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 2022's third quarter earnings conference call. I'd like to start this call today with the recognition of the executive appointments announced just this week. here at Tetra Tech of Jill Hudkins to Tetra Tech President and Dr. Leslie Shoemaker to Chief Sustainability and Leadership Development Officer. Both Jill and Leslie represent some of the most exceptional talent that we have in the entire company. In the case of Jill Hudkins, she's been with the company for over 20 years, in fact, 24 years to be precise, and has personally led our digital water growth strategy that I'll be discussing later on in this call. As for Leslie, Leslie's been with the company for over 30 years and has successfully led our growth initiative strategies and operations of the entire company. And in her new role, she'll further advance Tetra Tech's industry-leading sustainability program and leadership mentoring and development of our staff. I'd like you to join me in congratulating both of them in their new roles. Now I'd like to turn to our third quarter performance. We had a very strong third quarter with record third quarter revenue, net revenue, operating income, and earnings per share. Operating income was $84 million in the quarter, up 20% year over year, which reflected a 70 basis point increase in our operating margin over last year. Our backlog on a constant currency basis increased to an all-time high of $3.65 billion, which is up 12% from last year. This collective performance is really a direct result of our successful long-term strategy to provide high-end, leading with science services in the water and environmental markets. Our strategies put us at the forefront of our clients' critical programs to address climate change, increase resiliency, provide essential water supplies, and protect the environment. Given the strength of our performance, we're increasing our guidance for both the net revenue and earnings per share, the entirety of fiscal year 2022 and i'll provide more details of that at the guidance at the toward the end of this call now i'll begin with an overview of our performance and our customers followed by steve burdick our chief financial officer who'll provide a more detailed review of our financials and capital allocation i'll then follow steve with addressing our customer outlook and our earnings guidance for fiscal year 2022 and for the fourth quarter in the quarter we hit new all-time third quarter highs for revenue, net revenue, operating income, and earnings per share. Our net revenue increased 13% year-over-year from $638 million to $720 million, which represents an all-time high for any quarter in a company's history. Our operating income increased at an even faster rate, up 20% from last year, reaching a third quarter record of $84 million and increasing our operating margin by 70 basis points from the same quarter last year. And finally, we delivered $1.09 in earnings per share, which is up 15% from the $0.95 that we produced last year and is a new all-time high of $1.09 for the third quarter and the second highest earnings per share of any quarter in the history of the company. I'd now like to provide an overview of our performance by our end customer. In the third quarter, we saw growth across all four of our customer sectors. International, from clients and projects that were contracted for outside the United States, represented 35% of our revenue and was up 18% from last year. And it was actually up 26% if you evaluate it on a constant currency basis. This strong performance was driven by rapid growth in our high performance buildings practice and our resilient infrastructure design work across the United Kingdom, Australia, and all across Canada. We saw continued strength in our state and local revenues, which were up 10% compared to last year. This is the seventh consecutive quarter of double digit state and local growth, and our underlying municipal water services work was up 15% year-over-year, led by the rapid growth of our digital water practice, while our episodic disaster response services were flat in comparison to last year. Our U.S. commercial net revenue was 22% of our business, up 19% from last year. Our services in sustainability, which include environmental permitting, high-performance buildings design, and renewable energy all contributed to strong growth in the sector. And finally, our work for our U.S. federal clients represented 27% of our net revenues in the quarter and was up 8% year over year if we exclude the one-time impact of our Afghanistan wind down that took place almost a year ago now. Our federal work was driven by growth in all three of our main federal client sectors, and that includes the civilian agencies, international development, and all of the defense agencies that we work for, all three of them grew during the quarter. I'd now like to present our performance by segment. The commercial international group, or CIG segment, grew by 19% year over year. Higher utilization and strong project performance resulted in a 13.8% margin in the quarter, up 230 basis points from the prior year. Now while 13.8% was a very strong quarter, about 50 basis points of that increase were associated with pickups due to excellent project execution during the quarter. I expect CIG to continue to perform at the high end or even exceed the range that we've identified earlier for the CIG segment, which was 11.5 to 12.5 margin range. That particularly will be the case as we have higher margins in typically the third and even more especially in the fourth quarter of the fiscal years due to seasonality. CIG did have a strong broad-based growth from international work in the United Kingdom, Australia, and Canada, as well as work for commercial clients here in the United States. Our government services group or the GSG segment grew by 6% and delivered a 13.4% margin. The GSG segment's government work grew for municipal clients and federal clients during the quarter, while the episodic disaster work was a smaller portion of the GSG segment's revenue this quarter. GSG's 13.4% margin is right in the middle of the expected range that we have for this group of a 13 to 14 percent margin range. Typically, GSG's fourth quarter, which we're entering, will be at the high end of this range, which we expect as utilization increases due to summer field programs and other federal projects close out that are timed at the end of the fiscal year. Our backlog during the quarter was up 12 percent year over year on a constant currency basis. And even in a quarter with an all-time record revenue, our strong orders resulted in a book-to-bill of greater than one for the quarter. In the third quarter, we won new programs and task orders across all of our global operations that leveraged our more than $20 billion in federal contract capacity and also added additional work through our long-term client relationships that we have globally. Commercial orders added $396 million to backlog in the quarter. U.S. federal orders from long-term clients such as the Department of Defense, USAID, U.S. EPA, and the Department of Energy all contributed to backlog in the quarter. We continue to receive significant orders for climate change-related international development work from both Australia and the United Kingdom's aid agencies. At this point, I'd like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present the details of our financials.

