Tetra Tech, Inc. (NASDAQ:TTEK) Q3 2020 Results Conference Call July 30, 2020 11:00 AM ET
Dan Batrack – Chairman and Chief Executive Officer
Steve Burdick – Chief Financial Officer
Conference Call Participants
Sean Eastman – KeyBanc Capital Markets
Noelle Dilts – Stifel
Sam England – Berenberg
Andrew Wittmann – Baird
Gerry Sweeney – ROTH Capital
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. [Operator Instructions]
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.
Thank you very much, Michelle, and good morning, and welcome to our fiscal Year 2020 third quarter earnings conference call. I’m pleased to report that in the third quarter, our business delivered solid results, in line with our recently released guidance and projected performance. Overall, our efficiency increased as a result of our ability to leverage high-end virtual and remote working technologies. Our staff’s utilization is up and our indirect spending is down, resulting in higher margins and a strong cash generation.
And demand for our leading with science services, continued unabated for this quarter, resulting in our backlog increasing both year-on-year and sequentially.
Given our results to date and outlook, we are increasing our earnings per share guidance for fiscal year 2020, and I’ll speak to the details of that a bit later in this call. I’ll begin with an overview of our performance and customers. While Steve Burdick, our Chief Financial Officer, will provide an overview of our financial results and capital allocation. I will then address our customer outlook and market assessment.
We had a strong third quarter across multiple performance measures. Total revenue for the quarter was $710 million, and our net revenue was $560 million, at the upper end of the guidance we provided, slightly succeeding our expectations as a result of outperformance in our CIG segment.
We generated an earnings per share from operations of $0.78 for the quarter and $0.83, when we include proceeds from equipment sales associated with the wind-down of our Canadian oil and gas turnkey operations. Our backlog, the best indicator for future growth, was up 8% year-over-year. And up 2.6% sequentially, increasing to $3.7 billion. This increase was driven by broad-based orders across all of our end clients, and I’ll give a few more details about that in just a few moments.
I’d now like to provide an overview of our customer — of our performance by customer. In the third quarter, we had solid performance across our customers, in line with our expectations. Work for our U.S. Federal clients represented 31% of our net revenues in the quarter. During the quarter, we saw a 10% growth in the work that we do for the Department of Defense and 5% growth for civilian agencies. Unfortunately, travel restrictions impacted our ability to provide on-site services for some of our international development projects, offsetting the growth that we saw in these other client groups with the Federal Government, resulting in an overall flat revenues on a year-on-year basis for our U.S. Federal work.
Excluding last year’s Disaster Response contribution, our State and local revenues grew 5% year-on-year. We saw no project delays or cancellations and project bid opportunities increased in the quarter. Although revenue growth was slightly lower than expected, we anticipate that our State and local revenues will return to double-digit growth in the fourth quarter. Our U.S. commercial revenues comprised 25% of our business and was down 7% year-on-year. We saw a steady performance for regulatory-driven programs, which represent about half of our U.S. commercial revenues. However, we did see a reduction in oil and gas, commercial buildings work and some discretionary industrial manufacturing programs.
Our international net revenues, representing 30% of our business, grew 3% on a year-on-year basis. Our international Government services were stable, while some of the discretionary commercial services were down. Our United Kingdom operations did see some project delays due to regional travel restrictions and field access constraints.
I’d now like to present our performance by segment. Our 2 business segments include, the first segment, the Government Services Group, which is primarily focused on public sector clients. And the second segment which is the Commercial International Group, which includes our U.S. commercial practice and our international operations, primarily based in Canada, the United Kingdom and Australia.
As expected, the GSG segment with its strong public sector base was up 3%, driven by Government consulting services and Advanced Analytics for Water and Environmental Programs. The GSG group also delivered a 13.5% margin for the quarter, which was slightly ahead of our expectations. The CIG segment delivered a double-digit margin of 10.1%, increasing their margin from last year.
The strong margin performance was a result of disciplined management and project delivery, which is especially significant in light of this quarter’s slowdown in revenue, particularly in that group.
For the quarter, our backlog was up 8% year-on-year and 2.6% sequentially increasing, as I mentioned a bit earlier, to $3.7 billion. The sequential backlog increase was broad-based, with a positive book-to-bill in all 4 of our major client sectors. This increase in our contract and authorized work is the best indicator of the stability and improving outlook for our business as we go forward into the fourth quarter.
