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 copyrighted 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.

Great. Thank you very much, Melissa, and good morning, and welcome to our fiscal year 2021 second quarter earnings conference call. I'd like to start with sharing with you that we had a strong second quarter delivering results ahead of our guidance for both revenue and for earnings. Our leading with science approach focused on water, environment, sustainable infrastructure, and renewable energy is well aligned with the priorities of our clients worldwide. In the United States, the new administration is proceeding with implementing its policies and priorities associated with addressing climate change, environmental stewardship, and the use of international development to support its foreign policy. Currently, the Biden administration is in the process of filling 4,000 government-appointed positions, 1,200 of which require Senate approval. And all of these appointments are being put in place to implement and administer these priorities across all government agencies. As these appointments are put into place, we expect opportunities to increase for us to leverage our contract capacity and industry-leading 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 financial and capital allocation. I will then address our customer outlook and earnings guidance for the third quarter and for all of fiscal year 2021. We had a strong second quarter of 2021, exceeding our guidance for both revenue and earnings per share. Our operations generated a record second quarter earnings per share of 83 cents, which was up 26% from last year. Our net revenue was also an all-time high for a second quarter for the company at $600 million, up 3% from last year. And that is comparing this year's pandemic-affected quarter to last year's non-pandemic-affected quarter. And our backlog ended the quarter at $3,150,000,000, up 5%. from last year. I'd now like to provide an overview of our performance by our end customers. Our U.S. federal government and state and local revenues were both up year on year. State and local revenues were up organically 32% year on year, driven by continued growth across our municipal water and our disaster response programs. When adjusted for episodic disaster response work that we performed in the quarter, we still had a very strong 19% year-on-year growth rate for our municipal infrastructure programs. Work for our U.S. federal clients was 31% of our net revenue in the quarter and was up 6% year-over-year. This growth was led by double-digit increases in work for our U.S. civilian agencies and the Department of Defense. However, as we've spoken over the past several quarters, we continue to see delays in our USA projects due to travel restrictions associated with the pandemic globally. Our international net revenue was also 31% of our overall business, down 5% from last year. We saw our Canadian and our United Kingdom and Australian government work continuing to strengthen and saw additional growth in renewable energy work for Canadian regional utilities. However, growth in these areas was offset by a slower recovery in work for our international commercial clients. For our U.S. commercial net revenue, it represented 21% of our business in the quarter and was down 7% from the prior year, impacted by very difficult comparisons with strong pre-pandemic revenues that we had a year ago in fiscal year 2020. While our regulatory-driven programs and renewable energy revenues continue to grow, we saw a slower recovery in discretionary work for our industrial clients and our high-performance buildings practice. I'd now like to present our performance by segment, or for our two segments. In the second quarter, both of our segments contributed to an expansion of our operating margins. The government services group, or the GSG segment, was up 180 basis points year over year, delivering 13.3% margin for the quarter. The margin increase was driven by high-end, high-value data analytics and design services and significant municipal growth that drove strong utilization across the GSG operations. The Commercial International Group, or the CIG segment, was up 50 basis points year over year, resulting in a 10.4% margin for the quarter. This is particularly notable in the quarter that is impacted by the seasonal winter slowdowns in our Canadian operations, which very much limit their contribution to margin performance in the second quarter of each year during the months of January, February, and March, deep winter months up north. Overall, CIG's high-end consulting continued to perform very well, especially for our environmental and renewable energy services work. Our backlog for the quarter was up 5% year-on-year, ending the quarter at $3.15 billion. In the United States, this quarter was marked by the transition of the U.S. federal government's new administrations. and the initial steps toward new alignment of procurement to the administration's priorities of climate, water, environment, and international development. Holding contract capacity that aligns with the administration's priority programs is essential to funding a future work. This quarter, we added strategic contracts for the U.S. Army Corps of Engineers for dam safety and flood risk reduction, providing almost $100 million in contract capacity for our high-end services to analyze dams, manage flood risk, and address climate change mitigation. We won single award contracts that added $51 million in contract capacity for international development work that will support the transition of countries to lower carbon and higher efficiency renewable energy economies. We want a new Air Force program for engineering design services with a $2 billion ceiling that provides a vehicle for our delivery of high-end sustainable and resilient defense infrastructure designs. And we received new task orders from the federal government to support critical programs for some of our key clients with the United States Environmental Protection Agency, Federal Aviation Administration, and many international development agencies. Now, at this point, I'd now like to turn the presentation over to Steve Burdick to present the details of our financials for the quarter. Steve?

Thank you, Dan. So, yeah, I'd like to now review the GAAP financial results for the second quarter of fiscal 2021, as well as our financial condition as of the first half of the year. Overall, our revenue and net revenue came in better than expected when compared to our second quarter guidance. The fiscal 2021 second quarter revenue was $755 million, and the second quarter net revenue amounted to $600 million and was in excess of the top end of our guidance range of $565 million to $595 million. Both our revenue and net revenue were up 3% over last year, So when we compare our second quarter of this year to the second quarter of last year, our revenue and net revenue is positively impacted by the water and environmental services provided to our federal and state and local clients, partially offset by the impact to our commercial and international activities from COVID-19 restrictions. Similarly, our operating margin and earnings per share improved. Our earnings per share of 83 cents came in better than the top end of our Q2 guidance range of 73 to 78 cents and better than the second quarter of last year. The higher EPS was due to the improvement in operating income, which came in at $61 million this quarter. Our higher operating income was driven by an increase in our margin over last year by 114 basis points. And this operating income was a result of improvements in both our CIG segment, which realized a higher margin of 10.4%, and GSG, which realized an even better margin of 13.3%. So while the revenue, operating income, and EPS have improved, we also remain focused on generating positive cash flows. So cash flows for the generated from operations for the second quarter totaled $124 million. This is a $23 million improvement over last year, driven by both higher net income and continued improvement in our working capital this year. This working capital improvement also benefited from a decrease in our day sales outstanding, or DSO. Our DSO decreased to 65 days as of the second quarter, This is an improvement of six days from last year and a sequential improvement of two days from last quarter. Our net debt amounts to $42 million. This is an improvement of $169 million compared to last year, even as we used cash for strategic acquisitions, stock buybacks over the last 12 months of about $66 million, and dividends over the last 12 months of about $37 million. You know, 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 over the last trailing 12 months, cash from operations generated $337 million, which is over $6 per share. During the second quarter, we continued to benefit from this cash position by providing significant returns to our shareholders through both dividends and share buybacks. So regarding the dividend program, during this past quarter, we paid out $9.2 million in dividends. And I want to announce that our Board of Directors approved our 28th consecutive dividend, which will be paid in the month of May at a rate of $0.20 per share. This is a $0.03 increase and an 18% increase from last year. Furthermore, we utilized $15 million in the quarter on our stock buyback program. So as of the end of the second quarter, we have about $178 million remaining under our previously approved stock buyback program. And 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 a balance sheet at the end of Q2, with the current leverage of 0.2 times and an available liquidity of over $800 million in the form of cash on hand and funds available under our credit facilities. As a result, Tetra Tech is in a very good financial position such that we will continue to provide returns to our shareholders while investing in technical capabilities in strategic growth areas, both organically and through acquisitions with top tier firms such as Coenda and Eber Armac who have joined the company and that Dan will discuss later in this presentation. I'm pleased to share these financial results for the second quarter. I want to thank you for your support, and I'll now hand the call back over to Dan.