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OFFON

TETRA TECH, INC.

(TTEK)
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TETRA TECH INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

11/24/2021 | 04:12pm EST
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 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 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 21,000 associates supported
by technological innovation. Our government business, which represents
approximately 60% of our revenue, has been stable, while our commercial business
experienced 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 2021, our revenue increased 7.3% compared to fiscal 2020. This
year-over-year growth primarily reflects increased activity with government
clients, both U.S. and international, as federal and local government agency
spending has been a source of economic stability and stimulus during the
COVID-19 pandemic. However, this growth was partially offset by lower commercial
activity, which has been slower to recover to pre-pandemic levels. Our revenue
also includes contributions from acquisitions that did not contribute to our
revenue in fiscal 2020. Our year-over-year revenue comparisons were also
impacted by the decision to dispose of our Canadian turn-key pipeline activities
in fiscal 2019 and the subsequent wind-down of those activities in fiscal 2020.
U.S. State and Local Government. Our U.S. state and local government revenue
increased 22.2% in fiscal 2021 compared to last fiscal year. The increase
reflects 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. Our disaster response activities also increased
compared to fiscal 2020. Most of our work for U.S. state and local governments
relates to critical water and environmental programs, which we expect to
continue to grow next year. The risk of budgetary constraints to our clients is
mitigated with the passage of the American Rescue Plan Act of 2021, signed into
law on March 11, 2021, which provides financial support for state and local
governments.
U.S. Federal Government. Our U.S. federal government revenue increased 8.8% in
fiscal 2021 compared to fiscal 2020. This increase includes contributions from
acquisitions, which did not have comparable revenue in last fiscal year. During
periods of economic volatility, including during the COVID-19 pandemic, our U.S.
federal government business has historically been the most stable and
predictable. We expect our U.S. federal government revenue to grow in fiscal
2022 due to continued increased advanced analytics activity, and the current
administration's focus on long-term infrastructure and climate change.
U.S. Commercial. Our U.S. commercial revenue decreased 5.4% in fiscal 2021
compared to fiscal 2020. The decline was primarily due to reduced industrial
activity as a result of the COVID-19 pandemic. We currently expect our U.S.
commercial revenue to grow in fiscal 2022 primarily with clients focused on
environmental programs, including meeting net zero carbon goals, and from higher
demand for renewable energy; however, if conditions due to the COVID-19 pandemic
worsen or are prolonged, it could have a negative impact on our revenue for
fiscal 2022.
International. Our international revenue increased 7.9% in fiscal 2021 compared
to fiscal 2020. The revenue growth primarily reflects government stimulus
spending on infrastructure, increased commercial activity related to new
regulatory requirements for sustainability, and fewer restrictions related to
the COVID-19 pandemic. Our revenue also includes contributions from acquisitions
that did not contribute to our revenue in fiscal 2020. We expect these trends
and the related growth in our international work to continue in fiscal 2022.
                                       36
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RESULTS OF OPERATIONS
Fiscal 2021 Compared to Fiscal 2020
Consolidated Results of Operations
                                                                             Fiscal Year Ended
                                                October 3,           September 27,                       Change
                                                   2021                  2020                   $                    %
                                                                             ($ in thousands)
Revenue                                       $ 3,213,513          $    2,994,891          $ 218,622               7.3%
Subcontractor costs                              (661,341)               (646,319)           (15,022)              (2.3)
Revenue, net of subcontractor costs (1)         2,552,172               2,348,572            203,600                8.7
Other costs of revenue                         (2,053,772)             (1,902,037)          (151,735)              (8.0)
Gross profit                                      498,400                 446,535             51,865               11.6
Selling, general and administrative expenses     (222,972)               (204,615)           (18,357)              (9.0)

