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 Investors section of its website @ 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 we'll 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 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 reconciliation is posted in the Investors section of Tetra Tech 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. We 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% year-over-year from $605 million to a new all-time high for our first quarter of $679 million. Our operating income increased at more than double the rate of our revenue growth, and operating income was up 25% from last year, reaching a record $83 million for the quarter. Finally, we delivered a $1.19 in adjusted earnings per share, the highest quarterly earnings per share of any quarter in the company's history and a 14 cents increase from our previous high record earnings per share of any quarter. I will note that on a GAAP basis, our quarterly earnings per share was even higher at $1.25 per share, up 30% year-over-year, which Steve Burdick, our CFO, will address later on this phone call. Now I would 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, Hoare Lea, 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 Department of Defense work increased during the quarter, this growth was offset by reductions that we saw with 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 a 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 billion, $450 million of contracted, funded, and authorized work during the company. We did see the U.S. dollar strengthen during the quarter, so if evaluated on a constant currency basis just from the beginning of the first quarter, our backlog would have been up not only 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’ 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 have issued new task orders for high-end water and environmental services through our watershed science and technology contracts. Now I would like to turn the presentation over to Steve Burdick to present the details of our financials for the quarter.

Thank you, Dan. So I'd like to now review the GAAP financial results for the first quarter of 2022. Overall, as Dan noted earlier, we had record Q1 results for revenue and earnings, with 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, local, international, and commercial markets. Our operating and financial results were 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 27% growth in CIG segment operating income, and 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 the 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 a 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 $1.3. The difference between our GAAP EPS of $1.25 and 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. As you can see, our record revenue and profits have further translated to a continued increase in our cash flow generation. Cash flows 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 so 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. However, we now believe that we can do better and generate a sustainable DSO below 70 days. Also, I don't look at 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 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 by $81 million compared to last year. 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. Now, 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 shareholders. 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 $0.20 per share, which is an 18% increase over last year. Furthermore, we utilized $50 million in the first quarter on our stock buyback program. As of the end of the first quarter, we have a total of $498 million remaining in our approved stock buyback programs. Also for Q1 we returned more than $60 million to our shareholders through this dividend and share buyback program. Our strong cash flow has allowed us to successfully complete several strategic acquisitions and continued to return capital to our shareholders while deleveraging to 0.2 times from 0.5 times a year ago. 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 I'm very pleased to share these financial results for the start of our fiscal year. I want to thank you for your support and I will now hand the call back over to Dan.