In addition, we continue to expand our contract capacity with the U.S. Federal Government with awards with the Department of Defense, the Army Corps of Engineers, Environmental Protection Agency, USAID and the Department of State. These contracts enter more than $18 billion in capacity across the U.S. Federal agencies, provide the essential framework for us to quickly respond to future stimulus programs and Government initiatives.
For example, just in this third quarter, we were awarded the Environmental Protection Agency’s Superfund Technical Assessment and Response Team contract for the mid-Atlantic Coastal Region of the United States. Under the single-award contract, we will assist the Environmental Protection Agency in protecting human health and the environment in response to man-made and natural emergencies and disasters.
Now I’d like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present the details of our financials. Steve?
Okay, thank you, Dan. I’d like to now review the financial results for the third quarter of fiscal 2020 as well as our financial condition as of the end of the third quarter. Overall, our revenue and net revenue came in and about as expected. Fiscal 2020 third quarter revenue was $710 million. In the third quarter, net revenue amounted to $560 million and was in line with our guidance range of $540 million to $560 million.
Our revenue and net revenue growth rate was impacted by the completion of large disaster response projects in 2019 as well as our decision last year to dispose of our Canadian turnkey pipeline business. Excluding these 2 impacts, our net revenue would have been in line with the prior year. While our revenues were down year-over-year, our operating margin and earnings per share improved in relation to our revenue. We managed the business and remain disciplined by controlling our cost structure to be in line with our revenue.
As a result, our adjusted earnings per share of $0.78 came in better than the top end of our Q3 guidance range of $0.72 to $0.75. And the improvement in our operating margin was partially driven by the increase in the CIG segment, which realized a margin of 10.1%. For those of you following on the slide presentation on Page 8, I’d like to summarize the GAAP and reconciliation adjustments. First, we realized gains on the noncore equipment dispositions. And due to our decision in Q4 ’19 to divest our Canadian pipeline construction management business, we continue to sell the equipment in the third quarter, which resulted in a gain of about $5 million or $0.06 per share.
Secondly, we reported a non-operating loss relative to our earn-out liability, and this amount represents a small true-up of the total estimated earn-out liability. Even as the global economic outlook is uncertainty in many ways, Tetra Tech remains fiscally disciplined and focused on generating positive cash flows in excess of our net income and proactively strengthening the balance sheet to ensure more than adequate liquidity. Cash flows generated from operations for the third quarter totaled $111 million. This cash flow from operations amounts to about $2.03 of cash per share for the quarter.
On a year-to-date basis, we generated $195 million in cash flow, which is a 72% improvement over the first 9 months of fiscal 2019. And just as important as these recent periods, over the long term, when we look back at our trailing 12 months, we generated cash from operations at a rate 30% higher compared to the previous trailing 12 months. Our focus on working capital and cash flows has also resulted in our days sales outstanding, or DSO, decreasing to 70 days as of the third quarter. This is an improvement of 10 days from last year and a sequential improvement from last quarter. Our net debt amounts to $136 million, which is a 40% decrease from last year. And our net debt-to-EBITDA came in at 0.5x, which is sequentially less than the leverage of 0.8x in the second quarter.
Our long-term capital allocation strategy calls for balance of investing in the growth of our business, managing the balance sheet and return, and providing returns to our shareholders. Over the last trailing 12 months, we have generated $290 million in cash from operations. And during the third quarter, we continued to benefit from this cash position by providing significant returns to our shareholders through dividends and share buybacks.
Regarding our dividend program, during the past quarter, we paid out $9.2 million in dividends and I want to announce that our Board of Directors approved our 25th consecutive dividend, which will be paid in the month of September at a rate of $0.17 per share, which is a 13% increase over last year. Furthermore, we utilized $21 million in the third quarter on our stock buyback program.
On a combined basis, we have $223 million remaining under both of our previously approved stock buyback programs. And 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 Q3 an available liquidity of over $800 million in the form of cash on hand and funds available under our credit agreements.
As a result, Tetra Tech is in a financial position such that we will continue to provide significant returns to our shareholders while investing in strategic growth areas, both organically and through acquisitions that Dan will discuss a bit later in the presentation. I’m pleased to share these financial results for the third quarter. I want to thank you all for your support, and I’ll hand the call back over to Dan.
