Tetra Tech Inc (TTEK) 2020 Q4 法說會逐字稿

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) With that, I would like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Great. Thank you very much, Laura, and good morning, and welcome to our fourth quarter and fiscal year 2020 earnings conference call.

Before I begin my presentation today, I'd like to begin with an update on the potential implications to our business from the election here in the United States that took place just 9 days ago. Well, first, it's very early, and the transition process hasn't even started yet. But we do know some things, and let me share with you what we've observed to date.

Joe Biden has identified climate change as the top priority of his administration. This priority is directly in line with our expertise and more than 50-year history in addressing the complicated aspects of water, environment and energy associated with climate change for the federal government. We work for agencies such as the United States Environmental Protection Agency, U.S. Agency for International Development, the Army Corps of Engineers and FEMA, who we believe will be among the frontline entities leading the government's climate change initiatives.

The Biden administration has also emphasized investing in infrastructure as a key to revitalizing the United States economy. Even in a likely divided Congress, government-sponsored infrastructure stimulus funding has the potential for bipartisan support. Clearly, we would also benefit from increased infrastructure spending. However, the timing of the new infrastructure stimulus package is uncertain at this time. As we see the new administration's programs develop, we'll give you additional updates on our quarterly calls.

I will now begin with an overview of our performance and customers, followed by Steve Burdick, our Chief Financial Officer, who will provide a more detailed review of our financials and capital allocation. I'll then address our customer outlook and our earnings guidance for fiscal year 2021.

We had a strong fourth quarter, led by our record EPS and backlog performance. Our revenue of $753 million was up 6% from the prior quarter. Our net revenue also increased on a sequential quarterly basis by 5% to $590 million, which is at the high end of our forecast. Our Q4 EBITDA of $74 million generated an adjusted earnings per share of $0.91, which is ahead of our expectations on strong performance across all of our operating divisions, and is also up 17% from the prior quarter. This represents the highest quarterly earnings per share in the company's history.

And our backlog, which is our best forward indicator, was up 5% year-over-year and 6% sequentially, growing to over $3.2 billion, also the highest in the history of the company.

I'd now like to provide an overview of our performance by our end customer. In the fourth quarter, revenue for all of our customers increased sequentially. We saw continued strength in our state and local revenues, which were up organically year-over-year 14% and up sequentially 9%. Excluding the extraordinary contributions of our disaster response work, this is the 5th consecutive year of double-digit growth in our state and local business.

Work for our U.S. federal clients was 30% of our net revenue in the quarter and was up 4% sequentially. Our U.S. federal work grew 5% year-over-year for civilian agencies and 10% for the U.S. Department of Defense. However, this growth was offset by delays in work for USAID due to travel restrictions associated with the COVID-19 virus.

Our U.S. commercial net revenue was 24% of our business and up 3% from the prior quarter. Our environmental permitting, our regulatory-driven programs and renewable energy services continue to be stable. We did see some reductions in consulting for nonregulatory services, especially for new buildings in the commercial property sector.

And finally, our international net revenue was up 7% from the prior quarter. We saw continued growth in our local government services and commercial energy work in Canada. However, discretionary work for commercial clients was impacted by project delays and cancellations in our Asia Pacific region.

I'd now like to present our performance by segment. This quarter, I'd like to provide more insight into our margin performance by segment, a key metric that we've been very focused on for the past several years. In the fourth quarter, both of our segments showed significant margin expansion on both a year-over-year basis and a quarter-over-quarter basis. The Government Services Group or the GSG segment was up 50 basis points year-over-year, delivering 14.6% margin in Q4 of fiscal year '20. The strong margin performance is driven by our high-end data analytics and design services for a broad base of our clients in the water and environmental and for both our local and federal clients.

The Commercial/International Group or CIG segment, its margins were up 150 basis points year-over-year as per our plan and is now closer to the GSG's margin. CIG delivered an 11.9% margin, up 180 basis points from the prior quarter, demonstrating a continued expansion of their margin in spite of the impacts of COVID-19. CIG's fourth quarter results were the result of the change to a more favorable business mix and a disciplined project delivery that our management team oversaw during the quarter.

