Good morning, and thank you for joining the Tetra Tech Earnings Call. By now, you should have received a copy of the press release. If you have not, please contact the company’s corporate office at 626-351-4664. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the Investors section of its website at www.tetratech.com.

This call is being recorded at the request of Tetra Tech, and this broadcast is the copyright property of Tetra Tech. Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited.

With us today from management are Dan Batrack, Chairman and Chief Executive Officer; and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results, and we’ll open up the call for questions. I’d like to direct your attention to the Safe Harbor statement in today’s presentation.

Today’s discussion contains forward-looking statements about future growth and financial expectations. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in Tetra Tech’s periodic reports filed with the SEC.

Except as required by law, Tetra Tech takes no obligation to update its forward-looking statements. In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the Investors section of Tetra Tech’s website.

At this time, I’d like to inform you that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. With that, I would like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack..

Great. Thank you very much, Stacy. And good morning, and welcome to our Fiscal Year 2020 Second Quarter Earnings Conference Call.

I’m looking forward to giving you an overview of what we are seeing across our business, what Tetra Tech’s recent responses have been and the key areas that we’re focused on for the remainder of this fiscal year 2020 and into next fiscal year. We started the second quarter on pace for another very strong quarter.

In March, we saw the onset of the impacts associated with the COVID-19 pandemic, which I’ll discuss on the next slide. I’d like to highlight up front that the strength of Tetra Tech’s resilient and diversified business model has never been more evident than today.

Our essential water, environment and infrastructure services have generated a very robust backlog of $3 billion. Our long-term commitment to financial discipline has resulted in a low debt to earnings ratio of 0.8x, with high liquidity and very strong continuing cash flow.

We’re entering these uncertain times with a very strong company and business model, which allows us to focus our efforts on seamlessly supporting our clients today and into the future.

For this call, due to the unusual recent circumstances brought on by the global pandemic, I’ll begin with an overview of our COVID-19 response and actions and then I’ll have Steve Burdick, our Chief Financial Officer, provide an overview of our financial performance and our capital allocation.

I’ll then address our customer outlook and our market assessment. Early in March, Tetra Tech implemented, and this was prior to the stay-at-home orders coming out, we implemented a company-wide enhanced hygiene program. We implemented social distancing practices and encouraged remote working wherever it was possible for our staff.

The global response to the COVID-19 quickly expanded to widespread government stay-at-home orders, exempting essential services, which included most of what Tetra Tech does.

These events happened essentially concurrently with the precipitous oil and gas price drop, which resulted in some project cancellations, as some of our clients responded to the unanticipated downturn of their business. But at the same time, we saw most of the essential work we do for our clients continue uninterrupted.

Our team here within Tetra Tech, which I’m actually quite proud of, moved very quickly. We moved to 95% remote working throughout our operations. We implemented social distancing practices for our field operations and negotiated short-term adjustments to our current activities where they were needed with our clients.

We coordinated with our clients to add new COVID-19 services and expand our scope of services and work we provide where appropriate to include pandemic business continuity consulting, health and safety plan preparation and even emergency medical facility designs. Throughout this time, and as of today, all 450 Tetra Tech offices are fully operational.

Our project work continues and bidding on new work is very active, and our high-end workforce is proving to be very effective in the remote working environment. Tetra Tech’s resilience has been demonstrated through many recessionary cycles over our more than 50-year history and almost 30-year performance as a publicly traded company.

Our high-end leading with science approach has adapted quickly to changes in our clients’ needs. And our focus on critical water and environmental services means our work is even more relevant today and will likely be even more so in the future.

Our high-end consulting and design services employ advanced analytics, which are well adapted to supporting our clients as they have increased needs to manage their systems remotely.

And through this time, our strong financial position and consistent performance provides us the balance sheet needed to navigate through this disruption in the global economy.

I’d like to now turn the call over to Steve Burdick, our Chief Financial Officer, to review the financial details of our second quarter and provide an overview of our cash and our liquidity positions.

So Steve?.

Thanks, Dan. So as Dan said, I’d like to now review the financial results for the second quarter of fiscal 2020 as well as our financial condition at the end of the second quarter. So overall, we had growth across most of our end markets.

However, our growth rate was impacted by the completion of large disaster recovery projects in 2019 and our decision last year to dispose of our Canadian turnkey pipeline business. So if we excluded these two impacts, our revenue would have been up about 14%, and net revenue would have been up about by 13%.

