Tetra Tech Inc. (NASDAQ:TTEK) Q3 2022 Earnings Conference Call August 4, 2022 11:00 AM ET
Dan Batrack – Chairman and CEO
Steve Burdick – CFO, Executive VP and Treasurer
Conference Call Participants
Sean Eastman – KeyBanc
Noelle Dilts – Stifel
Tate Sullivan – Maxim Group
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 website. [Operator Instructions]
With that, I would like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.
Thank you very much, Laura, and good morning, and welcome to our fiscal year 2022 third quarter earnings conference call. I’d like to start this call today with the recognition of the executive appointments announced just this week here at Tetra Tech of Jill Hudkins to Tetra Tech President; and Dr. Leslie Shoemaker to Chief Sustainability and Leadership Development Officer. Both Jill and Leslie represent some of the most exceptional talent that we have in the entire company.
In the case of Jill Hudkins, she’s been with the company for over 20 years, in fact, 24 years to be precise, and has personally led our digital water growth strategy that I’ll be discussing later on in this call. As for Leslie, Leslie has been with the company for over 30 years and has successfully led our growth initiative strategies and operations of the entire company. And in her new role, she’ll further advance Tetra Tech’s industry-leading sustainability program and leadership mentoring and development of our staff. I’d like you to join me in congratulating both of them in their new roles.
Now I’d like to turn to our third quarter performance. We had a very strong third quarter with record third quarter revenue, net revenue, operating income and earnings per share. Operating income was $84 million in the quarter, up 20% year-over-year, which reflected a 70 basis point increase in our operating margin over last year. Our backlog on a constant currency basis increased to an all-time high of $3.65 billion, which is up 12% from last year. This collective performance is really a direct result of our successful long-term strategy to provide high-end Leading with Science services in the water and environmental markets.
Our strategy has to put us at the forefront of our client’s critical programs to address climate change, increase resiliency, provide essential water supplies and protect the environment. Given the strength of our performance, we’re increasing our guidance for both the net revenue and earnings per share for the entirety of fiscal year 2022, and I’ll provide more details of that at the guidance at the — toward the end of this call.
Now I’ll begin with an overview of our performance and our customers, followed by Steve Burdick, our Chief Financial Officer, who will provide a more detailed review of our financials and capital allocation. I’ll then follow Steve with addressing our customer outlook and our earnings guidance for fiscal year 2022 and for the fourth quarter.
In the quarter, we hit new all-time third quarter highs for revenue, net revenue, operating income and earnings per share. Our net revenue increased 13% year-over-year from $638 million to $720 million, which represents an all-time high for any quarter in the company’s history. Our operating income increased at an even faster rate, up 20% from last year, reaching a third quarter record of $84 million and increasing our operating margin by 70 basis points from the same quarter last year.
And finally, we delivered $1.09 in earnings per share, which is up 15% from the $0.95 that we produced last year and is a new all-time high of $1.09 for the third quarter and the second highest earnings per share of any quarter in the history of the company.
I’d now like to provide an overview of our performance by our end customer. In the third quarter, we saw growth across all 4 of our customer sectors. International, from clients and projects that were contracted for outside the United States represented a 35% of our revenue and was up 18% from last year, and it was actually up 26% if you evaluate it on a constant currency basis. This strong performance was driven by rapid growth in our high-performance buildings practice and our resilient infrastructure design work across the United Kingdom, Australia and all across Canada.
We saw continued strength in our state and local revenues, which were up 10% compared to last year. This is the seventh consecutive quarter of double-digit state and local growth. And our underlying municipal water services work was up 15% year-over-year led by the rapid growth of our digital water practice, while our episodic disaster response services were flat in comparison to last year.
Our U.S. commercial net revenue was 22% of our business, up 19% from last year. Our services and sustainability which include environmental permitting, high-performance buildings design and renewable energy, all contributed to strong growth in the sector.
And finally, our work for our U.S. federal clients represented 27% of our net revenues in the quarter and was up 8% year-over-year if we exclude the onetime impact of our Afghanistan wind-down that took place almost a year ago now. Our federal work was driven by growth in all 3 of our main federal client sectors, and that include the civilian agencies, international development and all of the defense agencies that we work for. All 3 of them grew during the quarter.
