Earnings Call Transcript - TTEK Q3 2021

Operator, Operator

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 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 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'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 Investors Section of Tetra Tech's Web site. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Dan Batrack, Chairman and Chief Executive Officer

Great. Thank you very much, Hilary, 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 Hoare Lea 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 cybersecurity. I'll now begin with an overview of our performance in 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 of Tetra Tech at $638 million, up 14% from last year. Our operations generated a third quarter earnings per share of $0.95, which was up 22% from the prior year, and our backlog set a new all-time record for the company, ending the quarter at $3 billion, approximately $3.250 billion, 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 and 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 Transportation. 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-based 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 had 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 operating margins. The Government Services Group or the GSG segment's 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 have been impacted by the pandemic in 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 advanced 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 U.S. 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?

Steve Burdick, Chief Financial Officer

Okay. 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 condition 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. This 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 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 continue to improve our working capital management and also benefited from a decrease in our days 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 5 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 to our 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 $0.20 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 0.1x and available liquidity of over $800 million in the form of cash on hand and funds available under our current credit agreement. 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 a strategic acquisition. And most recently, and in fact, just this week, we added Hoare Lea, 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.

Dan Batrack, Chairman and Chief Executive Officer

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 and 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% 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 in greener building design is increasingly important to our clients. Our Leading with Science approach can significantly address our clients' 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 an 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 Hoare Lea in the United Kingdom. Hoare Lea adds to our team an entity that's a pioneer in mechanical, electrical and hydraulic design of building systems. Now Hoare Lea 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. Hoare Lea 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 U.S. 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 markets. We've added five firms, each bringing another dimension of specialized expertise in client relationships. Now this strategy has really been working for us and has resulted in a $300 million per year revenue for us today, a sixfold increase since we began this back in 2016. We're focused on achieving a 2023 target of $500 million per year in revenue, and we'll 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 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 revenue 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 Hoare Lea. It does estimate a tax rate of 25% for the fourth quarter. We have 54.6 million diluted 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 Hoare Lea and as a result of our Q3 performance and outlook for the remainder of the year, we're raising our annual guidance for both revenue and earnings per share. And with that, Hilary, I'd now like to open the call up for questions.

Operator, Operator

Operator instructions. Our first question is from Sean Eastman of KeyBanc Capital Markets.

Alex Dwyer, Analyst

This is Alex on for Sean this morning. Congrats on the strong quarter. So my first one is, the condition of the state and local budget has completely flipped compared to this time last year. So is Tetra Tech starting to see that funding start to be utilized and are projects starting to be advanced? And if so, have the priority areas for state and local clients changed at all with the pandemic shake-up and the federal government advancing a sustainability agenda?

Dan Batrack, Chairman and Chief Executive Officer

Well, it's a really good question, and it's one that we actually receive somewhat frequently: 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, storm water 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. We really have seen it not speciated to just federal funding causing certain projects to go forward, but an overall strengthening of funding of the programs that they've had scheduled for years.

Alex Dwyer, Analyst

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 opportunity 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?

Dan Batrack, Chairman and Chief Executive Officer

Well, I'll answer that 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 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, the synergies are very, very high. And in fact, our Federal IT business is embedded in work that we do for international development, USAID, our U.S. State Department, our civilian agencies and Department of Defense, and it is carrying higher margins, it is higher in demand. It's more specialized services, 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. 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 business.

Alex Dwyer, Analyst

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.

Dan Batrack, Chairman and Chief Executive Officer

We actually see that they are hand in glove. 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 the physical structures. 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. We rarely see projects that have an environmental or a water program or a climate change component that have no structure associated with them. To be focused on the high-performance buildings component of it is 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 to not have this building capability would actually create more of a discontinuity with respect to how we address this. Why would we not address our clients' request in an area that has complete synergies with the core services of the company?

Operator, Operator

Our next question is from Sam England of Berenberg.

Sam England, Analyst

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?

Dan Batrack, Chairman and Chief Executive Officer

We really do think that Hoare Lea in the U.K. 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 in 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 have been significantly underrepresented was in the United Kingdom and Hoare Lea filled 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 where we're a market leader, but we'll still be looking to add niche components. We think that Hoare Lea fills out the geographic coverage that we're looking for as a corporation.

Sam England, Analyst

And then on the margin side, I was just wondering with the improvement you're making and the work you're doing around analytics, what is your long-term view on the margins that you can achieve? Is that changing, or is there a point where you have to hand back any margin improvement to the clients through lower pricing?