Thank you, Steven. Next, we're covering the details on our quarterly performance, not just on the work from our operations, but also where we sit on the balance sheet as you presented it quite clearly. We have, here at Tetra Tech, three key market drivers that continue to shape our client spending, long-term programs, and investments in the future. The first is the U.S government has identified climate change, water, and environmental protection as critical priorities. First and foremost, these priority programs are implemented through the federal budget associated with spending by key agencies that we work for, such as the U.S. Army Corps of Engineers, the U.S. Environmental Protection Agency, and the U.S. Agency for International Development. The second area that is a key driver for us is the U.S. government is now also working with state and local governments to implement the Infrastructure Investment and Jobs Act, or IIJA, to supplement additional funding for the government budgets, especially at the state and local levels, which are creating long-term increases in spending for water, environment, and resilient infrastructure services that we provide in the global market leadership. The White House's guidebook to IIJA was just released Monday, just three days ago, and outlined an estimated $80 billion that has been identified for distribution to states as just the first step in releasing the funding associated with IIJA. The third market driver is in our international markets. Here, we are seeing a new focus on climate change programs and an increase in associated budgets including decarbonizing buildings, biodiversity and land management, and protecting the oceans. This focus is resulting in an increased demand for our high-end consulting and engineering services in the United Kingdom, Australia, and all throughout Canada. I'd now like to highlight how these same priorities are affecting our commercial clients. Now, we've previously commented on sustainability drivers across our government clients. But more recently, we've also seen our global commercial clients significantly increase their commitment to sustainability. As part of corporate reporting, companies are focused on ESG or environment, social, and governance metrics. And in particular, the environmental aspect. This has resulted in very public commitments to science-based targets, schedules for reduction of greenhouse gas emissions, and increased funding for sustainability initiatives. Increasingly, stringent government regulations are driving additional spending for our scientists and our engineers to investigate, assess, and evaluate innovative treatment technologies to address emerging contaminants such as PFAS. And at the same time, the bar is being raised for the restoration of impacted lands. It's being increased from just basic cleanup to more sustainable solutions that now often include the creation and management of biodiversity ecosystems. I would now like to present our outlook for fiscal year 2022 across our four client sectors. First, our U.S. state and local should continue to grow at a double-digit pace for us between 10 and 15%. We expect continued strong growth in the sector as additional projects are initiated by our clients. This growth rate excludes future revenues associated with any extraordinary or episodic disaster response activities that we may undertake. International work is expected to be about a third of our business evenly split between government and commercial work. Our international work is expected to grow at a 10% to 15% rate as we increase our support for sustainable infrastructure and climate change services in the United Kingdom, Australia, and Canada. U.S. Commercial work is expected to be about 20% of our business and grow at a 5% to 10% rate. This growth will be supported by our clients’ programs associated with sustainability, including environmental restoration, high-performance buildings, work such as net-zero buildings designs, and renewable energy programs. Our U.S. Federal work should grow at a rate of 5% to 10% as budgets for fiscal year '22 are finalized in alignment with Biden's administration priorities. We assume, however, that increases associated with the new infrastructure act for the IIJA funding will not begin until the very end of fiscal year '22 and most likely in early fiscal year '23, creating an increased tailwind as we move into the next fiscal year. Therefore, we've not included any significant contributions in revenue to our FY2022 outlook. I'd now like to present our guidance for the second quarter and for all of fiscal year 2022. Our guidance for the second quarter is as follows. For net revenue, our guidance ranges from $620 million to $670 million with an associated earnings per share of $0.86 to $0.91. As noted in my opening remarks, we are increasing our full-year guidance for both revenue and for earnings. The excellent performance we had in the first quarter has been incorporated into the full-year guidance. For revenue, first, we've increased the bottom end of our guidance by our net revenue beat in the first quarter, resulting in increased guidance for net revenue of a range of $2.65 billion to $2.8 billion. For earnings per share, in the first quarter, we beat our quarterly guidance by $0.21 above the lower end and $0.16 above the high end. Based on our profitability, we now have estimated that our tax rate for the remainder of the year will increase from our previously estimated 25% to now 26%. This tax increase represents about a $0.02 per quarter increase, or an increase of $0.06 over the remainder of the fiscal year. Our guidance incorporates both our first-quarter beat and the impact of the increased tax rate for the remainder of the year. As a result, we're increasing the bottom and top end of our earnings per share guidance for fiscal year '22 to $4.15 to $4.30. This guidance does include the following assumptions. It does assume, and it's incorporated into our guidance for the year, a $10 million charge or $0.14 per share associated with intangible amortization. It does assume a 26% tax rate for Q2, Q3, and Q4 for each of the remaining quarters this year. It does assume that we have 54.5 million average diluted shares outstanding. And it excludes any contributions from future acquisitions that may happen subsequent to this call between now and the end of the fiscal year. In summary, we had an excellent first quarter and start to fiscal year 2022, setting new first quarter records for revenue and earnings per share performance. Our high-end water environment, sustainable infrastructure, and renewable energy services are directly aligned with our clients’ priorities. Our strong backlog, funded and authorized work provides us with both excellent visibility and momentum as we move throughout this year and look to even increase as we move out into the coming years. At this point, Laura, I would like to open up the call for questions.

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're using a speakerphone, please pick up the handset before pressing any numbers. Our first question comes from the line of Noelle Dilts with Stifel. You may proceed with your question.

Hi, guys. Good morning, and thanks for taking my questions.

Absolutely.

I was hoping you could provide more details on what you're observing and forecasting regarding margins. Both segments had strong margins this quarter, with GSG performing particularly well. Can you discuss the factors contributing to this strength, how much of it is likely to be sustainable, and how much may have been influenced by store mark? Additionally, could you share your margin expectations for each segment this year and if there have been any changes since the last conference call, as well as your longer-term outlook? Thank you.

