What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-01-29 compared with 2020-07-31 · 133 added, 192 removed, 264 unchanged (55% of the section changed)

12 unchanged sentences

Tetra Tech, Inc.

is a leading global provider of consulting and engineering services that focuses on water, environment, infrastructure, resource management, energy, and international development.

is a leading global provider of consulting and engineering services that focuses on water, environment, sustainable infrastructure, resource management, energy, and international development.

We are a global company that is Leading with Science® to provide innovative solutions for our public and private clients.

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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 55 years.

Today, we are proud to be making a difference in people’s lives worldwide through broad consulting, engineering, and technology service offerings.

We are working on over 70,000 projects a year, in more than 100 countries on seven continents, from 450 offices, with a talent force of 20,000 associates.

We are Leading with Science® throughout our operations, with domain experts across multiple disciplines supported by advanced analytics, artificial intelligence, machine learning, and digital technology.

Today, we are proud to be making a difference in people’s lives worldwide through broad consulting, engineering, and technology servic e offerings.

In fiscal 2020, we worked on over 65,000 projects, in more than 100 countries on seven continents, with a talent force of 20,000 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 and inclusive, embracing the breadth of experience across our talent force worldwide with a culture of innovation and entrepreneurship.

We are diverse 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 delivering value to customers and high performance to our shareholders.

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The following table presents the percentage of our revenue by client sector:

Three Months Ended Nine Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

Three Months Ended

2020 December 29,

Client Sector

1 unchanged sentence

federal government (1)

34.3 29.8 32.7 30.2

commercial 20.6 22.7

International (2)

28.3 25.8 30.1 27.4

Total 100.0 % 100.0 %

1 unchanged sentence

federal government contracts performed outside the United States.

(2) Includes revenue generated from foreign operations, primarily in Canada, Australia and the United Kingdom, and revenue generated from non-U.S.

(2) Includes revenue generated from foreign operations, primarily in Canada, Australia, the United Kingdom, and revenue generated from non-U.S.

We manage our operations under two reportable segments.

Our Government Services Group reportable segment primarily includes activities with U.S.

Our Government Services Group ("GSG") reportable segment primarily includes activities with U.S.

government clients (federal, state and local) and all activities with development agencies worldwide.

Our Commercial/International Services Group reportable segment primarily includes activities with U.S.

Our Commercial/International Services Group ("CIG") reportable segment primarily includes activities with U.S.

commercial clients and international clients other than development agencies.

This alignment allows us to capitalize on our growing market opportunities and enhance the development of high-end consulting and technical solutions to meet our growing client demand.

We continue to report the results of the wind-down of our non-core construction activities in the Remediation and Construction Management ("RCM") reportable segment.

Our reportable segments are as follows:

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.

Substantially, there has been no remaining backlog for RCM since fiscal 2018 as the projects were complete.

Government Services Group ( “ GSG ” ).

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GSG supports U.S.

government civilian and defense agencies with services in water, environment, infrastructure, information technology, and disaster management.

government civilian and defense agencies with services in water, environment, sustainable infrastructure, information technology, and disaster management.

GSG also provides engineering design services for U.S.

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The following table presents the percentage of our revenue by reportable segment:

Three Months Ended Nine Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

Three Months Ended

2020 December 29,

Reportable Segment

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CIG 40.7 44.0

RCM — — — (0.1)

Inter-segment elimination (1.9) (1.3)

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The following table presents the percentage of our revenue by contract type:

Three Months Ended Nine Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

Three Months Ended

2020 December 29,

Contract Type

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Total 100.0 % 100.0 %

Under fixed-price contracts, the client agrees to pay a specified price for our performance of the entire contract or a specified portion of the contract.

Under 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.

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As the coronavirus disease 2019 ("COVID-19") spread globally, we responded quickly to ensure the health and safety of our employees, clients and the communities we support.

Our high-end consulting focus and the technologies we deployed has allowed our staff to support clients and projects remotely.

Our high-end consulting focus and the technologies we deployed have allowed our staff to support clients and projects remotely without interruption.

We remain focused on providing clients with the highest level of service and our 450 global offices are operational, supporting our programs and projects.

By Leading with Science® , we are responding to the challenges of COVID-19, with the commitment of our 20,000 staff supported by technological innovation.

We entered fiscal 2020 in the best position in our history, with record backlog from our government and commercial clients supporting their critical water and environmental programs.

For the first five months of fiscal 2020, we were on pace for another record year;

however, the unprecedented disruption of the global economy due to the COVID-19 pandemic has impacted all businesses.

Our government business, which represents approximately 60% of our revenue, has been relatively stable, while our commercial business has seen more impact.