On an adjusted basis, the fiscal 2020 second quarter revenue of $740 million increased 2% when compared to the revenue of $727 million in the second quarter of fiscal 2019, and the second quarter net revenue of $590 million is comparable to the prior year and in line with our guidance range we provided.

Our earnings per share increased at a higher percentage than our top line revenue increase, and the adjusted earnings per share was also in line with guidance and up by 4% at $0.73 compared to $0.70 last year. And on a constant currency basis, backlog increased by 9% over the prior year to over $3 billion.

So for those of you that are following the slide presentation and on Page 6, I’d like to summarize the non-GAAP and reconciling adjustments. First, we realized gains on the non-core equipment dispositions.

And as we discussed previously, due to our decision in the fourth quarter of 2019 to divest our Canadian pipeline construction business, we continued to sell the equipment in the second quarter, which resulted in a gain of about $0.03 per share. Secondly, we recorded a non-operating gain relative to our earn-out liabilities.

The net amount represents a small true-up of less than – probably less than 2% of the total estimated liability. In addition to these non-operating gains, we did take actions resulting from the impacts related to the disruption on our end markets created by the COVID-19 pandemic towards the end of the second quarter.

These timely actions aimed to align our cost structure consistent with the decrease in revenues, where we anticipated longer term project delays and cancellations. The aggregate of these charges amounted to about $8 million or $0.11 per share.

The worsening macroeconomic situation in March also resulted in the weakening of foreign currencies in countries outside of the U.S. where we do business, which negatively impacted our revenue and net revenue by $6 million and our EPS by about $0.01. The FX rate variances also impacted the total backlog by about $73 million in Q2.

So even as the current economic outlook remains uncertain in many ways, Tetra Tech is focused on generating positive cash flows in excess of our net income and proactively protecting the balance sheet to ensure more than adequate liquidity. So I would like to review our second quarter cash results and report on our balance sheet position.

Cash flow generated from operations for the second quarter totaled $101 million. This cash flow from operations amounted to about $1.82 on a per share basis in the second quarter.

And over the longer term, when we look back over the trailing 12 months, we generated cash from operations at 133% compared to our net income over that same trailing 12-month period. Our focus on working capital and cash flows also resulted in our days sales outstanding decreasing to 71 days in the second quarter.

This is an improvement of seven days from last year and a sequential improvement of two days from last quarter. Our net debt stands at about $211 million. And during the second quarter, we utilized close to $100 million in cash for acquisitions, stock buybacks and dividend payments to our shareholders.

And even with these activities, our net debt-to-EBITDA settled in at about 0.8 times, which remains less than our target of one times to two times. On our long-term capital allocation strategy, calls for a balance of investing in the growth of our business, managing our balance sheet and returning cash to our shareholders.

And during the second quarter, we completed the acquisition of Segue, which expands our client base and our federal IT business.

And regarding our dividend program, I want to announce that our Board of Directors approved our 24th consecutive dividend, which will be paid in the month of May at a rate of $0.17 per share, which is a 13% increase over last year’s dividend. Since we started this dividend program six years ago, we’ve increased the annual dividend paid each year.

And during the second quarter, we paid out $0.15 per share or about $8.2 million in dividends. Furthermore, we utilized $60 million in the second quarter on our stock buyback program. On a combined basis, we have $243 million remaining under both of our previously approved stock buyback programs.

And during these difficult times, just as important as successfully implementing our capital allocation strategy is ensuring we have a strong balance sheet and ample liquidity.

We have both in terms of our balance sheet at the end of Q2 and the available liquidity in the form of cash on hand amounting to $135 million as well as funds available under our credit facility amounting to $639 million for a total of $774 million at the end of the second quarter.

I am very pleased to be able to share these financial results with you for the second quarter. I want to thank you for your time today, and I will now hand the call back over to Dan..

Thank you very much, Steve. I would now like to discuss Tetra Tech’s leading positions in the critical water and environmental sectors.

The fundamental services that Tetra Tech provides our clients in water, renewable energy, government services and emergency response are essential, relevant and represent long-term needs for our clients and the communities at large.

We hold the Number 1 ranking in water, dams and reservoirs, environmental management in seven additional categories, as published by the Engineering News-Record. And we see water-related services for water supply, wastewater treatment, watershed management and flood protection is having continued demand throughout this crisis.

