TETRA TECH, INC. FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements regarding future events and our future results that are subject to the safe harbor provisions created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "estimates," "seeks," "continues," "may," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below under "Part II, Item 1A. Risk Factors," and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
GENERAL OVERVIEW
Tetra Tech, Inc. is a leading global provider of high-end consulting and engineering services that focuses on water, environment, sustainable infrastructure, clean energy, and international development. We are a global company that is Leading with Science® to provide innovative solutions for our public and private clients. We typically begin at the earliest stage of a project by identifying technical solutions and developing execution plans tailored to our clients' needs and resources. Our reputation for high-end consulting and engineering services and our ability to develop solutions for water and environmental management has supported our growth for more than 50 years. Today, we are proud to be making a difference in people's lives worldwide through our high-end consulting, engineering, and technology service offerings. We work on over 70,000 projects annually, in more than 100 countries on all seven continents, with a talent force of 21,000 associates. We are Leading with Science® throughout our operations, with domain experts across multiple disciplines supported by our advanced analytics, artificial intelligence, machine learning, and digital technology solutions. Our ability to provide innovation and first-of-kind solutions is enhanced by partnerships with our forward-thinking clients. We are diverse, equitable, and inclusive, embracing the breadth of experience across our talented workforce worldwide with a culture of innovation and entrepreneurship. We are disciplined in our business, and focused on delivering value to customers and high performance for our shareholders. In supporting our clients, we seek to add value and provide long-term sustainable consulting, engineering and technology solutions.
By combining ingenuity and practical experience, we have helped to advance sustainability by managing water, protecting the environment, providing clean energy, and engineering green solutions for our cities and communities.
We derive income from fees for professional, technical, program management, and construction management services. As primarily a professional services company, we are labor-intensive rather than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. We provide services to a diverse base ofU.S. state and local government,U.S. federal government,U.S. commercial, and international clients. 24 -------------------------------------------------------------------------------- The following table presents the percentage of our revenue by client sector: Three Months Ended Six Months Ended April 3, March 28, April 3, March 28, 2022 2021 2022 2021 Client Sector U.S. state and local government 18.3 % 17.2 % 18.4 % 16.8 % U.S. federal government (1) 29.7 35.5 30.4 35.1 U.S. commercial 20.1 19.0 20.4 19.8 International (2) 31.9 28.3 30.8 28.3 Total 100.0 % 100.0 % 100.0 % 100.0 % (1) Includes revenue generated under U.S. federal government contracts performed outsidethe United States . (2) Includes revenue generated from foreign operations, primarily in Canada,Australia , theUnited Kingdom , and revenue generated from non-U.S. clients. We manage our operations under two reportable segments. OurGovernment Services Group ("GSG") reportable segment primarily includes activities withU.S. government clients (federal, state and local) and all activities with development agencies worldwide. OurCommercial/International Services Group ("CIG") reportable segment primarily includes activities withU.S. commercial clients and international clients other than development agencies. Additionally, we continue to report the results of the wind-down of our non-core construction activities in the Remediation and Construction Management ("RCM") reportable segment. RCM's projects were complete at the end of fiscal 2018; however, there was an outstanding$11 million claim receivable in dispute resolution as ofApril 3, 2022 . InMay 2022 , we received a cash settlement for this claim, which will result in an immaterial gain in the third quarter of fiscal 2022. There were no significant operating activities in RCM for the second quarters and first halves of fiscal 2022 and 2021.Government Services Group ("GSG"). GSG provides high-end consulting and engineering services primarily toU.S. government clients (federal, state and local) and development agencies worldwide. GSG supportsU.S. government civilian and defense agencies with services in water, environment, sustainable infrastructure, information technology, and disaster management. GSG also provides engineering design services forU.S. municipal and commercial clients, especially in water infrastructure, solid waste, and high-end sustainable infrastructure designs. GSG also leads our support for development agencies worldwide, especially inthe United States ,United Kingdom , andAustralia .Commercial/International Services Group ("CIG"). CIG primarily provides high-end consulting and engineering services