Absolutely. Let's start with the significant contributions during the first quarter from unusual events. We did see a contribution from disaster activities that helped expand margins in the first quarter, which we typically link to higher utilization. The GSG margins were 14.7 for the quarter compared to 14 the previous year, indicating a year-on-year increase of 0.7. Approximately half of the rise in GSG margins is attributed to increased utilization driven by disaster work, while the other half results from a shift in our mix towards more data analytics in high-end federal IT activities. If we focus only on the GSG margins this quarter, around half of the 70 basis points increase is due to higher utilization, partly related to the disasters. Therefore, it would relate to about 35 basis points. Since the GSG segment represents about half of our business, if we extrapolate this across the entire company, it would approximate to about 17 basis points. I would describe this contribution as notable but not the main driver. Regarding our CIG margins, the increase is primarily due to a performance improvement stemming from the mix shift we've implemented. We continue to prioritize higher-end consulting and front-end engineering work, which typically carries higher margins. This reflects a more structural direction for us. Looking at the annual margin rates for the two groups, we have incrementally increased our expectations this year for CIG to a range of 11.5% to 12.5%, raising both the lower and upper ends by an additional 50 basis points from our previous estimates. For Government Services, we have raised the annualized margin expectation to 13% to 14%. I want to point out that we experience some seasonal impacts in our business during the second quarter, particularly due to weather and downtime affecting our Commercial and International Group, mainly in Canada. Cold weather has extended down to Florida and has impacted much of the Central U.S. We typically see less activity in the winter months of January, February, and March, so margins may be lower in Q2, which is a common occurrence for us. I anticipate a muted margin performance in Q2, with a significant recovery expected in Q3 and Q4. Overall, GSG is expected at 13% to 14%, and CIG at 11.5% to 12.5%. I’ve just shared insights on Q1, which was somewhat exceptional. I hope that addresses your comments. Questions are welcome.

That's it. Thank you. Very helpful. And then just for my second question, you definitely stepped up the share repurchase in the quarter; shares have been under pressure and that really part of the year. Could you speak to how you're thinking about priorities for capital allocation and the relative attractiveness of repurchases versus acquisitions at this point? Thanks.

Well, that's a good question. I think Steve covered it. I'll basically just do a quick recap on the priority. Number one is of course we want to fund internal organic growth. That's embedded in our operations already with respect to CapEx, which is quite modest. We're down to about one-half to 1%. So we're incredibly asset-light. The organic growth that we are realizing at the company is only requiring a very, very small amount of our cash generated from operations. Second, we're committed to the dividends. We've now, in every year that we've had the dividend, as Steve had indicated, we're 31 consecutive quarters. So do that math. It's about eight years. Every one of those years we've increased the dividend double digits. We're committed to that and to continuing that process. So that's the next priority for our use of capital. On the next does actually use for acquisitions and making Tetra Tech more competitive and furthering our strategic plan in the marketplace and to differentiating ourselves in the water environment, sustainable infrastructure, and renewable energy markets. We are very focused on bringing the best and brightest firms to come join and drill new VAR partners here at Tetra Tech, and that's through acquisitions. Now, acquisitions can be less consistent with respect to the timing and the size and therefore, we've employed a buyback. In fact, this was the second greatest quarter we've had in the amount of buyback we've had, and it was not triggered even though there's been some dislocation in multiples and pricing, that wasn't unique to Tetra Tech. Of course, there was a pullback across entire market sectors. But we put in an essentially even purchase throughout the quarter; some weeks it's higher, some weeks it's lower, and we also are supportive of our company at an underlying rate in the event that we would become more constructive even than what you've seen here. So what we see is that the cash generated from our operations. If you take a look at this last quarter at $61 million between dividends and buybacks, we can sustain that through cash generated from operations. It's not our goal to just pile up cash and leave it unreturned to our shareholders. Through dividends and buybacks, we will return our cash to our shareholders, and then we'll use our credit facilities to remain active on the M&A front. We're not borrowing cash in order to create a dividend and buyback, we're actually using the cash generated from operations. In fact, we have surplus cash to actually fund a portion of our acquisitions and if we need to go with larger acquisitions, Steve said, we have access essentially to a billion-dollar credit facility to put no limit on the ability to have great companies come join us at any time. So that's the hierarchy and how we think about the use of the capital we're generating.

Thank you. Very helpful.

Our next question comes from the line of Sean Eastman with KeyBanc Capital Markets. You may proceed with your question.

Hi, Dan and team. I'd love to dig a little deeper into the growth optionality in commercial. I think the high-performance building side is pretty well-defined, but if you could round out what other opportunities are firming in Commercial and maybe tie that in with this nice margin accretive mix shift we're already seeing in the Commercial book of business, that would be super helpful.

