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.

Dan Batrack Great. Thank you very much, Hillary, and good morning, and welcome to our fiscal year 2021 third quarter earnings conference call. We had an excellent third quarter with record results for net revenue, operating income, and earnings per share. And at the very end of this quarter, we had an all-time high backlog. Just after the close of the third quarter, we also welcomed Horley to Tetra Tech, adding a stellar team of over 900 staff in the United Kingdom that significantly advances our strategy to build a global $500 million per year high-performance buildings practice. Across our markets we're seeing increasing demand for our leading with science approach focused on water environment sustainable infrastructure and renewable energy. Overall, I see tetra tech is extraordinarily well aligned to today's highest priority programs that address climate change secure water supplies and facilitate digital transformation and cyber security. I'll now begin with an overview of our performance and customers, followed by Steve Burdick, our Chief Financial Officer, who will provide more detailed review of our financials and capital allocation. I'll then address our customer outlook and earnings guidance for the fourth quarter and for all of fiscal year 2021. We had a very strong third quarter with record results for net revenue, operating income, and earnings per share. Our net revenue was an all-time high for any quarter at Tetra Tech at $638 million, up 14% from last year. Our operations generated a third quarter earnings per share of 95 cents, which was up 22% from the prior year. And our backlog set a new all-time record for the company, ending the quarter at approximately $3,250,000, up almost $200 million from the prior year. I'd now like to provide an overview of our performance by our end customer. State and local revenues for us were up organically 31% year over year, driven by continued growth across our municipal water and our disaster response programs. When adjusted for episodic disaster response work that we had in the quarter, we still had a very strong 19% year over year growth rate for our municipal infrastructure work. Work for our U.S. federal clients was 29% of our net revenues in the quarter. It was up 7% year over year. This broad-based growth included an increase in all of our major sectors, including international development work, civilian agencies, and the Department of Defense. Our international net revenue was 34% of our business in the quarter, up 26% from last year. We saw strengthening revenue in Canada, the United Kingdom, and in our Australian operations driven by broad base orders for water, environment, and sustainable infrastructure services. Our U.S. commercial net revenue was 21% of our business in the quarter, and it was down slightly, about 2% from the prior year. While our regulatory-driven programs and our renewable energy revenues continue to grow, we have a somewhat slower recovery in our discretionary environmental work for our industrial clients. I'd now like to present our performance by segment, our two business segments. In the third quarter, both of our segments grew revenue by double digits while also expanding their operation margins. The government services group, or the GSG segments, revenue was up 12% and margins increased by 30 basis points year over year, resulting in a 13.8% margin for the quarter. Their strong margin was driven by high-end, high-value data analytics and design services and significant municipal growth that drove higher utilization across the GSG operations. The Commercial International Group, or the CIG, segment's revenue was $282 million, up 17% from the prior year. Their margin increased by a much higher number at 130 basis points year over year, resulting in an 11.4% margin for the quarter, which was right in line with our plan for the segment. Revenue growth and margin performance were driven by a resurgence of work across multiple international end markets that had been impacted by the pandemic and the associated economic downturn that we saw in fiscal year 2020. One of the best metrics that we had in the quarter was our backlog. Our backlog reached $3.25 billion at the end of the quarter, which is a new all-time high for the company. In the quarter, we booked new orders across our federal, commercial, state and local, and international markets, demonstrating the broad-based strength of our book of business. Orders for the quarter included significant international development programs, that advance ESG priorities globally in the areas of women empowerment, climate change, and sustainable fisheries management. Even in this record quarter, we had a book to bill a record revenue quarter. We had a book to bill of 1.12, giving us excellent visibility into the remainder of the year. We also added over $1 billion in new contract capacity to support the US government's priorities in sustainable infrastructure and environmental programs with the U.S. Army Corps of Engineers. Now I'd like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present the details of our financials in the quarter.