Much of our commercial business has continued due to regulatory drivers, but we have seen project delays and cancellations in the industrial sectors.

Our diversified end-markets have allowed us to redeploy staff to areas of uninterrupted or increased demand, and we have made decisions to align our cost structures with certain program delays and cancellations.

Our government business, which represents approximately 60% of our revenue, has been stable, while our commercial business experienced relatively more impact.

Much of our commercial business has continued due to regulatory drivers, but we have seen project delays in the industrial sectors.

Our diversified end-markets have allowed us to redeploy staff to areas of uninterrupted or increased demand, and we have made decisions to align our cost structures with our clients' projects.

The actions we have taken to navigate through this worldwide pandemic, the strength of our balance sheet, and our technical leadership position us well to address the global challenges of providing clean water, environmental restoration, and the impacts of climate change.

In the first nine months of fiscal 2020, our revenue decreased 1.1% c ompared to the prior-year period.

Our revenue includes $186.4 million of revenue from acquisitions, which did not have comparable revenue in the first nine months of fiscal 2019.

Our year-over-year revenue comparisons were also 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.

Excluding the net impact of acquisitions/disposals and these disaster response activities, our revenue in the first nine months of fiscal 2020 decreased 3.4% primarily due to the adverse impact of the COVID-19 pandemic on our U.S.

commercial and international revenue.

Federal Government.

federal government revenue increased 6.6% i n the first nine months of fiscal 2020 compared to the prior-year period.

Excluding contributions from acquisitions, our revenue declined 1.2% in the first nine months of fiscal 2020 compared to the fiscal 2019 period.

The decrease was primarily due to reduced international development activities, partially offset by increased federal information technology consulting activity.

During periods of economic volatility, our U.S.

federal government clients have historically been the most stable and predictable.

In first quarter of fiscal 2021, our revenue decreased 4.1% compared to the prior-year period.

Our revenue includes contributions from acquisitions that did not contribute to our revenue in the first quarter of fiscal 2020.

Our year-over-year revenue comparisons were also impacted by the decision to dispose of our Canadian turn-key pipeline activities in the fourth quarter of fiscal 2019 and the subsequent wind-down of those activities in fiscal 2020, which included the disposal of related equipment.

State and Local Government.

state and local government revenue decreased 24.5% i n the first nine months of fiscal 2020 compared to the same period last year as we experienced a decrease in revenue from the aforementioned disaster response activities.

This decline was partially offset by continued broad-based growth in our U.S.

state and local government revenue increased 0.9% in the first quarter of fiscal 2021 compared to the same period last year.

This comparison was impacted by a reduction in subcontractor activity.

state and local revenue, net of subcontractor costs, increased 11.0% in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020.

This 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.

Although most of our work for U.S.

state and local governments relates to critical water and environmental programs, we currently would expect some of our clients to face future budgetary constraints, which could impact our business.

commercial revenue decreased 3.7% i n the first nine months of fiscal 2020 compared to the same period last year.

Most of our work for U.S.

state and local governments relates to critical water and environmental programs, which we expect to increase further next year.

However, further budgetary constraints to our clients could negatively impact our business.

Conversely, increased disaster response activity could cause our fiscal 2021 revenue to exceed our current expectations.

Federal Government.

federal government revenue increased 8.4% in the first quarter of fiscal 2021 compared to the prior-year period.

This increase includes the contributions from acquisitions completed in fiscal 2020.

These contributions were partially offset by reduced international development activities as COVID-19 travel restrictions have caused some project delays.

During periods of economic volatility, our U.S.

federal government business has historically been the most stable and predictable.

We expect our U.S.

federal government revenue to grow modestly in fiscal 2021 due to continued increased federal advanced analytics activity.

However, U.S.

federal spending amounts and priorities could change significantly from our current expectations, which could have a significant positive or negative impact on our fiscal 2021 revenue.

commercial revenue decreased 13.1% in the first quarter of fiscal 2021 compared to the same period last year.

This decline was primarily due to reduced industrial activity as a result of the COVID-19 pandemic.

We currently expect the adverse impact of the COVID-19 pandemic to our U.S.

commercial revenue to continue to be more significant than to our government programs and projects.

commercial revenue to continue to be more significant than to our U.S.

government programs and projects throughout most of this fiscal year.

International.

Our international revenue increased 8.8% in the first nine months of fiscal 2020 compared to the prior-year period.

Excluding contributions from acquisitions and the impact of the prior-year disposal of our Canadian turn-key pipeline activities, our revenue declined 4.4% compared to the first nine months of fiscal 2019.