For the full fiscal year of 2020, we achieved all-time record highs for EPS, cash from operations and backlog. Tetra Tech's full year revenue was $3 billion. Notably, we generated a record earnings per share of $3.16 on a GAAP basis and a record adjusted earnings per share of $3.26 for the year. We also generated record cash from operations of 300 -- sorry, of $262 million for the year. And I'm quite pleased with the performance of our team in this area, especially during the unusual circumstances and disruption caused by the global pandemic.

Finally, rounding out the year, our key leading indicator backlog was also a record high of just over $3.2 billion. Backlog was up 5% on a year-on-year basis and up 6% sequentially on strong broad-based orders, resulting in a new all-time high of just over $3.2 billion.

The last quarter of the fiscal year is typically our strongest quarter for orders from the federal government, and this quarter delivered fully up to our expectations. In the fourth quarter, we won new programs and task orders for differentiated water, environmental and renewable energy services across a broad base of our clients, both in the United States and internationally.

We expanded our contract capacity by $277 million, just over $0.25 billion with the United States Environmental Protection Agency and the U.S. Army Corps of Engineers for environmental restoration and hazardous waste management services. And just in the fourth quarter, we won $69 million in contracts for renewable energy and power consulting services, continuing our differentiated leadership in this market.

Now I'd like to turn the presentation over to Steve Burdick, to present the details of our financials for the quarter and year. Steve?

Okay. Thank you, Dan. So I'd like to now review the GAAP financial results for the fourth quarter of fiscal 2020 as well as our financial position as of the end of fiscal 2020.

Overall, our revenue and net revenue came in about as expected. The fiscal 2020 fourth quarter revenue was $753 million. And net revenue amounted to $590 million, which was in line with the higher end of our guidance range of $560 million to $600 million. Our fourth quarter 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 revenues would have been in line with the prior year.

Our operating margin and earnings per share increased compared to the prior year. This improvement in margins has resulted from both our project performance and our business mix as we continue to shape our portfolio. Our adjusted earnings per share of $0.91 came in better than the top end of our guidance for Q4, which was a range of $0.78 to $0.83. This improvement in our EPS was driven by the continued improvement in our operating margin, which saw an increase of 150 basis points over last year on a GAAP basis.

In the year -- in the current year, both our GAAP EPS of $0.82 and adjusted EPS of $0.91 were improvements over the fourth quarter of last year. The reconciliation details between our GAAP and adjusted results are included in the appendix of this presentation. Excluded from our adjusted earnings this quarter were 2 matters. First, we realized additional cash positive gains on the fourth quarter noncore equipment sales of our Canadian pipeline business. These equipment sales now are complete, and the total gain for fiscal 2020 was just shy of $9 million.

Secondly, we recorded noncash adjustments relative to purchase accounting in the fourth quarter: one for true-up of our earn-out liabilities; and two, a goodwill charge for our Asia Pacific division.

Tetra Tech continues to be fiscally disciplined and focused on generating positive cash flows in excess of our net income. And proactively, we're strengthening the balance sheet to ensure a healthy level of liquidity. As such, our cash flows generated from operations for the year totaled $262 million, including $68 million in the fourth quarter. This cash flow from operations amounts to about $4.80 of cash per share for the year. And on an annual basis, the cash flow generated is about 26% higher over our fiscal 2019.

Our focus on working capital and cash flows has also resulted in our days sales outstanding, or DSO, decreasing to 68 days as of the fourth quarter. This is an improvement of 10 days from last year and a sequential improvement of 2 days from last quarter. Our net debt amounts to $134 million, which is a 14% decrease from last year, while still our net debt-to-EBITDA came in at about 0.5x.