Steve? Well, hey, thank you, Dan. I'd like to now review the GAAP financial results for the third quarter of fiscal 2021, as well as our financial conditions as of the first nine months of the year. Overall, our revenue and net revenue came in much better when compared to our third quarter from last year. The fiscal 2021 third quarter revenue was $802 million. The net revenue amounted to $638 million and was towards the upper end of our guidance range of $600 million to $650 million. Our revenue was up 13% over last year and net revenue was up 14% over last year. And when compared to last year, our revenue and net revenue was positively impacted by our strong demand for water and environmental services, advanced analytics for our U.S. federal clients, disaster response for our state and local clients, and improved economic conditions for international operations resulting from the loosening restrictions due to the COVID global pandemic. Similarly, our operating profit margin and earnings per share improved. Our earnings per share of $0.95 came in better than the top end of our Q3 guidance range of $0.85 to $0.90 and better than the third quarter of last year by 14% and by 22% when we compared the prior year's adjusted results. The higher EPS was due to the improvement in our operating income, which came in at $70 million this quarter, which was up 10% from last year and up 17% when compared to the prior year's adjusted results. Our improved operating income was driven by an increase in our segment margins over the last year, as Dan described, as we continue to focus on providing higher-end consulting and technical engineering services to our clients. So as Dan talked about before, the CIG segment realized a higher margin of 11.4%, which was up 130 basis points. and GSG realized an even better margin of 13.8%, which was up 30 basis points. In the quarter, we also remained focused on generating positive cash flows in excess of our net income. Cash flows generated from operations for the third quarter totaled $69 million. We continued to improve our working capital management and also benefited from a decrease in our day sales outstanding, or DSO, Year to date for fiscal 21, we've generated $227 million in cash flow from operations, which is ahead of last year by 16%. Our focus on working capital and cash flows has resulted in our DSO decreasing to 65 days as of the third quarter. And this was an improvement of five days from last year at this time. Our net debt amounts to $16 million. This is an improvement of $120 million compared to last year, even as we used our cash for strategic acquisitions, as well as stock buybacks and dividends in the last 12 months, which amounted to over $100 million. Our long-term capital allocation strategy calls for balance of investing in the growth of our business, managing the balance sheet, and providing returns for shareholders. Over the trailing 12 months, cash generated from operations was $294 million, or over $5 per share. During the third quarter, we continued to benefit from this cash position by providing significant returns for our shareholders through dividends and share buybacks. Regarding our dividend program, during the past quarter, we paid out $10.8 million in dividends, and I want to announce that our Board of Directors approved our 29th consecutive dividend which will be paid in the month of August at a rate of 20 cents per share, which is an 18% increase over last year. Furthermore, we utilized $15 million in the third quarter for our stock buyback program, and we have $163 million remaining under our previously approved stock buyback program. So all told, year to date, we've returned $74 million to our shareholders through both our dividends and our share buybacks. But just as important as implementing our capital allocation strategy is ensuring that we have a strong balance sheet and ample liquidity. We have both in terms of our balance sheet at the end of Q3, which has a current leverage of 0.1 times and available liquidity of over $800 million in the form of cash on hand and funds available under our current credit agreements. As a result, Tetra Tech is in a financial position such that we continue to invest in technical capabilities and strategic growth areas, both organically and through acquisitions with top-tier firms this quarter, such as Eber Armac and Kaizen. And most recently, and in fact, just this week, we added Ora Lee, a leader in sustainable engineering design, which Dan will discuss later in this presentation. I'm pleased to share these financial results for the third quarter. I want to thank you for your support, and I'll hand the presentation back over to Dan.