toU.S. commercial clients, and international clients that include both commercial and government sectors. CIG supports commercial clients across the Fortune 500, clean energy, industrial, high performance buildings, and aerospace markets. CIG also provides sustainable infrastructure and related environmental, engineering and project management services to commercial and local government clients acrossCanada , inAsia Pacific (primarilyAustralia and New Zealand ), theUnited Kingdom , as well asBrazil andChile . At the beginning of fiscal 2022, we aligned our operations to better serve our clients and markets, and created a new High Performance Buildings division in our CIG reportable segment. As a result, we transferred some related operations in our GSG reportable segment to our CIG reportable segment. Certain prior year amounts for reportable segments have been reclassified to conform to the current year presentation. The following table presents the percentage of our revenue by reportable segment: Three Months Ended Six Months Ended April 3, March 28, April 3, March 28, 2022 2021 2022 2021 Reportable Segment GSG 52.6 % 57.3 % 52.9 % 56.4 % CIG 48.9 44.5 48.7 45.5 Inter-segment elimination (1.5) (1.8) (1.6) (1.9) Total 100.0 % 100.0 % 100.0 % 100.0 % Our services are performed under three principal types of contracts with our clients: fixed-price, time-and-materials, and cost-plus. The following table presents the percentage of our revenue by contract type: 25 --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
April 3, March 28, April 3, March 28,
2022 2021 2022 2021
Contract Type
Fixed-price 37.1 % 36.1 % 37.8 % 36.0 %
Time-and-materials 47.9 46.0 47.0 46.2
Cost-plus 15.0 17.9 15.2 17.8
Total 100.0 % 100.0 % 100.0 % 100.0 %
Under fixed-price contracts, clients agree to pay a specified price for our
performance of the entire contract or a specified portion of the contract. Under
time-and-materials contracts, we are paid for labor at negotiated hourly billing
rates and paid for other expenses. Under cost-plus contracts, some of which are
subject to a contract ceiling amount, we are reimbursed for allowable costs plus
fees, which may be fixed or performance-based. Profitability on these contracts
is driven by billable headcount and our cost control. We recognize revenue from
contracts using the cost-to-cost measure of progress method to estimate the
progress towards completion to determine the amount of revenue and profit to
recognize. Changes in those estimates could result in the recognition of
cumulative catch-up adjustments to the contract's inception-to-date revenue,
costs and profit in the period in which such changes are made. On a quarterly
basis, we review and assess our revenue and cost estimates for each significant
contract. Changes in revenue and cost estimates could also result in a projected
loss that would be recorded immediately in earnings.
Other contract costs include professional compensation and related benefits,
together with certain direct and indirect overhead costs such as rents,
utilities, and travel. Professional compensation represents a large portion of
these costs. Our "Selling, general and administrative expenses" ("SG&A") are
comprised primarily of marketing and bid and proposal costs, and our corporate
headquarters' costs related to the executive offices, finance, accounting,
administration, and information technology. Our SG&A expenses also include a
portion of stock-based compensation and depreciation of property and equipment
related to our corporate headquarters, and the amortization of identifiable
intangible assets. Most of these costs are unrelated to specific clients or
projects, and can vary as expenses are incurred to support company-wide
activities and initiatives.
We experience seasonal trends in our business. Our revenue and operating income
are typically lower in the first half of our fiscal year, primarily due to the
Thanksgiving (in the U.S. ), Christmas, and New Year's holidays. Many of our
clients' employees, as well as our own employees, take vacations during these
holiday periods. Further, seasonal inclement weather conditions occasionally
cause some of our offices to close temporarily or may hamper our project field
work in the northern hemisphere's temperate and arctic regions. These
occurrences result in fewer billable hours worked on projects and,
correspondingly, less revenue recognized.
ACQUISITIONS AND DIVESTITURES
Acquisitions. We continuously evaluate the marketplace for acquisition
opportunities to further our strategic growth plans. Due to our reputation,
size, financial resources, geographic presence and range of services, we have
numerous opportunities to acquire privately and publicly held companies or
selected portions of such companies. We evaluate an acquisition opportunity
based on its ability to strengthen our leadership in the markets we serve, the
technologies and solutions they provide, and the additional new geographies and
clients they bring. Also, during our evaluation, we examine an acquisition's
ability to drive organic growth, its accretive effect on long-term earnings, and
its ability to generate return on investment. Generally, we proceed with an
acquisition if we believe that it will strategically expand our service
offerings, improve our long-term financial performance, and increase shareholder
returns.