The large macro trends on critical water supplies, the risks associated with climate change and diversification of water sources are unchanged, and we see them continuing unabated.

Renewable energy that we support in permitting and other aspects, demand and the movement of states and utilities to diversify and modernize their power generation are also continuing trends that will benefit Tetra Tech.

And in every recessionary cycle, the federal government spending has increased in order to stimulate the economy, to address fundamental modernization needs and support local governments. Tetra Tech has $18 billion in contract capacity built on a 50-year track record of supporting the U.S. federal government.

Our relationships and experience across a broad base of government clients, both civilian and defense related, position us well to support both existing and new programs that will be coming up. Our experienced emergency response teams are even more essential today.

We maintain over 400 standing contracts with municipalities across the United States to help them plan, prepare, respond and recover from disasters. Currently, we’re supporting response to recent tornadoes in Tennessee, while last year, we were mobilized for the California fire recovery. I’d now like to provide you with our customer outlook.

In the first and second quarters, our growth was driven by strong performance across all of our business, but especially for our international and federal clients. As we enter the third quarter and evaluate the early indications for our four customer sectors, we see a range of impacts ranging from minimal to more significant. The U.S.

federal government is where we expect to see the least impact. We have a large, broad federal client base across both civilian and defense programs. Longer-term, government stimulus programs typically create additional opportunities and funding increases that will likely build into our fiscal year 2021, state and local.

It’s been an excellent growth market for us due to our broad coverage with large to midsized municipalities for both essential water and disaster response services. We expect impacts here to be low to medium. Currently, the work in the state and local market is really quite stable with very active bidding opportunities and new programs taking place.

Larger municipalities have quickly moved to virtualized meetings and their contracting systems. However, while we don’t see it today, we would expect that in the future to see pressures on state and local budgets, which may be offset by federal government stimulus funding later in the year or even into next year.

The international sector for us is primarily our Canadian, United Kingdom and Australian clients. Here, we saw some immediate impacts for the commodity-related businesses associated with oil and gas and some of our mining clients.

We expect the public sector portion of our international client base, which is about half of that revenue, to remain stable or increase as each geography moves to recover and initiates its stimulus programs for its own geography. And finally, we expect our U.S. commercial clients to be the most impacted.

Our work with oil and gas customers for upgrades or discretionary work was almost immediately affected due to the financial disruption in this sector. The commercial work that is regulatory driven, such as our environmental permitting and restoration services, has been less impacted and it’s moving forward right now.

As we have assessed, the changes in our markets during the last six weeks, it has become quite apparent that a number of uncertainties exist that we have just not seen before as a company. The COVID-19 pandemic impact on our business will largely be dependent on the duration of stay-at-home orders and resulting macroeconomic conditions.

Tetra Tech’s financial results for the second half of fiscal 2020 cannot be estimated, at least at this time, with enough precision to be reliable. So accordingly, Tetra Tech is withdrawing our previously provided fiscal 2020 guidance for net revenue and earnings per share.

But I will say it is our intent to provide guidance prior to the end of the third quarter of fiscal 2020 if there’s improved clarity on our end markets and clients.

In summary, in spite of this near-term disruption of the global pandemic, we are seeing continued demand for our leading with science approach and advanced analytic solutions, as our clients focus increasingly and efficiently and rapidly adapting to changes in their capital spending.

A heightened concern over health and environment in places such as inside our buildings and associated with the cleanup of contaminated sites and the presence of improved air quality reaffirms the importance of our essential services in water, environment and sustainable infrastructure.

Our backlog of $3 billion in work is approved and authorized and provides us stability during this time of uncertainty. Tetra Tech’s strong balance sheet and access to capital is a result of our disciplined approach to financial management and capital allocation.

This has prepared us well for the current disruption and the post-COVID peak recovery period that’s coming up. And with that summary, Stacy, I’d like to open the call up to questions..

[Operator Instructions] Our first question comes from Andrew Wittmann with Robert W. Baird. Please go ahead..

Hey, thanks for taking my question, guys. I think I have two unless I come up with a follow-up here during the course of this. But Dan, I wanted to start out a little bit on your customer outlook update here. I heard your commentary on this, obviously, by customer type, and your low, medium and high are helpful directional indicators.

I was just wondering if you could put a little bit more meat on that bone and just talk about what low means, does low mean like zero, does low mean 5% to 10% hits, medium, high? Anything just to kind of round us with what you’re thinking today around that would be a little bit helpful given that everything is changing so quickly for everyone here..