Yes. That's a really good question. It's one we've really not spent a lot of time talking about in our investor calls quarterly here for some time. But I know over the past few quarters and certainly through the early part of the pandemic, we saw Commercial impacted negatively. We've indicated that we thought that the first quarter of this year would be the second step and inflection to go from being flat or even down to actually growing. We actually see it continue. What we find to be quite encouraging is not only do we see the Commercial, and that's not just in the United States, it's really for our very large, multinational global clients, including heavily on the industrial side. There's more dollars and more commitments in funding and contracts being committed by these clients that we both have here at Tetra Tech now which includes many of the Fortune 100, but we're also looking to bring other firms onto Tetra Tech. So if you asked what's one of our priority areas? You've certainly heard me in the past, U.S. Federal data analytics, IT differentiation with respect to using advanced data analytics to solve some of our clients’ problems, and water firms both in the U.K. and Australia. We're now going to add tactically looking for firms to join us that have leadership positions with global commercial clients. These are solving their problems regarding sustainability. A big issue has been water. We've always talked about this both for water, for supply, for their operations, for their containment and treatment before any type of discharge. Of course, their long-term sustainability and resiliency programs. What we do like and I have said this for the past many years, that the CIG, our Commercial International, has the ability to have margins much higher than our Government Services Group. That is going to be driven by work that we do at the C-suite for our large global commercial clients where we're bringing exceptional value. While it does carry higher margins for us, it actually carries enormous savings for our clients by selecting the right alternatives, the right compliance activities, and the right decisions to be made in their future for anticipating new regulations and compliance requirements on the environmental and water side. We think not only carries better margins for us, which will help accelerate CIGs closing, but I'll tell you the value we're bringing to our clients through these services is really extraordinary. I believe not only best-in-class, in many instances really not offered by anyone else.

Interesting stuff. And to the extent, just hypothetically, the business cycle rolls over, how much sensitivity is there in this growth prospect pipeline for the commercial business?

That's a really good question. I know that we've had in the past. If we went back 10 years ago where we were actually doing much more detailed designs and construction management, we saw the volatility or the cyclicality of commodities drive that business up and down for us. By having moved weight to the front-end and actually working on the front-end planning, the strategies, and the upfront prioritization of programs, we find ourselves much less exposed to cyclicality that you see with commodities that is inherent and a lot of these large multinational programs, especially when you're talking about fossil energy companies, which is really oil, gas, or mining. We're really moving away from that. In case of energy, it's not just oil and gas, but its transformation to add other energy sources, such as renewable energy or even decarbonizing some of the standard oil and gas or fossil fuel production that exists today. We would find the work that we do to be much more consistent. I will say we're prioritizing quality over quantity. So by not doing the implementation, the projects are smaller that are less volatile, and they are higher margin, and highly differentiated. Because when you become the long-term consultant and partner with the strategy and implementation on where the companies are going, we see that to be much less fluctuation through these business cycles that would have been seen if you're actually implementing these solutions.

Okay, interesting. One last quick one from me. Dan, how would you characterize the timing risk around the IIJA tailwind for Tetra Tech? Are you increasingly convicted that we're going to see meaningful momentum there starting in fiscal '23? How would you characterize that?

I wouldn't say that we're increasingly focused. We're very methodical about this. We're very analytic about this. I think my comments regarding the first $80 billion, which is just the first installment that's been earmarked for the programs and in fact the guidebook that's come out. So I'd say this is further, I would say, does that make us more encouraged? No. It's just additional support to what we've seen. So I do think it's important to note that we've not included any material contributions from IIJA into our fiscal 2022. We think it will come out in the fall. We're already seeing contract vehicles be put in place. We think the first beneficiaries of the funding are going to come out to current contract holders. Here at Tetra Tech, with over $20 billion in existing contract capacity that we have, I think we're there. I've heard anecdotally impact to contracting officers being impacted and not being able to come to work because of Omicron or something else. We don't need new contracts; we have contract vehicles. The technical staff and the people at the front line can provide funding through the vehicles we have now. I would say we continue to be optimistic regarding the timing of IIJA and to reiterate it, and then just to take your question one step further, some have asked about the build back better. Has there been some disappointment or discouragement that it hasn't passed? In fact, here at Tetra Tech, we think that a very methodical or careful furthering of that on a timely basis. There has been some discussions of breaking it up into pieces that may be better for us. It will create the government to have the systems to put the new funding through to get to the contractors and in fact allow the best contractors to perform this work, not everything at once but they actually do it in a thoughtful meaningful way that we get the best value for the government. We continue to be optimistic; I wouldn't say we are more optimistic. We are continuing to track that's coming in just as we expect at this point.