Great. Thank you very much, Steve. I’d now like to discuss our differentiated growth strategy in advanced analytics. As you know, Tetra Tech has a reputation for high-end services in water and environmental consulting. One of the reasons for our success is the ability of our experts to leverage advanced analytics in the delivery of solutions for our clients.
Some of the recent applications of advanced analytics for our commercial clients employ autonomous technologies and artificial intelligence with both increase the speed and the volume of data capture and facilitate the interpretation of that data. We’re applying these high-end technologies on land, in the air and at sea to address a wide range of environmental programs for our clients. For our State and local clients, we’re leveraging technology to operate water treatment facilities, using digital twins to apply real-time control solutions to optimize water operations and to create dynamic dashboards to enable adaptive management.
In the Federal market, we’re leveraging our artificial intelligence and cloud technologies to interpret and analyze and dynamically display information to address our Government’s clients rapidly expanding information management needs.
It is these interpretive analytics, applied by our experts in collaboration with our clients that are differentiating us in the marketplace today. Over the past 4 years, we have significantly expanded the Federal portion of our advanced analytics practice. Since 2016, 4 industry-leading technology firms have joined us, each bringing new capabilities and client relationships in the fiber market. Over the past 4 years, our revenues had quadrupled to a run rate of $200 million that we’ll see this year.
These revenues are a result of acquisitions and a 20% organic growth rate. Today, our Federal advanced analytics practice is fully integrated and has over a $1 billion in contract capacity for advanced analytics and IT services with the U.S. Federal Government. We have prioritized the continued growth in this practice with the goal to more than double revenues to $500 million a year on a run rate by the year 2023.
I’d now like to present our guidance for the fourth quarter and for all of fiscal year 2020. As we enter our fourth quarter, we see each of our 4 client end markets: one, the U.S. Federal Government; two, our U.S. State and local clients; three, our U.S. commercial clients; and four, our international operations, all growing sequentially from the third quarter.
However, the global pandemic has continued to impact select areas of our business, resulting in delays for projects that we’ve been awarded. Most notably, travel restrictions have impacted our international development revenues. Incorporating these delays, our guidance is as follows: for the fourth quarter of fiscal year 2020, our net revenue guidance is for revenues of $560 million to $600 million with an associated diluted earnings per share of $0.78 to $0.83. For the entire year, our updated fiscal year 2020 net revenue guidance is for a range of $2.32 billion to $2.36 billion with an associated diluted earnings per share of $3.13, and to $3.18.
In summary, throughout the ongoing disruption associated with the global pandemic, we’re seeing continued demand for our leading with science approach and advanced analytics solutions.
In this time of change, we are providing solutions to our clients to help them adapt and support their long-term objectives. Our broad-based increase in backlog is for work that is approved and authorized by our clients and provides us with additional visibility as we begin the fourth quarter.
As Steve has covered, Tetra Tech’s strong balance sheet and access to capital is a result of our disciplined approach to financial management and capital allocation. And we’re looking forward to solving the world’s most complex challenges in water, environment and the effects of climate change.
And Michelle, I now like to open the call up for questions.
Thank you. The question-and-answer session will begin now. [Operator Instructions] The first question comes from the line of Sean Eastman with KeyBanc Capital Markets. Please proceed with your question.
Hi, team. Thanks for taking my question. I’d just like to start on the backlog. I think it’s pretty notable that all sectors and client types drove that sequential increase. I just wonder, did you expect that dynamic this quarter? Do you think that can continue? And how would you characterize Tetra Tech’s visibility into fiscal ’21 at this point in time?
Well, great question, Sean. It was one of the areas that was a positive surprise for us in the quarter. It was not expected that we would have increased across all 4 areas. In fact, we did think we would have increases with the U.S. Federal Government, which was up. We did expect we would have increases in State and local, which is also quite predictable, and, which was up. But we were highly unsure, and I’m clear what was going to be the case with both our commercial and much of our international to work.
I do want to reiterate that we did see increases in all 4 client sectors with our backlog growth because coming into the quarter, and even at the time we provided guidance in early June, we expected that our U.S. Federal Government and State and local would carry the most for the majority of our backlog and that we would be challenged in commercial and international, and that was not the case. With respect to visibility, it was an interesting quarter with respect to the buildup in our orders.