Our long-term capital allocation strategy calls for balance of investing in growth of the business, managing the balance sheet and providing shareholder returns. Over the last fiscal year, we have generated $262 million in cash from operations. And during the fourth quarter, we continued to benefit from this cash position by providing significant returns for our shareholders through both dividends and share buybacks.

Regarding our dividend program, during the past quarter, we paid out $9.2 million in dividends, and for the year, we paid out $35 million. I want to announce that our Board of Directors approved our 26th consecutive dividend, which will be paid in the month of December at a rate of $0.17 per share, which is a 13% increase over last year. Furthermore, we utilized $15 million in the fourth quarter and $117 million for the year on our stock buyback program. On a combined basis, we have $208 million remaining under both of our previously approved stock buyback programs.

And just as important to successfully implementing our capital allocation strategy to provide returns to our shareholders is to ensure that we have a strong balance sheet and ample liquidity. We have both in terms of our balance sheet at the end of Q4 and 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 key strategic acquisitions such as Segue Technologies, which we closed in February; and BlueWater Federal, which we closed in September.

I am very pleased to share these results with you for the fourth quarter. I want to thank you all for your support. And I will now hand the call back over to Dan.

Great. Thank you, Steve. As we enter our fiscal year 2021, we continue to be very focused on delivering differentiated high-end services to our clients. At Tetra Tech, we lead with science by combining our experience, world-class scientists and engineers and technical innovation in delivering over 65,000 projects a year for our clients.

We call our differentiated technologies the Tetra Tech Delta. The Tetra Tech Delta encompasses the full spectrum of the solutions that we've developed for our local, federal and commercial clients worldwide. If you're following along on the webcast, illustrated on the slide are just a few of the technical solutions that we're bringing to our clients today. Some of the examples are our award-winning Csoft, real-time control system that optimizes water management. Our rail artificial intelligence or RailAI solution that reduces data collection time by over 80%. Our virtual reality solutions that enable 3D analysis of rugged and inaccessible terrain to be fully displayed digitally. And our AI vision solution that trains AI bots to rapidly recognize infrastructure features out in the field and through electronic media.

By building on the foundation of Tetra Tech's fundamental expertise in water, the environment, energy and infrastructure, the Tetra Tech Delta makes technical innovation meaningful, practical and implementable for our clients. It's not just a on-the-shelf concept, it's actually deployed in the real field.

I'll now highlight our differentiated services across our 4 client sectors and what we're focused on for fiscal year 2021. Our U.S. federal work for us is distributed across civilian agencies, the Department of Defense and international development. For these agencies, we are their high-end consultants, applying data analytics to help advance their most critical programs.

We currently have about $20 billion in contract capacity with U.S. federal government, and we use that capacity to support over 100 different federal agencies and departments with their highest priority programs. We support the Department of Defense in analyzing and mitigating the impacts of emerging contaminants such as PFAS. We work with the United States Environmental Protection Agency coast-to-coast on national water quality assessments, watershed programs such as the Chesapeake Bay and some of the fundamental Superfund site evaluations all across the country.

And for the United States Agency for International Development, we work on some of their highest profile programs such as the sustainable fisheries program, which uses digital tracing to establish sustainable practices. In fiscal year 2021, we expect our U.S. federal work to be almost 1/3 of our business and grow at about a 5% rate for the year.

Tetra Tech works with more than 500 cities and municipalities across the United States. We provide our state and local clients with our #1 ranked services in water, water supply and desalination design. We address regulatory requirements by using advanced data analytics solutions to optimize water management. And we provide high-end water supply solutions by designing first-of-the-kind water reuse and brackish water treatment facilities.

We expect our U.S. state and local work to continue to be a growth market for us, with our municipal water and planning services and longer-term disaster recovery work growing at approximately a 10% rate, continuing our industry-leading performance in this market.

