TETRA TECH, INC. FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements regarding future events and our future results that are subject to the safe harbor provisions created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "estimates," "seeks," "continues," "may," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below under "Part II, Item 1A. Risk Factors," and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
GENERAL OVERVIEW
Tetra Tech, Inc. is a leading global provider of consulting and engineering services that focuses on water, environment, infrastructure, resource management, energy, and international development. We are a global company that is Leading with Science® to provide innovative solutions for our public and private clients. We typically begin at the earliest stage of a project by identifying technical solutions and developing execution plans tailored to our clients' needs and resources. Our reputation for high-end consulting and engineering services and our ability to develop solutions for water and environmental management has supported our growth for more than 50 years. Today, we are proud to be making a difference in people's lives worldwide through broad consulting, engineering, and technology service offerings. We are working on over 70,000 projects a year, in more than 100 countries on seven continents, from 450 offices, with a talent force of 20,000 associates. We are Leading with Science throughout our operations, with domain experts across multiple disciplines supported by advanced analytics, artificial intelligence, machine learning, and digital technology. Our ability to provide innovation and first-of-kind solutions is enhanced by partnerships with our forward-thinking clients. We are diverse and inclusive, embracing the breadth of experience across our talent force worldwide with a culture of innovation and entrepreneurship. We are disciplined in our business delivering value to customers and high performance to our shareholders. In supporting our clients, we seek to add value and provide long-term sustainable consulting, engineering, and technology solutions.
By combining ingenuity and practical experience, we have helped to advance sustainable solutions for managing water, protecting the environment, providing energy, and engineering the infrastructure for our cities and communities.
We derive income from fees for professional, technical, program management, and construction management services. As primarily a professional services company, we are labor-intensive rather than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. We provide services to a diverse base ofU.S. state and local government,U.S. federal government,U.S. commercial, and international clients. 24 -------------------------------------------------------------------------------- The following table presents the percentage of our revenue by client sector: Three Months Ended Six Months Ended March 29, 2020 March 31, 2019 March 29, 2020 March 31, 2019 Client Sector U.S. state and local government 13.9 % 18.0 % 14.7 % 17.6 % U.S. federal government (1) 33.1 29.9 31.9 30.6 U.S. commercial 22.1 23.0 22.5 23.5 International (2) 30.9 29.1 30.9 28.3 Total 100.0 % 100.0 % 100.0 % 100.0 % (1) Includes revenue generated under U.S. federal government contracts performed outsidethe United States . (2) Includes revenue generated from foreign operations, primarily in Canada,Australia and theUnited Kingdom , and revenue generated from non-U.S. clients. We manage our operations under two reportable segments. OurGovernment Services Group reportable segment primarily includes activities withU.S. government clients (federal, state and local) and all activities with development agencies worldwide. OurCommercial/International Services Group reportable segment primarily includes activities withU.S. commercial clients and international clients other than development agencies. This alignment allows us to capitalize on our growing market opportunities and enhance the development of high-end consulting and technical solutions to meet our growing client demand. We continue to report the results of the wind-down of our non-core construction activities in the Remediation and Construction Management ("RCM") reportable segment.
