TETRA TECH, INC. The following analysis of our financial condition and results of operations should be read in conjunction with Part I of this report, as well as our consolidated financial statements and accompanying notes in Item 8. The following analysis contains forward-looking statements about our future results of operations and expectations. Our actual results and the timing of events could differ materially from those described herein. See Part 1, Item 1A, "Risk Factors" for a discussion of the risks, assumptions, and uncertainties affecting these statements. OVERVIEW OF RESULTS AND BUSINESS TRENDS General. As the COVID-19 spread globally, we responded quickly to ensure the health and safety of our employees, clients and the communities we support. Our high-end consulting focus and the technologies we deployed have allowed our staff to support clients and projects remotely without interruption. We remain focused on providing clients with the highest level of service and our 450 global offices are operational, supporting our programs and projects. By Leading with Science®, we are responding to the challenges of COVID-19, with the commitment of our 20,000 staff supported by technological innovation. We entered fiscal 2020 in the best position in our history, with record backlog from our government and commercial clients supporting their critical water and environmental programs. For the first five months of fiscal 2020, we were on pace for another record year; however, the unprecedented disruption of the global economy due to the COVID-19 pandemic has impacted all businesses. Our government business, which represents approximately 60% of our revenue, has been stable, while our commercial business experienced relatively more impact. Much of our commercial business has continued due to regulatory drivers, but we have seen project delays in the industrial sectors. Our diversified end-markets have allowed us to redeploy staff to areas of uninterrupted or increased demand, and we have made decisions to align our cost structures with our clients' projects. The actions we have taken to navigate through this worldwide pandemic, the strength of our balance sheet, and our technical leadership position us well to address the global challenges of providing clean water, environmental restoration, and the impacts of climate change. In fiscal 2020, our revenue decreased 3.6% compared to fiscal 2019. Our year-over-year revenue comparisons were impacted by the disposal of our Canadian turn-key pipeline activities in the fourth quarter of fiscal 2019 and a decrease in revenue from disaster response activities related toCalifornia wildfires. Excluding the disposal and the decreasedCalifornia wildfire activity, our revenue increased 3.5% in fiscal 2020 compared to last year. This increase includes$210.5 million of revenue from acquisitions, which did not have comparable revenue in fiscal 2019. Excluding the net impact of acquisitions/disposals and theCalifornia wildfire disaster response activities, our revenue in fiscal 2020 decreased 3.9% compared to fiscal 2019 primarily due to the adverse impact of the COVID-19 pandemic on ourU.S. commercial and international revenue.U.S. Federal Government. OurU.S. federal government revenue increased 5.6% in fiscal 2020 compared to fiscal 2019. Excluding contributions from acquisitions, our revenue declined 1.5% in fiscal 2020 compared to last year. The decrease was primarily due to reduced international development activities, partially offset by increased federal information technology consulting activity. During periods of economic volatility, ourU.S. federal government business has historically been the most stable and predictable. We expect ourU.S. federal government revenue to grow modestly in fiscal 2021 due to continued increased federal information technology consulting activity. However,U.S. federal spending amounts and priorities could change significantly from our current expectations, which could have a significant positive or negative impact on our fiscal 2021 revenue.U.S. State and Local Government. OurU.S. state and local government revenue decreased 25.3% in fiscal 2020 compared to last year as we experienced a decrease in revenue from the aforementionedCalifornia wildfire disaster response activities. This decline was partially offset by continued broad-based growth in ourU.S. state and local government project-related infrastructure business, particularly with increased revenue from municipal water infrastructure work in the metropolitan areas ofCalifornia ,Texas , andFlorida . Most of our work forU.S. state and local governments relates to critical water and environmental programs, which we expect to increase further next year. However, further budgetary constraints to our clients could negatively impact our business. Conversely, increased disaster response activity could cause our fiscal 2021 revenue to exceed our current expectations.U.S. Commercial. OurU.S. commercial revenue decreased 6.2% in fiscal 2020 compared to fiscal 2019. This decline was primarily due to reduced industrial activity as a result of the COVID-19 pandemic. We currently expect the adverse impact of the COVID-19 pandemic to ourU.S. commercial revenue to continue to be more significant than to ourU.S. government programs and projects throughout most of next year. International. Our international revenue increased 3.2% in fiscal 2020 compared to fiscal 2019. Excluding the impact of the aforementioned prior-year disposal of our Canadian turn-key pipeline activities, our international revenue increased 11.4% in fiscal 2020 compared to last year. This increase includes$132.5 million of revenue from acquisitions, which did not have comparable revenue in fiscal 2019. Excluding the net impact of acquisitions/disposals, our international revenue in fiscal 37 -------------------------------------------------------------------------------- 2020 decreased 5.5% compared to last year. The revenue decline primarily reflects the adverse impact of the COVID-19 pandemic, partially offset by increased renewable energy activity inCanada . In light of the COVID-19 pandemic, we currently expect our overall international government work to be stable in fiscal 2021; however, our international commercial activities could have a significant adverse impact if the current economic conditions due to COVID-19 are prolonged. RESULTS OF OPERATIONS Fiscal 2020 Compared to Fiscal 2019 Consolidated Results of Operations Fiscal Year Ended September 27, September 29, Change 2020 2019 $ % ($ in thousands) Revenue$ 2,994,891 $ 3,107,348 $ (112,457) (3.6)% Subcontractor costs (646,319) (717,711) 71,392 9.9 Revenue, net of subcontractor costs (1) 2,348,572 2,389,637 (41,065) (1.7) Other costs of revenue (1,902,037) (1,981,454) 79,417 4.0 Gross profit 446,535 408,183 38,352 9.4 Selling, general and administrative expenses (204,615) (200,230) (4,385) (2.2) Acquisition and integration expenses - (10,351) 10,351 NM Contingent consideration - fair value adjustments 14,971 (1,085) 16,056 NM Impairment of goodwill (15,800) (7,755) (8,045) (103.7) Income from operations 241,091 188,762 52,329 27.7 Interest expense - net (13,100) (13,626) 526 3.9 Income before income tax expense 227,991 175,136 52,855 30.2 Income tax expense (54,101) (16,375) (37,726) (230.4) Net income 173,890 158,761 15,129 9.5 Net income attributable to noncontrolling interests (31) (93) 62 66.7
Net income attributable to Tetra Tech
158,668$ 15,191 9.6 Diluted earnings per share $ 3.16 $ 2.84$ 0.32 11.3 (1) We believe that the presentation of "Revenue, net of subcontractor costs", which is a non-U.S. GAAP financial measure, enhances investors' ability to analyze our business trends and performance because it substantially measures the work performed by our employees. In the course of providing services, we routinely subcontract various services and, under certainUSAID programs, issue grants. Generally, these subcontractor costs and grants are passed through to our clients and, in accordance withU.S. GAAP and industry practice, are included in our revenue when it is our contractual responsibility to procure or manage these activities. Because subcontractor services can vary significantly from project to project and period to period, changes in revenue may not necessarily be indicative of our business trends. Accordingly, we segregate subcontractor costs from revenue to promote a better understanding of our business by evaluating revenue exclusive of costs associated with external service providers. NM = not meaningful In fiscal 2020, revenue and revenue, net of subcontractor costs, decreased$112.5 million , or 3.6%, and$41.1 million , or 1.7%, compared to fiscal 2019. These comparisons were impacted by the disposal of our Canadian turn-key pipeline activities in the fourth quarter of fiscal 2019 and a decrease in revenue from disaster response activities related toCalifornia wildfires. In addition, our fiscal 2019 results included a reduction of revenue of$13.7 million from a claim that was resolved last year. Excluding the disposal, the decreasedCalifornia wildfire activity, and the 2019 claim resolution, our revenue increased 3.0% in fiscal 2020 compared to last year. This increase includes$210.5 million of revenue from acquisitions, which did not have comparable revenue in fiscal 2019. Also excluding the contribution from acquisitions, our revenue in fiscal 2020 decreased 4.4% compared to fiscal 2019 primarily due to the adverse impact of the COVID-19 pandemic on ourU.S. commercial and international revenue. The following table reconciles our reported results to non-U.S. GAAP adjusted results, which exclude the RCM results and certain non-operating accounting-related adjustments, such as acquisition and integration costs, gains/losses from adjustments to contingent considerations, goodwill impairment charges, non-recurring costs to address COVID-19, and non-recurring tax benefits. Adjusted results also exclude charges resulting from the decision to dispose of our Canadian