• Revenue: Net revenue increased 12% to $1.11 billion in Q3.
• EBITDA: Increased 32% to $129 million in Q3.
• Earnings Per Share (EPS): Reached $1.59, up 42% from the prior year.
• Government Services Group (GSG) Revenue: Up 25% to $488 million with a 14.6% margin.
• Commercial International Group (CIG) Revenue: Grew 4% year over year with a 13.9% margin.
• Backlog: Increased to $5.23 billion, up 19% year over year.
• Cash Flow from Operations: $141 million in Q3, exceeding net income by over 64%.
• Days Sales Outstanding (DSO): Improved to 54 days, an industry-leading standard.
• Net Debt: $650 million with a leverage of 1.15x.
• Dividend: $0.29 quarterly dividend, a 12% increase year over year.
• Stock Split: Five-for-one stock split effective after September 6, 2024.
• Full-Year Revenue Guidance: Increased to $4.27 billion to $4.32 billion.
• Full-Year EPS Guidance: Updated to $6.23 to $6.28.

• Warning! GuruFocus has detected 8 Warning Sign with TTEK.

Release Date: August 01, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Tetra Tech Inc (NASDAQ:TTEK) reported record quarterly revenue of $1.11 billion, marking a 12% increase year-over-year.
• The company achieved an all-time high backlog of $5.23 billion, up 19% year-over-year.
• EBITDA increased by 32% to $129 million, with a margin expansion of 120 basis points to 13.3%.
• Earnings per share for the third quarter reached a record high of $1.59, up 42% from the previous year.
• The company announced a five-for-one stock split to increase liquidity and lower trading costs for investors.

Negative Points

• The contribution from Ukraine, while significant, is considered extraordinary and may not be sustainable long-term.
• The RPS segment's revenue remains flat as the company continues to phase out lower-margin projects.
• International development work, such as USAID projects, typically carries lower margins, impacting overall profitability.
• Potential regulatory changes, such as the Chevron deference ruling, could introduce uncertainties in environmental regulations.
• The company's growth in international revenue excluding RPS was only 5%, indicating slower growth in some international markets.

Q & A Highlights

Q: Your backlog is up about 20% year over year. How should investors interpret this in terms of your visibility for hitting the annual organic growth target of 6% to 10%? A: Dan Batrack, Chairman and CEO, explained that while the backlog is up 19% year over year, some of this was due to timing, with orders expected in the second quarter arriving in the third. He cautioned that backlog growth doesn't directly translate to net revenue growth. A significant portion of the increase was due to extraordinary contributions from Ukraine, accounting for about a third of the increase. This provides great visibility into the fourth quarter and into 2025.

Q: Are there areas of your business that might be exposed to changes in regulation due to the Chevron deference ruling? A: Dan Batrack noted that most environmental compliance work is regulated at the state and local level, not federal, so the Chevron ruling has minimal impact. Federal programs like those with the Department of Defense are not typically contested in court. He suggested that if regulatory interpretation becomes uncertain, it could create new opportunities for Tetra Tech, as clients will need data-driven support.

Q: How much revenue are you currently getting from high-performance buildings in data centers, and how fast is that segment growing? A: Joseph Fong, Global Lead for High Performance Buildings, stated that they are tracking towards a $100 million revenue target for advanced manufacturing and data centers, expecting a 20% compound annual growth rate for this market.

Q: With your leverage trending towards the low end of your target range, would you consider shifting more of your revenue base overseas through M&A? A: Dan Batrack emphasized that the U.S. remains the largest market, and they are focused on technology innovation that can be transferred across all platforms. While they seek the best technology globally, potential changes in U.S. policy do not bias them towards moving operations overseas.

Q: Can you provide more context on the Ukraine contribution to this quarter and your visibility on future work there? A: Dan Batrack confirmed about $60 million in net revenue from Ukraine in the third quarter, with a $160 million addition to backlog. They have significant contract capacity and visibility due to U.S. government support, and even if the conflict ends, restoration work could increase.

Q: How long will it take to run off the lower-margin work from the RPS acquisition? A: Dan Batrack estimated one to two more quarters before completing the transition away from low-margin work. By the end of the calendar year, they expect RPS to contribute positively to both revenue and margin expansion.

Q: How does the backlog composition affect your margin outlook, especially with USAID work being lower margin? A: Dan Batrack acknowledged that USAID work is lower margin, but the overall backlog supports a 50-basis-point margin expansion. The incremental contribution from USAID was about a third of the backlog increase, not the total backlog.

Q: How significant is litigation support for Tetra Tech, and could it be an area for M&A if regulatory changes create more business? A: Dan Batrack clarified that Tetra Tech focuses on providing technical support for data collection and analysis, not in-court expert testimony. They aim to provide objective, data-driven insights, which aligns with their current capabilities without needing significant changes.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.