Steve? Thank you, Dan. So I would like to now review the GAAP financials for the third quarter of 2022. Overall, as Dan noted earlier, we had record high double digit growth for revenue and earnings. The strong performance from our operations resulted in a top line growth with third quarter revenue of $890 million and net revenue amounted to $720 million. which was above the upper end of our guidance range of $665 million to $715 million. Our revenue and net revenue were both up at 11% and 13% respectively over last year, with strong growth from U.S. commercial, international, state, local, and markets. Our operating income and earnings per share for the third quarter also improved over last year. Our reported operating income came in at $84 million this quarter, up 20% over last year. Our improved operating income for the third quarter was largely driven by our 19% growth in the CIG segment net revenue, coupled with a 44% growth in CIG's operating income. On a consolidated basis, these improvements resulted in our EBITDA margin increasing 70 basis points over the third quarter of last year. Now, GAAP EPS came in at $1.09 in the third quarter, which was an increase of 15% over last year. Our EPS of $1.09, which also came in better than the top end of our guidance range, which was $1 to $1.05. And furthermore, our effective tax rate last year was lower, so a more appropriate way to look at the year-over-year comparison would be to utilize a consistent tax rate basis with last year. And this would have resulted in an EPS being up 22% over last year. Cash flows generated from operations for the third quarter totaled $98 million, an increase of 42% over last year. Our focus on working capital and cash flows has resulted in our DSO improving once again to an all-time low of 58.8 days. This is an improvement of about six days from last year at this time. And this lower DSO trend continues to reflect the outstanding work our project managers lead relative to high-quality projects and highly satisfied clients in the broad portfolio across all of our end markets and geographies. Our net income amounts to $44 million, and our net debt to EBITDA was at a leverage of 0.1 times, with a total cash position of more than $200 million. Our return on invested capital on a trailing 12-month basis exceeds 22%, and as a note, our ROIC has been over 20% for each quarter this fiscal year. So as we present it here today, the continued high-quality results with improved EBITDA margins, along with strong cash flows and lower working capital requirements, has shown that Tetra Tech is able to reinvest in the business and generate very strong returns. Now, our long-term capital allocation strategy calls for a balance of investing in this growth in our business, managing the balance sheet, and as I will now present, providing return to our shareholders. Year to date, cash flow from operations generated $276 million. Our strong cash flow allowed us to successfully complete four acquisitions so far this year, all of which advance our digital strategy, which Dan will discuss later. And during the third quarter, we continued to provide significant returns for our shareholders through dividends and share buybacks. Now, regarding our dividend program, year-to-date, we've paid up $34 million in dividends. And I want to announce that our Board of Directors approved our 33rd consecutive dividend, which is set at $0.23 per share and a 15% increase over last year. Furthermore, year-to-date, we utilized $150 million on our stock buyback program. we have a total of $398 million remaining in our approved stock buyback program. And all told, year to date, we've returned $184 million to our shareholders through these dividend and share buyback programs. And our strong balance sheet and available liquidity of over $1 billion positions us to continue investing in technical capabilities and strategic growth areas. Now, Prior to handing the presentation back over to Dan, I want to remind everybody of three key items for reconciliation to our Q4 21 results from the actual net revenue of $709 million. First, we had one extra week in Q4 of last year. Because of how our 52-53 week fiscal year works, we had an extra week in last year's Q4, which we do not have repeating this year, that will result in a year-over-year impact of about $50 million, or 8% of net revenue, which we highlighted on our previous earnings call. Second, the Afghanistan wind down occurred late in September 2021, where the US and other countries departed from the country, and as a result, our projects were wound down swiftly, which we expect to have about a $10 million impact in the fourth quarter. And third, we had $15 million of episodic disaster recovery work in the fourth quarter last year that we do not expect to have in the current year. In addition to these three issues, I want to note that the FX rate impact on our fourth quarter with the recent strengthening of the US dollar. So, as a reminder, our primary non-US operations are represented by Canada, Australia, and the UK, which have all been performing well in their local currencies. and I have to say across the board are exceeding expectations on both the top line and a bottom line. And so the recent strengthening of the US dollar versus the currencies in these countries is expected to create an FX translation impact of about $20 million or just about 3% of our net revenue. So in total, the net revenue amounting to $614 million should be utilized as a baseline for the year-over-year comparison to the fourth quarter and fiscal 2022 guidance that Dan will provide in the next few slides. I am very pleased to share these great results with you all for the third quarter and fiscal year to date. Thanks for your support, and I'll hand the call back over to Dan. Great.