Dan Batrack, Chairman and Chief Executive Officer

I don't think so. One goal we have here at Tetra Tech has really been to work at the very highest end of the technical offerings and not to be commoditized. Typically what we've seen where dollars would have to be handed 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 value services that we're providing to the clients. We are getting more of the work on a fixed-price versus a value proposition; in the case of the government it could be cost-plus a fixed fee with an award fee component. 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. 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 aren't being offered in the marketplace today. We expect that will not only achieve the higher margins we've spoken of, but actually raise that bar, including 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.

Operator, Operator

Our next question is from Tate Sullivan of Maxim Group.

Tate Sullivan, Analyst

And Dan, I'm sorry if I missed it, can you talk about: is a catalyst for that business different regulations forcing buildings to go net zero? Or is it mostly new build opportunities for that business, please?

Dan Batrack, Chairman and Chief Executive Officer

Well, I would say that, one, there is a growing regulatory requirement for new builds to meet certain energy efficiency, water recovery and self-sufficiency. So one component of it. But I would say the bigger drive is more what I call grassroots, and that is especially with this pandemic, as individuals are returning to their office, whether workers or in 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, healthier, and that allow for higher productivity of their workers and provide a safer environment. One of the axioms that our staff has within 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. The drive is actually coming from the building owners for renovation to up their game and to go through renovation to address health concerns. It's related to pandemic and other pathogens that have the potential to be present. Yes, there's a regulatory portion, but it's a little bit like sustainability and climate change. Did it come top-down from regulations or is it grassroots up that we actually want to address and protect the planet and building occupancy? We see the grassroots driving demand as a precursor to regulation and it has much more legs than a single regulation in any given geography.

Tate Sullivan, Analyst

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

Dan Batrack, Chairman and Chief Executive Officer

I think it's actually a bit ahead. They've come out with specific targets with respect to building energy usage reduction. The new requirements to meet certain standards put them in a new category that hasn'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 can be taken and lessons learned 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 emerging here. Now it's coming out certainly in the U.S. in certain states. Our communities have very high building requirements. The collaboration from our Australian, U.S. and U.K. operations, we believe, will be best-in-class to meet or exceed regulatory requirements and actually be used as a true differentiator for building owners to attract occupants while decarbonizing and reducing the overall footprint of buildings around the world. The U.K. is a bit ahead on the regulatory front and there are large financial estimates as to the dollars to be spent for renovation and compliance on new buildings. We see a lot of synergies across our high-performance buildings practices.

Tate Sullivan, Analyst

And then just a separate question. I had not heard you mentioned recurring revenue from software, and certainly that makes sense as part of the growing data analytics business. Is it a very small piece right now or do you have growth targets? How big is that opportunity?

Dan Batrack, Chairman and Chief Executive Officer

Well, it's very small right now. 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. We're looking carefully at how we can utilize that approach for the Tetra Tech Delta tools that we have, which consist of more than 100 different proprietary software, analytic tools and other methods. The goal is that we 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, keep them state of the art, and allow us to monetize in some instances 50 years' worth of investments we've made in these software and analytic packages.

Operator, Operator

Our next question is from Andrew Wittmann of Robert W. Baird.

Andrew Wittmann, Analyst

Dan, I wanted to talk about utilization a little bit. Certainly, over the past 12 months with the pandemic, there were points where utilization ebbed and flowed. Can you give us a sense of the trajectory through that time in the quarter? And then more importantly, with the outlook you've portrayed, double-digit type growth for the next few quarters: does this put Tetra Tech into hiring mode? Or do you feel like you have enough staff available to accomplish this and push utilization higher? I'm trying to understand the implications to margins through the lens of utilization.