If you review the slide presentation, you would notice that we have bundled a number of categories because what we saw in the quarter from the buildup of our backlog was close to a record number of individual orders that we received, which is close to an all-time high that we’ve received from different clients, different programs, all across the globe in our global operation. I will say that they came in with respect to smaller in size but greater in number. I would say our visibility is, particularly in the commercial and international is slightly less. We received more orders, but they were typically provided shorter periods.
So we are funded for 2 months, 3 months, where we typically would be funded for 6 months or 7 or 8 months. This is logical to us. It’s, I think that in this time of uncertainty, some of our clients are being a bit conservative with respect to how much they commit out into the future. But I’m quite encouraged, and we collectively are feeling very good that so many of our different programs in so many different areas and end clients are moving forward. So that’s a quick overview of what we saw and how it changed from what we anticipated coming into the quarter.
Very helpful. And the next one for me is, just concerns around State and local budgets are really front of mind for the investment community these days. So can you just sort of level set for us on what the reality is for Tetra Tech, basically, what you’re seeing today? What are the really important swing factors there? We have to watch and think about as we look at the trajectory of Tetra Tech State and local business over the next year or 2.
Well, it’s a really good question. I would say that probably the largest departure between what we’re hearing and what we’re seeing is with our State and local clients and our state and local work. What we’re hearing is that budgets are under pressure, that there are pullbacks with respect to reductions in staffing and other items at the State and local level. But what we’re seeing here at Tetra Tech as we’ve actually not seen our revenues pull back yet. We’ve actually seen the revenues and the cadence of the work and the projects moving forward, relatively uninterrupted from what we saw prior to the global pandemic.
With respect to looking forward, we’re looking at the number of solicitations or request for proposals or different submittals to the clients in response to inquiries that they’ve requested. That number actually, this past quarter, has gone up.
Now we haven’t seen the increase in our proposal submittals, our responses to our clients translate into an increase, an unusual increase in awards. What we’ve seen is the awards and the projects that have been delivered to us have continued at a steady pace that we would have seen before. These projects are not being awarded to others. We’ve actually seen what appears to be is that they’re being, and I had this discussion with a number of our project managers and technical staff. One observation is, it appears that these may be being collected or being prepared so that they can respond quite quickly to stimulus or other types of funding that may come into the cities and the States and the Counties, so they can move quite quickly.
I do, we do notice that I did note that back in the 2008, 2009 global financial crisis. When the Federal stimulus came forward, the first shovel-ready projects, there just weren’t that many projects that had been designed or ready to go. So I do think that perhaps our clients have taken a lesson from the previous financial crisis and are becoming more prepared and able to move quickly.
And no doubt this would portend well for us with contracts standing with over 400 different State, local and county clients, and we’d be prepared to move quite quickly. So what we’re seeing, again, to just summarize, we’re seeing revenues move forward relatively unabated, our bidding opportunities up. Things do look stable moving forward. And I will note, and this isn’t just from this financial crisis or the global financial crisis. But if you go back, there’s no doubt that the State and local clients, typically in the work that we provide for them, under the water environment and sustainable infrastructure, are lagging indicators.
So typically, when the financial impacts hit, in the 2008/’09 time frame, it took almost 3 years before we saw the financial impact in the orders and the work progressing. This, of course, is a much steeper production, but it’s still we would expect to be a lagging indicator. And if nothing is provided to support the State and local clients, it may be an impact in a year from now or something for this type of work or something even farther out. Of course, we’re not resigned to that inevitability. We think that Congress is speaking while we’re on this call today, they’re negotiating at this time for different stimulus programs that will help support local agencies, Governmental entities.
And so it’s possible with the right type of stimulus programs, it could actually see these revenues go up even further.
I’m going to sneak in one more, guys. Just clearly, cash flow, Tetra Tech’s financial position is a bright spot here. But just thinking about how you guys will be putting that to work. Any update on the acquisition pipeline? Are there more sort of WYGs and Coffeys coming up in the pipeline? And just given this backdrop we’re in, any kind of color on how, what we should expect from a capital deployment perspective in the immediate term would be great.