I’d now like to present our performance by segment. The Commercial International Group or CIG segment grew by 19% year-over-year. Higher utilization and strong project performance resulted in a 13.8% margin in the quarter, up 230 basis points from the prior year. Now while 13.8% was a very strong quarter, about 50 basis points of that increase were associated with pickups due to excellent project execution during the quarter.
I expect CIG to continue to perform at the high end or even exceed the range that we’ve identified earlier for the CIG segment, which was 11.5% to 12.5% margin range. And that particularly will be the case as we have higher margins in typically the third and even more especially in the fourth quarter of the fiscal years due to seasonality. CIG did have a strong broad-based growth from international work in the United Kingdom, Australia and Canada as well as work for commercial clients here in the United States.
Our Government Services Group or the GSG segment grew by 6% and delivered a 13.4% margin. The GSG segment’s government work grew for municipal clients and federal clients during the quarter, while the episodic disaster work was a smaller portion of the GSG segment’s revenue this quarter. GSG’s 13.4% margin is right in the middle of the expected range that we have for this group of a 13% to 14% margin range. Typically, GSG’s fourth quarter, which we’re entering, will be at the high end of this range, which we expect as utilization increases due to summer field programs and other federal projects close out that are time at the end of the fiscal year.
Our backlog during the quarter was up 12% year-over-year on a constant currency basis. And even in a quarter with an all-time record revenue, our strong orders resulted in a book-to-bill of greater than 1 for the quarter. In the third quarter, we won new programs and task orders across all of our global operations that leveraged our more than $20 billion in federal contract capacity and also add additional work through our long-term client relationships that we have globally.
Commercial orders added $396 million to backlog in the quarter. U.S. federal orders from long-term clients, such as the Department of Defense, USAID, USEPA and the Department of Energy, all contributed to backlog in the quarter. We continue to receive significant orders for climate change-related international development work from both Australia and the United Kingdom’s aid agencies.
At this point, I’d like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present the details of our financials. Steve?
Thank you, Dan. So I would like to now review the GAAP financials for the third quarter of 2022. Overall, as Dan noted earlier, we had record high double-digit growth for revenue and earnings. The strong performance from our operations resulted in a top line growth, with third quarter revenue of $890 million and net revenue amounted to $720 million, which was above the upper end of our guidance range of $665 million to $715 million. Our revenue and net revenue were both up at 11% and 13%, respectively, over last year, with strong growth from U.S. commercial, international, state and local end markets.
Our operating income and earnings per share for the third quarter also improved over last year. Our reported operating income came in at $84 million this quarter, up 20% over last year. Our improved operating income for the third quarter was largely driven by our 19% growth in the CIG segment net revenue, coupled with a 44% growth in CIG’s operating income. On a consolidated basis, these improvements resulted in our EBITDA margin increasing 70 basis points over the third quarter of last year.
Now GAAP EPS came in at $1.09 in the third quarter, which was an increase of 15% over last year. Our EPS of $1.09 also came in better than the top end of our guidance range, which was $1 to $1.05. And furthermore, our effective tax rate last year was lower. So a more appropriate way to look at the year-over-year comparison would be to utilize a consistent tax rate basis with last year, and this would have resulted in an EPS being up 22% over last year.
Cash flows generated from operations for the third quarter totaled $98 million, an increase of 42% over last year. Our focus on working capital and cash flows has resulted in our DSO improving once again to an all-time low of 58.8 days. This is an improvement of about 6 days from last year at this time. And this lower DSO trend continues to reflect the outstanding work our project managers lead relative to high-quality projects and highly satisfied clients in the broad portfolio across all of our end markets and geographies.
Our net income amounts to $44 million, and our net debt to EBITDA was at a leverage of 0.1x, with a total cash position of more than $200 million. Our return on invested capital on a trailing 12-month basis exceeds 22%. And as a note, our ROIC has been over 20% for each quarter this fiscal year.
So as we presented here today, the continued high-quality results with improved EBITDA margins, along with strong cash flows and lower working capital requirements, has shown that Tetra Tech is able to reinvest in the business and generate very strong returns.