Our international revenue decreased 12.4% in the first quarter of fiscal 2021 compared to the prior-year period.

Excluding the impact of the aforementioned prior-year disposal of our Canadian turn-key pipeline activities, our international revenue decreased 10.2% in the first quarter of fiscal 2021 compared to the same period last year.

The revenue decline primarily reflects the adverse impact of the COVID-19 pandemic, partially offset by increased renewable energy activity in Canada.

In light of the COVID-19 pandemic, we currently expect our total international government work to be stable;

however, our international commercial activities could have a significant adverse impact if the current economic conditions are prolonged.

In light of the COVID-19 pandemic, we currently expect our overall international government work to be stable for fiscal 2021;

however, our international commercial activities could have a significant adverse impact if the current economic conditions due to COVID-19 are prolonged.

RESULTS OF OPERATIONS

Consolidated Results of Operations

Three Months Ended Nine Months Ended

2020 June 30,

2019 Change June 28, 2020 June 30, 2019 Change

Three Months Ended

2020 December 29,

($ in thousands)

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Selling, general and administrative expenses (50,058) (46,435) (3,623) (7.8)

Contingent consideration - fair value adjustments (50) — (50) NM 1,521 (28) 1,549 NM

Income from operations 66,252 63,302 2,950 4.7

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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.

In the third quarter of fiscal 2020, revenue and revenue, net of subcontractor costs, decreased $116.0 million, or 14.0%, and $62.9 million, or 10.1%, respectively, compared to the same quarter last year.

Excluding the net contributions from the aforementioned acquisitions/disposal, our revenue decreased 18.6%, compared to the year-ago quarter.

This decline was primarily due to lower disaster response activities in our GSG segment and the adverse impact of the COVID-19 pandemic.

In the first nine months of fiscal 2020, revenue and revenue, net of subcontractor costs, decreased $24.3 million, or 1.1%, and $3.2 million, or 0.2%, respectively, compared to the same period of last year.

Excluding the net contributions from the aforementioned acquisitions/disposal and RCM, our revenue decreased 7.3% compared to the same period last year.

This decline was also primarily due to lower disaster response activities and the adverse impact of the COVID-19 pandemic.

In the first quarter of fiscal 2021, revenue and revenue, net of subcontractor costs, decreased $32.5 million, or 4.1%, and $8.9 million, or 1.4%, respectively, compared to the same period last year.

Excluding the net contributions from the aforementioned acquisitions/disposal, our revenue decreased 7.5% in the first quarter of fiscal 2021 compared to the prior-year quarter.

The decline was primarily due to the adverse impact of the COVID-19 pandemic, particularly on our U.S.

and international commercial revenue.

The following table reconciles our reported results to non-U.S.

GAAP adjusted results, which exclude the RCM results, gains on non-core equipment disposals, earn-out adjustments, COVID-19 impact, and non-recurring tax benefits.

The gains on non-core equipment disposals relate to the disposal of our Canadian turn-key pipeline activities that commenced in the

fourth quarter of fiscal 2019.

The effective tax rates applied to the adjustments to earnings per share ("EPS") to arrive at adjusted EPS averaged 24.3% and 23.9% in the first nine months of fiscal 2020 and 2019, respectively.

We applied the relevant marginal statutory tax rate based on the nature of the adjustments and tax jurisdiction in which they occur.

GAAP adjusted results, which exclude the gains on non-core equipment disposals in the first quarter of fiscal 2020 related to the disposal of our Canadian turn-key pipeline activities.

For the first quarter of fiscal 2020, the effective tax rate applied to the adjustment to earnings per share ("EPS") to arrive at adjusted EPS was 28.0%.

We applied the relevant marginal statutory tax rate based on the nature of the adjustment and tax jurisdiction in which it occurred.

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 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, substantially all of these costs were paid in cash in the third quarter of fiscal 2020.

Three Months Ended Nine Months Ended

2020 June 30,

2019 Change June 28,

2020 June 30,

Three Months Ended

2020 December 29,

($ in thousands)

Income from operations $ 66,252 $ 63,302 $ 2,950 4.7%

RCM 1 (3) 4 NM — 5,931 (5,931) NM

Non-core equipment disposal (4,494) — (4,494) NM (7,478) — (7,478) NM

Earn-out adjustments 550 500 50 NM (421) 1,528 (1,949) NM

COVID-19 — — — NM 8,233 — 8,233 NM

RCM — (1) 1 NM

Non-core equipment disposal — (800) 800 NM

Adjusted income from operations (1)