Dan Batrack, Chairman and Chief Executive Officer

Yes. It's a good question, Andy. There has been some ebbing and flowing of utilization. Overall, we did see utilization actually go up when the pandemic first came on; part of it was less traveling to conferences and other items. Recently, in the last few quarters, our utilization has gone up, particularly in the Government Services Group, and it's been a primary contributor to margin expansion. If you looked over the past 12 to 24 months, 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 higher demand and margins. This last quarter we had exceptional growth in state and local revenues over 30% and international work was exceptional at over 25%. We did see a slow recovery in our U.S. commercial work. One thing we've accomplished, and I'm glad we started this before the pandemic, is moving the company to a cloud and a common platform, so staff in one area that may be slower are quite fungible with respect to water treatment engineers and scientists who can then be utilized on state and local, federal or international work. The physics of hydraulics and hydrology don't change by geography. We've been able to use our staff across the board, increasing utilization for the company, which translated into increased margin—over 100 basis points in our Commercial International Group this last quarter. With respect to capacity to handle the forecasted growth rates, yes, I believe we have embedded sufficient resource capacity to handle 10% to 15% growth without adding additional staff. We are in active hiring mode and adding staff, but we don't see recruiting and adding staff as something that would restrict our ability to respond to work we have today with increased backlog or work from potential U.S. stimulus programs. Having staff is necessary but not sufficient—you still need contracts and clients. We are in a good position: resources, client relationships and standing contracts are in place.

Andrew Wittmann, Analyst

I guess another question focused on margins: could you comment on reopening effects such as more vacations, elective surgeries resuming, more travel? Are there factors we should consider as we think into fiscal 2022 that these may or may not have on your margins?

Dan Batrack, Chairman and Chief Executive Officer

It's a really good question. The one thing I've heard across our operations, both in the U.S. and internationally, is opening up of the economy and reduced travel restrictions have put additional priority on vacations and seeing family. I do think in the fourth quarter we will see more vacations and utilization will be impacted a little bit. It's embedded in our guidance already. The midpoints of our guidance for Q4 represent a record high. While we had a great third quarter, the midpoints of our guidance for Q4 actually approximate what we just did in Q3. Vacation impacts are not additional costs because we've already accrued for vacation; it's reflected in the balance sheet. So utilization will drop temporarily because people are not on projects during that time. I don't see it as a fiscal 2022 impact. I see this as temporal—people will take vacations and then return to work. Tetra Tech is moving to a hybrid work schedule allowing remote, office and mixed staffing. That flexibility helps with recruiting. We're looking for the best technical staff; we're not just looking to get bigger, but to get better and smarter. Yes, there will be some vacations; it's embedded in our guidance, and our guidance reflects record performance in Q4. I don't see it continuing as a drag into fiscal 2022.

Operator, Operator

Our next question is from Noelle Dilts of Stifel.

Noelle Dilts, Analyst

I just had one question that's relatively detailed. You talked about double-digit growth in renewables with particular strength in offshore wind. I was curious how you're thinking about the growth opportunity around offshore wind in particular. My understanding is we're pretty early innings there. Also, there is still a lot of activity with terrestrial wind and solar. How are you thinking about the outlook for those markets?

Dan Batrack, Chairman and Chief Executive Officer

Offshore wind is a large opportunity. Some of the offshore wind leases by the federal government have required developers to pay very large sums to obtain lease and development rights offshore. When entities make that upfront investment they prioritize moving projects forward. The upfront evaluation aligns well with Tetra Tech capabilities for offshore impacts: water quality, sedimentation, marine mammals, fisheries, and related studies. We also like offshore wind because it supports long-term monitoring—reoccurring work—because we'll continue to do monitoring after turbines are installed. The West Coast is more nascent due to deeper waters and different foundation approaches; those areas align with our offshore oceanographic capabilities that go back to the company's founding. Offshore wind also often faces less citizen opposition if it's out of sight. That said, we are not deemphasizing solar, onshore wind, geothermal, or hydro. Repowering with more efficient turbines, adding penstocks or fish bypass solutions for hydro are important opportunities. Hydro is a major renewable in Canada and parts of the U.S., and conservation efforts often focus on fisheries and fish passage. There's been calls for dam removal and calls for fish passage solutions; Tetra Tech is one of the leaders in making fisheries and habitats sustainable where dams exist. We are constructive and positive on offshore wind for the reasons mentioned, and our services across other renewable areas remain strong.

Operator, Operator

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

Dan Batrack, Chairman and Chief Executive Officer

Great. Thank you very much, Hilary, and thank you all for being on the call today. Thank you for the questions. 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 Hoare Lea in the U.K. It's really the phenomenal performance of the more than 21,000 employees at Tetra Tech that have given us this record performance. It's very easy 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 LA County or complete shutdowns in places like Sydney. When you put the performance of the company in light of the overall global impact, I'm very thankful for the phenomenal performance of the Tetra Tech associates and the clients that we serve every day. 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 most importantly, our specific guidance for fiscal year 2022. I hope you have a safe day and a great rest of the week. Thank you. Goodbye.

Operator, Operator

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