Sure, Andy. First of all, with respect to what those indicators are referring to. So low, medium and high are what we expect the impact to be of what we see our business going on a forward basis. So this would be – and I’ll move right to low. So low, we typically would think that it would be something less than 5% to no impact at all.

So in the case of the federal government, we’d have expected that it would grow from 5% to 10%, was our previous guidance. When we say we are seeing very low impact here, we would think that it would be less than 5% and perhaps no impact at all. So low is, say, 5% or less from what we had previously indicated on a go-forward basis.

Medium is sort of a broad range of anywhere from something more than 5% to perhaps up to 15%. So medium impact would be sort of in that range. And again, that would be on a go-forward basis. And high would be something in excess of 15%.

So those are sort of general numbers or ranges of numbers that we would associate with those qualitative descriptors of forward outlook for our clients..

Okay, great. That’s helpful. Well, given that commentary, obviously, here, your commercial business is clearly the most impacted. So I wanted to talk about the CIG segment in particular and try to just understand how things have trended during the quarter.

I understand there’s a number of moving parts that you articulated earlier in your conference call about, for instance, the shutting down or winding down of your pipeline business. Certainly, WYG has been more material in the commercial segment as well.

I was hoping you could kind of take us – really walk us through the revenue line in CIG to understand what the kind of underlying organic trend was for that segment for the quarter and how it progressed through the quarter, January, February and then into March where I have to imagine the impacts were more significant, all that in an idea to try to understand where it’s trending here as we move into 3Q and beyond?.

That’s a good question, Andy, and I’m glad you pointed out. CIG is an area that could use a bit more explanation. If you just took a look at the headline number, it would appear that our commercial and international group had actually shrunk by and what we reported in net revenue numbers and gross revenue and total revenue were about minus 4%.

But this doesn’t take into account a couple of items that were actually meaningful in the quarter. Number one, we actually adjusted our revenue for FX. If adjusted for FX or foreign exchange, then we saw actually quite a reduction in valuation in exchange rates between primarily Canada and Australia, a little bit in the UK.

But if you simply adjusted our 2020 Q2 for FX, that would take the minus 4% to 2%.

But the one item we tried to communicate and were very transparent, even a year ago, starting a year ago, is that Parkland piping or a midstream piping turnkey activity we have in Canada actually contributed a year ago about $34 million, $35 million, and we have successfully wound that down.

Steve Burdick has talked earlier in the reconciliation about liquidation of some of the equipment that actually contribute to our cash, and we actually normalized our earnings for that.

But if you adjust our revenue for the Canadian turnkey pipeline activities and put that back in, you would see that our net revenue actually increased at an 11% year-over-year rate.

When just adjusted for the FX, which accounted for a couple of percent, and the rest of it associated with the year-on-year comparisons of a business that we elected to wind down and exit. So I hope that helps with respect to a better insight into how the group performed on a year-over-year basis at the 11%.

And I will say to your second part of the question is, how did it trend over the quarter? We were growing quite well during January and February. And really, we saw quite a reduction in the month of March, and some of that was because of the oil and gas and heavy industry that is associated with the energy market, where we saw the work stopped.

But the rest of it was really transitioning, and this is internationally, transitioning our folks from working in the office to at home. I mean we took 95% of 20,000 people and we moved them home that actually did have a bit of a temporal impact. We actually have not seen that impact in April because that all took place in mid-March.

And so it’s not something that represents an ongoing impact, but that did impact CIG, internationally a bit more than the U.S. because our international operations have not been on our platform quite as long as our American – U.S. operations. And so that accounted for another portion of it – of the impact in March..

Okay, great. That’s helpful. I’m going to chime in a little bit more with another question later, but I’ll leave it there for now. Thank you..

Great. Thank you, Andy..

Our next question comes from Sean Eastman with KeyBanc Capital Markets. Please go ahead..

Hi Dan, thanks for taking my questions.

I just wanted to get a sense for potential kind of green shoots here on what could come out of this, how Tetra Tech could look on the other side of this, whether from a cost structure perspective, market share perspective or just new opportunity sets coming out? Just trying to understand how nimble you guys are and how quickly we can kind of get back onto an earnings growth trajectory?.

Well, it’s a great question, Sean. I would say that while certainly the impact to local human health and life is quite tragic and the short-term impact of moving our workforce to working remotely was a bit disruptive in late March, it is certainly possible.