1 unchanged sentence

EPS $ 0.96 $ 0.85 $ 0.11 12.9%

Earn-out adjustments 0.01 0.01 — NM (0.01) 0.02 (0.03) NM

RCM — — — NM — 0.08 (0.08) NM

Non-core equipment disposal (0.06) — (0.06) NM (0.10) — (0.10) NM

COVID-19 — — — NM 0.11 — 0.11 NM

Revaluation of deferred tax liabilities — — — NM — (0.05) 0.05 NM

Non-recurring tax benefits — — — NM — (0.40) 0.40 NM

Non-core equipment disposal — (0.01) 0.01 NM

Adjusted EPS (1)

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(1) Non-GAAP financial measure

Our operating income decreased $1.3 million in the third quarter and increased $6.3 million in the first nine months of fiscal 2020 compared to the prior-year periods.

These results include gains from the sales of non-core equipment of $4.5 million and $7.5 million in the third quarter and first nine months of fiscal 2020, respectively, related to the disposal of our Canadian turn-key pipeline activities.

The year-to-date gains were offset by the previously described incremental charges of $8.2 million in the second quarter of fiscal 2020 to address the COVID-19 pandemic.

Excluding these items, earn-out adjustments and RCM, our adjusted operating income decreased $5.8 million in the third quarter and $0.9 million in the first nine months of fiscal 2020 compared to the same periods last year.

Our GSG segment's operating income decreased $9.4 million and $14.2 million, in the third quarter and first nine months of fiscal 2020 compared to the same periods in fiscal 2019.

These results are described below under "Government Services Group." Our CIG segment's operating income increased $1.8 million and $7.2 million in the third quarter and first nine months of fiscal 2020, respectively, compared to the same periods last year.

Our operating income increased $3.0 million in the first quarter of fiscal 2021 compared to the same period last year.

Our GSG segment's operating income increased $5.7 million in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020.

These results are described below under "Government Services Group." Our CIG segment's operating income decreased $2.1 million in the first quarter of fiscal 2021 compared to the year-ago quarter.

These results are described below under "Commercial/International Services Group."

Our net interest expense was $3.6 million and $10.4 million in the third quarter and first nine months of fiscal 2020 compared to $3.5 million and $9.6 million in fiscal 2019 periods, respectively.

The increases reflect increased average borrowings, partially offset by lower interest rates (primarily LIBOR).

The effective tax rates for the first nine months of fiscal 2020 and 2019 were 21.2% and 7.1%, respectively.

Income tax expense was reduced by $7.1 million and $4.3 million of excess tax benefits on share-based payments in the first nine months of fiscal 2020 and 2019, respectively.

Additionally, we finalized the analysis of our deferred tax liabilities for the Tax Cuts and Jobs Act's ("TCJA's") lower tax rates in the first quarter of fiscal 2019 and recorded a deferred tax benefit of $2.6 million.

Also, valuation allowances of $22.3 million 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 is more likely than not that the deferred tax assets will 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 excess tax benefits on share-based payments, the net deferred tax benefits from the TCJA and valuation allowance releases, our effective tax rate in the first nine months of both fiscal 2020 and 2019 was 25.5%.

Our EPS was $0.83 and $2.34 in the third quarter and first nine months of fiscal 2020, compared to $0.88 and $2.63 in last-year periods, respectively.

On the same basis as our adjusted operating income and excluding non-recurring tax benefits in fiscal 2019, EPS was $0.78 and $2.34 in the third quarter and first nine months of fiscal 2020, compared to $0.89 and $2.28 in the fiscal 2019 periods, respectively.

Our net interest expense was $3.0 million in the first quarter of fiscal 2021 compared to $3.3 million in the prior-year period.

The decrease primarily reflects lower interest rates (primarily LIBOR).

The effective tax rates for the first quarters of fiscal 2021 and 2020 were 17.0% and 21.1%, respectively.

Income tax expense was reduced by $6.1 million and $3.6 million of excess tax benefits on share-based payments in the first quarters of fiscal 2021 and 2020, respectively.

Excluding the impact of the excess tax benefits on share-based payments, our effective tax rates for the first quarters of fiscal 2021 and 2020 were 26.8% and 27.1%, respectively.

Our EPS was $0.96 in the first quarter of fiscal 2021 compared to $0.85 in the year-ago quarter.

On the same basis as our adjusted operating income, EPS was $0.96 in the first quarter of fiscal 2021 compared to $0.84 in the first quarter of fiscal 2020.