Now our long-term capital allocation strategy calls for a balance of investing in this growth in our business, managing the balance sheet, and as I will now present, providing return to our shareholders. Year-to-date, cash flow from operations generated $276 million. Our strong cash flow allowed us to successfully complete 4 acquisitions so far this year, all of which advance our digital strategy, which Dan will discuss later. And during the third quarter, we continued to provide significant returns for our shareholders through dividends and share buybacks.
Now regarding our dividend program, year-to-date, we’ve paid out $34 million in dividends. And I want to announce that our Board of Directors approved our 33rd consecutive dividend, which is set at $0.23 per share and a 15% increase over last year. Furthermore, year-to-date, we utilized $150 million in our stock buyback program. We have a total of $398 million remaining in our approved stock buyback program. And all told, year-to-date, so we’ve returned $184 million to our shareholders through these dividend and share buyback programs. And our strong balance sheet and available liquidity of over $1 billion positions us to continue investing in technical capabilities and strategic growth areas.
Now prior to handing the presentation back over to Dan, I want to remind everybody of 3 key items for reconciliation to our Q4 ’21 results from the actual net revenue of $709 million. First, we had one extra week in Q4 of last year. Because of how our 52-, 53-week fiscal year works, we had an extra week in last year’s Q4, which we do not have repeating this year that will result in a year-over-year impact of about $50 million or 8% of net revenue, which we highlighted on our previous earnings call.
Second, the Afghanistan wind-down occurred late in September 2021 where the U.S. and other countries departed from the country, and as a result, our projects were wound down swiftly which we expect to have about a $10 million impact in the fourth quarter.
And third, we had a $15 million of episodic disaster recovery work in the fourth quarter last year that we do not expect to have in the current year.
In addition to these 3 issues, I want to note that the FX rate impact on our fourth quarter with the recent strengthening of the U.S. dollar. So as a reminder, our primary non-U.S. operations are represented by Canada, Australia and the U.K., which have all been performing well in their local currencies. And I have to say, across the board are exceeding expectations on both the top line and the bottom line. And so the recent strengthening of the U.S. dollar versus the currencies in these countries is expected to create an FX translation impact of about $20 million or just about 3% of our net revenue.
So in total, the net revenue amounting to $614 million should be utilized as a baseline for the year-over-year comparison to the fourth quarter and fiscal 2022 guidance that Dan will provide in the next few slides.
I am very pleased to share these great results with you all for the third quarter and fiscal year-to-date. Thanks for your support, and I’ll hand the call back over to Dan.
Great. Thank you, Steve. One of Tetra Tech’s key growth initiatives that advances our strategy is digital water. Our digital water practice was launched back in 2019, and over the past 3 years, has grown to $150 million in annual revenue, and we expect this to double again in the next 3 years.
We’ve grown our digital water practice by attracting top talent in automation, systems integration and data analytics. And we’re seeing a growing demand from our municipal clients for innovative, scalable technology solutions. This market is being driven by, first, new and proposed regulations for water utilities to address cybersecurity and other remote monitoring and operations, digital twin technologies that support facility optimization. And funding for all of this work and for new municipal programs is included in the Bipartisan Infrastructure Investment and Jobs Act, or IIJA, also known as the infrastructure stimulus program.
Our strategy is to deliver Tetra Tech’s suite of delta technologies to more than the 500 municipal agencies that we’re working for today. In the past 2 years, we’ve added 3 firms that each bring new technologies and expertise to Tetra Tech to further our digital water practice. The most recent addition is a firm called The Integration Group of the Americas, or TIGA, who joined us just 30 days ago. The addition of TIGA further expands our digital water practice with industry-leading software engineers and digital transformation consultants experienced in solving the complex challenges faced by utilities. TIGA brings Tetra Tech customers and customized analytics software and platform-as-a-service applications that are rapidly integrating into Tetra Tech’s differentiated suite of delta technologies.
I’d now like to provide our guidance for the fourth quarter and for all of fiscal year 2022. First, our guidance for the fourth quarter is for a net revenue of a range of $676 million to $726 million for net revenue and an associated earnings per share of $1.13 to $1.18.