And we see coming out of this a stronger Tetra Tech, a more flexible Tetra Tech and likely an even higher profitability of the company. This has given us a new perspective on the amount of commercial real estate that we actually need to support our workforce of 20,000 individuals. We’ve actually had this plan for a number of years.

We had the great advantage of having moved to an enterprise-wide ERP system. We’ve moved our storage to the cloud. We’ve moved our computing to the cloud. And so academically, we always felt this should work, but when do you get a chance to take 95% of your staff and move them home and give it a real-life test. So we’ve actually done that.

And for those that have spent some time with me over the years, you’d know I hold myself and the company to extremely high standards. So to say that it’s exceeded my expectations is really saying something. And so I just would like to thank the Tetra Tech folks and individuals who put the platforms together that made us quite efficient through this.

So I think we could come out of the – out of this pandemic with a more efficient, a lower cost structured company than we had before. And the investments that we made into our federal IT practice that has been growing quite well have actually served us well with respect to new orders.

We’ve seen our federal clients and has actually moved to our state and local clients with respect to cybersecurity systems we were putting in place for our water systems.

We’ve actually seen the demand climb very, very quickly to expand that just from cybersecurity protection of critical water infrastructure to actually allowing our clients to monitor and operate the systems remotely in the event that there was another shutdown or distancing from accessing these facilities.

So those are new items that we’re seeing grow as opportunities even right now through this period of uncertainty. So I think we could come out of this even stronger with more revenue opportunities in new markets we hadn’t seen before and with a more efficient cost base than we had going into this.

And so it could actually result in margins even better than what we had coming in..

Interesting stuff.

And I think maybe the other question I had is just trying to get a little bit more color on the decision to withdraw guidance and maybe just understanding exactly where the uncertainty lies right now? And what sort of events or things you’re watching out for here in the next month or so that could get you guys comfortable with putting those goalposts back out there for fiscal 2020?.

I’m glad you asked that question because it’s the one item that is certainly unprecedented for ourselves, and I think many of the publicly listed firms. But for Tetra Tech to withdraw guidance or not provide it for the next quarter after having, next year will be 30 years as a public company, has never happened before.

And it wasn’t taken lightly here. We certainly gave some thought to widening out until we could have clarity. But what we – what we’re looking for that would give us the clarity is actually our clients returning to work and getting a bit more clarity on their budgets as we move through the quarter.

It’s not moving our 95% of staff back to the office, that we can actually continue for an extended period of time. And to certain extent, a component of that will probably remain in perpetuity for the corporation.

But seeing our clients actually come back and get a bit more clarity as to their budgets, their priorities, their funding, the last thing we wanted to do is to provide guidance without any insight at all of what would happen during the middle of this quarter and late, only to come back and revise it.

It’s difficult to suggest to our shareholders that we would like just a little bit of time. And I think that many of the stay-at-home restrictions are being lifted now. Others have them over the next roughly 30 days. I believe that if you go out to roughly June 1, that encompasses most of the jurisdictions.

So I think that over this next month, we’ll get much more visibility, not on how we’re performing on the work, but how our clients see their priorities and how they move forward, and that will allow us to provide guidance.

It’s something that’s actually meaningful with an appropriate range so that you can evaluate what we see in the marketplace and how our performance would be. So I do believe that we will be able to provide updated guidance prior to the end of the third quarter.

But that is, as Steve had mentioned and I did with respect to uncertainty, is largely driven by our clients getting back to work and getting better insight into their priorities and timing of programs moving forward..

Okay, great. And just last one for me. In terms of the work where you’re seeing an immediate impact and the portions of the business that are more economically sensitive, I think you guys called out oil and gas and heavy industry specifically.

Just trying to get a sense for what that pressure means for Tetra Tech’s overall margins?.

Well, we have a very flexible cost base. The biggest portion is labor. Second is our real estate.

We do, as we’ve spoken since really the inception of the company, we are very focused on keeping the staff and our overall cost structure, including corporate and the rest of our indirect support in line with the amount of work that we have from our clients and the programs. So the actual dollar amount impacted on our revenue is relatively small.

We only had probably around 4% of our revenues were in the oil and gas and related fields, of our commercial work that we do overall, about half of it, as a matter of fact, more than half of it is for regulatory mandated programs that have regulatory drivers, compliance requirements, consent decrees or other items that have specific dates and times.