Segment Results of Operations

Government Services Group

Three Months Ended Nine Months Ended

2020 June 30,

2019 Change June 28, 2020 June 30, 2019 Change

Three Months Ended

2020 December 29,

($ in thousands)

3 unchanged sentences

Income from operations $ 47,700 $ 42,048 $ 5,652 13.4%

Revenue and revenue, net of subcontractor costs, decreased $59.8 million, or 12.2%, and $33.3 million, or 9.5%, respectively, in the third quarter of fiscal 2020 compared to the year-ago quarter.

For the first nine months of fiscal 2020, revenue and revenue, net of subcontractor costs, increased $5.0 million, or 0.4%, and decreased $1.9 million, or 0.2%, respectively, compared to the prior-year period.

These comparisons include contributions from the aforementioned acquisitions.

Excluding these contributions, revenue decreased 17.6% in the third quarter of fiscal 2020 and 6.4% in the first nine months of fiscal 2020 compared to the same periods in fiscal 2019.

These declines reflect the previously described revenue decline from disaster response projects.

Operating income decreased $9.4 million in the third quarter and $14.2 million in the first nine months of fiscal 2020 compared to the same periods last year, 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 12.4% in the first nine months of fiscal 2020.

Excluding the COVID-19 charges, our operating margin was 12.6% in the first nine months of fiscal 2020 compared to 13.9% in the first nine months of last year.

Revenue and revenue, net of subcontractor costs, increased $11.2 million, or 2.5%, and $15.2 million, or 4.6%, respectively, in the first quarter of fiscal 2021 compared to the year-ago quarter.

These increases reflect higher U.S.

local government activity for water and environmental programs and contributions from the aforementioned acquisitions.

These increases were partially offset by lower internatio nal development revenue due to project delays caused by COVID-19.

Operating income increased $5.7 million in the first quarter of fiscal 2021 compared to the year-ago quarter, reflecting the higher revenue and an improved operating margin.

Our operating margin, based on revenue, net of subcontractor costs, improved to 13.8% in the first quarter of fiscal 2021 compared to 12.8% in the same period last year primarily due to improved labor utilization.

Commercial/International Services Group

Three Months Ended Nine Months Ended

2020 June 30,

2019 Change June 28, 2020 June 30, 2019 Change

Three Months Ended

2020 December 29,

($ in thousands)

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Income from operations $ 29,559 $ 31,632 $ (2,073) (6.6)%

Revenue and revenue, net of subcontractor costs, decreased $56.7 million, or 16.3%, and $29.4 million, or 10.9%, respectively, in the third quarter of fiscal 2020 compared to the year-ago quarter.

For the first nine months of fiscal 2020, revenue and revenue, net of subcontractor costs, decreased $37.4 million, or 3.8%, and $5.3 million, or 0.7%, respectively, compared to the year-ago period.

These amounts include contributions from the aforementioned acquisitions.

Excluding these contributions, revenue decreased 23.9% and 13.6% in the third quarter and first nine months of fiscal 2020, respectively, compared to the same periods last year.

The declines primarily reflect the disposal of our Canadian turn-key pipeline activities and to a lesser extent, the adverse impact of the COVID-19 pandemic.

Operating income in the third quarter and first nine months of fiscal 2020 includes gains of $4.5 million and $7.5 million, respectively, from the disposition of non-core equipment related to the Canadian pipeline 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 disposition gains and the COVID-19 charges, operating income decreased $2.7 million and increased $6.3 million in the third quarter and first nine months of fiscal 2020, respectively, compared to the same periods in fiscal 2019.

Our operating margin, based on revenue, net of subcontractor costs, was 10.4% in the first nine months of fiscal 2020.

Excluding the disposition gains and the COVID-19 charges, our operating margin improved to 10.3% in the first nine months of fiscal 2020 from 9.4% in the first nine months of last year.

Revenue and revenue, net of subcontractor costs, decreased $40.1 million, or 11.4%, and $24.0 million, or 8.5%, respectively, in the first quarter of fiscal 2021 compared to the year-ago quarter.

Excluding the impact of the disposal of our Canadian turn-key pipeline activities, revenue and revenue, net of subcontractor costs, decreased 9.9% and 6.5%, respectively, in the first quarter of fiscal 2021 compared to the prior-year quarter.

The declines primarily reflect the adverse impact of the COVID-19 pandemic.

Operating income decreased $2.1 million in the first quarter of fiscal 2021 compared to the same period last year, reflecting the lower revenue partially offset by an improved operating margin.

Additionally, operating income in the first quarter of fiscal 2020 included gains of $0.8 million from the disposition of non-core equipment.

Our operating margin, based on revenue, net of subcontractor costs, improved to 11.4% in the first quarter of fiscal 2021 compared to 11.1% (10.8% adjusted for the non-core gain) in the same period last year.