turn-key pipeline activities that commenced in the fourth quarter of fiscal 2019 and subsequent related gains from non-core equipment 38 -------------------------------------------------------------------------------- disposals in fiscal 2020. Our fiscal 2019 adjusted results exclude a charge to operating income of$13.7 million from a claim that was resolved in the fourth quarter of fiscal 2019 for a remediation project, where the work was substantially performed in prior years. The effective tax rates applied to these adjustments to earnings per share ("EPS") to arrive at adjusted EPS averaged 155% and 16% in fiscal 2020 and 2019, respectively. The goodwill impairment charges in both fiscal years and certain of the transaction charges in fiscal 2019 did not have related tax benefits. Excluding these items, the effective tax rates applied to the adjustments in fiscal 2020 and 2019 were 24% and 26%, respectively. We applied the relevant marginal statutory tax rate based on the nature of the adjustments and tax jurisdiction in which they occur. Both EPS and adjusted EPS were calculated using diluted weighted-average common shares outstanding for the respective periods as reflected in our consolidated statements of income. During the second quarter of fiscal 2020, we took actions in response to the COVID-19 pandemic to ensure the health and safety of our employees, clients, and communities. These actions included activating our Business Continuity Plan globally, which enabled 95% of our workforce to work remotely and all 450 of our global offices to remain operational supporting our clients' programs and projects. This required incremental costs for employee relocation, expansion of our virtual private network capabilities, enhanced security, and sanitizing our offices. In addition, we incurred severance costs to right-size select operations where projects were cancelled specifically due to COVID-19 concerns and the resulting macroeconomic conditions. These incremental costs totaled$8.2 million in the second quarter of fiscal 2020. Substantially all of these costs were paid in cash in the second half of fiscal 2020. Fiscal Year Ended September 27, September 29, Change 2020 2019 $ % Income from operations$ 241,091 $ 188,762 $ 52,329 27.7 COVID-19 8,233 - 8,233 NM Non-core dispositions (8,525) 10,946 (19,471) NM RCM - 5,933 (5,933) NM Claims - 13,700 (13,700) NM Acquisition/Integration - 10,351 (10,351) NM Earn-out adjustments (13,371) 3,085 (16,456) NM Impairment of goodwill 15,800 7,755 8,045 NM Adjusted income from operations (1)$ 243,228 $ 240,532 $ 2,696 1.1 EPS $ 3.16 $ 2.84$ 0.32 11.3 COVID-19 0.11 - 0.11 NM Non-core dispositions (0.12) 0.14 (0.26) NM RCM - 0.08 (0.08) NM Claims - 0.18 (0.18) NM Acquisition/Integration - 0.19 (0.19) NM Earn-out adjustments (0.18) 0.04 (0.22) NM Impairment of goodwill 0.29 0.14 0.15 NM Non-recurring tax benefits -
(0.44) 0.44 NM Adjusted EPS (1) $ 3.26 $ 3.17$ 0.09 2.8 NM = not meaningful (1) Non-U.S. GAAP financial measure Our operating income increased$52.3 million in fiscal 2020 compared to fiscal 2019. Our operating income in fiscal 2020 was reduced by the previously described non-recurring charges of$8.2 million to address COVID-19. In addition, our fiscal 2020 results include gains from the sales of non-core equipment of$8.5 million related to the disposal of our Canadian turn-key pipeline activities. Our operating income in fiscal 2019 included charges of$10.9 million related to this disposal. Our operating income in fiscal 2019 also included a$5.9 million loss from exited construction activities in our RCM segment. Our RCM results are described below under "Remediation and Construction Management." Additionally, our operating income in fiscal 2019 included the aforementioned$13.7 million charge for a resolved claim and expenses of$10.4 million related to the acquisition and integration ofWYG plc ("WYG"). For further detailed information regarding the WYG-related costs, see "Fiscal 2019 Acquisition and Integration Expenses" below. Our fiscal 2020 operating income includes gains of$15.0 million related to changes in the estimated fair value of contingent earn-out liabilities partially offset by related compensation charges 39 -------------------------------------------------------------------------------- of$1.6 million . Our fiscal 2019 operating income reflects losses of$1.1 million related to changes in the estimated fair value of contingent earn-out liabilities and an additional$2.0 million of related compensation charges. These earn-out related amounts are described below under "Fiscal 2020 and 2019 Earn-Out Adjustments." Further, our operating income reflects non-cash goodwill impairment charges of$15.8 million and$7.8 million in fiscal 2020 and 2019, respectively. These charges are described below under "Fiscal 2020 and 2019 Impairment ofGoodwill ." Excluding these items, our adjusted operating income increased$2.7 million , or 1.1%, in fiscal 2020 compared to fiscal 2019. The increase reflects improved results in our CIG segment partially offset by lower operating income in our GSG segment. GSG and CIG results are described below under "Government Services Group " and "Commercial/International Services Group ", respectively. Our net interest expense was$13.1 million in fiscal 2020 compared to$13.6 million last year. The decrease primarily reflects lower interest rates (primarily LIBOR), and to a lesser extent, lower average borrowings. The effective tax rates for fiscal 2020 and 2019 were 23.7% and 9.3%, respectively. The goodwill impairment charges in fiscal 2020 and fiscal 2019 and certain of the transaction charges in fiscal 2019 did not have related tax benefits, which increased our effective tax rates by 1.5% and 1.1% in fiscal 2020 and 2019, respectively. Conversely, income tax expense was reduced by$8.3 million and$6.4 million of excess tax benefits on share-based payments in fiscal 2020 and 2019, respectively. Additionally, we finalized the analysis of our deferred tax liabilities for the Tax Cuts and Jobs Act's ("TCJA's") lower tax rates in the first quarter of fiscal 2019 and recorded a deferred tax benefit of$2.6 million . Also, valuation allowances of$22.3 million inAustralia were released due to sufficient positive evidence obtained during the second quarter of fiscal 2019. The valuation allowances were primarily related to net operating loss and research and development credit carryforwards and other temporary differences. We evaluated the positive evidence against any negative evidence and determined that it was more likely than not that the deferred tax assets would be realized. The factors used to assess the likelihood of realization were the past performance of the related entities, our forecast of future taxable income, and available tax planning strategies that could be implemented to realize the deferred tax assets. Excluding the impact of the non-deductible goodwill impairment charges and transaction costs, the excess tax benefits on share-based payments, the net deferred tax benefits from the TCJA, and the valuation allowance release, our effective tax rates in fiscal 2020 and 2019 were 25.6% and 24.6%, respectively. Our EPS was$3.16 in fiscal 2020, compared to$2.84 in fiscal 2019. On the same basis as our adjusted operating income and excluding non-recurring tax benefits in fiscal 2019, EPS was$3.26 in fiscal 2020, compared to$3.17 last year. Segment Results of OperationsGovernment Services Group ("GSG") Fiscal Year Ended September 27, September 29, Change 2020 2019 $ % ($ in thousands) Revenue$ 1,778,922 $ 1,820,671 $ (41,749) (2.3)% Subcontractor costs (478,839) (491,290) 12,451 2.5
Revenue, net of subcontractor costs
$ (29,298) (2.2) Income from operations$ 168,669 $ 185,263 $ (16,594) (9.0) Revenue and revenue, net of subcontractor costs, decreased$41.7 million , or 2.3%, and$29.3 million , or 2.2%, respectively, in fiscal 2020 compared to fiscal 2019. These declines primarily reflect the previously described decrease in revenue from disaster response activities related toCalifornia wildfires offset by revenue from acquisitions, which did not have comparable revenue in fiscal 2019. Excluding the contributions from acquisitions and theCalifornia wildfire disaster response activities, our revenue in fiscal 2020 was substantially the same as fiscal 2019 as increases in federal information technology activity were offset by lower international development revenue. Operating income decreased$16.6 million in fiscal 2020 compared to fiscal 2019 primarily reflecting the lower disaster response revenue. Also, we incurred$1.6 million of incremental costs for actions to respond to the COVID-19 pandemic in the second quarter of fiscal 2020. Our operating margin, based on revenue, net of subcontractor costs, was 13.0% in fiscal 2020 compared to 13.9% last year. Excluding the COVID-19 charges, our operating margin was 13.1% in fiscal 2020. 40 --------------------------------------------------------------------------------
Fiscal Year Ended
September 27, September 29, Change
2020 2019 $ %
($ in thousands)
Revenue $ 1,266,059 $ 1,342,509 $ (76,450) (5.7)%
Subcontractor costs (217,547) (279,468) 61,921 22.2
Revenue, net of subcontractor costs $ 1,048,512 $ 1,063,041 $ (14,529) (1.4)
Income from operations $ 114,022 $ 79,633 $ 34,389 43.2
Revenue and revenue, net of subcontractor costs, decreased $76.5 million , or
5.7%, and $14.5 million , or 1.4%, respectively, in fiscal 2020 compared to
fiscal 2019. Our year-over-year revenue comparisons were impacted by the
disposal of our Canadian turn-key pipeline activities in the fourth quarter of
fiscal 2019, and a reduction in revenue and a corresponding charge to operating
income of $13.7 million in fiscal 2019 for a remediation project where the work
was substantially performed in prior years. Excluding the disposal and the
fiscal 2019 claim resolution, our revenue decreased 2.2% due to lower
subcontractor activity and the adverse impact of the COVID-19 pandemic on our
U.S. and international commercial revenue.