Excellent. Thanks so much for the insights.

Our next question comes from the line of Tate Sullivan with Maxim Group. You may proceed with your question.

Hi, thank you. Just to start off, can you just give more background on moving the high-performance building from GSG to CIG, what does it show in terms of the evolution of that business? I imagine it could be in both based on the end customer, but, yeah.

Yes. If you went back three years, two years, even a little more than a year ago. The largest revenues were being generated here in the United States and a lot of it was government work. If you went back pre-five years ago, it was 100% U.S. as mostly East Coast and it was about 50/50 government and commercial. So it makes sense to go to government. When we added a West Coast operation about four years ago, was still all United States and that was also about 50/50 our government and commercial. So I would say in the U.S. there could have been a decision. But we're looking to grow government more so that's why we put it in GSG. About three-and-a-half years ago, we actually acquired our first international buildings practice, a high-performance buildings practice in Australia, headquartered out of Melbourne with 1,000 engineers. All of that work was being done and contracted for outside the U.S. So very quickly the work that we had within the buildings had moved to be international and the U.S. was about half commercial. The most recent acquisition back in August or in our fourth-quarter of Hoare Lea, which is all international in the United Kingdom, the overwhelming majority of the revenue became either international, the U.K., or Australia, and the U.S. is probably close to half, commercial. When you're sitting at 70%, 80% of the collective buildings group residing either in commercial or international, it made sense to house it there. We didn't really want to break it up because we're sharing clients, steering projects. I assure you one of the big growth areas that we see in our high-performance buildings area is actually with the U.S. Federal Government. We're growing work right now with the Australia government through their Ministry of Defense in the U.K. So we do have government work and we have had that overseas, but we're looking to grow that even more here in the U.S. The reason we moved it was to keep it consolidated, so the group could work cohesively, seamlessly, and bring all of the best that we have in Tetra Tech to clients and not have to go into the segment, and so that's the reason we moved to fully. We didn't move the entire high-performance buildings from Government Services to International because half of it or more than half of it was already in the International Group for the work that we had in Australia, and of course in the fourth quarter in the U.K., so that was the rationale for consolidating into the CIG segment.

Thank you for that context, Dan. You mentioned emerging contaminants in your prepared remarks and in the annual report, indicating $50 million allocated for new programs to investigate and treat these contaminants. Was that amount an increase from zero the previous year? Additionally, you talked about a new ion treatment plant. Is this an ion exchange plant? Can you clarify if this opportunity is currently present in just a couple of states, or has it expanded to multiple states? Could you provide more background on that opportunity, please?

Sure. We're up to $50 million and we have $50 million worth of orders to investigate our emerging contaminants, specifically PFAS. It was not up from zero, but up from what I'd say coming into 2021. To look back a year, the number was probably around $20 million, so it's up by about 150%. With respect to ion-exchange, there are a number of different methodologies of treating PFAS. The conventional best demonstrated available technology has been carbon or granular activated carbon, and also ion exchange. Tetra Tech did the design here in California for the largest PFAS municipal treatment facility in the United States, and we happen to have used ion exchange. There are other methods that we're working with on innovative technologies that are looking to disrupt these technologies of either ion exchange or granular activated carbon. We did call it out because it's first of its kind in scale for a municipality. We do think it's going to grow. There are several things that are driving it. One is the responsible parties who discharged PFAS, which is really an additive to firefighting foam, partially used by the military, but other firefighting institutions also. Ultimately, this is on track to be regulated as a drinking water contaminant that will have a maximum level that will be treated at every single municipality in the United States. Similarly, they are developing drinking water standards in Australia and the U.K. with their well down the road, similar to the U.S., sort of moving in parallel to developing these. The market opportunity is adding treatment technology to treat PFAS at every single water supply utility in the U.S., and that's ultimately our eye on the prize. Ultimately, the demonstration of putting full-scale treatment in place, we're among the first to do it and certainly the entity to do it at the largest scale in the U.S. now, and that's what we're focused on. It hasn't hit that steep part of the curve in funding, which will be driven by regulatory requirements, and that'll should take it and have a grow by really orders of magnitude.