Our reportable segments are as follows:
Government Services Group ("GSG"). GSG provides consulting and engineering services primarily toU.S. government clients (federal, state and local) and development agencies worldwide. GSG supportsU.S. government civilian and defense agencies with services in water, environment, infrastructure, information technology, and disaster management. GSG also provides engineering design services forU.S. municipal and commercial clients, especially in water infrastructure, solid waste, and high-end sustainable infrastructure designs. GSG also leads our support for development agencies worldwide, especially inthe United States ,United Kingdom , andAustralia .Commercial/International Services Group ("CIG"). CIG primarily provides consulting and engineering services toU.S. commercial clients, and international clients that include both commercial and government sectors. CIG supports commercial clients across the Fortune 500, energy utilities, industrial, manufacturing, aerospace, and resource management markets. CIG also provides infrastructure and related environmental, engineering and project management services to commercial and local government clients acrossCanada , inAsia Pacific (primarilyAustralia and New Zealand ), theUnited Kingdom , as well asBrazil andChile . The following table presents the percentage of our revenue by reportable segment: Three Months Ended Six Months Ended March 29, 2020 March 31, 2019 March 29, 2020 March 31, 2019 Reportable Segment GSG 59.5 % 57.8 % 58.4 % 57.6 % CIG 42.0 44.6 43.1 44.4 RCM - (0.6) - (0.2) Inter-segment elimination (1.5) (1.8) (1.5) (1.8) Total 100.0 % 100.0 % 100.0 % 100.0 % Our services are performed under three principal types of contracts with our clients: fixed-price, time-and-materials, and cost-plus. The following table presents the percentage of our revenue by contract type: 25 -------------------------------------------------------------------------------- Three Months Ended Six Months Ended March 29, 2020 March 31, 2019 March 29, 2020 March 31, 2019 Contract Type Fixed-price 34.8 % 34.3 % 34.4 % 33.9 % Time-and-materials 47.8 47.8 48.2 47.4 Cost-plus 17.4 17.9 17.4 18.7 Total 100.0 % 100.0 % 100.0 % 100.0 % Under fixed-price contracts, the client agrees to pay a specified price for our performance of the entire contract or a specified portion of the contract. Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and paid for other expenses. Under cost-plus contracts, some of which are subject to a contract ceiling amount, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. Profitability on these contracts is driven by billable headcount and our cost control. We recognize revenue from contracts using the cost-to-cost measure of progress method to estimate the progress towards completion to determine the amount of revenue and profit to recognize. Changes in those estimates could result in the recognition of cumulative catch-up adjustments to the contract's inception-to-date revenue, costs and profit in the period in which such changes are made. On a quarterly basis, we review and assess our revenue and cost estimates for each significant contract. Changes in revenue and cost estimates could also result in a projected loss that would be recorded immediately in earnings. Other contract costs include professional compensation and related benefits, together with certain direct and indirect overhead costs such as rents, utilities, and travel. Professional compensation represents a large portion of these costs. Our "Selling, general and administrative expenses" ("SG&A") are comprised primarily of marketing and bid and proposal costs, and our corporate headquarters' costs related to the executive offices, finance, accounting, administration, and information technology. Our SG&A expenses also include a portion of stock-based compensation and depreciation of property and equipment related to our corporate headquarters, and the amortization of identifiable intangible assets. Most of these costs are unrelated to specific clients or projects, and can vary as expenses are incurred to support company-wide activities and initiatives. We experience seasonal trends in our business. Our revenue and operating income are typically lower in the first half of our fiscal year, primarily due to theThanksgiving (in theU.S. ), Christmas, andNew Year's holidays. Many of our clients' employees, as well as our own employees, take vacations during these holiday periods. Further, seasonal inclement weather conditions occasionally cause some of our offices to close temporarily or may hamper our project field work in the northern hemisphere's temperate and arctic regions. These occurrences result in fewer billable hours worked on projects and, correspondingly, less revenue recognized.
ACQUISITIONS AND DIVESTITURES
Acquisitions. We continuously evaluate the marketplace for acquisition
opportunities to further our strategic growth plans. Due to our reputation,
size, financial resources, geographic presence and range of services, we have
numerous opportunities to acquire privately and publicly held companies or
selected portions of such companies. We evaluate an acquisition opportunity
based on its ability to strengthen our leadership in the markets we serve, the
technologies and solutions they provide, and the additional new geographies and
clients they bring. Also, during our evaluation, we examine an acquisition's
ability to drive organic growth, its accretive effect on long-term earnings, and
its ability to generate return on investment. Generally, we proceed with an
acquisition if we believe that it will strategically expand our service
offerings, improve our long-term financial performance, and increase shareholder
returns.
We view acquisitions as a key component in the execution of our growth strategy,
and we intend to use cash, debt or equity, as we deem appropriate, to fund
acquisitions. We may acquire other businesses that we believe are synergistic
and will ultimately increase our revenue and net income, strengthen our ability
to achieve our strategic goals, provide critical mass with existing clients, and
further expand our lines of service. We typically pay a purchase price that
results in the recognition of goodwill, generally representing the intangible
value of a successful business with an assembled workforce specialized in our
areas of interest. Acquisitions are inherently risky, and no assurance can be
given that our previous or future acquisitions will be successful or will not
have a material adverse effect on our financial position, results of operations,
or cash flows. All acquisitions require the approval of our Board of Directors.
For detailed information regarding acquisitions, see Note 4, "Acquisitions" of
the "Notes to Consolidated Financial Statements".
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Divestitures. We regularly review and evaluate our existing operations to
determine whether our business model should change through the divestiture of
certain businesses. Accordingly, from time to time, we may divest or wind-down
certain non-core businesses and reallocate our resources to businesses that
better align with our long-term strategic direction.
OVERVIEW OF RESULTS AND BUSINESS TRENDS
General. As the coronavirus disease 2019 ("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 has allowed our staff to support clients and projects remotely. 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
relatively stable, while our commercial business has seen more impact. Much of
our commercial business has continued due to regulatory drivers, but we have
seen project delays and cancellations 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
certain program delays and cancellations. 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, environment restoration and impacts of climate change.
In the first half of fiscal 2020, our revenue increased 6.4% compared to the
prior-year period. Our revenue includes $134.2 million of revenue from the
acquisitions of Segue Technologies ("SEG"), eGlobalTech and WYG plc , which did
not contribute to our revenue in the first half of fiscal 2019. Excluding the
current-year contribution from these acquisitions and the impact of the disposal
of our Canadian turn-key pipeline activities in the fourth quarter of fiscal
2019, our revenue was similar to the first half of last year.
U.S. Federal Government. Our U.S. federal government revenue increased 10.7% in
the first half of fiscal 2020 compared to the prior-year period. Excluding
contributions from acquisitions, our revenue grew 2.0% in the first half of
fiscal 2020 compared to the fiscal 2019 period. The increase was primarily due
to activity with civilian agencies, particularly water and environmental
programs. During periods of economic volatility, our U.S. federal government
clients have historically been the most stable and predictable.
U.S. State and Local Government. Our U.S. state and local government revenue
decreased 11.3% in the first half of fiscal 2020 compared to the same period
last year as we experienced a decrease in revenue from disaster response
activities. This decline was partially offset by continued broad-based growth in
our U.S. state and local government project-related infrastructure business,
particularly with increased revenue from municipal water infrastructure work in
the metropolitan areas of California , Texas , and Florida . Although most of our
work for U.S. state and local governments relates to critical water and
environmental programs, we currently would expect some of our clients to face
future budgetary constraints, which could impact our business.
U.S. Commercial. Our U.S. commercial revenue increased 1.9% in the first half
of fiscal 2020 compared to the same period last year. This growth was primarily
related to renewable energy and environmental remediation projects. We currently
expect the adverse impact of the COVID-19 pandemic to our U.S. commercial
revenue to be more significant than to our government programs and projects.
International. Our international revenue increased 16.3% in the first half of
fiscal 2020 compared to the prior-year period. Excluding contributions from
acquisitions and the impact of the prior-year disposal of our Canadian turn-key
pipeline activities, our revenue grew 2.2% compared to the first half of fiscal
2019. The revenue growth primarily reflects increased renewable energy activity
in Canada . In light of the COVID-19 pandemic, we currently expect our total
international government work to be stable; however, our international
commercial activities could have a significant adverse impact if the current
economic conditions are prolonged.
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