Our U.S. commercial work is primarily focused on differentiated environmental consulting and renewable energy services. We leverage our national reputation and #1 rankings in environmental science, in solid waste and in wind power and providing support to our clients that include the Fortune 500 commercial clients, top energy developers and waste management companies. Our work overall is distributed evenly across regulatory-driven programs such as environmental restoration of contaminated lands and discretionary programs for healthy buildings and renewable energy development. Our U.S. commercial work is expected to be about 1/4 of our overall business and grow at about a 3% rate for the year, driven primarily by increases in revenues for renewable energy.

International work is expected to be about 30% of our business, about evenly split between work we do for government clients and commercial clients outside the United States. Our international work includes high-end services in water systems, such as our intelligent real-time control program in Toronto, Canada. Our international programs also include high-end consulting for geotechnical investigations such as seismic sensor systems, [Arctic geotransportation] corridors in coastal zone management. Infrastructure stimulus programs expected to be deployed or implemented in Tetra Tech geography centers such as the United Kingdom and Canada could provide additional catalysts for growth in the latter portion of the year.

In fiscal year 2021, we expect Tetra Tech's international revenue to grow at a rate of about 2%. Our international growth will be driven by water and environmental planning, consulting and engineering work, primarily in Canada. However, the early part of the year is expected to be impacted negatively by continued lockdowns and slow economic recovery in United Kingdom and in Australia.

I'd now like to present our guidance for the first quarter of fiscal year 2021 and for the entire year of fiscal year 2021. Our guidance is as follows. For the first quarter, we anticipate a net revenue of approximately $570 million to $600 million with an associated diluted earnings per share of a range of $0.78 to $0.83. For the entire year and fiscal year 2021, we anticipate our collective net revenue to be in a range of $2.35 billion to $2.55 billion with an associated diluted earnings per share of $3.30 to $3.50. And if you're following along on the webcast, you can see the basis of some of the assumptions for this guidance for 2021 in the first quarter.

We do anticipate based on acquisitions previously concluded that we'll have approximately $8 million of amortization, which represents $0.12 per share. That's incorporated into the guidance. We expect a 25% effective tax rate. We expect approximately 54.5 million shares outstanding for the company. And I will note, as in past practices with our annual guidance, this guidance does exclude the contributions of any future acquisitions that may take place during the year.

In summary, we had an excellent fourth quarter and fiscal year 2020, setting new records for earnings, cash generation and EPS for our shareholders. As we enter fiscal year 2021, our high-end water, environment and renewable energy services and our approach of Leading with Science is more in demand than ever before. Our all-time high backlog of over $3.2 billion provides us with both excellent visibility and momentum as we move into our new fiscal year.

And with that, I'd now like to open up the call for questions. Laura?

(Operator Instructions) Our first question comes from the line of Sean Eastman with KeyBanc Capital Markets.

Nice strong finish to the year. I'd just like to start with the customary swing factors around the fiscal '21 guidance, just the real needle-moving dynamics that could get you to the upper or lower end. And looking longer term, as we think about this election outcome, what would -- what drives sort of an accelerated top line growth trajectory into fiscal '22 under this administration?

Good question, Sean. The swing factors, the growth rates that I had shared during my prepared remarks do represent and would model out to the midpoint of our guidance. We certainly have the ability to go to the high end. And I think some of the items that could drive us to the high end, some of them are very short-term transactional items such as increased revenues from the storm events. That would include the fires out of West Coast. That would include the storms that have taken place. But those would be onetime. Certainly, they would have a short-term impact on a positive, both in the early quarters and the year.

Probably on a longer-term basis, though, a more structural contribution would be the new priorities that the new federal administration if the Biden administration fully gets this implemented. And this would be, as said in my prepared remarks, focus on climate change, clean environment, focus on renewable energy. All of these are absolutely fundamental core areas of expertise for the company. And I think that we would have high confidence that, in fact, they would be put in place. And even without increases in funding or budget funding, we would also expect that they could actually prioritize the existing dollars that are spent by the government to areas that would be a focus of Tetra Tech.