Contingent consideration - fair value
adjustments                                         3,273                  14,971            (11,698)             (78.1)
Impairment of goodwill                                  -                 (15,800)            15,800                NM
Income from operations                            278,701                 241,091             37,610               15.6
Interest expense - net                            (11,831)                (13,100)             1,269                9.7
Income before income tax expense                  266,870                 227,991             38,879               17.1
Income tax expense                                (34,039)                (54,101)            20,062               37.1
Net income                                        232,831                 173,890             58,941               33.9
Net income attributable to noncontrolling
interests                                             (21)                    (31)                10               32.3
Net income attributable to Tetra Tech         $   232,810          $      173,859          $  58,951               33.9
Diluted earnings per share                    $      4.26          $         3.16          $    1.10               34.8


(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 international
development 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
In fiscal 2021, revenue and revenue, net of subcontractor costs, increased
$218.6 million, or 7.3%, and $203.6 million, or 8.7%, respectively, compared to
fiscal 2020. Excluding the net contributions from acquisitions and the impact of
the disposal of our Canadian turn-key pipeline activities, our revenue increased
3.2% in fiscal 2021 compared to last fiscal year. Our GSG segment's revenue and
revenue, net of subcontractor costs, increased $164.0 million, or 9.2%, and
$120.3 million, or 9.3%, respectively, in fiscal 2021 compared to the prior
fiscal year. Our CIG segment's revenue increased $59.6 million, or 4.7%, and
revenue, net of subcontractor costs, increased $82.7 million, or 7.9% in fiscal
2021 compared to fiscal 2020. Our fiscal 2021 results for our GSG and CIG
segments are described below under "Government Services Group" and
"Commercial/International Services Group", respectively.
The following table reconciles our reported results to non-U.S. GAAP adjusted
results, which exclude certain non-operating accounting-related adjustments,
such as gains on non-core dispositions, gains from adjustments to contingent
considerations, goodwill impairment charges, non-recurring costs to address
COVID-19, and non-recurring tax items. The gains on non-core dispositions in
fiscal 2020 relate to the disposal of our Canadian turn-key pipeline activities
that commenced in the fourth quarter of fiscal 2019. The goodwill impairment
charge in fiscal 2020 did not have related tax benefits. Excluding this charge,
the effective tax rates applied to the adjustments to earnings per share ("EPS")
to arrive at adjusted EPS averaged 25% and 24% for fiscal 2021 and 2020,
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.

                                       37
--------------------------------------------------------------------------------

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 of our
global offices to remain operational supporting our programs and projects. This
required incremental costs for employee relocation, expansion of our virtual
private network capabilities, enhanced security, and sanitizing of 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. Although the charges were recognized in the
second quarter of fiscal 2020, substantially all of these costs were paid in
cash in the third quarter of fiscal 2020.

                                                          Fiscal Year Ended
                                        October 3,      September 27,             Change
                                           2021              2020              $           %
Income from operations                 $  278,701      $      241,091      $ 37,610       15.6
Earn-out adjustments                       (3,273)            (13,371)       10,098        NM
COVID-19                                        -               8,233        (8,233)       NM
Non-core dispositions                           -              (8,525)        8,525        NM
Impairment of goodwill                          -              15,800       (15,800)       NM
Adjusted income from operations (1)    $  275,428      $      243,228      $ 32,200       13.2

EPS                                    $     4.26      $         3.16      $   1.10       34.8
Earn-out adjustments                        (0.04)              (0.18)         0.14        NM
COVID-19                                        -                0.11         (0.11)       NM
Non-core dispositions                           -               (0.12)         0.12        NM
Impairment of goodwill                          -                0.29         (0.29)       NM
Non-recurring tax items                     (0.43)                  -         (0.43)       NM
Adjusted EPS (1)                       $     3.79      $         3.26      $   0.53       16.3