Great. Thank you very much, Steve. I'd now like to provide our outlook and growth projections for our four client sectors that we see over the next several quarters. We see strong growth rates across the board for our United States and our international market sectors. In the U.S., Our state and local markets are expected to grow at a 15% to 20% rate, driven by high demand for our differentiated services. We expect growth to be led by critical need for sustainable water supplies, long-term disaster planning programs, and coastal zone protection for our local clients. Our long-term experience with more than 500 municipalities is key to our ability to maintain strong growth rates in this significant market. Our U.S. federal work is expected to grow at a 10 to 15% rate, leveraging our more than $20 billion in federal contract capacity to address the administration's priorities in climate change, environmental protection, and the digital transformation across both the civilian and defense agencies. We expect to grow our U.S. commercial work at a 5 to 10% year-over-year rate, driven by our differentiated services in renewable energy, and environmental program support. We expect our renewable energy revenues to grow at a double-digit rate, with the leading area focused on emerging offshore wind programs. And finally, our international work is expected to grow at a 10 to 15 percent rate year over year, with broad-based growth across Canada, the United Kingdom, and Australia for both our commercial and our government clients in those areas. All three regions have strengthened the economic conditions, and we see work continuing to increase as new programs and infrastructure initiatives are put in place in these geographies. I'd now like to give you an update on our high performance buildings growth strategy. Over the past few years, we've been focusing on expanding this service line in a significant market that is highly synergistic with our focus on water, environment, and renewable energy. Buildings collectively around the world are estimated to account for 28% of the world's carbon emissions. And higher efficiency and greener building design is increasingly important to our clients. Our leading with science approach can significantly address our client's goal to reduce emissions and increase efficiency by decarbonizing buildings and reducing energy and water usage. Our high-end building designs use advanced simulations to optimize airflow and create more efficient and healthier buildings. We're designing systems that recycle water and generate their own energy, effectively creating net zero water and energy solutions for our clients. This market is now just over $220 million a year in revenue for us, and it's tripled in size since we initiated our growth strategy. Although we saw some contraction during the pandemic, we now expect this market to grow rapidly for us with our objective to build a over $500 million per year business by the year 2024. And I'm very pleased to announce that just this week, we took a significant step in our high performance building strategy with the addition of Hor Lee in the United Kingdom. Hor Lee adds to our team an entity that's a pioneer in mechanical, electrical, and hydraulic design of building systems. Now, Horley actually was the very first designer of the first air conditioning system in the world, and they're very well aligned to Tetra Tech's leading with science culture. As leaders in sustainable design innovation, they're going to work with us to address the future challenges of building decarbonization. Orly brings over 900 staff that will join our global practice and work on some of the most advanced designs for buildings across our commercial and government client base. Including myself, our management team, and all of our operations, our entire team is very excited to have them on board, and we're looking forward to their successful contribution to our global operations. I would now like to update you on one of our other key growth strategies, and that's in the area of advanced analytics. Across our US federal client base, the drive for digital transformation in advanced analytics continues to build. Our advanced analytics teams work with our federal clients to apply artificial intelligence, machine learning, and cybersecurity analysis to their programs. By combining our domain expertise and knowledge with advanced analytics, we can help our clients visualize environmental data, better communicate with their stakeholders, and perform high-end modeling and forecasting for all of their programs. Since 2016, just in the last five years, we focused on expanding our team through both organic and strategic acquisitions of leading firms focused primarily on U.S. federal market. We've added five firms, each bringing another dimension of specialized expertise and client relationships. Now, this strategy has really been working for us, and it's resulted in a $300 million per year revenue for us today, a six-fold increase since we began this back in 2016. We're focused on achieving a 2023 target of $500 million per year in revenue and will continue to target acquisitions that can further expand our services for the U.S. federal government, primarily with civilian agencies. Both our buildings growth strategy, our high-performance advanced data analytics programs that we have with the federal government and many others are actually contributing to us increasing our guidance today for the remainder of the year. And I'd now like to present our guidance for the fourth quarter and for all of fiscal year 2021. For the fourth quarter, our guidance is for a range of $650 million to $700 million of net revenues. with an associated earnings per share of $0.95 to $1 for the quarter. For the entire year, the increased net revenue and guidance range is for net revenue $2.5 billion to $2.55 billion with an associated annual earnings per share for fiscal year 2021 of $3.69 to $3.74. This new updated annual guidance does include an increased amount of intangible amortization that's associated with the acquisition of Orly. It does estimate a tax rate of 25% for the fourth quarter. We have $54.6 million. Duluth shares outstanding and does exclude contributions from any additional acquisitions that we may complete between now and the end of the fiscal year. In summary, We had an absolutely excellent third quarter, setting new records for net revenue, operating income, earnings per share, backlog, and many other financial metrics. Our high-end water, environment, sustainable infrastructure, and renewable energy services, and our leading with science approach is in high demand and well aligned with the United States and international priorities. We significantly advanced our high-performance building strategy with the addition of Orly, And as a result of our Q3 performance and outlook for the remainder of the year, we're raising our annual guides for both revenue and earnings per share. And with that, Hilary, I'd now like to open the call up for questions.