Got you. Okay. That's helpful. And on the advanced analytics side, it seems like the fourth quarter was another leg of momentum on that side. And I'm just curious how you guys are tracking against that $300 million target for fiscal '21, sort of advanced analytics revenue that you had in last quarter. And is it fair to say that as we look over the next year or 2, growth in that advanced analytics business is really the kind of key margin expansion driver over that time frame?

Yes. The federal government, I think the continued growth in advanced analytics is going to expand our margin. We're on track for $300 million. It continues to grow at about a 15% to 20% organic rate for the federal government, and it is slightly higher margin. We do think that the growth of that business over the year will increase our overall targets for our GSG or Government Services Group from what had been 12% to 13%. We think it will add up probably 50 basis points for fiscal year 2021, so probably to 12.5% to 13.5%. So it is making an impact even right now.

Okay. Got it. And I'm going sneak one last one in. I mean clearly, you guys are well positioned within the framework of what this new administration has outlined here. But maybe on the flip side of that, Dan, are there any pockets of maybe risk, whether it be within the DoD business or otherwise that you guys are watchful of on the downside?

Well, I think the biggest issue would be not the administration or its priorities. I think with respect to defense, we have no engagement or participation in weapons platforms or logistics or these other items. Our work is on the environmental restoration side. So even a reduced spending in the defense sector, typically, we've seen with the base realignment and closure back a decade ago, actually had increased costs for environmental investigation assessment. Probably the biggest issue is a divided Congress that would end up in a lack of progress with respect to coming up with budgets. But even a continuing resolution, which means a freeze of the budget from the prior year is actually fine for us, because the executive administration or the President's administration would actually give the priority of where those funds are spent largely within each of the departments, which should be very favorable for us.

Our next question comes from the line of Noelle Dilts with Stifel.

Congrats on a nice quarter. Thanks for the clarity on the GSG margins. I was hoping you could also give us a sense of how you're thinking about CIG margins as you look out to fiscal '21 and what some of the key factors are that will impact how those are trending?

Yes. Well, we think that as a range for CIG, we think it's increased over 100 basis points from the previous year. So we think 11% to 12% range would be what we'd anticipate for the year. So it's closing in on GSG. Some of the swing factors, I think we've taken care of a number of them that needed to be addressed coming into the year, which is business mix, including closing down our turnkey Canadian pipeline work, that's been helpful. And probably the next most material area that we need for improvement is actually in our United Kingdom or the U.K. acquisition of WYG. We think that, that -- just moving into double-digit performance, which we think can happen this year, that in and of itself would account for probably half of that increase that we need to obtain this.

And I would say the swing factors with respect to what might be a headwind, obviously, the -- on the commercial side and some of the international lockdowns with respect to the pandemic could represent a bit of unknown factors at this moment. So both the slowdown or lockdown associated with the economic impacts that are associated with that are items that we're watching closely. But we've had those this last 6 months, 8 months, and we think we have pretty effectively developed structures and business approaches to address these lockdowns so far.

Okay. Great. And then on the topic of the U.K., could you give us an update on how you're thinking about the M&A opportunity there? I know you chatted a bit about looking at a U.K. water acquisition to complement WYG. Just curious kind of what the progress has been there and how you're thinking about that opportunity?

Well, we have had meetings with a number of firms. So there are opportunities out there. (inaudible) classic pipeline is full or at least it's sufficiently full that we have alternatives. We are looking for just the right firm. And I think some of the characteristics would be strong technical reputation, existing contracts with the utilities as they exist. And preferably, they would add a new sense of capability and expertise in the water sector that might not be as strong. Some of it might be on the economics portion that we're not necessarily strong economist, but that's certainly is part of some of the AMP cycle 7 priorities for doing that analysis. So that is something that we would look to make progress on in fiscal year 2021.

Our next question comes from the line of Sam England with Berenberg.

The first one I had, could you just talk about how the integration of recent acquisitions is going? And whether those acquisitions, the enhanced proposition you have has led to any contract wins that you might not otherwise have won before you did those deals?