Operating income increased $34.4 million in fiscal 2020 compared to last year.
This comparison was also impacted by the disposal of our Canadian turn-key
pipeline activities. Our fiscal 2020 operating income includes gains of $8.5
million from the disposition of non-core equipment and our fiscal 2019 operating
income includes charges of $10.9 million related to these activities. In
addition, we incurred $6.6 million of incremental costs for actions to respond
to the COVID-19 pandemic in the second quarter of fiscal 2020. Excluding the
Canadian turn-key pipeline activities, the COVID-19 charges, and the
aforementioned $13.7 million claim in fiscal 2019, our operating income
increased $7.9 million , or 7.5%, in fiscal 2020 compared to fiscal 2019. On the
same basis, our operating margin, based on revenue, net of subcontractor costs,
improved to 10.7% in fiscal 2020 from 9.7% last year.
Remediation and Construction Management ("RCM")
Fiscal Year Ended
September 27, September 29, Change
2020 2019 $ %
($ in thousands)
Revenue $ 198 $ (1,542) $ 1,740 NM
Subcontractor costs (221) (1,243) 1,022 NM
Revenue, net of subcontractor costs $ (23) $ (2,785) $ 2,762 NM
Loss from operations $ - $ (5,933) $ 5,933 NM
RCM's projects were substantially complete at the end of fiscal 2018. The
operating loss of $5.9 million in fiscal 2019 reflects reductions of revenue and
related operating losses based on updated evaluations of unsettled claim amounts
for two construction projects that were completed in prior years.
Fiscal 2020 and 2019 Earn-Out Adjustments
We review and re-assess the estimated fair value of contingent consideration on
a quarterly basis, and the updated fair value could differ materially from the
initial estimates. We recorded adjustments to our contingent earn-out
liabilities and reported net gains of $15.0 million and losses of $1.1 million
in fiscal 2020 and 2019, respectively. The fiscal 2020 net gains primarily
resulted from updated valuations of the contingent consideration liabilities for
eGlobalTech ("EGT"), Norman, Disney and Young ("NDY"), and Segue Technologies,
Inc. ("SEG"). These valuations included updated projections of EGT's, NDY's, and
SEG's financial performance during the earn-out periods, which were below our
original estimates at their respective acquisition dates. In addition, we
recognized charges of $1.6 million and $2.0 million in fiscal 2020 and 2019,
respectively, that related to the earn-out for Glumac . These charges were
treated as compensation in selling, general and administrative expenses due to
the terms of the arrangement, which included an on-going service requirement for
a portion of the earn-out.
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At September 27, 2020 , there was a total maximum of $70.9 million of outstanding
contingent consideration related to acquisitions. Of this amount, $32.6 million
was estimated as the fair value and accrued on our consolidated balance sheet.
Fiscal 2020 and 2019 Impairment of Goodwill
On September 2, 2020 , Australia announced that it had fallen into economic
recession, defined as two consecutive quarters of negative growth, for the first
time since 1991 including 7% negative growth in the quarter ending in June 2020 .
This prompted a strategic review of our Asia/Pacific ("ASP") reporting unit,
which is in our CIG reportable segment. As a result of the economic recession in
Australia , our revenue growth and profit margin forecasts for the ASP reporting
unit declined from the previous forecast used for our annual goodwill impairment
review as of June 29, 2020 . We also performed an interim goodwill impairment
review of our ASP reporting unit in September 2020 and recorded a $15.8 million
goodwill impairment charge. The impaired goodwill related to our acquisitions of
Coffey and NDY. As a result of the impairment charge, the estimated fair value
of our ASP reporting unit equals its carrying value of $144.9 million , including
$95.5 million of goodwill, at September 27, 2020 . If the financial performance
of the operations in our ASP reporting unit were to deteriorate or fall below
our forecasts, the related goodwill may become further impaired.
During the fourth quarter of fiscal 2019, we performed a strategic review of all
operations. As a result, we decided to dispose of our turn-key pipeline
activities in Western Canada in our Remediation and Field Services ("RFS")
reporting unit, which is in our CIG reportable segment. As a result, we incurred
severance and project-related charges related to the disposition of $10.9
million , which were reported in the CIG segment's operating income. We also
performed an interim goodwill impairment review of our RFS reporting unit and
recorded a $7.8 million goodwill impairment charge. The impaired goodwill
related to our acquisition of Parkland Pipeline Contractors Ltd. As a result of
the impairment charge, the estimated fair value of the RFS reporting unit
equaled its carrying value at September 29, 2019 . If the financial performance
of the remaining operations in our RFS reporting unit were to deteriorate or
fall below our forecasts, the related goodwill may become further impaired.
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Fiscal 2019 Compared to Fiscal 2018
Consolidated Results of Operations
Fiscal Year Ended
September 29, September 30, Change
2019 2018 $ %
($ in thousands)
Revenue $ 3,107,348 $ 2,964,148 $ 143,200 4.8%
Subcontractor costs (717,711) (763,414) 45,703 6.0
Revenue, net of subcontractor costs (1) 2,389,637 2,200,734 188,903 8.6
Other costs of revenue (1,981,454) (1,816,276) (165,178) (9.1)
Gross profit 408,183 384,458 23,725 6.2
Selling, general and administrative expenses (200,230) (190,120) (10,110) (5.3)
Acquisition and integration expenses (10,351) - (10,351) NM
Contingent consideration - fair value
adjustments (1,085) (4,252) 3,167 74.5
Impairment of goodwill (7,755) - (7,755) NM
Income from operations 188,762 190,086 (1,324) (0.7)
Interest expense - net (13,626) (15,524) 1,898 12.2
Income before income tax expense 175,136 174,562 574 0.3
Income tax expense (16,375) (37,605) 21,230 56.5
Net income 158,761 136,957 21,804 15.9
Net income attributable to noncontrolling
interests (93) (74) (19) (25.7)
Net income attributable to Tetra Tech $ 158,668 $ 136,883 $ 21,785 15.9
Diluted earnings per share $ 2.84 $ 2.42 $ 0.42 17.4
(1) We believe that the presentation of "Revenue, net of subcontractor costs",
which is a non-U.S. GAAP financial measure, enhances investors' ability to
analyze our business trends and performance because it substantially measures
the work performed by our employees. In the course of providing services, we
routinely subcontract various services and, under certain USAID programs, issue
grants. Generally, these subcontractor costs and grants are passed through to
our clients and, in accordance with U.S. GAAP and industry practice, are
included in our revenue when it is our contractual responsibility to procure or
manage these activities. Because subcontractor services can vary significantly
from project to project and period to period, changes in revenue may not
necessarily be indicative of our business trends. Accordingly, we segregate
subcontractor costs from revenue to promote a better understanding of our
business by evaluating revenue exclusive of costs associated with external
service providers.
NM = not meaningful
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The following table reconciles our reported results to non-U.S. GAAP adjusted
results, which exclude RCM results and certain non-operating accounting-related
adjustments, such as acquisition and integration costs, gains/losses from
adjustments to contingent consideration, and non-recurring tax benefits.
Adjusted results also exclude charges from the disposal of our Canadian turn-key
pipeline activities in fiscal 2019 and losses from the divestitures of our
non-core utility field services operations and other non-core assets in fiscal
2018. The disposal in fiscal 2019 also resulted in a $7.8 million goodwill
impairment charge that is excluded from our adjusted results. Our fiscal 2019
adjusted results exclude a reduction of revenue and a corresponding charge to
operating income of $13.7 million from a claim that was resolved in the fourth
quarter of fiscal 2019 for a remediation project, where the work was
substantially performed in prior years. In addition, our fiscal 2018 adjusted
results also exclude a reduction of revenue of $10.6 million and a related
charge to operating income of $12.5 million from a claim settlement in the
fourth quarter of fiscal 2018 for a fixed-price construction project that was
completed in fiscal 2014. The effective tax rates applied to the adjustments to
EPS to arrive at adjusted EPS averaged 16% and 28% in fiscal 2019 and 2018,
respectively. The goodwill impairment charge and certain of the transaction
charges in fiscal 2019 did not have a related tax benefit. Excluding these
items, the effective tax rate applied to adjustments in fiscal 2019 was 26%. We
applied the relevant marginal statutory tax rate based on the nature of the
adjustments and tax jurisdiction in which they occur. Both EPS and adjusted EPS
were calculated using diluted weighted-average common shares outstanding for the
respective periods as reflected in our consolidated statements of income.