NM = not meaningful
(1) Non-U.S. GAAP financial measure
Operating income increased $37.6 million in fiscal 2021 compared to fiscal 2020.
Our operating income reflects net gains of $3.3 million and $15.0 million
related to changes in the estimated fair value of contingent earn-out
liabilities in fiscal 2021 and 2020, respectively. The net gain in fiscal 2020
was partially offset by the related compensation charges of $1.6 million. These
gains are described below under "Fiscal 2021 and 2020 Earn-Out Adjustments." 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.
Further, our fiscal 2020 operating income reflects a non-cash goodwill
impairment charge of $15.8 million, which is described below under "Fiscal 2020
and 2019 Impairment of Goodwill."
Excluding these items, our adjusted operating income increased $32.2 million, or
13.2%, in fiscal 2021 compared to fiscal 2020. The increase reflects improved
results in our GSG and CIG segments, which are described below under "Government
Services Group" and "Commercial/International Services Group", respectively.
Our net interest expense was $11.8 million and $13.1 million in fiscal 2021 and
2020, respectively. The decrease primarily reflects lower average borrowings.
The effective tax rates for fiscal 2021 and 2020 were 12.8% and 23.7%,
respectively. Our fiscal 2021 effective tax rate reflects a non-recurring net
tax benefit of $21.6 million primarily consisting of valuation allowances in the
United Kingdom that were released due to sufficient sustainable profitability
being achieved in fiscal 2021. The valuation allowances were primarily related
to net operating loss carry-forwards and other temporary differences. The
goodwill impairment charge in fiscal 2020 did not have related tax benefits,
which increased our effective tax rate by 1.5% in fiscal 2020. Conversely,
income tax expense was reduced by $12.9 million and $8.3 million of excess tax
benefits on share-based payments in fiscal 2021 and 2020, respectively.
Excluding the impact of the fiscal 2021 non-recurring tax items, the
non-deductible goodwill impairment charge, and the excess tax benefits on
share-based payments, our effective tax rates in fiscal 2021 and 2020 were 25.7%
and 25.6%, respectively.
Our EPS was $4.26 in fiscal 2021, compared to $3.16 in fiscal 2020. On the same
basis as our adjusted operating income and excluding non-recurring tax benefits
in fiscal 2021, EPS was $3.79 in fiscal 2021, compared to $3.26 last fiscal
year.
                                       38
--------------------------------------------------------------------------------

Segment Results of Operations
Government Services Group ("GSG")
                                                           Fiscal Year Ended
                                       October 3,       September 27,              Change
                                          2021               2020               $            %
                                                           ($ in thousands)
Revenue                               $ 1,942,958      $    1,778,922      $ 164,036       9.2%
Subcontractor costs                      (522,583)           (478,839)       (43,744)      (9.1)
Revenue, net of subcontractor costs   $ 1,420,375      $    1,300,083      $ 120,292        9.3

Income from operations                $   195,297      $      168,669      $  26,628       15.8%


Revenue and revenue, net of subcontractor costs, increased $164.0 million, or
9.2%, and $120.3 million, or 9.3%, respectively, in fiscal 2021 compared to
fiscal 2020. These increases primarily reflect higher U.S. state and local
government activities related to water and environmental programs, and disaster
response. The increases also reflect contributions from acquisitions, which did
not have comparable revenue in the prior fiscal year.
Operating income increased $26.6 million in fiscal 2021 compared to fiscal 2020
primarily reflecting the revenue growth. In addition, 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, improved to 13.7% in fiscal 2021 compared to 13.0% last
fiscal year. Excluding the COVID-19 charges, our operating margin was 13.1% in
fiscal 2020. The improved operating margin was primarily due to our increased
focus on high-end consulting services and improved labor utilization.
Commercial/International Services Group ("CIG")
                                                          Fiscal Year Ended
                                       October 3,       September 27,             Change
                                          2021               2020              $           %
                                                          ($ in thousands)
Revenue                               $ 1,325,668      $    1,266,059      $ 59,609       4.7%
Subcontractor costs                      (194,459)           (217,547)       23,088       10.6
Revenue, net of subcontractor costs   $ 1,131,209      $    1,048,512      $ 82,697       7.9

Income from operations                $   131,720      $      114,022      $ 17,698       15.5