Thank you. The question and answer session will begin now. Please be aware that there will be a 30-second pause in our webcast to allow for buffering. At this time, audio participants are invited to submit their questions. Please remember to mute the audio function on your computer before you speak. If you are using a speakerphone, please pick up the handset before pressing any numbers. If you would like to ask a question, please press star 1 on your touchtone phone. Our first question is from Sean Eastman of KeyBank Capital Markets. Please state your question.

Hi, guys. This is Alex for Sean this morning. Congrats on the strong quarter. Thank you. Yep. So my first one is, so the condition of the state and local budgets has completely flipped compared to this time last year. So is Tech2Tech starting to see that funding start to be utilized and our projects starting to be advanced? And if so, what are the priority areas for state and local clients? Have they changed at all with the pandemic shakeup and the federal government advancing the sustainability agenda?

It's a really good question, and it's one that we actually receive somewhat frequently is, have we seen the positive impact from federal funding at the state and local level? For us, we've actually not seen, with the exception of just a few specialized instances, the color of the money being demarked either for their existing general fund coming from certain bonds or whether or not it's from the federal government. But what we have seen is the initial funding that came out to address the pandemic that had very, very broad applications of what it could be applied for, be used for many different items. And whether or not the dollars have come from targeting it from funds they've initially received from pandemic funding, or whether or not it's from the general strength of their own budgets at the state, we have seen the programs that were in place that we've been following for years continue to go forward. It does seem to us that the increased confidence in the funding that's coming from the federal government now has allowed the water programs such as coastal protection, water supply. We're headquartered out here in Southern California. Priority with respect to water reuse, desalination, stormwater capture, and other water sourcing programs that have been a priority for many years have continued to go forward. And I think it's a combination both of strengthening state budgets or a lack of having a financial hole, and then having additional funds come from the federal government. And we really have seen it not speciated to just federal funding has caused certain projects to go forward, but to give an overall confidence for the projects that have been slated for years that we're focused on, water programs, coastal protection, environmental programs to move forward. So we've not seen it. divided into specific buckets as to where it's coming from, but just an overall strengthening of funding of the programs that they've had scheduled for years.

That's very helpful. And then next one, Tetra Tech now has a portfolio of advanced analytics capabilities built up through acquisitions, and we have heard a lot about the margin opportunities there, but could you refresh us on the revenue synergy potential around the portfolio and the legacy business? And then relative to the growth targets that you guys outlined in the investor deck, is that the rate of growth in the market, or is this a trajectory specific to Tetra Tech?

Well, from last to first, I think that that's what we're seeing within Tetra Tech. We've certainly seen the general markets being up, but I do believe that the areas that we focused on that have actually been fully aligned with the new administration's priorities are has given growth rates for Tetra Tech a bit higher than what we've seen in the overall general market. With respect to the advanced analytics, synergies are very, very high. And, in fact, our federal IT business is embedded in work that we do for international development, USAID, U.S. State Department, our civilian agencies, and Department of Defense. And it is carrying higher margins. It is higher in demand. It's a more specialized services industry. and it has carried a few percentage points higher margin, which has helped increase our overall GSG margin outlook as we've been going forward. So we do see additional acquisitions in this area to strengthen it, and it supports the management consulting not only by giving us a technical differentiation by bringing new tools that don't exist in the market. The one area that we've been beginning to grow and actually see more promising areas is in recurring revenue and portions of subscription services for some of the software packages that we put together we've actually seen beginning to take hold. And while it hasn't been a big priority for us, it's actually been requested by our clients more and more. So we do see it as an emerging area that will drive margins even more quickly in this part of our businesses.

Got it. Last one from me. Since we're hearing more and more about the high-performance building strategy, we were wondering if it's a distraction since there's already such a great story on the water and environment side, and if you can just create value by doubling down there. Some color on why deploying resources here makes sense strategically in the broader context would be helpful.