Well, obviously, we've had here just a little over 30 days ago, roughly about 1.5 months ago, we announced the acquisition of BlueWater Federal, a little over a 30 days. And we've already seen a number of new contract wins that maybe more importantly is with new departments and agencies within the federal government that we hadn't worked before. So that's extremely valuable for us. It gives us new opportunity not only for the acquisition, in this case, BlueWater to bring in their expertise that can offer to our clients, which we've already initiated, but it also opens up offerings of the rest of the Tetra Tech services to these clients that we haven't had access to in the past So that's gone quite well.

If I go back just over a year ago, the WYG or White Young Green in the U.K., I'm proud to announce that we have fully integrated into our ERP systems. So it took us about a year, but we've migrated those couple of thousand people over to our ERP systems. We've had a significant number of wins across multiple client sets in the U.K. that we would not have had before, including working for some of the water utilities that they had not worked before by getting sole-source work in the U.K. We've had additional wins with the Ministry of Defense and a number of other areas there. So that's worked out quite well.

And by putting them on our platforms. It's allowed us to free up a number of the back-office staff to do more meaningful contributions to the operation folks, which has increased margins. And while we're not anywhere close to where we want to be in the U.K. yet, we're probably halfway there, even in light of the pandemic taking place. So moving on to these more efficient systems we have and integrating and cross-selling for revenue synergies has worked very well there.

Okay. Great. And then the next one, you've mentioned that you've been seeing sort of the trend towards a larger volume of smaller contract wins in Q4. What's behind that trend? And do you think it will continue into 2021?

Well, I think it will. So let me characterize what we're seeing. In fact, in the fourth quarter, I think it was our second highest number of orders that we received in the company. So it wasn't a single order. It wasn't just a Department of Defense task or project or program that drove it. It wasn't a single project or country mobilization for aid or anything else. It was really very, very large number of projects and task orders, and many of those were new programs that were starting up. So instead of single big blocks coming in with large orders, and I think you can actually see it in our backlog presentation slide. If you look down the orders that we booked, they typically were bundled into a number of categories. So I think that there are a couple of things that it reflects.

It reflects our clients making smaller bets as they go forward. So instead of providing us $10 million for 6 months, they're providing us $1 million every 3 weeks to get to the same levels. It does give them more flexibility. It allows them to be a bit more nimble. And it allows them also to perhaps spread out those single dollars to other projects that could move forward also. So we see it as a favorable trend. And I expect that it's going to continue for a little while until some of the uncertainty associated with this pandemic and other economic items get a little bit clearer for them.

Our next question comes from the line of Marc Riddick with Sidoti & Company.

I wondered if you could spend a little time talking about potential opportunities around -- and this is more, I guess, more global focus, I suppose, but as far as the opportunity as far as rejoining of Paris Climate Accord. And as well as with the federal election, I was wondering if -- with as much focus that we've had on the federal election, I was wondering if there was some state and local mandates or funding that was sort of top of mind or areas that (inaudible) represents opportunities for the company as well?

It's a good question. And I do believe that the U.S. joining -- rejoining the Paris Climate Accord, while that is one act that I understand will be put in place, and there's been a commitment or an indication from the Biden administration that will be the case, but what we actually see -- and we've seen early publications of some of the policies of doctrines that will be with the U.S. federal government with the executive branch is actually a whole of government approach which actually indicates that what they're going to do is identify individual champions and individual focuses that will address climate change as it impacts each and every department and each individual agency. And so this, I think, is going to broaden out the access and the priority for the types of services we have. And a lot of that is both here in the U.S., and of course, the impact that it has globally through the U.S. state department, through international development, through bilateral accords, through all of these.

So I do believe this focus on a whole of government will ripple globally through all of the investments and priorities that exist. And I just can't think of a individual end market or focus that would be more closely aligned to what Tetra Tech does and the expertise we have at the very front leading edge of this type of research and practical implementation of the Tetra Tech Delta or the technologies we've developed over the last 50 years. So I think that alignment portends very well for the company.

