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.

Great. Thank you very much, Laura, and good morning, and welcome to our fiscal year 22 first quarter's earnings conference call. We had an excellent first quarter and an exceptionally strong start to our 2022 fiscal year. Our performance resulted in record first quarter revenue, operating income and earnings per share, and 120 basis point expansion in our collective operating margin. This extraordinary performance is a direct result of our long-term strategy to grow our high-end services, which is defined by our leading with science approach applied to our water and environmental markets. Given the strength of our performance and our outlook, we're increasing our guidance for both net revenue and earnings per share for fiscal year 22. I will begin today 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. After Steve, I'll then address our customer outlook and our updated earnings guidance for fiscal year 2022. In the quarter, we hit all-time first-quarter highs for revenue, operating income, and earnings per share. Our revenue increased by 12 percent year-over-year from $605 million to a new all-time high for a first quarter of $679 million. Our operating income increased at more than double the rate of our revenue growth, and our operating income was up 25 percent from last year, reaching a record $83 million for the quarter. And finally, we delivered $1.19 in adjusted earnings per share, the highest quarterly earnings per share of any quarter in the company's history, and up 14 cents from our previous high record earnings per share of any quarter. I will note that on a gap basis, our quarterly earnings per share was even higher at $1.25 per share of 30% year over year, which Steve Burdick, our CFO, will address later on this phone call. But now I'd like to provide an overview of our performance by our end customer in the first quarter. We saw continued strength in our state and local revenues, which were up organically 29% from the first quarter of last year. Even excluding the contributions of our disaster response work, this is another quarter of double digit growth rate for our state and local municipal water businesses. Our second fastest growing client sector was international. where our net revenue was up 20% from last year. Our international revenues benefited from the addition of our new high-performance buildings group in the United Kingdom, Corley, who joined us in the fourth quarter and contributed about half of our international growth rate. The rest of our international work grew organically at a strong year-on-year pace with the expansion of broad-based sustainable infrastructure programs in Canada, Australia, and in the United Kingdom. Our U.S. commercial net revenue was 21% of our business, up 7% from last year. Our services in sustainability, including those for environmental permitting, high-performance building designs, and renewable energy services all contributed to growth in this sector. Work for our U.S. federal clients was 28% of our net revenues in the quarter and was stable from the same quarter last year. Although our civilian and our Department of Defense work increased during the quarter, this growth was offset by reductions that we saw with the U.S. Agency for International Development related work associated with a rapid wind down and exit of the project work that we had in Afghanistan. I'd now like to present our performance by segment. Both of our business segments grew their revenue while expanding their margins from last year. The Government Services Group, or our GSG segment, was up 7% year-on-year, and that was based on challenging comparisons, while delivering a very strong 14.7 operating income margin, which was up 70 basis points from last year. Our GSG performance was driven by our high-end data analytics and digital consulting and engineering services for water and environmental programs. The Commercial International Group, or CIG, grew by 17% year-over-year and increased margins by 100 basis points from last year. The CIG margin expansion was directly in line with our strategy to continue to expand our high-end commercial sustainability services while increasing margins in our international operations. Our backlog was up 8% year-on-year on strong broad-based orders, resulting in $3,450,000,000 of contracted, funded and authorized work here in the company. We did see the US dollar strengthened during the quarter. So if evaluated on a constant current basis, just from the beginning of the first quarter, our backlog would have been up not only up year on year, but up sequentially also to an all time high for the company. In the first quarter, we won new programs and task orders across our global businesses that are a direct result of our strategic focus on our clients' most highest priority programs that they have. Building on our expanded presence in the United Kingdom, we were awarded a large $2 billion public framework contract. Notably, Tetra Tech was the only firm that was awarded a position in all six scope areas. We were also awarded a $24 million contract for our U.S. international development work that advances carbon mitigation and biodiversity. And for the U.S. Environmental Protection Agency, they've issued us new task orders for high-end water and environmental services through our watershed and science and technology contracts. Now we'd like to turn the presentation over to Steve Burdick to present the details of our financials for the quarter. Hey, thank you, Dan.