Well, we really are focused on fulfilling the strategies that we’ve identified, both on this call and previous calls by building out our advanced data analytics in the Federal sector that we’ve presented, other areas in the water sectors. The pipeline is actually robust. It is quite full.
There are a number of drivers. Not everyone has been as fiscally conservative and been as successful ourselves. So certainly, that has created additional opportunities. So I would say that’s one. There certainly are many that have a concern regarding the tax regimen may change after this calendar year. And so others have looked to explore transactions. So our goal is not to completely not put our balance sheet to work.
We are looking for the best-in-class to join us. There’s plenty of opportunities. And so yes, there are other opportunities such as those that we’ve had great success in Australia, the U.K. And I would point back to my comments earlier, the 4 technology-leading firms that joined us over these past few years, including one just this past February in Segue, that was just an excellent contribution to the Company. I would expect our sequence of having the best and brightest join us to continue.
Got it. Appreciate the time. And thanks.
Our next question comes from the line of Noelle Dilts with Stifel. Please proceed with your question.
Hi, guys. Good morning. Congrats on operating well in a tough environment. So I have a couple of margin questions. Dan, I know in the past, you’ve talked about this idea that over time, we could see kind of convergence or coming together of CIG and GSG margins. Just kind of curious how you’re thinking about that at this point and kind of how we should think about the longer-term margin goals for each of the divisions?
Well, I’m actually glad you asked that. I have been off on my prediction on timing. I’m not going — I’m not willing to acknowledge that I’m off with respect to destination. Because I do think that our CIG or Commercial International Group will close the gap. My goal was originally that it would take place by the end of this fiscal year.
So it’s roughly 60 days from now. I do believe that the pandemic or I do recognize that the pandemic has pushed this back. But I think it’s pushed it back maybe 1 quarter, maybe 2 quarters. But with respect to longer-term goals, I think that under normal operating environments, I think our Government Services Group is between 12% and 13%. I do recognize that they’ve operated above that level on a pretty consistent basis.
That’s just excellent operation. We had 13.5% this last quarter. But I would say I’m satisfied, and I think it’s actually good operation and management if they run around 13%. So I’d say, on average, if they’re 13%, GSG is running well. Again, that range is pretty narrow, 12% to 13%. So it shows the low volatility. I do think that our CIG business can be at 13%. And I think the range may go in a challenging environment, maybe as low as 11% or 12%, but in a strong environment, something up to 15%. Inherently, the Government Services Business is — or sorry, the Commercial Business is more volatile. They make changes more quickly based on economic conditions.
So that’s why the range is wider. And as far as timing for a CIG group to achieve numbers similar to our Government Services Group for 12% to 13%. I think that within the next 2 quarters, we should be able to achieve that.
Great. That’s very helpful. And then sorry if I missed this, but just going back to last quarter, you kind of talked about kind of starting to get some clarity when we start to see State and municipal budgets get released, sort of giving you some ability to assess if there are going to be any pockets of weakness or areas that may be impacted by some of the coronavirus pressure on State and local Government. Again, if we could get kind of an update there on how you’re thinking about that? And while I understand a lot of that work is funded by long-term measures or user fees, things like that. Are there any areas where you might be a little bit more concerned on the State and local side?
Well, again, just headline risk with respect to challenges that our clients are having leaves to me sensitive and highly attuned to that. But I will say that our project staff, working with our counterparts at our clients have not seen these projects actually pull back at this time. We do know that the budgets came out essentially on July 1 for the States’ for their next 2021 fiscal year. And while some of them may be forecasting reductions and in fact, maybe significant reductions.
The part that we’re focused on are the programs on the Water Supply, Wastewater Treatment, Flood Control, and Environmental Restoration and Stewardship. Those do not appear to have been reduced at least from our counterparts. And so those programs are going forward. We have asked quite directly. How do you reconcile that our programs are moving forward when there’s potentially challenges with respect to other parts of the budget.
And generally, the response we’ve had is, it’s not clear that, that’s going to actually happen. There’s a number of modeling assumptions. Tax receipts from properties actually will be reduced later. If their valuations change, and that there’ll be updates midyear or late year if there actually are big changes to their programs. But for now, we’ve not seen those from our counterparts at our clients at the State and local level.
Next question comes from the line of Sam England with Berenberg.