As noted in my opening remarks, we’re increasing our full year guidance for both net revenue and earnings per share. Our new guidance for all of fiscal year 2022 for net revenue is $2.78 billion to $2.83 billion. This is an implied net revenue growth of 14% for the fourth quarter at the midpoint of guidance.
Our new increase for earnings per share for fiscal year 2022 is $4.38 to $4.43. This guidance both for the fourth quarter and for the year includes — for the fourth quarter includes intangible amortization of $3.4 million, which is approximately $0.05 per share, effective tax rate of 26% for the fourth quarter, it assumes we have 54 million shares — diluted shares outstanding, and it does exclude any contributions of revenue or income from acquisitions that we completed during the fourth quarter or the remainder of the year.
In summary, we had a very strong quarter with record high Q3 results. This performance is a direct result of our successful long-term strategy to provide high-end differentiated services that are Leading with Science in the water and environmental markets. We advanced our digital water growth strategy with the addition of TIGA in the quarter, a high-end industry-leading automation firm. And given the strength of our end markets and the increase in our backlog, I’m pleased that we were able to increase our guidance for both net revenue and earnings per share for the full fiscal year of 2022.
And with that, Laura, I would like to open up the call for questions.
[Operator Instructions] Our first question comes from the line of Sean Eastman with KeyBanc.
A great quarter, another great update, compliments to the team. So I wanted to start — I know it’s early to talk fiscal ’23, but then I’m sure you knew this was coming. Obviously, we’re focused on where this growth rate is going to end up into the out years. And you guys helped us out by pointing out the very strong exit growth velocity embedded in the fiscal fourth quarter guidance. So we have that exit growth rate to work with.
We’re thinking about the IIJA momentum that really hasn’t hit the model yet. But then maybe on the other hand, we got to think about the FX drag that will carry into next year. And maybe the disaster response creates a little bit of a tougher comp for state and local. Could you just put a finer point around any of those elements? And are there any other considerations you’d point out to us at this point as we try to bridge to fiscal ’23 revenue?
Thanks for being on the call and for the question. No doubt, we’re very focused here at Tetra Tech. And first of all, completing this fiscal year ’22 very strong. In the fourth quarter, you’ve seen the guidance. I think it’s a 14% midpoint on revenue growth. We are looking at 2023. I will say that there are mostly positive indications as we’re moving forward and a few items that we’re looking very closely at that we had particular strength in 2022.
As far as detailed guidance, I’ll provide that in the next call for fiscal year 2023. But I will identify a few macro trends or areas that our clients are providing new funds, even new builds as we speak today. So obviously, IIJA, it was passed earlier this fiscal year. We had estimated and forecasted that we’d begin to see its contributions in early 2023. And we’ve seen no change in our initial projections. And so we think that, that is a very large program that will continue over the next 5 to 10 years. So we think it’ll begin contributing in 2023. So we think that, that’s a material contributing factor as we look into this next year.
There are things that have passed such as the CHIPS Act, $53 billion. And we find that represents a fair amount of opportunity for us. This is for manufacturing. It is requiring facilities to be put in place. And every one of those facilities and buildings will require permitting. They’ll require environmental valuation. It’ll be citing. It will be stormwater that we’ll participate. And in the buildings themselves, one thing with respect to chip manufacturing, every one of them require ultrapure water, water supply, water treatment, water recycling and sourcing. And those are things that we would participate in every one of those.
So those are areas — and of course, our high-performance buildings with respect to making the buildings highly efficient, in fact, self-sufficient with respect to energy consumption, generation, water and waste, we think that those will all be very good for us.
And of course, the most recent one, which is sort of the topic of the day in some circles, is the Inflation Reduction Act, which will generate approximately $700 million in new funding or reduced spending, but they’re going to then reallocate about half of that. And I think the overall number is up around $400 million, with $300 billion being attributed to climate change, renewable energy.