We view acquisitions as a key component in the execution of our growth strategy,
and we intend to use cash, debt or equity, as we deem appropriate, to fund
acquisitions. We may acquire other businesses that we believe are synergistic
and will ultimately increase our revenue and net income, strengthen our ability
to achieve our strategic goals, provide critical mass with existing clients, and
further expand our lines of service. We typically pay a purchase price that
results in the recognition of goodwill, generally representing the intangible
value of a successful business with an assembled workforce specialized in our
areas of interest. Acquisitions are inherently risky, and no assurance can be
given that our previous or future acquisitions will be successful or will not
have a material adverse effect on our financial position, results of operations,
or cash flows. All acquisitions require the approval of our Board of Directors.
For detailed information regarding acquisitions, see Note 4, "Acquisitions" of
the "Notes to Consolidated Financial Statements".
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Divestitures. We regularly review and evaluate our existing operations to
determine whether our business model should change through the divestiture of
certain businesses. Accordingly, from time to time, we may divest or wind-down
certain non-core businesses and reallocate our resources to businesses that
better align with our long-term strategic direction.
OVERVIEW OF RESULTS AND BUSINESS TRENDS
General. As the coronavirus disease 2019 ("COVID-19") spread globally, we
responded quickly to ensure the health and safety of our employees, clients and
the communities we support. Our high-end consulting focus and the technologies
we deployed 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
current global challenges including COVID-19, with the commitment of our 21,000
associates supported by technological innovation. 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 the first half of fiscal 2022, revenue increased 12.6% compared to the
prior-year period. This year-over-year growth reflects increased activity with
U.S. state and local government clients and commercial clients. Our
international activities with both commercial and government clients have also
contributed to our revenue growth. Our revenue also includes contributions from
acquisitions that did not contribute to our revenue in the first half of fiscal
2021. In the second half of fiscal 2022, we expect our revenue to continue to
grow year-over-year at a rate similar to the first half of fiscal 2022 after
normalizing for the extra week of operations in the fourth quarter of fiscal
2021. We report results of operations based on 52/53 week periods ending on the
Sunday nearest September 30 . As a result, our fiscal 2021 had 53 weeks compared
to 52 weeks this year with the extra week occurring in the fourth quarter of
fiscal 2021.
U.S. State and Local Government. Our U.S. state and local government revenue
increased 23.7% in the first half of fiscal 2022 compared to the same period
last 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 the first half of fiscal 2021. Most of our work for the
U.S. state and local governments relates to critical water and environmental
programs, which we expect to continue to grow for the remainder of fiscal 2022.
U.S. Federal Government. Our U.S. federal government revenue decreased 2.5% in
the first half of fiscal 2022 compared to the prior-year period. The decrease
was due to reduced international development activity, especially in
Afghanistan . This decline was partially offset by increased year-over-year
revenue for both Department of Defense and civilian agencies. 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. Our
revenue also includes contributions from acquisitions that did not contribute to
our revenue in the first half of fiscal 2021. We expect our U.S. federal
government revenue to grow for the remainder of fiscal 2022 primarily due to
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 increased 15.6% in the first half
of fiscal 2022 compared to the same period last year. This increase was
primarily due to more activity on environmental programs, including meeting net
zero carbon goals and high performance buildings. We expect these trends and the
related growth in our U.S. commercial work to continue for the remainder of
fiscal 2022.
International. Our international revenue increased 22.7% in the first half of
fiscal 2022 compared to the prior-year period. The revenue growth primarily
reflects government stimulus spending on infrastructure and commercial activity
related to an increased focus on sustainability. Our revenue also includes
contributions from acquisitions that did not contribute to our revenue in the
first half of fiscal 2021. We expect these trends and the related growth in our
international work to continue for the remainder of fiscal 2022.
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