That's a great question, and we actually see that they are hand-in-gloves. And what I mean by that is if you have a water program, such as a water treatment program or water recycling, they do have facilities and buildings. And how we got into this business originally was by designing the physical structures in addition to the pumps and the pipes and the chemical processing, in addition to that, the physical structures. And to now design physical structures that are net carbon zero, that actually can decrease the amount of their carbon footprint, has been requested by our clients. And so we rarely see projects that have an environmental or a water program or a climate change that have no structure associated with them. And so to be focused on the high buildings component of it, it's actually just a natural move for us. In fact, it was requested by our clients as part of their environmental stewardship of the programs that we were performing in water, environment, and sustainability in earlier years. So this is just a natural outgrowth, and, in fact, to not have this building would actually create more of a discontinuity with respect to distraction as to how are we going to address this and why would we not actually address our client's request in an area that has complete synergies with the core services of the company.

Thank you.

Great.

Thanks, Al.

Our next question is from Sam England of Barenburg. Please state your question.

Hey, guys. Thanks for taking the question. Just a follow-up on the sustainable buildings point. I was just wondering if you've now got the platform that you need to grow to the type of scale that you're targeting in that space, or do you think you're going to need to do further M&A there going forward, perhaps in some of the other geographies that you operate in?

Good question. We really do think that Horley in the UK was the last major piece that we needed to add. We have a significant presence in the United States, primarily on the east and west coast. We really do have one of the most elite high-end design practices and consulting practices and buildings. We've had in the company for about four years now a large practice in Australia that services both the Australia the New Zealand and Asia Pacific region for us. But the area that we've been significantly underrepresented was in the United Kingdom, and Horley fills that in. We do think there are specialty niche areas that can be added with respect to some advanced work on communications and low level lighting that we're a market leader, but we'll still be looking to add niche components. But we think that Horley fills out the geographic coverage that we're looking for as a corporation.

Great. Thanks very much. And then on the margin side, I was just wondering with the improvement you're making and all the work you're doing around analytics, whether your long-term view on the margins that you can achieve is changing or whether there's a point where you have to hand back any margin improvement to the client through lower pricing.

I don't think so. One goal we have here at Tetra Tech has really been to work at the very, we talk about at the very highest end of the technical offerings and not to be commoditized. Typically what we've seen is dollars that we'd have to hand back is the commoditization of the services, and that would include components of IT. What we're looking to do is to advance the very highest valued services that we're providing to the clients. We are getting more of the work. on a fixed price or other value proposition. In the case of the government, it could be cost plus a fixed fee with an award fee component. And so we've actually put more of our margin, even in areas that have typically been range bound, onto an award fee basis in addition to the base fee such that the value being contributed can actually be identified and rewarded back to the company based on the value that the client receives, not just the price. And so, no, I don't see the margin actually hitting an inflection point that would come down because it's been commoditized. We're actually looking at adding new services and new capabilities that, in fact, aren't being offered in the marketplace today at all. And we expect that that will not only achieve these higher margins that we've spoken of, but actually raise that bar. And that includes in the government services area, which is typically more range-bound because of the nature of the costing models with state, local, and federal clients.

Great. Thanks very much. I'll pass it over there. All right. Thank you, Sam.

As a reminder, if you would like to ask a question, please press star 1 on your touchtone phone. Our next question is from Andrew Whitman of – I'm sorry. Our next question is from Tate Sullivan of Maxim Group. Please state your question.

Hi, thank you, and thank you, Kyle. Thank you for the detail on the high-performance building strategy as well. And, Dan, sorry if I miss it, but can you talk about, is a catalyst for that business different regulations forcing buildings to go net zero or the mostly new-build opportunities for that business, please?