So I expect that to go forward uninterrupted. And so I think it’s a smaller portion, and we’ll be able to provide specific numbers in our updated guidance, but I would anticipate that it would be a very modest impact to our commercial margins because that’s really the field we’re talking about with respect to where there could be some variability.

But I think it should be relatively modest because of the flexible nature of our cost structure. So we don’t need to carry costs that are supporting revenue that’s not there..

Very helpful. I appreciate the time. Thanks guys..

Thank you, Sean..

Our next question comes from Noelle Dilts with Stifel. Please go ahead..

Hi, guys. Good morning. The first question I wanted to ask kind of ties into that last comment that you made. When I think about Tetra Tech, I think repeatedly over the years, you’ve talked about how your people are your best asset and also, recently, you’ve seen very good utilization, for example, in GSG.

So when we think about the margin impact here over the next few quarters, how do we think about that utilization element? My sense is that even though, as you’re saying, you have the ability to reduce cost and not hold capacity where maybe you don’t need it.

At the same time, if you’re expecting a rebound, I would think that you’d probably hold on to those folks.

So how do we think about that utilization element as we look at the business model?.

That’s a good question. First of all, we – our first move in every instance is that when we see a change in one of our end clients, our markets, what we – our first move every time is to redeploy the staff to other areas where we have more work, we have more backlog and we can actually employ that. So that was our first move.

So when we saw the downturn in portions of the commercial, if we have a civil engineer or an electrical engineer who’s working, and they will go right to oil and gas and their technical background would allow them to work on a municipal project or a federal project. We move them over.

So the first goal is to move the staff to retain as much of our capability as possible. However, there are groups or portions that are highly focused on a market.

And in the case of oil and gas, if we believe that the market is going away and it is going away and won’t return for more than a quarter or two, and sometimes it’s a judgment call between those two. But if it’s going to not return in what we would call the relatively near future, we’ll actually make appropriate adjustments. And so that’s what we did.

With respect to utilization, I will say, and this was something we didn’t anticipate immediately in March. But our utilization across the company has actually gone up slightly through this moving to remote working.

And what we’ve attributed it to, we’ve looked very carefully to see so what has caused it to go up? Our staff are spending less time in airplanes. They’re spending less time traveling to and from airports. They’re actually going to fewer conferences like virtual ones only. They’re actually doing a little bit less training at remote locations.

And meetings have actually taken place online instead of moving to one of our offices or locations where we travel. So removing all of that off of what would typically be indirect time has actually caused our utilization to go up a little bit. Now at first glance, we’d say, it’s great.

Our revenue is going to go up, our head count hasn’t changed much other than the small reduction from markets we don’t think are coming back. So how has utilization fared? It’s up.

But the one thing we’re being very careful, and this actually contributed to one of the aspects of not providing guidance, we really would like to see this increased utilization to flow through our books and flow through our billing cycles to ensure that the quality of the utilization is as high as it was when they were back in the office.

So that 10 hours of working on a technical evaluation is – completes just as much work or it’s just as billable and payable as it was back while they were working in the office. So assuming we have the same level of efficiency or quality of utilization, we could actually see increased performance across our company.

So I hope that addresses what we do with staff and how we keep them and what we’ve seen at least in the short term with respect to utilization..

Yes. That’s very helpful. Second topic, and I know you talked about this a bit on the call, but when you think about state and local budgets, I think the general funds are going to be under a lot of pressure when we think about the more critical infrastructure markets that you’re tied to.

I know that in recent years you’ve seen a bit more funding coming from long-term bond measures.

Is there a way you can help us understand how you’re thinking about sort of the vulnerability of the state and local budget in terms of where you have exposure and how that might compare to past cycles?.

Yes. That’s something that we’ve looked at here immediately. Fortunately, this is not the first recessionary period that we’ve seen as a management team or as a company. Probably the biggest previous financial disruption or recession we saw was the 2008 global financial crisis. We did go back and take a look at that.

While 2008 in some respects seems a long time ago another respect seems like just yesterday. What we saw there was – while the – in 2008, we saw the very first impacts like we’re seeing now with our commercial clients. They move quick, they move fast.

They get conservative with respect to their budgets until they have a little bit more clarity on what their availability of funds are. Much – I hate to use the word slower, but late cycle, we didn’t see in the global financial crisis, the bottomed at of our state and local spending until about 2012, so about three and a half, four years later.

