TETRA TECH INC annual report, FY2022

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Tetra Tech, Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended October 2, 2022 (52 weeks); this is an annual report, not a standalone fourth-quarter filing. Tetra Tech provides consulting and engineering services focused on water, environment, sustainable infrastructure, renewable energy and international development.

Financial performance and position

  • Revenue: $3.504 billion, up 9.0% year over year; revenue excluding subcontractor costs, a non-GAAP measure, was $2.836 billion, up 11.1%. Management estimated growth of approximately 11% after adjusting for the extra week in FY2021. Excluding acquisitions without comparable prior-year revenue, reported revenue grew 4.1%.
  • Profitability: Gross profit was $575.6 million, up 15.5% (gross margin 16.4%, versus 15.5%). Operating income was $340.4 million, up 22.2% (operating margin 9.7%, versus 8.7%). Net income attributable to Tetra Tech was $263.1 million, up 13.0%; diluted EPS was $4.86, up 14.1%.
  • Adjusted results: Management reported adjusted operating income of $334.0 million, up 21.3%, and adjusted diluted EPS of $4.50, up 18.7%. These non-GAAP measures exclude specified items, including the RPS-related foreign-exchange gain from adjusted EPS.
  • Segments: GSG revenue was $1.821 billion (+2.7%) and operating income $198.4 million (+13.6%); CIG revenue was $1.738 billion (+15.9%) and operating income $194.1 million (+27.5%). Segment margins on revenue net of subcontractor costs improved to 14.8% for GSG and 13.0% for CIG.
  • Cash flow and liquidity: Operating cash flow was $336.2 million, up 10.5%. Cash and equivalents were $185.1 million. Net cash used in investing activities was $55.7 million and in financing activities was $249.6 million. The company said cash, operating cash flows and borrowing capacity were expected to meet requirements for at least 12 months.
  • Debt: Borrowings were $258.8 million at year-end, against $484.3 million of available revolving credit; reported leverage was 0.76x and interest coverage 29.52x, within covenants. Cash less debt implies net debt of approximately $73.7 million. A subsequent $500 million term-loan facility was arranged to help finance the planned RPS acquisition.
  • Other metrics: Backlog/remaining unsatisfied performance obligations were $3.7 billion, up 7.6%; about two-thirds was expected to be recognized as revenue in FY2023. The company repurchased $200 million of shares and paid $46.1 million in dividends ($0.86 per share). Goodwill was $1.11 billion; no goodwill impairment was recorded in FY2022.

Changes versus the prior period

  • Growth was strongest in U.S. commercial (+17.4%), international (+13.6%) and U.S. state and local government (+12.5%) work. U.S. federal revenue declined 1.6%, largely due to the Afghanistan program wind-down; excluding Afghanistan, management reported approximately 3% growth.
  • Operating income growth included $6.5 million of Employee Retention Credits received in FY2022. Reported net income also included a $19.9 million unrealized foreign-exchange gain related to the planned RPS acquisition. The prior-year tax rate and EPS benefited from a nonrecurring U.K. valuation-allowance release.
  • Operating cash flow improved from $304.4 million to $336.2 million, which management attributed to higher earnings and improved working-capital collections. Financing cash use rose, primarily because of higher share repurchases.

Outlook, risks and unusual items

  • Outlook: Management expected FY2023 growth in U.S. federal, state and local, U.S. commercial and international work. It cited roughly $1 trillion of U.S. infrastructure, climate and technology-related legislation as a multi-year opportunity. No quantitative FY2023 revenue or EPS guidance is provided in the supplied filing text. Management cautioned that a global recession could affect international growth.
  • RPS transaction: The proposed all-cash acquisition of RPS for approximately GBP 636 million was approved by RPS shareholders on November 3, 2022, but remained subject to regulatory and court approvals. Closing was expected in January 2023. A GBP 714 million forward contract generated the FY2022 unrealized gain; it did not qualify for hedge accounting.
  • Principal risks: Exposure includes government budget and procurement changes, contract cancellations, fixed-price cost overruns and estimate revisions, labor recruitment and utilization, acquisition integration and goodwill impairment, foreign exchange and geopolitical conditions, cybersecurity, and environmental or professional-liability claims. Backlog is not a guarantee of revenue or profit.
  • Contingencies: The company disclosed a U.S. False Claims Act and breach-of-contract case involving environmental remediation at Hunters Point Naval Shipyard. It said it could not determine the probability of outcome or reasonably possible loss. Management did not expect other disclosed litigation and contingencies to have a material adverse effect, but noted uncertainty and insurance limitations.
  • Other unusual matters: A $11 million RCM claim was settled in May 2022, producing an immaterial gain. The auditor identified estimation of total costs on fixed-price contracts as a critical audit matter; anticipated contract losses were $10 million, with approximately $80 million estimated cost to complete those contracts. The auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Reconcile reported and adjusted earnings, particularly the $6.5 million Employee Retention Credit and $19.9 million RPS-related foreign-exchange gain.
  • Track RPS closing, final purchase consideration, financing costs and integration performance; the transaction was not complete at FY2022 year-end.
  • Assess whether the $3.7 billion backlog converts to revenue and profit as expected, considering cancellations, funding and scope changes.
  • Monitor fixed-price project cost estimates and the $10 million anticipated-loss provision, along with collection of receivables and contract assets.
  • Review the status and potential financial exposure of the Hunters Point litigation, government audits and other contingencies.
  • Check FY2023 results against management’s qualitative growth expectations and monitor leverage after acquisition-related borrowing.