Just a couple from me. The first one, you touched on the growth in some of the technology-focused businesses you’ve acquired. Could you give us a bit more color around the cross-selling opportunities that they create, and where you see them accelerating growth in any of your legacy business areas?
Well, I think that’s a great opportunity for us. And so the Federal Advanced Data Analytics and IT Services carry their own book of business with modernization, data presentation and dashboard development and so all of this work. But what we’ve been offering to our long-term legacy clients are those services that have been paid for or developed or where we’ve developed best-in-class through these other programs that we can actually take and lend that to and translate it to a zero-learning curve for other clients.
Now I didn’t speak much today on our commercial and international application of advanced data analytics, but we do believe that the technologies and the lessons learned can be cross-sold and brought at a huge savings to our commercial and international clients. And really do it on the lessons learned for where the cutting-edge work had been done by the National Governments and State and local clients.
So we do think that, that’s an area that helps differentiate Tetra Tech, and that we can take those lessons learned in investments that have been made by the government and actually translate that to our commercial and international clients. So it is one of the big areas that we think cross-selling opportunities exist. And it should be a much higher margin work. So not only will it drive revenue. So top line synergies, it should generate higher margins and actually contribute to CIG closing that gap. And hopefully, actually exceeding our GSG margins.
Okay. Great. And then you talked about how travel restrictions has impacted you on the international side. I suppose given the likelihood of longer-term travel restrictions, do you have any opportunities to change the scope of any of those contracts and do them completely remotely? Or do you just see the way until travel restrictions come off to do them?
Well, we’re actually taking components of the scopes of work we have that can be done remotely and maybe resequencing the work that we’re performing in taking those items that can be performed here in the U.S. Developing some of the data platforms and some of the methodologies and some of the guidance documents we can do here.
But much of the work for international development are actually done in-country in developing locations that the recipients of the benefit of these are these developing countries.
So I would say, yes, we can do a fair amount of it remotely. But let me add a few numbers to this and see if I can quantify it just a little bit. The reduction that we’ve seen in our international development work with revenues because of travel restrictions has been in the range of 10% to 15%.
So let me use the upper end of that range, 15%. If you flip that over that you would then recognize that 85% of the work that we have, which is for one of the leading practices in the world, providing consulting, engineering, water and environment and sustainable infrastructure support for developing countries is still proceeding. So while I do recognize being down 10% to 15% is not preferable. The glass is half full, it is still 85% full. And when the travel restrictions are lifted, I believe we’ll close that gap and move forward.
These projects have not been canceled. They’ve not been reprogrammed. They’ve not been contractually delayed. It’s just a matter of some of this work can’t be done if you can’t get to these countries.
Our next question comes from the line of Andrew Wittmann with Baird.
Okay. I wanted to dig a little bit more into the margins as well. And if the top of your remarks, Dan, you talked about how your utilization rates were very good. I think you mentioned that your efficiency from lack of travel, entertainment expenses also benefited the margins. Obviously, you guys wake up every day, trying to maximize these things, but the COVID situation here makes it, takes it out of your hands. And people are taking less vacation, presumably, I would imagine, and obviously, can’t travel and entertain like they used to.
So I was just hoping you could comment, was it just a lack of vacation? Or was the lack of vacation a contributor to the utilization? And could you help us understand this better by quantifying the benefit of lack of vacation or travel expenses on the business? Because presumably, these are going to carry into your fourth quarter. And then I want to understand how this could affect the year-over-year margin performance as you look into ’21?
Well, there’s no doubt that there’s couple of components to that. But let me start with, did reduced vacations contribute to higher utilization or margin increase? Not particularly. Because there was projects that were put on hold or delayed, we had people taking vacation. So in lieu of furloughs, people took vacation.
So that, we didn’t see vacation in and of itself be a material contributor to our lack of vacation converting to utilization. That’s not the case. We did see an increase in utilization associated with a significant reduction in indirect time for travel, for conferences, for conventions, for seminars, for all these different things that take place, including going out and meeting collaboratively at different events.
So we did see that reduce and that translates over to increased utilization. We do think that’s going to continue at a higher level. I would say though that the savings that we had for not spending for airplane tickets and meals and hotels and all of these types of things. It was noteworthy. It was more than de minimis. But we also spent money on the Company that wasn’t programmed that essentially off-set this to increase our IT services.