Fiscal Year Ended
September 29, September 30, Change
2019 2018 $ %
Revenue $ 3,107,348 $ 2,964,148 $ 143,200 4.8%
RCM 1,542 (14,199) 15,741 NM
Claims 13,700 10,576 3,124 NM
Adjusted revenue (1) $ 3,122,590 $ 2,960,525 $ 162,065 5.5
Revenue $ 3,107,348 $ 2,964,148 $ 143,200 4.8
Subcontractor costs (717,711) (763,414) 45,703 NM
Revenue, net of subcontractor costs $ 2,389,637 $ 2,200,734 $ 188,903 8.6
RCM 2,785 (2,648) 5,433 NM
Claims 13,700 10,576 3,124 NM
Adjusted revenue, net of subcontractor costs (1)
8.9
Income from operations $ 188,762 $ 190,086 $ (1,324) (0.7)
Earn-out expense 3,085 5,753 (2,668) NM
RCM 5,933 4,573 1,360 NM
Claims 13,700 12,457 1,243 NM
Non-core divestitures 18,701 3,434 15,267 NM
Acquisition/Integration 10,351 - 10,351 NM
Adjusted income from operations (1) $ 240,532 $ 216,303 $ 24,229 11.2
EPS $ 2.84 $ 2.42 $ 0.42 17.4
Earn-out expense 0.04 0.08 (0.04) NM
RCM 0.08 0.06 0.02 NM
Claims 0.18 0.16 0.02 NM
Non-core divestitures 0.28 0.11 0.17 NM
Acquisition/Integration 0.19 - 0.19 NM
Non-recurring tax benefits (0.44) (0.19) (0.25) NM
Adjusted EPS (1) $ 3.17 $ 2.64 $ 0.53 20.1
NM = not meaningful
(1) Non-U.S. GAAP financial measure
In fiscal 2019, revenue and revenue, net of subcontractor costs, increased
$143.2 million , or 4.8%, and $188.9 million , or 8.6%, respectively, compared to
fiscal 2018. Our adjusted revenue and revenue, net of subcontractor costs,
increased $162.1
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million, or 5.5%, and $197.5 million , or 8.9%, respectively, compared to fiscal
2018. This growth includes contributions from the fiscal 2019 acquisitions of
EGT and WYG, partially offset by the impact of the divestiture of our non-core
utility field services operations in fiscal 2018. Excluding the net impact from
these transactions, our adjusted revenue and revenue, net of subcontractor
costs, grew $144.2 million , or 5.0%, and $180.5 million , or 8.3%, in fiscal 2019
compared to fiscal 2018. This growth primarily reflects continued growth in our
U.S. state and local government water infrastructure revenue. In addition, our
revenue from disaster response and recovery planning projects increased compared
to fiscal 2018. Our U.S. state and local government adjusted revenue and
revenue, net of subcontractor costs, increased $132.3 million , or 28.8%, and
$90.7 million , or 27.1%, respectively, in fiscal 2019 compared to fiscal 2018.
Additionally, in fiscal 2019, our international adjusted revenue, net of
subcontractor costs, increased $98.6 million , or 16.3%, primarily due to
increased activity in Canada .
Our operating income decreased $1.3 million in fiscal 2019 compared to fiscal
2018. Our operating income in fiscal 2019 was reduced by WYG-related acquisition
and integration expenses of $10.4 million . For further detailed information
regarding these expenses, see "Fiscal 2019 Acquisition and Integration Expenses"
below. In addition, our operating income reflects losses of $1.1 million and
$4.3 million related to changes in the estimated fair value of contingent
earn-out liabilities and related compensation charges of $2.0 million and $1.5
million in fiscal 2019 and 2018, respectively. These earn-out charges are
described below under "Fiscal 2019 and 2018 Earn-Out Adjustments." The loss from
exited construction activities in our RCM segment was $5.9 million in fiscal
2019 compared to $4.6 million in fiscal 2018. Our RCM results are described
below under "Remediation and Construction Management." Additionally, our
operating income for fiscal 2019 includes charges of $10.9 million related to
the planned disposal of our turn-key pipeline activities in Western Canada . This
disposal also resulted in a non-cash goodwill impairment charge of $7.8 million
in fiscal 2019. Both of these charges are described above under "Fiscal 2020 and
2019 Impairment of Goodwill ." Our operating income in fiscal 2018, also includes
losses of $3.4 million related to the divestitures of our non-core utility field
services operations and other non-core assets. These losses are reported in
selling, general and administrative expenses in our consolidated statements of
income.
Excluding these items and the aforementioned claims in fiscal 2019 and 2018,
adjusted operating income increased $24.2 million , or 11.2%, in fiscal 2019
compared to fiscal 2018. The increase reflects improved results in both our GSG
and CIG segments. GSG's operating income increased $17.1 million in fiscal 2019
compared to fiscal 2018. These results are described below under "Government
Services Group ." CIG's operating income increased $5.2 million ($17.4 million on
an adjusted basis) in fiscal 2019 compared to fiscal 2018. These results are
described below under "Commercial/International Services Group ."
Interest expense, net of interest income, was $13.6 million in fiscal 2019,
compared to $15.5 million in fiscal 2018. The decreases reflect reduced
borrowings, partially offset by higher interest rates (primarily LIBOR).
The effective tax rates for fiscal 2019 and 2018 were 9.3% and 21.5%,
respectively. These tax rates reflect the impact of the comprehensive tax
legislation enacted by the U.S. government on December 22, 2017 , which is
commonly referred to as the TCJA. The TCJA significantly revised the U.S.
corporate income tax regime by, among other things, lowering the U.S. corporate
tax rate from 35% to 21% effective January 1, 2018 , while also repealing the
deduction for domestic production activities, limiting the deductibility of
certain executive compensation, and implementing a modified territorial tax
system with the introduction of the Global Intangible Low-Taxed Income ("GILTI")
tax rules. The TCJA also imposed a one-time transition tax on deemed
repatriation of historical earnings of foreign subsidiaries. In fiscal 2019, we
finalized our fiscal 2018 U.S. federal tax return and recorded a $2.4 million
tax expense with respect to the one-time transition tax on foreign earnings. As
we have a September 30 fiscal year-end, our U.S. federal corporate income tax
rate was blended in fiscal 2018, resulting in a statutory federal rate of 24.5%
(3 months at 35% and 9 months at 21%), and was 21% in fiscal 2019.
U.S. GAAP requires that the impact of tax legislation be recognized in the
period in which the tax law was enacted. As a result of the TCJA, we reduced our
deferred tax liabilities and recorded a deferred tax benefit of $10.1 million in
fiscal 2018 to reflect our estimate of temporary differences in the United
States that were to be recovered or settled in fiscal 2018 based on the 24.5%
blended corporate tax rate or based on the 21% tax rate in fiscal 2019 and
beyond versus the previous enacted 35% corporate tax rate. We finalized this
analysis in the first quarter of fiscal 2019 and recorded an additional deferred
tax benefit of $2.6 million .
Valuation allowances of $22.3 million in Australia were released due to
sufficient positive evidence being obtained in fiscal 2019. The valuation
allowances were primarily related to net operating loss and Research and
Development credit carry-forwards and other temporary differences. Excluding the
net deferred tax benefits from the TCJA and the release of the valuation
allowance, our effective tax rate was 21.9% in fiscal 2019 compared to 25.1% in
fiscal 2018; the reduction is primarily due to the reduced U.S. corporate income
tax rate.
With respect to the GILTI provisions of the TCJA, we had analyzed our structure
and global results of operations and expected a GILTI tax of $0.4 million for
fiscal 2019, which was included in our fiscal 2019 income tax expense.
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Our EPS was $2.84 in fiscal 2019, compared to $2.42 in fiscal 2018. On the same
basis as our adjusted operating income and excluding non-recurring tax benefits,
adjusted EPS was $3.17 in fiscal 2019, compared to $2.64 in fiscal 2018.