This improvement was primarily due to our increased focus on high-end consulting services.

Remediation and Construction Management

Three Months Ended Nine Months Ended

2020 June 30,

2019 Change June 28, 2020 June 30, 2019 Change

($ in thousands)

Revenue $ 48 $ 329 $ (281) $ 198 $ (2,862) $ 3,060

Subcontractor costs (43) (167) 124 (221) (1,140) 919

Revenue, net of subcontractor costs $ 5 $ 162 $ (157) $ (23) $ (4,002) $ 3,979

Income (loss) from operations $ (1) $ 3 $ (4) $ — $ (5,931) $ 5,931

RCM's projects were substantially complete at the end of fiscal 2018.

The revenue of $(2.9) million in the first nine months of 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 last fiscal year.

There were no significant activities in RCM for the first quarters of fiscal 2021 and 2020.

The following table provides a reconciliation between remaining unsatisfied performance obligations ("RUPOs") and backlog:

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Specifically, our backlog does not consider the impact of termination for convenience clauses within the contracts.

The contract term and thus remaining performance obligation on certain of our operations and maintenance contracts, are limited to the notice period required for contract termination (usually 30, 60, or 90 days).

The contract term and thus remaining performance

obligation on certain of our operations and maintenance contracts, are limited to the notice period required for contract termination (usually 30, 60, or 90 days).

Financial Condition, Liquidity and Capital Resources

Capital Requirements.

As of June 28, 2020, we had $142 million of cash and cash equivalents and access to an additional $703 million of borrowings available under our credit facility.

During the third quarter of fiscal 2020, we generated $111 million of cash from operations.

As of December 27, 2020, we had $163.4 million of c ash and cash equivalents and access to an additional $686 million of borrowings available under our credit facility.

During the first quarter of fiscal 2021, we generated $33.2 million of cash from operations.

To date, we have not experienced any significant deterioration in our financial condition or liquidity due to the COVID-19 pandemic and our credit facilities remain available.

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We have no need or plans to repatriate foreign earnings at this time.

On November 5, 2018, the Board of Directors authorized a stock repurchase program ("2019 Program") under which we could repurchase up to $200 million of our common stock.

This was in addition to the $25 million remaining as of fiscal 2018 year-end under the previous stock repurchase program ("2018 Program").

On January 27, 2020, the Board of Directors authorized a new $200 million stock repurchase program ("2020 Program").

In fiscal 2019, we expended $100 million to repurchase our stock under these programs.

In the first nine months of fiscal 2020, we paid an additional $102.2 million for share repurchases.

As a result, we had a remaining balance of $222.8 million available under the 2019 and 2020 programs.

On November 11, 2019, the Board of Directors declared a quarterly cash dividend of $0.15 per share payable on December 13, 2019 to stockholders of record as of the close of business on December 2, 2019.

On January 27, 2020, the Board of Directors declared a quarterly cash dividend of $0.15 per share payable on February 28, 2020 to stockholders of record as of the close of business on February 12, 2020.

On April 27, 2020, the Board of Directors declared a quarterly cash dividend of $0.17 per share payable on May 29, 2020 to stockholders of record as of the close of business on May 13, 2020.

On January 27, 2020, the Board of Directors authorized a new $200 million stock repurchase program, which was included in our remaining balance of $207.8 million as of fiscal 2020 year-end.

In the first quarter of fiscal 2021, we repurchased and settled 135,413 shares with an average price of $110.77 per share for a total cost of $15 million in the open market.

At December 27, 2020, we had a remaining balance of $192.8 million under our stock repurchase program.

On November 9, 2020, the Board of Directors declared a quarterly cash dividend of $0.17 per share payable on December 11, 2020 to stockholders of record as of the close of business on November 30, 2020.

Subsequent Event.

On July 27, 2020, the Board of Directors declared a quarterly cash dividend of $0.17 per share payable on September 4, 2020 to stockholders of record as of the close of business on August 21, 2020.

On January 25, 2021, the Board of Directors declared a quarterly cash dividend of $0.17 pe r share payable on February 26, 2021 to stockholders of record as of the close of business on February 10, 2021.

Cash Equivalents and Restricted Cash.

As of June 28, 2020, cash equivalents and restricted cash were $141.8 million , an increase of $20.9 million compared to the fiscal 2019 year-end.

The increase was due to net cash provided by operating activities, primarily due to shorter collection periods for accounts receivable, and increased proceeds from sale of equipment.

These increases were partially offset by decreased net borrowings of long-term debt, stock repurchases, dividends, contingent earn-out payments, and SEG acquisition.

