Tetra Tech, Inc. (NASDAQ: TTEK) — Q2 FY2021 Form 10-Q
Reporting period: Second quarter and six months ended March 28, 2021; comparisons are with periods ended March 29, 2020. Amounts are U.S. dollars unless stated otherwise.
Business context
Tetra Tech provides consulting and engineering services in water, environment, sustainable infrastructure, resource management, energy, and international development. Its principal segments are Government Services Group (GSG) and Commercial/International Services Group (CIG); Remediation and Construction Management (RCM) is winding down. Government work represented about 60% of revenue and was comparatively stable during the COVID-19 disruption.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $754.8m | $734.1m | $1,519.9m | $1,531.8m |
| Gross profit | $112.5m | $97.0m | $228.8m | $206.7m |
| Operating income | $60.8m | $47.5m | $127.1m | $110.8m |
| Net income attributable to Tetra Tech | $45.5m | $36.4m | $98.0m | $83.7m |
| Diluted EPS | $0.83 | $0.66 | $1.79 | $1.51 |
| Operating cash flow | Not separately stated | Not separately stated | $157.4m | $83.2m |
Q2 revenue rose 2.8%, while first-half revenue declined 0.8%; excluding the net effects of acquisitions and a prior business disposal, first-half revenue declined 3.8%. First-half gross margin was approximately 15.1% versus 13.5% and operating margin was approximately 8.4% versus 7.2%. Management also reports revenue net of subcontractor costs, a non-GAAP measure: it increased 0.5% in the first half despite the slight decline in reported revenue.
At March 28, 2021, cash and cash equivalents were $225.3m, total assets $2.46bn, and stockholders’ equity $1.15bn. Balance-sheet current assets were $1.06bn and current liabilities $796.7m. Debt and other short-term borrowings on the balance sheet totaled approximately $267.2m; borrowings under the amended credit agreement were $250.8m. The company reported $419.6m available under its revolving facility and compliance with debt covenants (leverage ratio 1.03x; interest coverage 23.06x). Operating cash flow increased year over year, primarily due to payment timing with vendors and employees.
Changes and operating trends
- GSG first-half revenue grew 5.4% and operating income 21.2%, supported by U.S. state and local water, environmental, and disaster-response work. Its operating margin on revenue net of subcontractor costs improved to 13.6% from 11.9%.
- CIG first-half revenue declined 8.4%, reflecting COVID-related commercial and international weakness and the prior pipeline-business disposal. Operating income increased 4.8%; its margin on revenue net of subcontractor costs improved to 10.9% from 9.7%.
- U.S. state and local government revenue rose 12.0% in the first half; U.S. federal revenue rose 9.2%, including acquired-business contributions. U.S. commercial revenue fell 11.9% and international revenue fell 9.2%.
- Backlog was $3.15bn at quarter-end, down from $3.24bn at fiscal year-end; remaining unsatisfied performance obligations were $3.13bn, of which $1.83bn was expected to be completed within 12 months. Cancellations, deferrals, and scope changes remain possible.
Outlook, risks, and unusual items
- Management expected U.S. commercial revenue to grow in the second half, supported by renewable energy and environmental programs, and expected international government work to improve. These expectations were conditional; prolonged COVID-19 disruption could further affect commercial and international activity. Management expected modest FY2021 growth in U.S. federal revenue, while noting federal spending priorities could change.
- Management said cash, operating cash flows, and borrowing capacity were expected to meet requirements for at least the next 12 months, including potential COVID-related needs. No numerical full-year earnings or revenue guidance is provided in the supplied filing text.
- First-half results included $1.1m of favorable contract-estimate adjustments and $2.8m of claim-related revenue gains in CIG. Anticipated contract-loss liabilities were $9.5m. Contract estimates, claims collection, and project cost overruns could affect future results.
- COVID-19 continued to delay some projects and reduce industrial activity. Management cited foreign-currency exposure, variable-rate debt exposure, and uncertain tax positions ($10.0m liability). The filing identifies a False Claims Act and contract dispute concerning remediation work at Hunters Point Naval Shipyard; the company disputes the allegations and could not estimate the probability or range of loss.
- Other items: the company acquired computational-fluid-dynamics firm Coanda Research and Development Corporation; repurchased $30m of shares in the first half; and declared a subsequent quarterly dividend of $0.20 per share. The filing reports no material change in risk factors and states disclosure controls were effective.
Key facts for investors to verify
- Whether projected second-half recovery in commercial and international markets materializes, particularly if COVID-related delays persist.
- How much reported growth and segment performance reflects acquisitions, foreign exchange, prior disposals, and contract-estimate or claim adjustments.
- Backlog conversion, project cancellations or deferrals, and the status of contracts with anticipated losses.
- Debt, available borrowing capacity, covenant headroom, and cash-flow sustainability given working-capital timing.
- Developments in the Hunters Point litigation and uncertain tax examinations, including any change in estimated exposure.