And it’s actually very favorable for us. It actually broadens out tax benefits and incentives for more than just narrowly focused wind or solar, it broadens it out much broader. It expands the definition from renewable energy to clean energy, which, at least in the bill, as it stands today, includes things such as hydrogen and other items, that would be very effective. And of course, all of these would require high-voltage engineering for interconnects, environmental permitting, citing, resource evaluation, all of the things that Tetra Tech is a leader in.
So I think there’s 3 that we see from the federal government that are measured in the — in case of the CHIP Act, the smallest $50 billion that they want to deploy right away in the case of the inflation to that deficit bill that would — or act that would represent in the hundreds of billions of dollars. And of course, IIJA, which has yet to materially deploy any of that funding is measured if you include earmark dollars from existing budgets over $1 trillion. So we see all of these as favorable trends going into 2023.
I do want to mention one item that we see that could be a counter for us. We had an exceptional contribution to responding to disasters or episodic events, particularly early in 2022. It drove us to some amazing numbers in our first quarter. I think it was $1.19 in the first quarter of last year because of high utilization and fast response for disaster activities. And we — it’s very difficult to forecast those into your next year. So it’s one item that we’ll be looking at and we’ll be updating in our next quarterly guidance. But I’d say, the only item that we are not forecasting at this moment similar to acquisitions, we don’t include them in our guidance until they’re completed, and we don’t include disaster response episodic activities until they’ve occurred.
The other item I would mention, and we’ll see where this moves, is foreign exchange. It’s amazing. We’ve seen — just during the last 90 days, certainly last short period, we’ve seen the euro go from approximately $1.20 to parity. We’ve seen the British pound go from $1.40 or higher to sub $1.20, I think $1.18 I saw earlier this week. So our operations there are actually quite material and collectively, we’re at 35% of our revenues come from Australia, Canada and the United Kingdom.
And if you take a look at those, Steve, I thought, did a good job of outlining what the headwind is from revenues from those sources, at least as we see the translation today. So I think those are items that were put all together and will provide a very detailed forecast. But a little bit long-winded, but I hope that provided some insight of what we’re looking at from sort of a big picture as we’re heading towards 2023.
Yes. Very helpful, very — a lot of very exciting stuff there. I appreciate that. And maybe just one more question as we think about potential offsets. We’re hearing from a lot of government contractors about slow new award activity around sluggish federal outlays, which I think is generally just a function of productivity issues at government agencies. I just wondered if that is something Tetra Tech is seeing and if you see personnel challenges at the client level as a risk to the growth profile at Tetra Tech over the coming year?
Well, that’s a good question. And I would say, we have seen a bit of a slower contract activity. It’s not been limited to a single location. So for us, our work comes — Department of Defense is about 1/3 of our federal revenues, civilian agencies about 1/3, and then international development or USAID and State Departments about 1/3. We’ve seen all of them a little bit slower than we had before. I would say, that appears to be equally or evenly impacted.
And some of the things that I’ve heard from our project managers or our staff on the front line are the COVID impacts have taken people to work remotely. Maybe it hasn’t been quite as efficient as the federal government as it has been in some private companies like ourselves. And the great resignation has not left the U.S. government untouched and its impact to contracting officers.
Now with that as a backdrop that they’ve been impacted, we didn’t see when the budget for 2022 — the federal budget was passed in late March. Some thought that there would be a catch-up or sort of a tidal wave of work that would flood back in. We didn’t see that. We’ve seen it have a nice, steady, even progressing growth. You saw this quarter, our federal revenue growth was twice that of the second quarter. So it is ramping up. But it is a ramp-up, not a perfect step-up. And I think it’s because of certain personnel challenges, both on working remotely from the pandemic and impacts of staff really departing the industry, which has affected a lot of people.
I am glad to say, though, that we had forecasted a 5% to 10% growth in our federal government. If you normalize, just for Afghanistan, which this year-on-year comparable will go away after this quarter, we’re growing at 8%. So we’re right in the middle. Now I would expect and would have hoped that the number would have been even better, that we would have been well into the double digits, but I think it’s part of this ramp-up rather than step-up. So yes, it is a little slower than we’ve seen historically. I’m giving you for a few reasons why we think that’s the case, but we’ve not seen it favoring one portion of the federal government over another. It’s been really quite broad and even across those sectors for us.