So I'd like to now review the GAAP financial results for the first quarter of 2022. So overall, as Dan noted earlier, we had record Q1 results for revenue and earnings. We had very strong top-line growth with first quarter revenue of $859 million. The net revenue amounted to $679 million, which was at the upper end of our guidance range of $630 million to $680 million. Our revenue and net revenue were both up 12% over last year with strong growth from state and local, international, and commercial markets. Our operating and financial results are the highest of any first quarter. Our operating profit and earnings per share for the first quarter increased over last year also. GAAP EPS came in at $1.25 in the first quarter, which is an increase of 30% over last year. The higher EPS was due to the increase in reported operating income, which came in at $87 million this quarter, which is up 32% over last year. Our record operating income for the first quarter was largely driven by a 27% growth in CIG segment operating income and a 13% growth in GSG segment operating income. The resulting CIG margin of 12.5% is up by 100 basis points over last year, and the GSG margin of 14.7% is up 70 basis points over last year. We also had lower corporate costs, which contributed to the better margins. And all told, on a consolidated basis, this resulted in an EBITDA margin of 13.7%, which is 170 basis points over the first quarter of last year of 12%. Now, our GAAP EPS came in better than our adjusted earnings per share of $1.19 and better than the top end of our guidance range of $0.98 to $1.03. The difference between our GAAP EPS of $1.25 the adjusted EPS of $1.19 was due to the benefit from employee retention credits received in the quarter related to COVID-19 programs instituted back in fiscal 2020. So as you can see, our record revenue and profits have further translated to a continued increase in our cash flow generation. Cash flow is generated from operations for the first quarter totaled $82 million, which is up 148%. Our focus on working capital and cash flows has resulted in our DSO decreasing to 61 days as of the first quarter. This is a further reduction of six days from last year at this time. And for many of those who have been following us for a while, you may remember that our long-term goal was to generate a DSO of 70 days. I think, however, we now believe that we can do better and generate a sustainable DSO below 70 days. Also, I don't look at this DSO just as a financial KPI. I also look at it as an indicator of our client satisfaction resulting in timely payments for the work that we perform on so many projects throughout the year. Our net debt amount amounts to about $58 million. Our net debt to EBITDA was at a leverage of 0.2 times this year versus 0.5 times a year ago. This reduction in net debt was a reduction in net debt by $81 million compared to last year. And so as we presented here today, these high-quality results, including an increase in EBITDA and higher margins, along with strong cash flows, lower working capital requirements, have all resulted in a return on invested capital of 20% over the last trailing 12 months. Our long-term capital allocation strategy calls for a balance of investing in the growth of our business, managing the balance sheet, and also providing returns for our shareholders. And so for the trailing 12 months, cash from operations generated $354 million, or about $6.50 per share. Sequentially from last quarter, this was an increase of 16% from our fiscal 2021 record year where we generated $304 million of cash flow. During the first quarter, we continued to provide significant returns to our shareholders through both dividends and share buybacks. And so 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 31st consecutive dividend, which will be paid in the month of February at a rate of 20 cents per share which is an 18% increase over last year. Furthermore, we utilized $50 million in the first quarter on our stock buyback program. So as of the end of the first quarter, we have a total of $498 million remaining in our approved stock buyback programs. All told, for Q1, we've returned more than $60 million to our shareholders through these dividend and share buyback programs. Our strong cash flow has allowed us to successfully complete several strategic acquisitions and continue to return capital to our shareholders while deleveraging to 0.2 times from 0.5 times a year ago. And this lower leverage point also helps us to de-risk the impact of inflationary interest rates on the company. Our strong balance sheet and available liquidity of over $900 million positions us to continue investing in technical capabilities and strategic growth areas as Dan will cover next. So, you know, I'm very pleased to share these financial results for the start of our fiscal year.