So in the short term, we saw very little disruption and it actually was a few years later. I’ve seen some statistics. Some say it’s typically two years. I can just speak to what we saw based on the portions of the market we’re in. It was really much closer to four years.

So we don’t see that as an immediate issue although we’re not naïve to believe it’s not going to take place. There’s certainly things a little bit different potentially this time. Every financial crisis does have its own vagarities.

It is possible that the federal government stepping in with unprecedented size of financial contributions to many different areas has the potential that they would backstop all of this. And certainly, I’ve heard as many different takes on that as there are commentaries. But with respect to timing and impact in the near term, we expect it to be low.

We did put low to medium on the presentation, but the medium was – to be very transparent and very clear on this, the medium was based on an estimated or an anticipated impact in the future periods and potentially that’s even years. The reality of what we’re seeing now is low to no impact.

And in fact, our municipal business has actually had the highest level of bidding activities and proposals being submitted of anything right now..

Thanks very much..

Our next question comes from Ryan Connors with Boenning and Scattergood. Please go ahead..

Great. Good morning. Thanks for taking my question. So the question has to do with – Dan, you’re the leader in a very fragmented industry. Many of your competitors are much smaller players. They are kind of sometimes serving smaller regional markets. So the good news is you’ve got greater resources.

But on the other hand, larger companies are suddenly out of favor in terms of any financial support the government is making available. And obviously, that creates the potential for unintended distortions, let’s say.

So what are the ramifications of that? I mean if you go back to the prior question on keeping staff around in some of these more challenged verticals, is there a chance that there could be some kind of irrational maintaining of capacity in some of those markets as some of those staff reductions don’t take place at smaller competitors and things like that? And also thinking about M&A that might have been available that won’t – I mean what are the ramifications of many of your competitors maybe being able to access this PPP money while the larger players will not?.

We’ve had this discussion here at Tetra Tech over the years because while we are a public company, we have a bit more scale than many of the fragmented participants. No doubt that’s true. The one thing – and certainly, we’ve been very acquisitive.

And one of the discussions we have with these smaller private companies are, "I’m concerned about joining a public company because you have a quarterly reporting requirement, and you may – you’re thinking about the long term." And then when I inquire as to what that means, as they say, "Well, if there’s a downturn, we would keep all of our staff, which you just alluded to, we would be committed to these items whereas you may not." And my response to that, I’ll share this with you all is Tetra Tech.

I’ve been with the company when we were public back in the 1970s, when we were part of a larger conglomerate, we were a private company for a number of years and back public and all the decisions I would make, and I have been counseled on and mentored over my career, are we would make the same decisions.

We make the best decisions, what’s best for our clients, what’s best for their programs and what’s best for the key individuals that are running those. And so the – I was on a conference call the other day where there was a smaller firm that was asked this very question, are you committed to keep all of your employees? And the answer was, yes.

They said, is your revenue down? Yes. How long will you keep them? Indefinitely, we’re going to get PPP money. They said when the PPP money is out, then what are you going to do? And the answer was, I don’t believe that will happen. I don’t have a plan for that.

So whether or not you have stimulus money, I think, making the right decisions with respect to what the right actions are for your clients, for their programs and for your staff has left Tetra Tech in very well stead.

We – I won’t say we wouldn’t – the way we’ve been disciplined, I don’t want to say conservative because I just call it disciplined, with respect to how we run our business and how we manage our balance sheet has held us in good stead through the 1987 financial problems, the dot-com drops and other items in 2000, through the global financial crisis, through our election to exit construction six years ago and through a several mining commodity moves in oil and gas and even this pandemic.

And I believe it’s the fundamental underlying decisions that we will make that will leave us with the best staff, the best clients and the best performance on their projects.

And so I actually believe people, who are committed to making one decision to not affect their workforce whatsoever, regardless of what happens, is not good for them and, ultimately, will be good for us..

Okay.

I mean, I guess what I’m driving at more is presuming you’re not exiting those markets altogether that are going to be challenged, what could be the pricing impact in those markets? I mean if there are players, who are irrationally keeping people on because of PPP money when the business is drying up, then presumably, they’re going to be bidding at breakeven or worse in terms of trying to just keep those people busy and that could complicate pricing matters even for folks like yourself, who are doing the right thing and kind of rightsizing the business.

So, what could be the kind of industry-wide impact of that issue?.