As of December 27, 2020, cash equivalents and restricted cash w ere $163.4 million, an increase of $5.9 million compared to the fiscal 2020 year-end.

The increase was due to net cash provided by operating activities, net proceeds from borrowings, stock options exercised and the effect of exchange rate chang es on cash, partially offset by stock repurchases, taxes paid on vested restricted stock, dividends and contingent earn-out payments.

Operating Activities .

For the first nine months of fiscal 2020, net cash provided by operating activities was $194.6 million, an increase of $81.2 million compared to the same period last year.

The increase was primarily due to strong cash collections on our accounts receivable.

For the first quarter of fiscal 2021, net cash provided by operating activities was $33.2 million, an increase of $51.2 million compared to the prior-year qua rter.

The increase was primarily due to strong collections on our accounts receivable.

Investing Activities .

For the first nine months of fiscal 2020, net cash used in investing activities was $20.7 million, a decrease of $24.0 million compared to the year-ago period.

The change resulted from payments for the SEG acquisition in the second quarter of fiscal 2020, partially offset by the proceeds from sales of equipment related to the disposal of our Canadian turn-key pipeline activities.

For the first quarter of fiscal 2021, net c ash used in investing activities was $1.8 million, a decrease of $1.1 million compared to the year-ago quarter, due to reduced capital expenditures compared to the same quarter last year.

Financing Activities .

For the first nine months of fiscal 2020, net cash used in financing activities was $152.6 million, an increase of $105.3 million compared to fiscal 2019 period.

The change was due to lower net borrowings of long-term debt, and increased stock repurchases and contingent earn-out payments compared to the prior-year period.

For the first quarter of fiscal 2021, net cash used in financing activities was $32.8 million, compared to net cash provided by financing activities of $8.8 million in the prior-year qua rte r.

The change was primarily due to a reduced net borrowing.

Debt Financing.

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The Amended Credit Agreement expires on July 30, 2023, or earlier at our discretion upon payment in full of loans and other obligations.

As of June 28, 2020, we had $277.2 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $231.3 million under the Term Loan Facility and $45.9 million outstanding under the Amended Revolving Credit Facility at a year-to-date weighted-average interest rate of 2.53% per annum.

As of December 27, 2020, we had $288.5 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $225.0 million under the Term Loan Facility and $63.5 million outstanding under the Amended Revolving Credit Facility at a year-to-date weighted-average interest rate of 1.34% per annum.

In addition, we had $0.7 million in standby letters of credit under the Amended Credit Agreement.

Our average effective weighted-average interest rate on borrowings outstanding during the nine months ended June 28, 2020 under the Amended Credit Agreement, including the effects of interest rate swap agreements described in Note 14, “Derivative Financial Instruments” of the “Notes to Consolidated Financial Statements”, was 3.52%.

At June 28, 2020, we had $403.4 million of available credit under the Amended Revolving Credit Facility, all of which could be borrowed without a violation of our debt covenants.

Our average effective weighted-average interest rate on borrowings outstanding during the three months ended December 27, 2020 under the Amended Credit Agreement, including the effects of interest rate swap agreements described in Note 14, “Derivative Financial Instruments” of the “Notes to Consolidated Financial Statements”, was 3.28%.

At December 27, 2020, we had $386.3 million of available credit under the Amended Revolving Credit Facility, all of which could be borrowed without a violation of our debt covenants.

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 June 28, 2020, we were in compliance with these covenants with a consolidated leverage ratio of 1.31x and a consolidated interest coverage ratio of 16.11x.

Our obligations under the Amended Credit Agreement are guarant eed 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 December 27, 2020, we were in compliance with these covenants with a consolidated leverage ratio of 1.18x and a consolidated interest coverage ratio of 20.51x.

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 June 28, 2020, there were no borrowings outstanding under these facilities and the aggregate amount of standby letters of credit outstanding was $69.5 million.

At December 27, 2020, there were no borrowings outstanding under these facilities and the aggregate amount of standby letters of credit outstanding was $69.3 million.

As of December 27, 2020, we had bank overdrafts of $13.5 million related to our U.S.

disbursement bank accounts.

This balance is reported in the "Current portion of long-term debt and other short-term borrowings" on our consolidated balance sheet as of December 27, 2020.

The change in bank overdraft balance is classified as cash flows from financing activities on our consolidated statements of cash flows as we believe these overdrafts to be a form of short-term financing from the bank due to our ability to fund the overdraft with the overdraft protection on the bank accounts or our other credit facilities if needed.