Well, I would say that, one, there is a growing regulatory requirement for new builds to meet certain standards. energy efficiency, water recovery, and self-sufficiency. So that's one component of it. But I would say that the bigger drive for it is more what I call grassroots. And that is especially with this pandemic, as individuals are returning to their office, whether or not it's workers or whether it's in the industrial buildings, they're looking for safer buildings, healthier buildings. And the real estate market, in order to attract new tenants or to keep the tenants they have are looking for buildings that are more efficient, are healthier, are more allowed for higher productivity of their workers, are providing a safer environment. And one of the axioms that our staff has with the design is you're safer and healthier at your work office location for the buildings that we design and the facilities that we design than you are at your home. So the fact is the drive is actually coming from the building owners for renovation to sort of up their game and to go through renovation to address health concerns. And it's all that you would more than be familiar with with the pandemic and other pathogens that have the potential to be present. And so we're leading in that area. So, yes, there is a regulatory portion, but it's a little bit like sustainability and climate change. Was it, did it come from the top down from a regulation or is it from the grassroots up that we actually want to address and protect the planet and the occupants of our buildings? And we see that the grassroots driving of this to drive demand is actually a precursor to the regulations. And in fact, has much more legs to it than just a regulation that would be passed in a given geography.

And the most recent acquisition in that high-performance building, is the U.K. ahead of the U.S. in terms of percent of adoption of the buildings, or is it about the same in terms of the business, and is it mostly a U.K. opportunity in terms of their current practice?

Well, I think it's actually going to be ahead. They've come out with specific targets with respect to building energy usage reduction. new requirements to meet certain LEED standards that would put them in a new category that haven't fully been adopted here in the U.S. So we do think some of the practices that we've developed in the U.S. that are best in class in the world can be taken and lessons learned and capability exported to the U.K. And some of the expertise they have there to meet regulatory requirements will then be retransferred over to the U.S. as a precursor to meet requirements that are just emerging here. Now, it's coming out certainly in the U.S. certain states where communities have very, very high building requirements. And so the collaboration from both our Australian, U.S., and U.K. operations, we believe, will be best in class, meet or exceed the regulatory requirements, and actually be used as not just a marketing but as a true differentiator for the building owners in order to attract new customers. new occupants while decarbonizing and reducing the overall footprint of buildings around the world. So UK's ahead a bit on the regulatory. There are a number of financial estimates as to how large that is, and it's enormous with respect to the dollars to be spent both for renovation and for compliance on new buildings. So we see an awful lot of synergies through the collaboration across our high-performance buildings practices.

Great. And then just a separate question for me. I had not heard you mention recurring revenue from software, and certainly that makes sense that it's part of the growing data analytics business. Is it a very small piece right now, or do you have growth targets? I mean, how big is that opportunity compared to the best?

It's very small right now. It's very small. We have had it, and I've spoken of this in the past. We do have subscriptions for environmental assessments and projections for airport flight corridors in cities around the world for software that we put in place, which is part of their ongoing monitoring and evaluation of environmental impacts from new air corridors and other items. And what we're looking at carefully is how we can utilize that information for the Tetra Tech Delta tools that we have that actually consist of more than 100 different proprietary software, analytic tools, and other methods that we use for our clients. The goal is that we can not only do the work, but put something in place that can continue the consulting and engineering evaluation on a more automated approach by the embedded software and tools that we have with our clients. It will save them money. It will keep them up at state-of-the-art. and it'll allow us to monetize the, in some instances, 50 years' worth of investments we've made in these software and these analytic packages.

Great. Thank you for the follow-up detail. Thank you. Have a good day.

Thank you, David.

Our next question is from Andrew Whitman of Robert W. Baird. Please state your question.

Hi. Good morning. Thanks for taking my question. Dan, I wanted to talk about utilization a little bit. Certainly over the past 12 months with the pandemic, I have to imagine there were points where the utilization kind of ebbed and flowed. Can you give us a sense of the trajectory through that time and in the quarter? And then maybe more importantly even, with the outlook that you've portrayed here on slide 10, double-digit type growth for the next few quarters, does this put Tetra Tech into hiring mode, or do you feel like you kind of have enough, I don't know if slack is the word, but is there enough team available to accomplish this and push utilization higher? Obviously, the implications to margins, and this is what I'm ultimately trying to get at, but how we could do it through the lens of utilization.

Yeah, it's a good question, Andy, and there has been a little bit of ebbing and flowing of utilization. I would say that overall we did see utilization actually go up when the pandemic first came on, when there was the onset. Part of it was less traveling to conferences and other items like that, so there was a bit of an increase. But I would say that recently, in the last few quarters, our utilization has gone up, and particularly in the government services, it's been the primary contributor to margin expansion on the government services. And, in fact, to parse that out, if you looked over the past 12 to 24 months or four to eight quarters, I'd say about half of the expansion in our government services has been from utilization, and the other half has been from advanced data analytics and actually a higher demand and higher margins. Now, the one thing you would note this last quarter, we had exceptional growth in our state and local revenues. We saw just over 30%. You saw our international work. It was exceptional for the quarter at over 25%, so 26%. But we did see a very slow recovery in our commercial work, our U.S. commercial work. And the one thing that we have accomplished, and I'm glad we started this many years before the pandemic, is to move the company to a cloud, to a common platform. So the staff that we have in one area that may be slower, and in this case, at least this current, this last quarter, third quarter, was state and local. They're quite fungible with respect to water treatment engineers, scientists that could then be utilized on state and local work or federal government work that grow well or international. And if you would wonder, can you really use an American civil engineer on an Australian project? The answer is being on a common platform, yes. The physics of soil compaction or the issues with respect to hydraulics and hydrology don't change whether or not you're down under or in some other geography. And so we have been able to use our staff across the board, increasing utilization for the company. It has translated into increased margin. You saw over 100 basis points again in our commercial international group this last quarter. With respect, do we have enough capacity to handle the growth rates that we have forecasted for the next few quarters? Yes. I do believe we have embedded sufficient resource capacity to handle a 10% to 15% growth without adding any additional staff. And yes, we are in active hiring mode, and we are adding staff. But we don't see the ability to recruit and add staff as as anything that would restrict our ability to respond to work that we have today with our increased backlog or even work that could come out from a U.S. stimulus program. Yes, it's the bipartisan infrastructure deal that has just been coined here in the last just over 24 hours. We've seen some of the numbers, but we think we're more than a position with resources and contract capacity because just because you have staff doesn't mean you can get the work and put your staff to work on it. You still have to have the resources. We have the client long-term relationships in the standing contracts in place.

Got it. Thanks.

I guess just kind of another question focused on trying to get at the margins. Could you comment, please, on... the impact that, I guess, reopening, perhaps people are taking elective surgeries again that they deferred maybe last year, or even the fact that people might be traveling more now that they did. Could you just comment on some of those kind of reopening factors, and if there's any factor we should be considering as we think into your fiscal 2022 that these may or may not have on your margins?

That's a really good question. Both in the U.S. and internationally is opening up of the economy and traveling and reducing travel restrictions and opening up restaurants and all the rest of this have put an additional priority for folks that haven't been on vacations either themselves or with their families for the past year and a half put a priority. So I do think that here in the fourth quarter we will have more vacations utilization will actually be impacted a little bit. It's obviously completely embedded in our guidance already. And in fact, the midpoints of our guidance for Q4, just to put this in the proper context, do represent a record high. And while we had a great third quarter and just set records across the board, the midpoints of our guidance for the fourth quarter actually eclipsed what we just did this last third quarter. But we do think that there are more vacation that's going to take place. It's not a cost per se because we've already accrued for the vacation. So it's already embedded in our balance sheet. So it's not an additional expense. But that does mean that utilization will drop because they're not on projects during those times. I don't see it as a fiscal year 22 impact because I think that the vacations are going to be done, at least in the northern hemisphere, in the late summer, which is now the summer, the fall. But I do believe as we move into 2022, this is a very sort of temporal impact with let me get a vacation, let me actually go see family members we haven't seen, let's get out and do something, but then let's get back to work. So I don't see this as a fiscal year 2022 impact. I actually see utilization remaining high because Tetra Tech has gone and is going to a hybrid work schedule where we allow some individuals to work on a dedicated basis remotely. Many are both in the office and remote, and some are in the office completely. And so it has helped us with respect to recruiting. You can come to Tetra Deck and work on a project that is in Southern California, but very well you may live in Kansas or some other geography. And so the flexibility that we offer as a corporation is, I think, second to none. What we're looking for is the best, the brightest, the most innovative, and the number one technical staff to solve our clients' problems. We're not looking just to bring more people on to get bigger. We're looking to get better, smarter, and to continue to be a market leader in in the areas of water, environment, and sustainable infrastructure. So, yes, there'll be some more vacations. It's embedded in our guidance, and our guidance reflects record performance in the fourth quarter, and I don't see it continuing into fiscal year 22.