That's great. And then I guess maybe a quick follow-up on a different note. So wondering what the opportunities that you do see for the year as far as the budgeting for that was embedded with the guidance. I was wondering if you could spend a little time talking about talent acquisition thoughts and sort of maybe what we might see throughout the year and if there's a timing component to that to take advantage of the opportunities that you see before you?

Well, I do think the one item that Tetra Tech does have great bench strength, a great (inaudible) of world-class experts in a number of areas. And some would say that our staff is quite fungible with respect to being able to move from supporting commercial clients at front-end cutting-edge treatment technologies to federal government. So as these opportunities increase, I think we'll be able to mobilize our staff quite quickly to address them and to be -- not only respond to precisely what they're asking, but also to be able to introduce additional scenarios or alternatives that perhaps haven't been fully vetted yet.

So I think we can be both on the front implementable, which I believe in my comments are, it's not only being developed, but it's actually being mobilized. So I think that with respect to talent acquisition, we certainly are bringing some of the best and brightest through acquisitions. We do have a number of strategic hires that join us from academic institutions and other leading entities globally. But we do have the ability to take the best and brightest across our entire enterprise and apply it to the clients' problems where they need solutions on almost a real time. So there should be no lag as these opportunities present themselves during 2021.

Our next question comes from the line of Ryan Connors with Boenning and Scattergood.

Congratulations on a tremendous run for the stock.

Thank you very much, Ryan.

So my question is more big picture in nature. This topic, you've talked a lot about this potential for federal infrastructure, environmental spending under Biden administration. But -- and the stock does appear to be prizing some of that in. But how worried are you that he will be inheriting a massive federal budget deficit, especially given that the politics seem to be such that maybe additional stimulus spending for COVID economically seems like the first priority. So they definitely going to get even bigger before they even get around to any of this. So how much -- how realistic is it to expect a big ramp there? When you look back at the history, generally coming off a recession, the government is trying to get the deficit under control. And Tetra Tech actually tends to underperform, because the government is trying to reduce the deficit. So what's your view there?

Yes, I've seen that note. First of all, there's some things I agree with, with respect to what the natural progression of a stimulus is. So when the initial stimulus comes out, there's more work, more projects, more demand for the services that we provide. And we think that because these will be more aligned with renewable energy, environment, climate change, that they actually are different than just traditional A&E services. So we think that we would fare better.

But I do think if you just look at it from a macro view and sort of set aside the services, they do spend a lot at the beginning. There's big spending. And then, of course, what happened under the Obama administration during the last major global financial crisis is that it does then go through eventually, at least historically, through sequestration, which was their words for spending less to get the budgets in place.

What we have seen is that as the federal budget begins to decrease its spending to recover from these very large deficits -- and by the way, I want to emphasize, the very large spending for the deficits for infrastructure and others, which also happened under Obama, have not yet happened. So that is still in front of us, which is a big hill to climb with respect to work that needs to be done. So that should be an enormous tailwind.

But if you do want to take it to its logical next step, it's that at some point, you need to now pay for the amount that you've spent. What happens is, and this is what we've observed, that then typically is followed by a recovery in the general economy with commercial clients and even state and local spending, tax receipts, property values and other items that are the output of the stimulus. So yes, we have seen during sequestration, where there was a 10% year-over-year reduction in spending at the federal government, we did see that come down a bit, but we saw offsetting increases in commercial and state and local.

So -- and with respect to Tetra Tech's performance during previous recessions or stimulus spending, we haven't gone back and looked at that. And there were actually other factors with respect to submarkets that we had that actually account for that, and it was not associated with the actual work or the positions we had with the federal government. So I do think that while at the surface it could be attributed with the lack of knowledge of what the actual impacts were, if you look a little deeper, you could see that it was actually other drivers that had impacts in those particular years.