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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(in thousands) Payment Date

November 11, 2019 $ 0.15 December 2, 2019 $ 8,190 December 13, 2019

January 27, 2020 $ 0.15 February 12, 2020 $ 8,225 February 28, 2020

April 27, 2020 $ 0.17 May 13, 2020 $ 9,175 May 27, 2020

July 27, 2020 $ 0.17 August 21, 2020 N/A September 4, 2020

November 9, 2020 $ 0.17 November 30, 2020 $ 9,198 December 11, 2020

January 25, 2021 $ 0.17 February 10, 2021 N/A February 26, 2021

We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and adjust the allowance, if necessary.

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Based on future operating results in certain jurisdictions, it is possible that the current valuation allowance positions of those jurisdictions could be adjusted in the next 12 months, particularly in the United Kingdom where we have a valuation allowance of approximately $12.5 million primarily related to the realizability of net operating loss carry-forwards.

As of June 28, 2020 and September 29, 2019, the liability for income taxes associated with uncertain tax positions was $9.3 million and $9.2 million, respectively.

As of December 27, 2020 and September 27, 2020, the liability for income taxes associated with uncertain tax positions was $10.7 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.

These liabilities represent our current estimates of the additional tax liabilities that we may be assessed when the related audits are concluded.

If these audits are resolved in a manner more unfavorable than our current expectations, our additional tax liabilities could be materially higher than the amounts currently recorded resulting in additional tax expense.

Off-Balance Sheet Arrangements

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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 June 28, 2020, we had $0.7 million in standby letters of credit outstanding under our Amended Credit Agreement and $69.5 million in standby letters of credit outstanding under our additional letter of credit facilities.

At December 27, 2020, we had $0.7 million in standby letters of credit outstanding under our Amended Credit Agreement and $69.3 million in standby lett ers of credit outstanding under our additional letter of credit facilities.

• From time to time, we provide guarantees and indemnifications related to our services.

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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.

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.

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Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended September 27, 2020.

On September 30, 2019, we adopted Accounting Standards Update 2016-02, "Leases (Topic 842)" and implemented related changes to our lease accounting policies.

To date, there have been no other material changes in our critical accounting policies as reported in our 2019 Annual Report on Form 10-K.

To date, there have been no material changes in our critical accounting policies as reported in our 2020 Annual Report on Form 10-K.

New Accounting Pronouncements

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The Facility matures on July 30, 2023.

At June 28, 2020, we had borrowings outstanding under the Credit Agreement of $277.2 million at a year-to-date weighted-average interest rate of 2.53% per annum.

At December 27, 2020, we had borrowings outstanding under the Credit Agreement of $288.5 million at a year-to-date weighted-average interest rate of 1.34% per annum.

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 June 28, 2020, the notional principal of our outstanding interest swap agreements was $231.3 million ($46.3 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 June 28, 2020, was 3.52%.

As of December 27, 2020, the notional principal of our outstanding interest swap agreements was $225.0 million ($45.0 million each.) Our year-to-date average effective interest rate on borrowings outstanding under the Credit Agreement, including the effec ts of interest rate swap agreements, at December 27, 2020, was 3.28%.

For more information, see Note 14, “Derivative Financial Instruments” of the “Notes to Consolidated Financial Statements”.

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We attempt to minimize our exposure to these fluctuations by matching revenue and expenses in the same currency for our contracts .

Foreign currency gains and losses were immaterial for both first nine months of fiscal 2020 and 2019.

Foreign currency gains and lo s ses are reported as part of “Selling, general and administrative expenses” in our consolidated statements of income.

For the first quarters of fiscal 2021 and 2020, we reported $1.3 million and $0.5 million of foreign currency losses, 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.

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 the first nine months of fiscal 2020 and 2019, 30.1% and 27.4% of our consolidated revenue, respectively, was generated by our international business.

For the nine-month periods ended June 28, 2020 and June 30, 2019, the effect of foreign exchange rate translation on the consolidated balance sheets was a decrease in equity of $11.4 million and $8.7 million, respectively.

For the first quarters of fiscal 2021 a nd 2020, 28.3% and 31.0% of our consolidated revenue, respectively, was generated by our international business.

T he effect of foreign exchange rate translation on the consolidated balance sheets was an increase in our equity by $32.4 million and $13.9 million for the first quarters of fiscal 2021 and 2020, respectively.

These amounts were recognized as adjustments to equity through other comprehensive income.

Quantitative and Qualitative Disclosures about Market Risk

Please refer to the information we have included under the heading “Financial Market Risks” in Item 2.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which is incorporated herein by reference.

Please refer to the information we have included under the heading “Financial Market Risks” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2 of this Form 10-Q which is incorporated herein by reference.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis