Tetra Tech, Inc. — Q2 FY2023 Form 10-Q
Business context and reporting period. Tetra Tech provides consulting, engineering, program management and technology services focused on water, environment, sustainable infrastructure, renewable energy and international development. This unaudited filing covers the quarter and six months ended April 2, 2023; comparisons are with the periods ended April 3, 2022. Results include RPS from its January 23, 2023 acquisition and Amyx from its January 2023 acquisition.
Key financial results
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $1,158.2m | $852.7m | $2,053.0m | $1,711.3m |
| Income from operations | $61.0m | $74.5m | $153.1m | $161.7m |
| Net income attributable to Tetra Tech | $42.8m | $53.0m | $159.5m | $121.5m |
| Diluted EPS | $0.80 | $0.98 | $2.98 | $2.23 |
| Operating cash flow | Not separately reported by quarter | $113.1m | $177.5m |
Q2 revenue rose 35.8%; six-month revenue rose 20.0%. Excluding RPS, management reported revenue growth of 15.9% for Q2 and 10.1% for the first half. First-half reported net income and EPS benefited substantially from a foreign-exchange forward-contract gain; see unusual items below. Non-GAAP adjusted EPS was $1.06 for Q2, up 8.2%, and $2.40 for the first half, up 10.6%.
Margins. GAAP gross margin was approximately 14.7% in Q2 versus 15.9% a year earlier; first-half gross margin was approximately 15.8% versus 16.1%. Q2 operating margin was approximately 5.3% versus 8.7%. Acquisition and integration costs and contingent consideration fair-value losses weighed on operating income.
Balance sheet and liquidity. At April 2, 2023, cash was $231.4m, current assets $1,468.8m and current liabilities $1,173.0m. Long-term debt was $1,065.0m, with a further $12.5m current portion; total borrowings under the credit agreement were reported as $1.08bn. The company said it had $459.3m of additional borrowing capacity under its amended credit facility, while separately reporting $159.3m available under the revolving facility. Management believes cash, operating cash flow and borrowing capacity will meet requirements for at least 12 months. Covenant ratios were 2.44x leverage and 14.24x interest coverage, within required limits.
First-half investing cash outflow was $755.2m, primarily reflecting $854.3m of net cash paid for acquisitions. Financing activities provided $680.5m, principally from acquisition-related borrowing. Cash increased $46.3m from fiscal year-end.
Material changes and management commentary
- RPS, acquired for approximately $784m, contributed $169.5m of revenue from closing through April 2; its reported net loss for that period was $2.0m before intangible amortization. RPS added scale in energy transformation, water and program management. Amyx expanded federal technology and cybersecurity services.
- Six-month revenue grew across federal, commercial and international markets. U.S. state and local revenue declined 4.5%, mainly because of lower disaster-response activity; excluding disaster response, it increased 20.2%.
- Management expected federal, state and local, U.S. commercial and international work to continue growing in the remainder of FY2023. It cited infrastructure, water, environmental, renewable-energy and sustainability investment as demand drivers. The filing provides no specific full-year revenue or EPS guidance.
- RPS integration expenses, primarily for IT systems integration and real-estate consolidation, were expected to continue in the second half of FY2023 and could be material.
Unusual items, risks and contingencies
- The RPS-related foreign-exchange forward contract generated $89.4m of non-operating income in the first half, including $21.4m in Q2; its cumulative cash gain at settlement was approximately $109.3m. It was an economic hedge but did not qualify for hedge accounting.
- First-half acquisition and integration expenses were $23.7m. Contingent consideration remeasurement losses were $8.5m, largely reflecting stronger-than-expected performance of certain prior acquisitions. These items reduced reported operating income.
- Net interest expense increased to $18.7m for the first half from $6.0m, primarily due to debt raised for RPS and certain debt-fee write-offs. The first-half weighted-average borrowing rate was 5.46% before the disclosed effect of interest-rate swaps.
- The company recorded $6.7m of non-operating tax expense in Q2 related to foreign earnings no longer considered indefinitely reinvested and an uncertain tax position. Uncertain-tax-position liabilities were $42.4m at April 2, 2023; they could decrease materially within 12 months, but less favorable audit outcomes could increase tax expense.
- The company faces professional-liability claims and an ongoing False Claims Act and contract case concerning environmental remediation work at Hunters Point Naval Shipyard. It disputes the claims and said it could not determine the probability or reasonably possible loss. Management did not expect other professional claims to have a material adverse effect, while acknowledging uncertainty.
- RUPO was $4.24bn, including $2.88bn expected to be satisfied within 12 months. The company cautioned that cancellations, deferrals and scope changes may occur; some operations and maintenance contracts can be terminated on short notice.
Important facts for investors to verify
- How RPS integration, amortization and debt costs affect future operating margins, cash generation and adjusted EPS.
- Whether organic growth and segment profitability continue, particularly given lower disaster-response revenue and the margin mix of international development work.
- Debt repayment progress, interest-rate exposure, covenant headroom and the differing available-credit figures disclosed in the filing.
- Resolution and potential financial effects of the Hunters Point litigation and uncertain tax positions.
- Conversion of RUPO into revenue and cash, including the risk of contract termination, deferral or scope changes.