Thank you, Dan.

Thanks, Tate.

Our next question comes from the line of Marc Riddick with Sidoti. You may proceed with your question.

Good morning.

Morning, Marc.

A lot has been discussed in the Q&A, which is great. I want to revisit the acquisition pipeline from a higher perspective and your observations compared to a year ago. Last year, you completed five acquisitions, and I'm interested in your thoughts on how the current pipeline compares to then, as well as the appeal of international versus domestic opportunities. Thank you.

Thanks for your question, Marc. I think our acquisition pipeline actually looks very consistent with what we saw a year ago. We're looking at it on fiscal years and not calendar, but we did four acquisitions in fiscal year 2021, and we did one in our first quarter, so we've got one down. We look that it's relatively similar. We're relatively agnostic whether or not it's International or U.S. because some of our priorities with respect to international, particularly in Australia and the United Kingdom, with adding water consultancies is a priority. However, we wouldn't put that priority over adding additional federal IT companies here in the U.S., or advanced data analytic companies primarily here in the U.S., or digital water companies here in the U.S. Really, the tactics I think will contribute as a company, very high-end commercial environmental companies here in the U.S. So if you'd asked if a water company came up in the U.K. or Australia versus a data analytics company, or a commercial high-end environmental company here in the U.S., we go international, or will we go U.S. Will we go U.S. environmental over IT? My response is that we will do all four. We'll do one water in the U.K. or Australia, and we'll do an environmental in the U.S., and we'll do an IT company here in the U.S. So I think was the balance sheet we have that Steve covered, it's not either or for us; it's just one criteria. Will it increase Tetra Tech's competitive position? Bring new clients and differentiate us in the marketplace? Will it think it's better than we are today? If the answer is yes, we don't have a governor or threshold by which we have to make a selection of one over another. With respect to what the pipeline looks like, it looks very similar to what we saw last year.

Okay. I would be remiss if I didn't ask about overall labor availability, spending, recruiting, and related matters. Could you provide a quick update on what you're observing and your expectations? Additionally, how does this tie into the backlog and growth opportunities you see moving forward? Thank you.

It's a good question and one that I frequently receive, along with our team. We have not experienced labor shortages and have not faced any shortfall in our workforce. However, we have made significant efforts in consolidating within the environmental water sectors, which has resulted in some disruptions due to certain consolidators. Despite this, we have greatly benefited from what we refer to internally as strategic hires—thought leaders and technical leaders in the market. Overall, this process has gone quite well for us. We closely monitor our turnover rate, which has actually decreased slightly since the pandemic began compared to pre-pandemic levels. While there may be some noise in the data, our voluntary turnover rate has dipped a few tenths of a percent—from about 9.8% to 9.5%. I consider this change to be minimal, and turnover has not presented a significant issue for us. We are aware of salary pressures and inflation and ensure that we pay competitive wages. Most of our contracts are structured as time and materials with annual escalation rates or cost-plus, where the costs are passed through. We do not see a negative impact from these pressures and believe that utilizing advanced data analytics and technology can significantly enhance our productivity. The goal is not to increase work hours but to improve output with the same amount of labor. We aim to break the traditional consulting model where increased work requires more staff. Instead, we believe we can deliver greater output and value for our clients more quickly, resulting in better technical outcomes with the same or even a reduced workforce. While we are hiring more people as we expand, this shift will also open up new technological applications and career opportunities that were previously unseen. The best talent that joins Tetra Tech will have the chance to engage in a wider array of projects across different geographies, tackling challenges with advanced technology more than they ever thought possible. This is how we are addressing the workforce challenges we face.

Much appreciated. Thank you very much.

Great. Thanks a lot, Marc.

Our next question comes from the line of Michael Dudas with Vertical Research. You may proceed with your question.

Good morning, Dan and Steve.

Good morning, Michael.

Given you reaching a record backlog and on a constant currency basis, how will the order flow be, especially with the federal side? Do you anticipate that during 2022 you can maintain growth in the backlog, a positive book-to-bills? Any issues given maybe some of the funding or some discussions on Washington, especially with what's going on in defense and some of the focuses may be turned elsewhere on how to make some of those?