Segment Results of Operations
Government Services Group ("GSG")
Fiscal Year Ended
September 29, September 30, Change
2019 2018 $ %
($ in thousands)
Revenue $ 1,820,671 $ 1,694,871 $ 125,800 7.4%
Subcontractor costs (491,290) (482,537) (8,753) (1.8)
Revenue, net of subcontractor costs $ 1,329,381 $ 1,212,334 $ 117,047 9.7
Income from operations $ 185,263 $ 168,211 $ 17,052 10.1
Revenue and revenue, net of subcontractor costs, increased $125.8 million , or
7.4%, and $117.0 million , or 9.7%, respectively, in fiscal 2019 compared to
fiscal 2018. These increases include contributions from the aforementioned
acquisitions in fiscal 2019. Excluding these contributions, revenue and revenue,
net of subcontractor costs, increased 4.8% and 6.9%, respectively, in fiscal
2019 compared to fiscal 2018. These increases reflect continued broad-based
growth in our U.S. state and local government project-related infrastructure
revenue. In addition, our revenue from disaster response and recovery planning
projects increased compared to fiscal 2018. Overall, our U.S. state and local
government adjusted revenue, net of subcontractor costs, increased $136.7
million and $85.7 million , respectively in fiscal 2019 compared to fiscal 2018.
Operating income increased $17.1 million in fiscal 2019 compared to fiscal 2018,
primarily reflecting the higher U.S. state and local revenue. Our operating
margin, based on revenue, net of subcontractor costs, was stable at 13.9% in
both fiscal 2019 and 2018.
Commercial/International Services Group ("CIG")
Fiscal Year Ended
September 29, September 30, Change
2019 2018 $ %
($ in thousands)
Revenue $ 1,342,509 $ 1,323,142 $ 19,367 1.5%
Subcontractor costs (279,468) (337,390) 57,922 17.2
Revenue, net of subcontractor costs $ 1,063,041 $ 985,752 $ 77,289 7.8
Income from operations $ 79,633 $ 74,451 $ 5,182 7.0
Revenue and revenue, net of subcontractor costs, increased $19.4 million , or
1.5%, and $77.3 million , or 7.8%, respectively, in fiscal 2019 compared to
fiscal 2018. Our fiscal 2019 results included a reduction of revenue and a
corresponding non-cash charge to operating income of $13.7 million from a claim
that was resolved in the fourth quarter of fiscal 2019 for a remediation
project, where the work was substantially performed in prior years. Excluding
this claim and the net impact of the aforementioned acquisitions/divestiture,
revenue and revenue, net of subcontractor costs, increased 4.0% and 10.3%,
respectively, in fiscal 2019 compared to fiscal 2018. These increases primarily
reflect increased international revenue, particularly for broad-based activities
in Canada and renewable energy projects globally. Operating income increased
$5.2 million in fiscal 2019 compared to fiscal 2018 reflecting the higher
revenue. In addition to the aforementioned claim resolution, operating income in
fiscal 2019 included the previously described charges of $10.9 million related
to the planned disposal of our Canadian turn-key pipeline operations. Operating
income in fiscal 2018 included a $12.5 million charge for a claim settlement for
a fixed-price construction project that was completed in fiscal 2014. Excluding
these charges, our operating income increased $17.4 million in fiscal 2019
compared to fiscal 2018, and our operating margin, based on revenue, net of
subcontractor costs, improved to 9.8% in fiscal 2019 from 8.8% in fiscal 2018.
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--------------------------------------------------------------------------------Remediation and Construction Management ("RCM")
Fiscal Year Ended
September 29, September 30, Change
2019 2018 $ %
($ in thousands)
Revenue $ (1,542) $ 14,199 $ (15,741) NM
Subcontractor costs (1,243) (11,551) 10,308 89.2
Revenue, net of subcontractor costs $ (2,785) $ 2,648 $ (5,433) NM
Loss from operations $ (5,933) $ (4,573) $ (1,360) (29.7)
NM = not meaningful
RCM's projects were substantially complete at the end of fiscal 2018. The
operating loss of $5.9 million in fiscal 2019 reflects reductions of revenue and
related operating losses based on updated evaluations of unsettled claim amounts
for two construction projects that were completed in prior years. The operating
loss in fiscal 2018 primarily reflects legal costs related to outstanding
claims. We recorded no material gains or losses related to claims in fiscal
2018.
Fiscal 2019 Acquisition and Integration Expenses
In fiscal 2019, we incurred acquisition and integration expenses of $10.4
million related to the WYG acquisition. These expenses included $3.3 million of
acquisition expenses that were primarily for professional services, such as
legal and investment banking, to support the transaction and were all paid in
the fourth quarter of fiscal 2019. Subsequent to the acquisition date, we also
recorded charges of $7.1 million for integration activities, including the
elimination of redundant general and administrative costs, real estate
consolidation, and conversion of information technology platforms, substantially
all of which were paid in fiscal 2020.
Fiscal 2019 and 2018 Earn-Out Adjustments
We review and re-assess the estimated fair value of contingent consideration on
a quarterly basis, and the updated fair value could differ materially from the
initial estimates. We recorded adjustments to our contingent earn-out
liabilities and reported losses of $1.1 million and $4.3 million in fiscal 2019
and 2018, respectively. The fiscal 2018 losses resulted from updated valuations
of the contingent consideration liabilities for NDY, Eco Logical Australia
("ELA") and Cornerstone Environmental Group ("CEG"). These valuations included
updated projections of NDY's, ELA's, and CEG's financial performance during the
earn-out periods, which exceeded our original estimates at their respective
acquisition dates. In addition, we recognized charges of $2.0 million and $1.5
million in fiscal 2019 and 2018, respectively, that related to the earn-out for
Glumac . These charges were treated as compensation in selling, general and
administrative expenses due to the terms of the arrangement, which included an
on-going service requirement for a portion of the earn-out.
At September 29, 2019 , there was a total maximum of $72.4 million of outstanding
contingent consideration related to acquisitions. Of this amount, $53.0 million
was estimated as the fair value and accrued on our consolidated balance sheet.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements. As of September 27, 2020 , we had $157.5 million of cash
and cash equivalents and access to an additional $722 million of borrowings
available under our credit facility. During fiscal 2020, we generated $262
million of cash from operations. To date, we have not experienced any
significant deterioration in our financial condition or liquidity due to the
COVID-19 pandemic and our credit facilities remain available.
Our primary sources of liquidity are cash flows from operations and borrowings
under our credit facilities. Our primary uses of cash are to fund working
capital, capital expenditures, stock repurchases, cash dividends and repayment
of debt, as well as to fund acquisitions and earn-out obligations from prior
acquisitions. We believe that our existing cash and cash equivalents, operating
cash flows and borrowing capacity under our credit agreement, as described
below, will be sufficient to meet our capital requirements for at least the next
12 months including any additional resources needed to address the COVID-19
pandemic.
We use a variety of tax planning and financing strategies to manage our
worldwide cash and deploy funds to locations where they are needed. At
September 27, 2020 , undistributed earnings of our foreign subsidiaries,
primarily in Canada , amounting to approximately $66.9 million are expected to be
permanently reinvested in these foreign countries. Accordingly, no provision for
foreign withholding taxes has been made. Upon distribution of those earnings, we
would be subject to foreign withholding taxes. Assuming the permanently
reinvested foreign earnings were repatriated under the laws and rates applicable
47
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at September 27, 2020 , the incremental foreign withholding taxes applicable to
those earnings would be approximately $2.0 million . We currently have no need or
plans to repatriate undistributed foreign earnings in the foreseeable future;
however, this could change due to varied economic circumstances or modifications
in tax law.
On November 5, 2018 , the Board of Directors authorized a stock repurchase
program ("2019 Program") under which we could repurchase up to $200 million of
our common stock. This was in addition to the $25 million remaining as of fiscal
2018 year-end under the previous stock repurchase program ("2018 Program"). On
January 27, 2020 , the Board of Directors authorized a new $200 million stock
repurchase program ("2020 Program"). In fiscal 2019, we expended $100 million to
repurchase our stock under these programs. In fiscal 2020, we paid an additional
$117.2 million for share repurchases. As a result, we had a remaining balance of
$207.8 million available under the 2019 and 2020 programs. We declared and paid
common stock dividends totaling $34.7 million , or $0.64 per share, in fiscal
2020 compared to $29.7 million , or $0.54 per share, in fiscal 2019.
Subsequent Event. On November 9, 2020 , the Board of Directors declared a
quarterly cash dividend of $0.17 per share payable on December 11, 2020 to
stockholders of record as of the close of business on November 30, 2020 .
Cash and Cash Equivalents. As of September 27, 2020 , cash and cash equivalents
were $157.5 million , an increase of $36.6 million compared to the fiscal 2019
year-end. The increase was due to net cash provided by operating activities,
primarily due to shorter collection periods for accounts receivable, and
increased proceeds from sale of equipment. These increases were partially offset
by stock repurchases, dividends, acquisitions and contingent earn-out payments.