Our next question comes from the line of Noelle Dilts with Stifel.
So you discussed some of these elements in your comments. But I think last quarter, I asked about this idea that we should see convergence in the GSG and CIG margins. It certainly happened in the quarter, maybe a little bit faster than I was anticipating. Understanding you’re not giving ’23 guidance, maybe you could speak directionally to how we should think about the GSG and CIG margins and if we should expect some further convergence next year, again, understanding that you’re not going to be guiding to the emergency work repeating?
Yes. That’s a good question. I have spoken and indicated over the past many quarters that I expected CIG to trend up and to catch or to converge with GSG. Now the one thing I would also say is the goal is that CIG will converge to GSG without GSG coming down at all. So to make that point. I did see that CIG was particularly strong. Typically, third quarter is good. I did mention the 50 basis points support of extraordinary contributions. But if I take the 50 basis points from the 13.8% if we put at low 13%, 13.3% to be precise, I think that’s sort of a number they’re up to.
I think that they’re running in the low 13%. And I think because of the work that we have in CIG in Canada, it does make them seasonally stronger in our Q3, and particularly Q4. So if you want to look sequentially, I think that CIG is going to be up from where it just was, certainly equivalent or maybe even higher than the 13.8% we just saw. GSG will also be a bit stronger than we put them at a 13% to 14%. It should be a pretty close race on who has the highest margins in our fourth quarter.
Now with respect to annual conversions, I still think our government is probably 50 basis points higher. We’ll see how we see that as we get a little bit closer to 2013. But this gap between GSG and CIG is becoming smaller, it is diminishing. And I expect that during 2023, it may fully close without GSG coming down. And in fact, we’ll — I’d like to give you an update on our next call on what the next incremental increase in GSG’s margin on a forward basis is. So without getting too precise about ’23, I hope that directionally provides some insight.
Yes. That definitely helps. And then I was just hoping last quarter, you spoke to and expanded on your offerings with federal advanced analytics and software, any — and Software-as-a-Service, any update on how that’s progressing and how you’re thinking about that opportunity today?
Well, Software-as-a-Service and a term we’re using around here more and more that is actually rivaling or we think will actually may exceed what we’re seeing as Software-as-a-Service or SaaS is actually a Platform-as-a-Service. And some of the areas that we have with, let’s say, we can be found on our website and other areas, but we’re offering our clients a consolidation product that is technically — has a technical basis for doing analytics for water flow distribution, flow rates, contaminant loading, all of these other items, which are SaaS, but that they’re all then represented on a Platform-as-a-Service. .
And this allows Tetra Tech’s Platform-as-a-Service, that’s a subscription model, to take all of the different items that are out in the marketplace, whether it’s air, water, soil, operational efficiency, asset management and be on our platform for them. And it’s not just a programmer’s challenge. You actually have to be a domain expert to actually understand all of the input parameters from those to manage them. So this area is growing for us.
Acquisitions that we’ve done this year of firms like [Indiscernible] or TIGA, firms like EA Consulting, of course, and of course, Axiom which is a little different, it’s on the federal climate change, all have subscriptions, both on the SaaS and on the Platform-as-a-Service. I’m hoping that in 2023, we can actually begin to provide some quantitative measurement of how much we’re actually deriving from a recurring subscription-based revenue.
But at this point, I’ll say we’re making good progress. We’re getting really hesitant to provide a quantified number, which would then trigger all of the — what’s your growth rate, what’s your CAGR, what’s the gross margin. All of that will come when we open this up for tracking. But we are making progress. It is growing, and it’s being supported by the most recent acquisitions. In fact, the ones that Steve presented that we’ve done this year, all of those bring subscription revenues to the company.
[Operator Instructions] Our next question comes from the line of Tate Sullivan with Maxim Group.
Thank you on the comments on digital water and the slides showing 2025 target that you’ve included before. But I have a question that I think you’ve addressed in previous calls about the organic growth versus acquisition-based growth. And in terms of the potential targets for digital water, are there hundreds of incremental technologies you can add? Or is it most — is it going to shift to more organic?