We actually spent more money for setting up monitors and all the different things that could increase the efficiency and productivity of our staff at their remote working locations. Now we would hope we don’t have to do that on a future basis, once you provide new monitors and new chairs and new technologies and connections to the VPNs and others. We hopefully won’t have to replicate that. So these savings on travel and entertainment should become more of a contributor as we go forward. So vacation did not contribute, travel and entertainment did contribute but was offset by investments that we made in the quarter to have our remote working staff more effective with respect to IT investments.
Super helpful answer. And then I just, kind of taken a step back from that one, but along the same vein. I guess, you’re getting to the end of your fiscal year here and presumably budgeting for ’21. I know you haven’t given guidance, I’m not going to ask for guidance. But as you think about ’21, I was hoping you could just run us through some of the puts and takes that you see into ’21 in terms of either the comparisons that you realized here in ’20?
Obviously, there were some notable comparisons from ’19 that affected ’20 pretty significantly. But just as you’re thinking about building your own budget, what are some of the key factors that are — or the swing factors in either your revenue or margin forms it said that we should be aware of as we put out our own ’21 estimates for your guidance?
Well, some of the swing factors, I think, will be the timing with respect to — I hate to use the word normalization, but let’s refer to it as relaxation of some of the restrictions with respect to travel, additional health and safety.
So as it relaxes, we will move back to more efficient and more field work. We’ll actually move to locations where we’ve been restricted or that are existing in the United Kingdom and Australia right now. And certainly here in some of the States, here in the United States. So for us, I think it’s actually a function that we’re looking at right now, which is a little one — is one of the more complicated exercises we’ve done in maybe ever with respect to planning our 2021. Because what I hear from our project managers and engineers are, what type of restrictions will I have before I can go out on to a given river or a lake for a sediment remediation project? Are there going to be restrictions that are going to become more constraining or less?
And that actually does make a difference for us. So that’s — I hate to say it’s an imponderable, but it’s one that we’re watching very closely. So that’s one item. I also think a big swing item, and we should know this here in the next week or 2 weeks, will be the role of the Federal Government with respect to stepping in for stimulus and providing additional funding for State, local or even other programs that would give confidence on our commercial sectors.
And by the way, that’s not just here in the United States. We just saw Europe passed a stimulus program of just under a $1 trillion, which is quite significant and will provide benefit for that marketplace. That geography we’re seeing similar discussions in the U.K. and Australia. So I think that these can actually be pretty.
And for the most part, all on a positive side because the dollars are often highly focused and aligned with infrastructure programs that will help the overall economy, putting people back to work, having lasting benefits for these various economies.
So those are a few things that we’re looking at very, very carefully. And then there’s some small items that may seem not that big that we’re looking at right now. And one is actually the construct of what Tetra Tech looks like with its offices. And we are clearly going to move to a hybrid model. And the hybrid model will be less office space, maybe 20% to 30% less office space. It will be a hybrid model, which will have the benefits that we’ve actually realized of working in a virtual-global collaboration platform that we have now.
We’re actually collaborating more today, significantly more today across our global platform than we did before the pandemic when we are working just in offices. But at the same time, we are going to return. So again, if you flip it over 25% less office, that means 75% may come back, which will give us the benefits of collaboration in the offices and the mentoring, and the perpetuating and development of the culture that we have here at the Company.
So we think we can have both. And a reduction of 25% of our office space, it won’t all hit our bottom line as a contribution in the first year. It will take roughly 3 years for that to fully bake in. But we think we have $20 million or $30 million of contribution to the bottom line from reduced office space. And in 3 years from now that could represent, or at least based on what we’re producing today. That’s a 10% increase in our earnings just on that office reduction. So those are some of the moving pieces that we’re looking at and working with as we move through the fourth quarter, and I’m really looking forward to sharing with you our guidance for 2021 based on our valuation of these and other factors.
Our next question comes from the line of Gerry Sweeney with ROTH Capital.
Wanted to talk about margins. I know several questions have come up on it already, but I want to take a little bit of a different tact and different look. Obviously, you highlighted the analytics growth strategy, $200 million today to $500 million. When you look at that business, does that carry a higher-margin than some of the historical Tetra Tech or GSG or CIG business? And could this be a margin enhancer as we go forward, either by being a utilization enhancer or just a higher-priced ticket type margin item?