Operating Activities. For fiscal 2020, net cash provided by operating activities
was $262.5 million compared to $208.5 million in fiscal 2019. The increase was
primarily due to strong cash collections on our accounts receivable.
Investing Activities. Net cash used in investing activities was $63.0 million in
fiscal 2020, a decrease of $36.7 million compared to last year. The change
resulted from lower payments for acquisitions in fiscal 2020 compared to last
year and the proceeds from sales of equipment related to the disposal of our
Canadian turn-key pipeline activities.
Financing Activities. For fiscal 2020, net cash used in financing activities was
$163.0 million , an increase of $28.0 million compared to fiscal 2019. The change
was primarily due to increased stock repurchases and contingent earn-out
payments.
Debt Financing. On July 30, 2018 , we entered into a Second Amended and Restated
Credit Agreement ("Amended Credit Agreement") with a total borrowing capacity of
$1 billion that will mature in July 2023 . The Amended Credit Agreement is a $700
million senior secured, five-year facility that provides for a $250 million term
loan facility (the "Amended Term Loan Facility"), a $450 million revolving
credit facility (the "Amended Revolving Credit Facility"), and a $300 million
accordion feature that allows us to increase the Amended Credit Agreement to $1
billion subject to lender approval. The Amended Credit Agreement allows us to,
among other things, (i) refinance indebtedness under our Credit Agreement dated
as of May 7, 2013 ; (ii) finance certain permitted open market repurchases of our
common stock, permitted acquisitions, and cash dividends and distributions; and
(iii) utilize the proceeds for working capital, capital expenditures and other
general corporate purposes. The Amended Revolving Credit Facility includes a
$100 million sublimit for the issuance of standby letters of credit, a $20
million sublimit for swingline loans, and a $200 million sublimit for
multicurrency borrowings and letters of credit.
The entire Amended Term Loan Facility was drawn on July 30, 2018 . The Amended
Term Loan Facility is subject to quarterly amortization of principal at 5%
annually beginning December 31, 2018 . We may borrow on the Amended Revolving
Credit Facility, at our option, at either (a) a Eurocurrency rate plus a margin
that ranges from 1.00% to 1.75% per annum, or (b) a base rate for loans in U.S.
dollars (the highest of the U.S. federal funds rate plus 0.50% per annum, the
bank's prime rate or the Eurocurrency rate plus 1.00%) plus a margin that ranges
from 0% to 0.75% per annum. In each case, the applicable margin is based on our
Consolidated Leverage Ratio, calculated quarterly. The Amended Term Loan
Facility is subject to the same interest rate provisions. The Amended Credit
Agreement expires on July 30, 2023 , or earlier at our discretion upon payment in
full of loans and other obligations.
At September 27, 2020 , we had $254.9 million in outstanding borrowings under the
Amended Credit Agreement, which was comprised of $228.1 million under the
Amended Term Loan Facility and $26.8 million outstanding under the Amended
Revolving Credit Facility at a year-to-date weighted-average interest rate of
2.31% per annum. In addition, we had $0.7 million in standby letters of credit
under the Amended Credit Agreement. Our average effective weighted-average
interest rate on borrowings outstanding during the year-to-date period ended
September 27, 2020 under the Amended Credit Agreement, including the effects of
interest rate swap agreements described in Note 14, "Derivative Financial
Instruments" of the "Notes to Consolidated Financial Statements" included in
Item 8, was 3.52%. At September 27, 2020 , we had $422.4 million of available
credit under the Amended Revolving Credit Facility, all of which could be
borrowed without a violation of our debt covenants. Commitment fees related to
our revolving credit facilities were $0.7 million , $0.7 million , and $0.6
million for fiscal 2020, 2019 and 2018, respectively.
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The Amended Credit Agreement contains certain affirmative and restrictive
covenants, and customary events of default. The financial covenants provide for
a maximum Consolidated Leverage Ratio of 3.00 to 1.00 (total funded debt/EBITDA,
as defined in the Amended Credit Agreement) and a minimum Consolidated Interest
Coverage Ratio of 3.00 to 1.00 (EBITDA/Consolidated Interest Charges, as defined
in the Amended Credit Agreement). Our obligations under the Amended Credit
Agreement are guaranteed by certain of our domestic subsidiaries and are secured
by first priority liens on (i) the equity interests of certain of our
subsidiaries, including those subsidiaries that are guarantors or borrowers
under the Amended Credit Agreement, and (ii) the accounts receivable, general
intangibles and intercompany loans, and those of our subsidiaries that are
guarantors or borrowers. At September 27, 2020 , we were in compliance with these
covenants with a consolidated leverage ratio of 1.10x and a consolidated
interest coverage ratio of 19.76x.
In addition to the Amended Credit Agreement, we maintain other credit
facilities, which may be used for bank overdrafts, short-term cash advances and
bank guarantees. At September 27, 2020 , there was $36.6 million outstanding
under these facilities and the aggregate amount of standby letters of credit
outstanding was $69.7 million . As of September 27, 2020 , we had bank overdrafts
of $33.6 million related to our U.S. disbursement bank accounts. This balance is
reported in the "Current portion of long-term debt and other short-term
borrowings" within our fiscal 2020 year-end consolidated balance sheet. The
change in bank overdraft balance is classified as cash flows from financing
activities within our consolidated statements of cash flows as we believe these
overdrafts to be a form of short-term financing from the bank due to our ability
to fund the overdraft with the $50.0 million overdraft protection on the bank
accounts or our other credit facilities if needed.
Inflation. We believe our operations have not been, and, in the foreseeable
future, are not expected to be, materially adversely affected by inflation or
changing prices due to the average duration of our projects and our ability to
negotiate prices as contracts end and new contracts begin.
Dividends. Our Board of Directors has authorized the following dividends:
Total Maximum
Dividend Per Payment
Share Record Date (in thousands) Payment DateNovember 11, 2019$ 0.15 December 2, 2019$ 8,190 December 13, 2019 January 27, 2020$ 0.15 February 12, 2020$ 8,225 February 28, 2020 April 27, 2020$ 0.17 May 13, 2020$ 9,175 May 27, 2020 July 27, 2020$ 0.17 August 21, 2020$ 9,153 September 4, 2020 November 9, 2020$ 0.17 November 30, 2020 N/A December 11, 2020 49
-------------------------------------------------------------------------------- Contractual Obligations. The following sets forth our contractual obligations atSeptember 27, 2020 : Total Year 1 Years 2 - 3 Years 4 - 5 Beyond (in thousands) Debt: Credit facility$ 291,522 $ 49,127 $ 242,395 $ - $ - Other debt 137 137 - - - Interest (1) 9,326 3,439 5,887 - - Operating leases (2) 333,810 88,069 141,736 56,513 47,492 Contingent earn-outs (3) 32,617 16,142 16,475 - - Other long-term obligations (4) 39,599 1,841 2,561 245 34,952 Unrecognized tax benefits (5) 9,650 7,633 1,694 323 - Total$ 716,661 $ 166,388 $ 410,748 $ 57,081 $ 82,444 (1) Interest primarily related to the Term Loan Facility is based on a weighted-average interest rate atSeptember 27, 2020 , on borrowings that are presently outstanding. (2) Predominantly represents leases for our Corporate and project office spaces. (3) Represents the estimated fair value recorded for contingent earn-out obligations for acquisitions. The remaining maximum contingent earn-out obligations for these acquisitions total$70.9 million . (4) Predominantly represents deferred compensation liability. (5) Represents liabilities for unrecognized tax benefits related to uncertain tax positions, excluding amounts related primarily to outstanding refund claims. For more information, see Note 8, "Income Taxes" of the "Notes to Consolidated Financial Statements" included in Item 8. Income Taxes We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and adjust the allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The ability or failure to achieve the forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets. Based on future operating results in certain jurisdictions, it is possible that the current valuation allowance positions of those jurisdictions could be adjusted in the next 12 months, particularly in theUnited Kingdom where we have a valuation allowance of approximately$14 million primarily related to the realizability of net operating loss carry-forwards. As ofSeptember 27, 2020 andSeptember 29, 2019 , the liability for income taxes associated with uncertain tax positions was$9.7 million and$8.8 million , respectively. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions may significantly decrease within the next 12 months. These changes would be the result of ongoing examinations. Off-Balance Sheet Arrangements In the ordinary course of business, we may use off-balance sheet arrangements if we believe that such arrangements would be an efficient way to lower our cost of capital or help us manage the overall risks of our business operations. We do not believe that such arrangements have had a material adverse effect on our financial position or our results of operations. The following is a summary of our off-balance sheet arrangements: •Letters of credit and bank guarantees are used primarily to support project performance and insurance programs. We are required to reimburse the issuers of letters of credit and bank guarantees for any payments they make under the outstanding letters of credit or bank guarantees. Our Amended Credit Agreement and additional letter of credit facilities cover the issuance of our standby letters of credit and bank guarantees and are critical for our normal operations. If we default on the Amended Credit Agreement or additional credit facilities, our inability to issue or renew standby letters of credit and bank guarantees would impair our ability to maintain normal operations. AtSeptember 27, 2020 , we had$0.7 million in standby letters of credit outstanding under our Amended Credit Agreement and$69.7 million in standby letters of credit outstanding under our additional letter of credit facilities. •From time to time, we provide guarantees and indemnifications related to our services. If our services under a guaranteed or indemnified project are later determined to have resulted in a material defect or other material deficiency, then we may be responsible for monetary damages or other legal remedies. When sufficient information about claims on guaranteed or indemnified projects is available and monetary damages or other costs or losses are determined to be probable, we recognize such guaranteed losses. 