I don’t believe that’s the case. That I would say – I won’t say all of the work we have, but most of the work we have is based on technical selection and technical capability. The work we get through the federal government is the Brooks Bill, which is highest technical ranking is selected for initial negotiation.

So it’s not – we are not in – Tetra Tech does not participate in the commodity engineering business with how low will you go to get the work. And in fact, we have a very, very keen focus on the differentiators why you get selected. We get selected because of technical innovation that doesn’t exist in the market.

We get selected because of patents and intellectual property that nobody else owns. We get selected because of history and institutional knowledge that doesn’t exist that goes back 20, 30, 40 years with our clients.

And if a client is going to select their engineer based strictly on low price or primarily on low price, that’s actually not the right client for us. We expect to be best value, not low price. And so on many of these technical solicitations, they open the bids up based on technical ranking from one to 10, and then they will open up the price.

And they’ll rank them from lowest to highest, from 1 to 10, and they’ll add the two numbers. And if we can be technically ranked number one every single time, we don’t have to be the lowest price. And so those that will actually sell their staff at below their price point is not a long-term winning solution based on how we run our company..

Got it. Okay, that’s – that is actually a good color. Now, last one from me is just on – keeping on the theme of kind of pricing. As we look at the potential evolution of – infrastructure spending is still going to be there.

I think what’s the big question is to what extent the – that wallet share goes from state and local to federal and vice versa, how that evolves? Can you talk about the different margin and pricing dynamics with the different types of government customers you deal with from the federal to the state all the way down to the smaller county and local? I mean what are the different margin dynamics as we look for that mix to shift?.

Well, it’s less so on clients and it’s more so on contract type. Although I will say that there is some linkage between the two. So, we’ve spoken of this before. Under a contract type, cost-plus fixed fee, or CPFF. That’s typically a contract issued with the federal government, where items can’t be as definitized.

They pay our direct salaries, our indirects, employee fringe benefits, overhead G&A and other items and negotiate fees. Those typically would be, I don’t know, 4% to 8%. So cost plus sort of in that type of range. That represents about 15% of our revenue. A lot of that is first of its kind research that we do, first of its kind assessment that we do.

So for instance, the Federal Aviation Administration, a space-based navigation program, first of its kind, doesn’t exist globally. We work that program, and so that’s a cost-plus program. The international development work, which by its very nature is in remote locations, has uncertainty to it, that’s cost plus.

So the margins are sort of in that range, sometimes a little bit higher, generally not lower. Time and materials where we’ll negotiate a rate for a given engineer. So, let’s say, civil engineer with three to five years is $100 an hour. That represents about half of the work we have, which is the sort of standard time and materials.

Margins on that, depending on the staff that we put on a program would probably be 8% to 10% sort of in that range.

And then firm fixed price, where we actually would take some of the risk of completing the job under a number that we’ve identified our goal because there is inherent risk associated with the fixed price project, is to run it north of that 12%. So it would be typically, I would say, even 15% or greater. But we’re taking on risks with respect to that.

But I will say on the fixed price, which is around 35% of our margins – I’m sorry, 35% of our revenues. We are not doing construction or construction at risk or construction management at risk. We’ve taken this work on a fixed price to do work plans or technical designs that we’ve done before.

So, we’re not impacted by commodity prices or labor strikes or materials or weather because we’re doing that work internally. So, the very risk nature of the fixed price work is quite different than you might see in other companies even in this business..

Got it, okay. That’s very helpful. Thanks for your time..

Thank you, Ryan..

This will conclude the Q&A session. I will now turn the conference over to Dan Batrack to conclude..

Thank you very much, Stacy. And I want to thank all of you on the phone for your insights, your questions and most importantly, your support of Tetra Tech. I hope that you all are staying very safe at whatever location you happen to be residing.

And I would like to say that on behalf of the 20,000 employees of Tetra Tech, we are absolutely committed to leading by example in safety, promoting sustainability by the services that we provide and supporting our clients in essential water, environment and essential infrastructure services.

And I really do look forward to speaking again, with you later this quarter with a little bit of clarity. We’ll be speaking with you prior to the end of the quarter with an update on our current status and guidance. And if things are not clear, I’ll certainly speak with you at our next quarterly call. So, thank you very much and stay safe. Bye..

Ladies and gentlemen, this concludes our conference for today. Thank you all for your – for participating, and have a nice day. All parties may now disconnect..