Well, the answer is yes, yes and yes. So yes, it does carry a higher margin. Yes, it is driven by higher utilization. The one thing that we’re aware of here is that in the case of advanced analytics, most all of the revenue is net revenue. So quite often, we carry about 20% subcontract, 20%, 25% of the revenues we have is subcontracted for our field investigative activities. And that includes laboratories and field surveying and drilling. That’s subcontracted. And we generally get low and in many instances, no margin on the subcontracted work.
On the advanced analytics, it’s actually performed internally. And so it’s our professional staff that perform at. So we carry margin on all of the revenue. And so you’ll actually see it be enhanced to the revenue, we’ll be greater for a given dollar. The margin itself is higher because it’s actually highly specialized and there really is a very high demand, supply and demand, very high demand, relatively small supply, especially at the high end analytics that are linked with our domain experts. So, and the utilization is up, more of the revenue carries margin and it has margin in itself.
And we haven’t fully modeled out exactly what the increase in the GSG margins would be as a result of taking us from $200 million to $500 million. But we think that could move it up 100 or 200 basis points. So the 13 could move to a 14 or even higher once we get to a bit larger scale with our advanced analytics at the Federal level.
And then I just wanted to just follow-up quick questions. Talking about international development, obviously, travel has been delayed. Does this create a backlog opportunity of work that needs to be done once, as you said, relaxation of restrictions come into place?
Yes, it does. But I know that there are a couple of different ways of looking at a backlog. There is a, one school of thought is that there will then be a big rush of work to be complete.
And so that revenues will flow at a higher level in order to get up. What we see more often is since the work still has a finite throughput that can be completed, it’s generally pushed to the right. So it, the projects don’t become larger in a given quarter to keep the original schedule. So if the work that was to be done was originally scheduled to be done and completed by the end of 2021, a 6-month delay actually moves it to. It will be done the mid-year of 2021. So I think if things move to the right, not simply pile up and get back to the original schedule.
Got it. But at the end of the day, that revenue does eventually come through?
Yes. Yes, it does. Yes, it does.
And then just one quick follow-up. Obviously, your Tetra Tech’s financial position is very good. There was a comment about acquisitions and just being better positioned for that. But taken a little bit of a step further, does your financial position drive additional revenue opportunities versus competition that may be smaller, questionable in terms of leverage or anything like that?
Well, I think it does in a different light. So we do not like to use our balance sheet as a differentiator with respect to putting it on the table. So our goal is not because we can, that we want to put up a letter of credit, an LC or a bond or something else. Our goal isn’t because we have it, we want to put it at risk. That’s not our goal.
And in fact, the reason that we have a very strong balance sheet and a very low leverage and great cash generation is because we are fiscally prudent, and don’t do that. But I will say that many of our large commercial clients and say, even in the State, local and federal side are looking for larger, fiscally stable companies because what they don’t want to do, and we saw this during the global financial crisis.
We saw some of our largest clients across all of our sectors go to some of the more stable, larger firms because what they want is they want their consultants and engineers to be around for the life of their program and beyond. So I think it does give a natural tendency and priority to those that are most stable. And by the way, scale in and of itself is not the answer because we know a lot of very large firms in different sectors that just because they’re large, they weren’t safe. They went away.
So those that carry high leverage, those that have leverage multiples of 2, 3 or higher. You may be large, but you may not be long for this world. So I think we’re in an excellent position to have both, low leverage, access to plenty of capital, stable workforce and the predictability of deliverance across any of these economic changes.
Great. And congrats on a nice quarter.
Great. Thank you, Gerry.
Thank you. This will conclude the question-and-answer session. I will now turn the conference back over to Dan Batrack to conclude.
Great. Thank you very much, Michelle. And thank you all very much for your insight, your questions and mostly for your support of Tetra Tech. On behalf of myself and the 20,000 employees at Tetra Tech, we are committed to leading the science, promoting sustainability by the services we provide and supporting our clients with solutions in water, environment and infrastructure services.
And I really look forward to our next call, where I — we’ll share with you not only how we performed in the third quarter and all of fiscal year 2020, but giving you our forecast and guidance for fiscal year 2021. And thank you very much, and have a great rest of the day and a great rest of the summer. And be safe. Thank you.
Thank you. Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.