50 -------------------------------------------------------------------------------- •In the ordinary course of business, we enter into various agreements as part of certain unconsolidated subsidiaries, joint ventures, and other jointly executed contracts where we are jointly and severally liable. We enter into these agreements primarily to support the project execution commitments of these entities. The potential payment amount of an outstanding performance guarantee is typically the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts. However, we are not able to estimate other amounts that may be required to be paid in excess of estimated costs to complete contracts and, accordingly, the total potential payment amount under our outstanding performance guarantees cannot be estimated. For cost-plus contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract. For lump sum or fixed-price contracts, this amount is the cost to complete the contracted work less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete. In those cases where costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors, for claims. •In the ordinary course of business, our clients may request that we obtain surety bonds in connection with contract performance obligations that are not required to be recorded in our consolidated balance sheets. We are obligated to reimburse the issuer of our surety bonds for any payments made thereunder. Each of our commitments under performance bonds generally ends concurrently with the expiration of our related contractual obligation. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our financial statements in conformity withU.S. GAAP requires us to make estimates and assumptions in the application of certain accounting policies that affect amounts reported in our consolidated financial statements and accompanying footnotes included in Item 8 of this report. In order to understand better the changes that may occur to our financial condition, results of operations and cash flows, readers should be aware of the critical accounting policies we apply and estimates we use in preparing our consolidated financial statements. Although such estimates and assumptions are based on management's best knowledge of current events and actions we may undertake in the future, actual results could differ materially from those estimates. Our significant accounting policies are described in the "Notes to Consolidated Financial Statements" included in Item 8. Highlighted below are the accounting policies that management considers most critical to investors' understanding of our financial results and condition, and that require complex judgments by management. Revenue Recognition and Contract Costs To determine the proper revenue recognition method for contracts under ASC 606, we evaluate whether multiple contracts should be combined and accounted for as a single contract and whether the combined or single contract should be accounted for as having more than one performance obligation. The decision to combine a group of contracts or separate a combined or single contract into multiple performance obligations may impact the amount of revenue recorded in a given period. Contracts are considered to have a single performance obligation if the promises are not separately identifiable from other promises in the contracts. At contract inception, we assess the goods or services promised in a contract and identify, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the "unit of account" for purposes of determining revenue recognition. In order to properly identify separate performance obligations, we apply judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract. Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided or significant interdependencies in the context of the contract and are accounted for as if they were part of the original contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. We account for contract modifications as a separate contract when the modification results in the promise to deliver additional goods or services that are distinct and the increase in price of the contract is for the same amount as the stand-alone selling price of the additional goods or services included in the modification. The transaction price represents the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed 51 -------------------------------------------------------------------------------- amounts, variable amounts, or both. The nature of our contracts gives rise to several types of variable consideration, including claims, award fee incentives, fiscal funding clauses, and liquidated damages. We recognize revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized for the contract will not occur. We estimate the amount of revenue to be recognized on variable consideration using either the expected value or the most likely amount method, whichever is expected to better predict the amount of consideration to be received. Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Claims are amounts in excess of agreed contract prices that we seek to collect from our clients or other third parties for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in our performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. This can lead to a situation in which costs are recognized in one period and revenue is recognized in a subsequent period when a client agreement is obtained, or a claims resolution occurs. In some cases, contract retentions are withheld by clients until certain conditions are met or the project is completed, which may be several months or years. In these cases, we have not identified a significant financing component under ASC 606 as the timing difference in payment compared to delivery of obligations under the contract is not for purposes of financing. For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using a best estimate of the standalone selling price of each distinct good or service in the contract. The standalone selling price is typically determined using the estimated cost of the contract plus a margin approach. For contracts containing variable consideration, we allocate the variability to a specific performance obligation within the contract if such variability relates specifically to our efforts to satisfy the performance obligation or transfer the distinct good or service, and the allocation depicts the amount of consideration to which we expect to be entitled. We recognize revenue over time as the related performance obligation is satisfied by transferring control of a promised good or service to our customers. Progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method. The cost input is based primarily on contract cost incurred to date compared to total estimated contract cost. This measure includes forecasts based on the best information available and reflects our judgment to faithfully depict the value of the services transferred to the customer. For certain on-call engineering or consulting and similar contracts, we recognize revenue in the amount which we have the right to invoice the customer if that amount corresponds directly with the value of our performance completed to date. Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost measure of progress method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs indicates a loss, a provision for the entire estimated loss on the contract is made in the period in which the loss becomes evident. Contract Types Our services are performed under three principal types of contracts: fixed-price, time-and-materials and cost-plus. Customer payments on contracts are typically due within 60 days of billing, depending on the contract. Fixed-Price. Under fixed-price contracts, clients pay us an agreed fixed-amount negotiated in advance for a specified scope of work. Time-and-Materials. Under time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we spend on a project. In addition, clients reimburse us for our actual out-of-pocket costs for materials and other direct incidental expenditures that we incur in connection with our performance under the contract. Most of our time-and-material contracts are subject to maximum contract values, and also may include annual billing rate adjustment provisions. Cost-Plus. Under cost-plus contracts, we are reimbursed for allowed or otherwise defined costs incurred plus a negotiated fee. The contracts may also include incentives for various performance criteria, including quality, timeliness, ingenuity, safety and cost-effectiveness. In addition, our costs are generally subject to review by our clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract. 52 -------------------------------------------------------------------------------- Insurance Matters, Litigation and Contingencies In the normal course of business, we are subject to certain contractual guarantees and litigation. Generally, such guarantees relate to project schedules and performance. Most of the litigation involves us as a defendant in contractual disagreements, workers' compensation, personal injury and other similar lawsuits. We maintain insurance coverage for various aspects of our business and operations. However, we have elected to retain a portion of losses that may occur through the use of various deductibles, limits and retentions under our insurance programs. This practice may subject us to some future liability for which we are only partially insured or are completely uninsured. We record in our consolidated balance sheets amounts representing our estimated liability for self-insurance claims. We utilize actuarial analyses to assist in determining the level of accrued liabilities to establish for our employee medical and workers' compensation self-insurance claims that are known and have been asserted against us, as well as for self-insurance claims that are believed to have been incurred based on actuarial analyses but have not yet been reported to our claims administrators at the balance sheet date. We include any adjustments to such insurance reserves in our consolidated statements of income. Except as described in Note 17, "Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" included in Item 8, we do not have any litigation or other contingencies that have had, or are currently anticipated to have, a material impact on our results of operations or financial position. As additional information about current or future litigation or other contingencies becomes available, management will assess whether such information warrants the recording of additional expenses relating to those contingencies. Such additional expenses could potentially have a material impact on our results of operations and financial position.Goodwill and Intangibles The cost of an acquired company is assigned to the tangible and intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets and liabilities acquired requires us to make estimates and use valuation techniques when a market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill.Goodwill typically represents the value paid for the assembled workforce and enhancement of our service offerings. Identifiable intangible assets include backlog, non-compete agreements, client relations, trade names, patents and other assets. The costs of these intangible assets are amortized over their contractual or economic lives, which range from one to ten years. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss. We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. In addition, we regularly evaluate whether events and circumstances have occurred that may indicate a potential change in recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, including a deterioration in general economic conditions, an increased competitive environment, a change in management, key personnel, strategy or customers, negative or declining cash flows, or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods (see Note 6, "Goodwill and Intangible Assets" of the "Notes to Consolidated Financial Statements" in Item 8 for further discussion). We believe the methodology that we use to review impairment of goodwill, which includes a significant amount of judgment and estimates, provides us with a reasonable basis to determine whether impairment has occurred. However, many of the factors employed in determining whether our goodwill is impaired are outside of our control and it is reasonably likely that assumptions and estimates will change in future periods. These changes could result in future impairments. The goodwill impairment review involves the determination of the fair value of our reporting units, which for us are the components one level below our reportable segments. This process requires us to make significant judgments and estimates, including assumptions about our strategic plans with regard to our operations as well as the interpretation of current economic indicators and market valuations. Furthermore, the development of the present value of future cash flow projections includes assumptions and estimates derived from a review of our expected revenue growth rates, operating profit margins, business plans, discount rates, and terminal growth rates. We also make certain assumptions about future market conditions, market prices, interest rates and changes in business strategies. Changes in assumptions or estimates could materially affect the determination of the fair value of a reporting unit. This could eliminate the excess of fair value over carrying value of a reporting unit entirely and, in some cases, result in impairment. Such changes in assumptions could be caused by a loss of one or more significant contracts, reductions in government or commercial client spending, or a decline in the demand for our services due to changing economic conditions. In the event that we determine that our goodwill is impaired, we would be 53 -------------------------------------------------------------------------------- required to record a non-cash charge that could result in a material adverse effect on our results of operations or financial position. We use two methods to determine the fair value of our reporting units: (i) the Income Approach and (ii) the Market Approach. While each of these approaches is initially considered in the valuation of the business enterprises, the nature and characteristics of the reporting units indicate which approach is most applicable. The Income Approach utilizes the discounted cash flow method, which focuses on the expected cash flow of the reporting unit. In applying this approach, the cash flow available for distribution is calculated for a finite period of years. Cash flow available for distribution is defined, for purposes of this analysis, as the amount of cash that could be distributed as a dividend without impairing the future profitability or operations of the reporting unit. The cash flow available for distribution and the terminal value (the value of the reporting unit at the end of the estimation period) are then discounted to present value to derive an indication of the value of the business enterprise. The Market Approach is comprised of the guideline company method and the similar transactions method. The guideline company method focuses on comparing the reporting unit to select reasonably similar (or "guideline") publicly traded companies. Under this method, valuation multiples are (i) derived from the operating data of selected guideline companies; (ii) evaluated and adjusted based on the strengths and weaknesses of the reporting units relative to the selected guideline companies; and (iii) applied to the operating data of the reporting unit to arrive at an indication of value. In the similar transactions method, consideration is given to prices paid in recent transactions that have occurred in the reporting unit's industry or in related industries. For our annual impairment analysis, we weighted the Income Approach and the Market Approach at 70% and 30%, respectively. The Income Approach was given a higher weight because it has the most direct correlation to the specific economics of the reporting unit, as compared to the Market Approach, which is based on multiples of broad-based (i.e., less comparable) companies. Our last review atJune 29, 2020 (i.e. the first day of our fourth quarter in fiscal 2020), indicated that we had no impairment of goodwill, and all of our reporting units had estimated fair values that were in excess of their carrying values, including goodwill. Our ASP reporting unit was the only reporting unit that had an estimated fair value that exceeded its carrying value by less than 20%. OnSeptember 2, 2020 ,Australia announced that it had fallen into economic recession, defined as two consecutive quarters of negative growth, for the first time since 1991 including 7% negative growth in the quarter ending inJune 2020 . This prompted a strategic review of our ASP reporting unit, which is in our CIG reportable segment. As a result of the economic recession inAustralia , our revenue growth and profit margin forecasts for the ASP reporting unit declined from the previous forecast used for our annual goodwill impairment review as ofJune 29, 2020 . We also performed an interim goodwill impairment review of our ASP reporting unit inSeptember 2020 and recorded a$15.8 million goodwill impairment charge. The impaired goodwill related to our acquisitions of Coffey and NDY. As a result of the impairment charge, the estimated fair value of our ASP reporting unit equals its carrying value of$144.9 million , including$95.5 million of goodwill, atSeptember 27, 2020 . Contingent Consideration Certain of our acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based upon our valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of these earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in "Estimated contingent earn-out liabilities" and "Long-term estimated contingent earn-out liabilities" on the consolidated balance sheets. We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former shareholders of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination. We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy (See Note 2, "Basis of Presentation and Preparation - Fair Value of Financial Instruments" of the "Notes to Consolidated Financial Statements" included in Item 8). We use a probability weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally two or three years), and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in our 54 -------------------------------------------------------------------------------- consolidated statements of cash flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows. We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income. Income Taxes We file a consolidatedU.S. federal income tax return. In addition, we file other returns that are required in the states, foreign jurisdictions and other jurisdictions in which we do business. We account for certain income and expense items differently for financial reporting and income tax purposes. Deferred tax assets and liabilities are computed for the differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to reverse. In determining the need for a valuation allowance on deferred tax assets, management reviews both positive and negative evidence, including current and historical results of operations, future income projections and potential tax planning strategies. Based on our assessment, we have concluded that a portion of the deferred tax assets atSeptember 27, 2020 , primarily loss carryforwards, will not be realized, and we have reserved accordingly. According to the authoritative guidance on accounting for uncertainty in income taxes, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. For more information related to our unrecognized tax benefits, see Note 8, "Income Taxes" of the "Notes to Consolidated Financial Statements" included in Item 8. RECENT ACCOUNTING PRONOUNCEMENTS For a discussion of recent accounting standards and the effect they could have on the consolidated financial statements, see Note 2, "Basis of Presentation and Preparation" of the "Notes to Consolidated Financial Statements" included in Item 8. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We do not enter into derivative financial instruments for trading or speculation purposes. In the normal course of business, we have exposure to both interest rate risk and foreign currency transaction and translation risk, primarily related to the Canadian and Australian dollar, and British Pound. We are exposed to interest rate risk under our Amended Credit Agreement. We can borrow, at our option, under both the Amended Term Loan Facility and Amended Revolving Credit Facility. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a Eurocurrency rate plus a margin that ranges from 1.00% to 1.75% per annum, or (b) a base rate for loans inU.S. dollars (the highest of theU.S. federal funds rate plus 0.50% per annum, the bank's prime rate or the Eurocurrency rate plus 1.00%) plus a margin that ranges from 0% to 0.75% per annum. Borrowings at the base rate have no designated term and may be repaid without penalty any time prior to the Facility's maturity date. Borrowings at a Eurodollar rate have a term no less than 30 days and no greater than 180 days and may be prepaid without penalty. Typically, at the end of such term, such borrowings may be rolled over at our discretion into either a borrowing at the base rate or a borrowing at a Eurodollar rate with similar terms, not to exceed the maturity date of the Facility. The Facility matures onJuly 30, 2023 . AtSeptember 27, 2020 , we had borrowings outstanding under the Credit Agreement of$254.9 million at a weighted-average interest rate of 2.31% per annum. InAugust 2018 , we entered into five interest rate swap agreements with five banks to fix the variable interest rate on$250 million of our Amended Term Loan Facility. The objective of these interest rate swaps was to eliminate the variability of our cash flows on the amount of interest expense we pay under our Credit Agreement. As ofSeptember 27, 2020 , the notional principal of our outstanding interest swap agreements was$228.1 million ($45.6 million each.) Our year-to-date average effective interest rate on borrowings outstanding under the Credit Agreement, including the effects of interest rate swap agreements, atSeptember 27, 2020 , was 3.52%. For more information, see Note 14, "Derivative Financial Instruments" of the "Notes to Consolidated Financial Statements" in Item 8. Most of our transactions are inU.S. dollars; however, some of our subsidiaries conduct business in foreign currencies, primarily the Canadian and Australian dollar, and British Pound. Therefore, we are subject to currency exposure and volatility because of currency fluctuations. We attempt to minimize our exposure to these fluctuations by matching revenue and expenses in the same currency for our contracts. We reported$1.3 million of foreign currency losses in fiscal 2020 and$0.5 million of foreign currency gains in fiscal 2019 in "Selling, general and administrative expenses" on our consolidated statements of income. 55 -------------------------------------------------------------------------------- We have foreign currency exchange rate exposure in our results of operations and equity primarily because of the currency translation related to our foreign subsidiaries where the local currency is the functional currency. To the extent theU.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions will result in reduced revenue, operating expenses, assets and liabilities. Similarly, our revenue, operating expenses, assets and liabilities will increase if theU.S. dollar weakens against foreign currencies. For fiscal 2020 and 2019, 29.6% and 27.7% of our consolidated revenue, respectively, was generated by our international business. For fiscal 2020, the effect of foreign exchange rate translation on the consolidated balance sheets was an increase in equity of$3.4 million compared to a decrease in equity of$21.1 million in fiscal 2019. These amounts were recognized as an adjustment to equity through other comprehensive income. 56
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