Revenue and revenue, net of subcontractor costs, increased $59.6 million, or
4.7%, and increased $82.7 million, or 7.9%, respectively, in fiscal 2021
compared to fiscal 2020. The revenue growth in fiscal 2021 primarily reflects
increased infrastructure activity in Canada and fewer restrictions related to
the COVID-19 pandemic in the second half of fiscal 2021. The increases also
reflect contributions from acquisitions, which did not have comparable revenue
in the prior fiscal year, partially offset by the disposal of our Canadian
turn-key pipeline activities.
Operating income increased $17.7 million in fiscal 2021 compared to fiscal 2020
primarily due to revenue growth. Additionally, we realized gains of $8.5 million
from the disposition of non-core equipment related to our Canadian turn-key
pipeline activities, partially offset by $6.6 million of incremental costs for
actions to respond to the COVID-19 pandemic in fiscal 2020. Excluding these
disposition gains and the COVID-19 charges, operating income increased $19.6
million in fiscal 2021 compared to fiscal 2020. Our operating margin, based on
revenue, net of subcontractor costs, improved to 11.6% in fiscal 2021 compared
to 10.9% last fiscal year. Excluding the disposition gains and COVID-19 charges,
our operating margin was 10.7% in fiscal 2020. The improved operating margin was
primarily due to our increased focus on high-end consulting services and
improved labor utilization.
                                       39
--------------------------------------------------------------------------------

Remediation and Construction Management ("RCM")

                                                        Fiscal Year Ended
                                       October 3,       September 27,           Change
                                          2021               2020             $         %
                                                        ($ in thousands)
Revenue                               $       613      $          198      $  415       NM
Subcontractor costs                           (25)               (221)        196       NM
Revenue, net of subcontractor costs   $       588      $          (23)     $  611       NM

Loss from operations                  $         -      $            -      $    -       NM


NM = not meaningful
RCM's projects were substantially complete at the end of fiscal 2018. There were
no significant operating activities in RCM in fiscal 2021 and 2020.
Fiscal 2021 and 2020 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 $3.3 million and $15.0 million in fiscal
2021 and 2020, respectively. Fiscal 2021 adjustments resulted from the updated
valuations of several contingent consideration liabilities, which reflect
updated projections of acquired companies' financial performance during their
respective earn-out periods. None of these valuation changes were individually
material. In fiscal 2020, the 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 in fiscal 2020 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 October 3, 2021, there was a total maximum of $105.4 million of outstanding
contingent consideration related to our acquisitions. Of this amount, $59.3
million was estimated as the fair value and accrued on our consolidated balance
sheet.
                                       40
--------------------------------------------------------------------------------

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         $      173,859          $    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 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

                                       41
--------------------------------------------------------------------------------

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 to California wildfires. In
addition, our fiscal 2019 results included a reduction of revenue of $13.7
million from a claim that was resolved in fiscal 2019. Excluding the disposal,
the decreased California wildfire activity, and the 2019 claim resolution, our
revenue increased 3.0% in fiscal 2020 compared to fiscal 2019. 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 our U.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 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 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 third quarter of fiscal 2020.

                                       42
--------------------------------------------------------------------------------

                                                                                         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 of WYG 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 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 of Goodwill."
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 fiscal 2019. 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 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
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in the first quarter of fiscal 2019 and recorded a deferred tax benefit of $2.6
million. Also, valuation allowances of $22.3 million in Australia 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 in fiscal 2019.
Segment Results of Operations
Government 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               $    1,300,083          $  1,329,381          $ (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 to California wildfires
offset by revenue from acquisitions, which did not have comparable revenue in
fiscal 2019. Excluding the contributions from acquisitions and the California
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% in fiscal
2019. Excluding the COVID-19 charges, our operating margin was 13.1% in fiscal
2020.
Commercial/International Services Group ("CIG")
                                                                                 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
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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 fiscal 2019.
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% in fiscal 2019.
Remediation and Construction Management ("RCM")
                                                            Fiscal Year Ended
                                       September 27,                                    Change
                                            2020           September 29, 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


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.
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 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
EGT, NDY, and 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.
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
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charge. The impaired goodwill related to our acquisitions of Coffey
International Limited ("Coffey") and NDY. As a result of the impairment charge,
the estimated fair value of our ASP reporting unit equaled its carrying value of
$144.9 million, including $95.5 million of goodwill, at September 27, 2020. On
September 28, 2020 (the first day of our fiscal 2021), we merged our former ASP
reporting unit into our Client Account Management reporting unit.
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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements. As of October 3, 2021, we had $166.6 million of cash and
cash equivalents and access to an additional $749 million of borrowing capacity
available under our credit facility. We generated $304.4 million of cash from
operations in fiscal 2021. 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. In the
fourth quarter of fiscal 2021, we repatriated approximately $80 million from
Canada and recognized a related tax expense of $5.6 million. At this time, we
also determined that our remaining undistributed earnings in Canada of
approximately $20.1 million are no longer being indefinitely reinvested and
recorded an additional deferred tax liability/expense of $3.1 million. At
October 3, 2021, undistributed earnings of our other foreign subsidiaries,
primarily in Australia and the U.K. of approximately $50.9 million are expected
to be indefinitely reinvested in these foreign countries. Accordingly, no
provision for foreign withholding taxes has been made. Assuming the indefinitely
reinvested foreign earnings were repatriated under the laws and rates applicable
at October 3, 2021, the incremental taxes applicable to those earnings would not
be material. We currently have no need or plans to repatriate undistributed
foreign earnings, other than from Canada, in the foreseeable future; however,
this could change due to varied economic circumstances.
On January 27, 2020, the Board of Directors authorized a $200 million stock
repurchase program, which was included in our remaining balance of $207.8
million as of fiscal 2020 year-end. In fiscal 2021, we repurchased and settled
479,369 shares with an average price of $125.16 per share for a total cost of
$60.0 million in the open market. At October 3, 2021, we had a remaining balance
of $147.8 million under our stock repurchase program. We declared and paid
common stock dividends totaling $40.0 million, or $0.74 per share, in fiscal
2021 compared to $34.7 million, or $0.64 per share, in fiscal 2020.
Subsequent Events. On October 5, 2021, the Board of Directors authorized a new
stock repurchase program under which we could repurchase up to $400 million of
our common stock in addition to the $147.8 million remaining under the previous
stock repurchase program at October 3, 2021. On November 15, 2021, the Board of
Directors also declared a quarterly cash dividend of $0.20 per share payable on
December 20, 2021 to stockholders of record as of the close of business on
December 2, 2021.
Cash and Cash Equivalents. As of October 3, 2021, cash and cash equivalents were
$166.6 million, an increase of $9.1 million compared to the fiscal 2020
year-end. The increase was due to net cash provided by operating activities,
partially offset by net repayments of long-term debt, stock repurchases,
dividends, as well as payments for business acquisitions and contingent earn-out
payments.
Operating Activities. In fiscal 2021, net cash provided by operating activities
was $304.4 million compared to $262.5 million in fiscal 2020. The increase
primarily reflects an increase in earnings adjusted for non-cash items of $24.1
million and improved working capital from faster collections of our accounts
receivable in fiscal 2021 compared to the prior fiscal year.
Investing Activities. Net cash used in investing activities was $93.0 million in
fiscal 2021, an increase of $30.0 million compared to last fiscal year. The
increase was due to higher payments for business acquisitions in fiscal 2021 and
the proceeds from sales of equipment related to the disposal of our Canadian
turn-key pipeline activities in fiscal 2020.
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Financing Activities. In fiscal 2021, net cash used in financing activities was
$210.1 million, an increase of $47.1 million compared to fiscal 2020. The
increase was due to the net change in overdrafts and higher net repayments on
long-term debt, partially offset by lower stock repurchases compared to last
fiscal year.
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 October 3, 2021, we had $212.5 million in outstanding borrowings under the
Amended Credit Agreement, which was comprised of $212.5 million under the
Amended Term Loan Facility and no borrowings outstanding under the Amended
Revolving Credit Facility. The weighted-average interest rate of the outstanding
borrowings during fiscal 2021 was 1.25%. In addition, we had $0.7 million in
standby letters of credit under the Amended Credit Agreement. Our
weighted-average interest rate on borrowings outstanding during fiscal 2021
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 3.30%. At
October 3, 2021, we had $449.3 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 each year for fiscal 2021, 2020 and 2019, respectively.
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 October 3, 2021, we were in compliance with these
covenants with a consolidated leverage ratio of 0.87x and a consolidated
interest coverage ratio of 26.38x.
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 October 3, 2021, there was no outstanding borrowings under
these facilities and the aggregate amount of standby letters of credit
outstanding was $53.4 million. As of October 3, 2021, we had no bank overdrafts
related to our disbursement bank accounts.
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.
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Dividends. Our Board of Directors has authorized the following dividends:

                                                                                                Total Maximum
                                          Dividend Per                                             Payment
                                              Share                  Record Date                (in thousands)               Payment Date
November 9, 2020                          $     0.17              November 30, 2020           $         9,198              December 11, 2020
January 25, 2021                          $     0.17              February 10, 2021           $         9,212              February 26, 2021
April 26, 2021                            $     0.20                May 12, 2021              $        10,831                May 28, 2021
July 26, 2021                             $     0.20               August 20, 2021            $        10,800              September 3, 2021
November 15, 2021                         $     0.20              December 2, 2021                           N/A           December 20, 2021


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 unlikely that the current valuation allowance positions of
those jurisdictions could be adjusted in the next 12 months.
As of October 3, 2021 and September 27, 2020, the liability for income taxes
associated with uncertain tax positions was $14.1 million and $9.7 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. At October 3,
2021, we had $0.7 million in standby letters of credit outstanding under our
Amended Credit Agreement and $53.4 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.
•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
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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 with U.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
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
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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.
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
                                       50
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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 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;
                                       51
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(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 at June 28, 2021 (i.e. the first day of our fourth
quarter in fiscal 2021), 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. We had no reporting units that had
estimated fair values that exceeded their carrying values by less than 150%.
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 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. On September 28, 2020 (the first day
of our fiscal 2021), we merged our former ASP reporting unit into our Client
Account Management reporting unit.
During the fourth quarter of fiscal 2019, we performed an interim goodwill
impairment review of our RFS reporting unit and recorded a $7.8 million goodwill
impairment charge. As a result of the impairment charge, the estimated fair
value of the RFS reporting unit equaled its carrying value of $61 million at
September 29, 2019, including the remaining $48.8 million of goodwill.
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 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
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We file a consolidated U.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 at October 3, 2021, 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 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. 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 on
July 30, 2023. At October 3, 2021, we had $212.5 million in outstanding
borrowings under the Amended Credit Agreement, which was comprised of $212.5
million under the Amended Term Loan Facility and no borrowings outstanding under
the Amended Revolving Credit Facility. The weighted-average interest rate of the
outstanding borrowings during fiscal 2021 was 1.25%.
In August 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 of October 3, 2021, the notional principal of our
outstanding interest swap agreements was $212.5 million ($42.5 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, at
October 3, 2021, was 3.30%. For more information, see Note 14, "Derivative
Financial Instruments" of the "Notes to Consolidated Financial Statements" in
Item 8.
Most of our transactions are in U.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 $1.4 million and $1.3 million of foreign currency
losses in fiscal 2021 and 2020, respectively in "Selling, general and
administrative expenses" on our consolidated statements of income.
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
the U.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 the U.S. dollar weakens
against foreign currencies. For fiscal 2021 and 2020, 29.8% and 29.6% of our
consolidated revenue, respectively, was generated by our international business.
For fiscal 2021, the effect of foreign exchange rate translation on the
consolidated balance sheets was an increase in equity of $30.6 million compared
to an increase in equity of $3.4 million in fiscal 2020. These amounts were
recognized as an adjustment to equity through other comprehensive income.
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