Okay. Now what about the fact that if we peel back the onion on the politics, obviously, the presidential politics is highest profile. But it sounds like, based on what you're saying, if the big driver is the federal spend, the environmental spending, Green New Deal, infrastructure, et cetera, it sounds like the Senate is really the key issue. So how different is your outlook a couple of months from now if the Republicans hold the Senate and this is very difficult to get some of this through versus if it's even or if Democrats take control of the Senate and then a lot of this could really just really could expand for a few years? I mean how critical is that side in your view?

Well, the one thing we feel very optimistic about for the type of work that we provide and the areas that we're focused on is that -- let's pick a complete stalemate. Nobody will do anything. House goes one way, Senate goes the other way and that they just will agree on nothing. So what they end up with, and unless you're going to shut the government down, is to end up with a continuing resolution, which is we agree to disagree and we're just going to not fund anything and there'll be no increase. So under that scenario, it's the executive branch, the President that sets the priority within his appointees as to where the dollars are spent that have been provided through the continuing resolution. And that should be very favorable to us.

And that's why we believe that even without an increase or an increased deficit spending, whatsoever, we could still be a very large beneficiary of the priorities with respect to the government to actually implement their priorities for climate change, the New Green Deal, the items you just outlined. So we don't need increased stimulus spending. We don't need increased federal deficits in order to fare very well through this next period.

Got it. Okay. And then one last one from me. Just you kind of danced around this a little bit, but if you could just kind of look at your buckets of business, specifically the types of projects you see coming down the pike, not everything carries the same type of margin. So in terms of the mix of business, what are the margin profiles of the things that you see, the areas that you see growing relative to the areas of potential contraction?

Well, the areas that we think will grow, we think, in the federal government, our advanced data analytics is going to help expand our margin. It's an area that's growing 15% to 20% organically in 2020. We saw 20% organic growth. We think that number is in the same neighborhood coming into 2021. We did add BlueWater Federal here essentially in the first day of this fiscal year. That gives us additional contributions in area of a better, higher margin. So this is an area that we think is growing. It's growing well for us and has higher margins.

Renewable energy in the commercial sector to move over to CIG, work that we're doing in offshore wind. Tetra Tech has more -- has done more permitting work, monitoring evaluation and during construction monitoring and environmental impairment in the marine environment, net sedimentation impact to marine mammals, shellfish, fisheries, flyways, we've done more work on offshore leases than all others combined. And so we're not just the majority that we don't have the most of a given share. We're actually quite dominant there. And it has a priority. We'll see additional focus on that as part of the New Green Deal and others.

But it also makes economic sense. There are larger turbines. You have less impact with respect to local land use since it's far offshore. And we think this is another growth area for us, and we're in an excellent position for that. And that also carries higher margin for us. So those are a couple of areas that we see growing, both on the government and commercial side, that are coming down the pike that will actually carry margins and help that margin expansion, both on the government and commercial and international sectors for us.

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

Thank you very much, Laura, and thank all of you for your insights, questions and interest in Tetra Tech. We were really glad to finish fiscal year 2020 with such a strong fourth quarter. And in the 50 years, and I haven't been here at Tetra Tech for all 50-plus years of its history, but I've been here for an awful lot of those, and no doubt fiscal year 2020 was the most complicated, the most varied with the pandemic, with oil prices going to negative, with the largest single unemployment drops followed by quick recoveries. In many ways, it was the -- one of the most complicated or the most complicated year.

But I just want to commend the staff at Tetra Tech, the leadership team that I work with every day. Our Board of Directors, because I believe that we could not have navigated this better. I was glad to see that revenues held up unbelievably well. We saw growth through the second half, all-time high earnings per share, all-time high backlog, all-time cash generation. And thanks to our phenomenal finance team, I was glad we were able to finish the year with completing stock buybacks, with completing dividend executions, completing multiple acquisitions and decreasing the leverage of the company. And I think there are a few or no firms that can say that irrespective of the very bright end markets that we have looking forward to us in 2021.

But with that said, I look forward to talking with all of you on the next quarterly call. And be safe and healthy until then. Thank you.

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