Good. Great. I'll leave it there. Have a good day.

Great. Thank you very much, Andy.

Our next question is from Noel Diltz of Steeple. Please state your question.

Hi, guys, and congratulations on another good quarter. I just had one question that's relatively detailed, as a lot of my questions have been answered. But you talked about double-digit growth in renewables with particular strengths in offshore wind. So I was kind of curious how you're thinking about the growth opportunity around offshore wind in particular. My understanding is we're pretty early innings there. But then also there's still a lot of activity going on with terrestrial wind and solar, so also how you're thinking about the outlook for those markets.

Well, offshore wind has large promise. Some of the offshore wind leases by the federal government have required certain developers to pay very, very large sums in order to obtain lease rights and actually development rights offshore. So when obviously any entity puts that amount at investment up front, they prioritize moving it forward. And the items that are required to do the up front evaluation line up very well with Tetra Tech with respect to offshore impacts for water quality, offshore impacts for sedimentation, marine mammals, fisheries, all the rest of it. So that's why it fits well for us. We also like offshore wind a lot because it fits the long-term monitoring That's not recurring, but it's reoccurring revenue because we'll continue to do the monitoring long after a wind turbine has gone up offshore. And that will be from water quality, from the stability of the foundations. If you're on the east coast, it's just in the very, very nascent phase on the west coast where it would actually be tethering and anchoring because the waters are so much deeper. And those are areas that work with some of our farther offshore, not nearshore, but our offshore oceanographic capability that we have that really goes all the way back to the founding of the company. So those are the reasons we really like offshore wind, and that's why we see that it is a higher priority because of the investments. It also has less citizen opposition in most instances because if it's out of sight, it's out of complaints to a certain extent. So that's why we're interested in that. But I would also say we are not We're not de-emphasizing solar or terrestrial wind, onshore wind, or even geothermal. And it certainly wouldn't minimize hydro. And whether or not that's just as simple as repowering with new turbines that are much more efficient, which is the more conventional method of increasing output on a given hydro facility, or whether or not it's actually raising it or adding additional penstock tubes that actually drive the addition of new chambers that then have fish bypass requirements. And, you know, there has been a big, with respect to hydro being one of the largest renewable energy generation methods, certainly in Canada and the U.S., one thing that's been very interesting, the Conservation of the environment has largely revolved around fisheries, and it's fish bypassage. And there has been some call for removal of dams, but there's been an equal and offsetting call for fish bypassage. So it allows both flood control, allows power generation, and addresses fisheries and environmental impacts. And that's an area that Tetra Tech is one of the leaders, not only in the U.S., but around the world, with respect to making a fisheries and a habitat where there are dams sustainable for biodiversity and for the environment. So yes, we are very constructive and positive on offshore wind for the reasons I just mentioned, but the services that we offer and the others line up very well. And I would say here internally, when I do mention offshore wind, I typically get four or five emails a minute from the folks in terms of what about the great work we're doing in these other renewable areas.

Okay. Thanks very much. I appreciate it.

Thanks to all.

This concludes the Q&A session. I will now turn the conference back over to Dan Batrick to conclude.

Great. Thank you very much, Hilary, and thank you all for being on the call today. Thank you for the questions, and I would I would be remiss not to thank all of the Tetra Tech associates, including those that have been with us now for four days with Orly in the UK. It's really the phenomenal performance of the more than 21,000 employees at Tetra Tech that have given us this record performance. And it's very easy to sometimes for us to say we had another good quarter, and that is definitely true. But sometimes it's not front of mind to realize this performance is being done in the light of an ongoing pandemic, additional restrictions in places like L.A. County where we are, or complete shutdowns in places like Sydney. And so when you really put the performance of the company in light of the overall impact globally, I just am very thankful for the phenomenal performance of the Tetra Tech Associates, and the clients that we serve every day. And with that, I look forward to speaking with you next quarter to give you the results for our fourth quarter, all of fiscal year 2021, and perhaps most importantly, what our specific guidance is for fiscal year 2022. And I hope you have a safe day and a great rest of the week. Thank you. Goodbye.

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