarter led by our record earnings per share performance. In the first quarter, our operations generated an earnings per share of 96 cents, which is up 13% from last year. Our net revenue was $605 million, up sequentially for the second quarter in a row as we're recovering from the impacts of the pandemic. Our backlog into the quarter at $3,190,000,000, up 1% from the prior year. I'd now like to provide an overview of our performance by customer. Our U.S. federal and our state and local revenues were both up year on year. State and local revenues were up organically 11% year on year with continued growth in municipal water programs led by our digital water services. Work for our U.S. federal clients was 31% of our collective net revenues in the quarter and was up 8% year on year. This growth was led by double-digit increases in our work for the U.S. civilian agencies and the U.S. Department of Defense. However, as we've seen in the past several quarters, we continue to see some delays in our USAID projects due to travel restrictions associated with the COVID-19 pandemic. While our international net revenue was down 8% from last year, revenues did grow sequentially by 4% in this business area from our fourth quarter. We did see continued strength in our Canadian government and renewable energy services work. However, this growth was offset by reductions in discretionary work for our commercial clients, especially in the Asia-Pacific operations. And also in the United Kingdom, our UK practice, it was impacted negatively by project delays associated with renewed COVID-19 restrictions that were put in place in the region. Our U.S. commercial net revenue was 22% of our business in the quarter, down 7% from the prior year. While our regulatory-driven programs and renewable energy revenues continue to grow, we saw a reduction in discretionary work for some of our industrial services and our commercial real estate clients. I'd now like to present our performance by our segments or our business groups. In the first quarter, both of our segments contributed to an expansion of our operating margin for the entire corporation. The Government Services Group, or the GSG segment, was up 100 basis points year-on-year, delivering a 13.8% margin in the first quarter of fiscal year 2021. Their margin increase was driven by high-end, high-value data analytics and design services, as well as strong utilization across the entire GSG operation. The Commercial International Group, or our CIG segment, margin was up 60 basis points year and year. And as per our plan, and as we've signaled in the past, it is increasing and moving much closer to GSG's margin. CIG segment delivered an 11.4% margin in the quarter. CIG's first quarter performance was the result of growth in high-end services that resulted in a much more favorable business mix for us in that sector of the company. Our backlog was up 1% year-on-year, ending the quarter at just under $3.2 billion, which I will note is the second highest ending quarter number that we've ever had in the history of the company. Now, the first quarter of the fiscal year is typically lighter for us in orders. In the United States, the first quarter also happened to coincide this year with our U.S. elections. the federal budget negotiations and the lead up to the presidential leadership transition that took place in January. This was all together combined with a typical holiday season that starts from November through New Year's, which does make orders a bit lighter. But in spite of these seasonal impacts, we saw strong orders from our key federal agencies, including the Department of Defense, Department of Energy, and the U.S. Environmental Protection Agency. Now, at the same time, we also continue to add new contract capacity with agencies that are going to be at the forefront of the new administration's priorities, such as our recently awarded contract with FEMA and contracts that will support USA's renewable energy programs around the world. Now, I would like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present the details of our financials for this past quarter.

Steve? Well, hey, thank you, Dan. So I'd like to now review the GAAP financial results for the first quarter of fiscal 2021, as well as our financial condition as of the end of the first quarter. So overall, our revenue and net revenue came in better than expected when compared to our first quarter guidance. The fiscal 2021 first quarter revenue was at $605 million and was in excess of the top end of our guidance range, which was $570 million to $600 million. Our net revenue was up about 3% over the last quarter. And furthermore, our first quarter net revenue is up when compared to each of our most recent Q2, Q3, and Q4 results. When compared to the first quarter of last year, our revenue and net revenue was impacted by the economic conditions resulting from the COVID-19 global pandemic, as well as our decision last year to dispose of our Canadian turnkey pipeline business. Similarly, our operating margin and earnings per share improved. Our earnings per share of 96 cents came in better than the top end of our Q1 guidance range, which was 78 to 83 cents, and better than the first quarter of last year. This higher EPS was due to two reasons. First, earnings per share improved due to the improvement in operating income, which came in at $66 million this quarter. Our improved operating income was driven by an increase in our margins over the last year by 70 basis points. This operating income was a result of improvements in both our CIG segment, which realized a higher margin, 11.4%, and GSG, which realized an even better margin of 13.8%. Second, our tax rate benefited from a discrete tax matter primarily due to stock compensation. I do want to point out that if we apply the normalized 25% tax rate to both years in our first quarter, Our EPS would have come in at about 87 cents this quarter, which is still much stronger than the prior year of 81 cents at that same constant tax rate. While net revenue, operating income, and earnings per share have improved, we've also remained focused on generating positive cash flows in excess of our net income. Now, cash flows generated from our operations for the first quarter totaled $33 million. For those investors and others who have followed us for a while, you will note that we typically have a negative cash flow in the first quarter. However, as we continue to improve our working capital management, we've realized a $51 million improvement over last year. This working capital improvement also benefited from a decrease in our day sales outstanding, or DSO. Our focus on working capital and cash flows is resulting in a DSO decreasing to 67 days as of the first quarter. This is an improvement of six days from last year and a sequential improvement from last quarter. Now, our net debt of $139 million amounts to about a 38% decrease from last year. This is an improvement of $85 million compared to last year, even as we use cash for strategic acquisitions, stock buybacks over the last 12 months amounting to about $111 million, and dividends over the last 12 months of $36 million. So our long-term capital allocation strategy calls for a balance of investing in the growth of our business, managing the balance sheet, and providing returns to our shareholders. And so over the last trailing 12 months, cash from operations generated $314 million, which equates to about $5.75 per share. During the first quarter, we continued to benefit from this cash position by providing significant returns to our shareholders through both dividends and share buybacks. So regarding our dividend program, during the first quarter, we paid out $9.2 million in dividends, And I want to announce that our Board of Directors approved our 27th consecutive dividend, which will be paid in the month of February at a rate of 17 cents per share, which is a... Furthermore, we utilized $15 million in the first quarter on our stock buyback program. We do have about $193 million remaining under our previously approved stock buyback program. Just as important as successfully implementing our capital allocation strategy is ensuring we have a strong balance sheet and ample liquidity. We have both in terms of our balance sheet at the end of Q1 with a current leverage of 0.5 times to EBITDA and available liquidity of over $800 million in the form of cash on hand and funds available under our credit agreements. As a result, Tetra Tech has been a financial position such that we will continue to provide significant returns for our shareholders while investing in technical capabilities and strategic growth areas, both organically and through acquisitions. So I am very pleased to share these financial results for the first quarter with you all. And I want to thank you for your support. And I will now hand the call back over to Dan.