Well, that’s a really good question. For us, it’s been about evenly split. So the firms that we brought on have brought technology to us but actually very little revenue. And so in the case of TIGA, EA, [Indiscernible] as examples, I’d say, even Axiom Data Science, what they brought to us is technology and platforms that we can then use to offer and bring to solve solutions for our suite of clients.
And here in the U.S., that’s roughly 500 municipal clients. So what we’ve been acquiring is really the technologies and the expertise in automation, remote monitoring, remote operation and other aspects on the digital transformation sector, but the actual implementation has been organic with respect to our clients, our projects, our contracts. And it’s been co-linked with the experts we have internally in my prepared remarks where we’ve been very proactive on recruiting and hiring individuals into the automation and data analytics and other, and that’s an organic portion.
So I would say as far as furthering the technology and market penetration, acquisitions are very helpful for bringing in expertise and technology, but the actual execution of the work and those that we’re targeting is really our client sector. And so I’d put that all into organic.
And then also just following up on the slide where you comment on the orders and you released details earlier this month on the $500 million order with the Army Corps of Engineers and international orders for the DoD. Is that $500 million order part of that included in backlog for fiscal 3Q ’22? And also related to that, can you give more detail on that order? Was it a renewal from an amount 5 years ago? Was it a new contract? Or is it a new contract fee?
Yes. I would say, U.S. Army Corps of Engineers contract, it’s an environmental contract for environmental assessments and cleanup and remediation. It’s a new contract for us. It’s not a renewal of a contract we have. But it’s a contract capacity. Now we just issued the press release this week as far as a notification, although I do know that the U.S. Army Corps of Engineers provided its announcement earlier. So some may have seen our name on it from the Corps announcement.
Not $1 yet has been put into funded or to our backlog. That’s all contract capacity. And I think it’s a great illustration of how Tetra Tech reports its backlog substantially different than others in the industry. I am cognizant and [Indiscernible] and aware of how others and peers in the market do it. And in order to provide an optic of their backlogs looking strong, they add contract capacity that have no funding to it into their report of backlog since it’s not a GAAP item.
We only put the numbers into our backlog. If we have a contract signed, there’s a legal contract that’s been binding, they have funded it, and they’ve authorized us to go do all the work. And so I think if you look at some of these others that report backlogs being up varying numbers, if you actually look at the underlying portions that are funded, I think you quite often find that, in fact, it’s only a very small percentage of what’s being reported.
Our number, only when it’s been contracted, funded and authorized. So that’s the difference between — just with the federal government, we’re well over $20 billion in contract capacity. The $500 million that you’re referring to is the new contract capacity that we have, that would go to increase the overall availability of contract vehicles we have with the federal government. But that’s the case of that particular contract, we did receive the initial task order. So — but that still hasn’t been put into funded. I expect that will fall here in Q4. So that’s an update on that particular contract that was announced by ourselves this week.
And one more follow-up from me, please, on — you mentioned fiscal 1Q ’22 included disaster remediation work. Any rough estimate of how much of the $119 million from the prior year included that work?
I don’t have that broken out for you today, but we would — but we think it was about $25 million if you wanted approximation, I’ll give you a rough number on the revenue side. So it was about $25 million contribution top line, and that then drove utilization at higher margins. So I could convert that as we get into guidance for next year. But on a revenue basis, it was about $25 million, maybe a bit more, but in that neighborhood for the first quarter.
This will conclude the Q&A session. I will now turn the conference back over to Mr. Dan Batrack to conclude.
Thank you very much, Laura. Appreciate it. And thank all of you for attending this call for your great questions. We here at Tetra Tech are excited about finishing fiscal year 2022 very strongly as we have had great momentum through the first 3 quarters. And I look forward to speaking with you in our next quarterly call, which will both give you the results of our fourth quarter of 2022, but of course, and probably even more importantly, what our guidance for 2023 is and our outlook for the first quarter. So I hope you all have a great rest of the day and a great rest of the summer. And I look forward to talking to you in the next call. Bye.
Ladies and gentlemen, this concludes our conference for today. Thank you all for your participation. Have a nice day. All parties may now disconnect.