I was very encouraged with our first quarter in terms of our business. The new task orders awarded to us exceeded our expectations, especially since we achieved our highest first-quarter revenue ever. Typically, we see pressure on our backlog during the first quarter due to lighter activity for new awards caused by the holiday season. However, we experienced a strong flow of new orders. Regarding our outlook, it's notable. I believe defense will not be a top priority, as we have three main areas of our Federal work: civilian agencies such as the FAA, U.S. CPA, NASA, and NOAA, among others. Most of these agencies have seen their budgets increase, aligning with the administration's priorities. The outlook for this area looks quite promising. While I don't want to specifically cite Ukraine, I do want to emphasize the administration's focus on diplomacy and development rather than defense. More funding will likely be directed toward diplomacy, and then development, which will help those in need, benefiting everyone. As one of the large USAID contractors, we expect to gain from this trend as the year progresses, which makes me optimistic. Although defense may not see significant increases in funding, we believe we will still benefit from shifts in priorities. Funding is likely to move away from traditional defense spending toward initiatives that enhance quality of life, sustainability, and environmental cleanup from past defense operations. We anticipate a strong future for our activities even if the overall defense budget remains stable or does not see vast increases.

That's encouraging, Dan, and my follow-up is, let me just go back to the capital allocation and M&A pipeline. Is there any target level of capacity, balance sheet capacity that you like profitable for you? Given what you've described, it sounds like there will be more niche, smaller acquisitions, maybe several of them as opposed to one or two ones that they've might be out for the current company. Less likely is that something we should think about in regard to how capital gets allocated this year?

I would like to start with a very high level, 100-thousand-foot overview on our capital allocation at target levels, which it really would like to get to a range of one to two times. I'd be comfortable going over to two, but it would be for the right action for the company. I wouldn't feel uncomfortable at all if it was the right strategy and the right move. You would be right to point out, you've said this for I don't know how many years, Dan, one to two, and you haven't yet been able to get there. I don't think it's the worst foible that we've had; if we've been able to grow the company at double digits, we've been able to acquire great companies, we've been able to return cash to our shareholders, we've been able to increase our dividends, and we deliver because of strong cash flow. That's not what we're targeting, but it's not a bad place to be. I do think in the short term, at least if you looked at the horizon, and I commented earlier on the questions here, that I see the pipeline being similar to what we saw last year and the year before, which does lend itself to several, if you want to call it niche firms. Every firm that's joined us, whether or not it's had 20 people or it's had 1,000 people considered to be niche. From a financial standpoint, as a percentage of the company's revenue can be characterized, but we think that they are incredibly accretive to the company's intellectual status in the marketplace. Whether it's a smaller firm like EA or Ebro PHARMAQ. They are unbelievably valuable in the company. Whether it's a small Canadian company like Covanta, which is very high in research and development with an expert on fluid mechanics and other calculations, that moved us to another level, or if it's bigger like we needed a thousand people added both geography and some of the best buildings. Every one of those has made us better. Some have made our revenues, has moved the needle a little bit more than others. If we find a larger firm that fits with Tetra Tech, and I think there are a few out there that they would benefit every bit as much as us because what's important is, it's not a one-way street. It's not to benefit Tetra Tech. We think that every associate that comes to us for the acquisition will have a better, brighter future than they now have on their own and frankly, that Tetra Tech staff have on their own. Do I like to go bigger? Yes. But it needs to be for the reason that we're going to be better. If that gets us to leverage to two, I'll be even happier. But we don't want to be at the risk of being redundant; we really want to move to be better, not just bigger.

Sounds like the department is going to continue to be quite busy. Thank you, Dan.

Great. Thank you very much, Michael.

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

Thank you very much, Laura, and I want to thank every one of you for attending the call. I know you all have busy schedules, and take the time out and participate; asking these questions and following Tetra Tech is really very much appreciated. I feel really good, and our entire company feels very good about the start of the year with a good first quarter. But of course, we do know what we did in the first quarter as what we did before, and we're focused on doing as well or better as we move into the future. I really look forward to giving you an update here on our next quarterly call on how our second quarter has performed and providing you more updates on both our outlook for the rest of the year, and how things like the IIJA and other programs are progressing. As we see them moving forward into the rest of 2022 and beyond. So with that, I hope you have a great rest of the week and stay safe. Thank you.

Ladies and gentlemen, this concludes our conference for today. Thank you all for your participation and have a great rest of your day. All parties may now disconnect.