Tetra Tech, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
Tetra Tech provides consulting, engineering and technical services focused on water, environment, sustainable infrastructure, renewable energy and international development. This filing covers the 53-week fiscal year ended October 3, 2021; the comparable fiscal 2020 year had 52 weeks. The company operated through Government Services Group (GSG) and Commercial/International Services Group (CIG), while winding down its non-core construction segment.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $3,213.5 million | $2,994.9 million | +7.3% |
| Gross profit | $498.4 million | $446.5 million | +11.6% |
| Income from operations | $278.7 million | $241.1 million | +15.6% |
| Net income attributable to Tetra Tech | $232.8 million | $173.9 million | +33.9% |
| Diluted EPS | $4.26 | $3.16 | +34.8% |
| Operating cash flow | $304.4 million | $262.5 million | +$41.9 million |
Gross margin was approximately 15.5% of revenue and operating margin approximately 8.7%, versus 14.9% and 8.1% in FY2020. Revenue, net of subcontractor costs, a company-presented non-GAAP measure, rose 8.7% to $2,552.2 million. On that basis, GSG operating margin improved to 13.7% from 13.0%, and CIG to 11.6% from 10.9%.
Reported FY2021 EPS included a $21.6 million non-recurring tax benefit, primarily from releasing U.K. valuation allowances. Excluding this benefit and other specified adjustments, adjusted EPS was $3.79 versus $3.26, up 16.3%; adjusted operating income increased 13.2% to $275.4 million. The effective tax rate was 12.8%, compared with 23.7%; management reported a 25.7% rate excluding specified non-recurring items and share-based compensation benefits.
Cash, debt and liquidity
- Cash and cash equivalents were $166.6 million at year-end, up $9.1 million. Operating cash flow was $304.4 million; investing cash outflow was $93.0 million and financing cash outflow was $210.1 million.
- Debt under the credit agreement was $212.5 million, down from $291.7 million. Cash less reported debt implies net debt of approximately $45.9 million.
- The company reported $449.3 million available under its revolving facility, with no revolver borrowings, and stated that it had sufficient liquidity for at least the next 12 months. It was compliant with debt covenants: leverage ratio 0.87x and interest coverage 26.38x.
- FY2021 shareholder returns included $60.0 million of share repurchases and $40.0 million of dividends ($0.74 per share). A new $400 million repurchase authorization was approved after year-end, in addition to $147.8 million remaining under the prior program.
Material changes and operating trends
- Reported revenue growth reflected acquisitions and increased government activity; excluding net acquisition contributions and the Canadian pipeline disposal impact, revenue grew 3.2%.
- GSG revenue increased 9.2%, supported by U.S. state and local water, environmental and disaster-response work, as well as acquisitions. CIG revenue rose 4.7%, including infrastructure growth in Canada and fewer pandemic-related restrictions.
- U.S. state and local revenue grew 22.2%, U.S. federal revenue 8.8%, and international revenue 7.9%; U.S. commercial revenue declined 5.4% amid weaker industrial activity.
- Backlog/RUPOs were approximately $3.5 billion, up 7.4% year over year. Management estimated about two-thirds would be recognized as revenue in FY2022; the filing separately lists $2.03 billion expected within 12 months.
- Four FY2021 acquisitions had aggregate purchase consideration fair value of $151.7 million, including estimated contingent earn-outs. Goodwill reached $1.11 billion; no goodwill impairment was recorded in FY2021, versus $15.8 million in FY2020.
Outlook, commentary, risks and unusual items
Management expected U.S. federal revenue to grow in FY2022, citing advanced analytics demand and focus on infrastructure and climate change. It anticipated continued international growth and U.S. commercial growth tied to environmental programs, net-zero goals and renewable energy. These are qualitative expectations, not quantified earnings guidance. Management cautioned that prolonged or worsening COVID-19 conditions could hurt commercial demand.
- Principal risks include government funding delays or reductions, contract cancellations and re-competes, competitive pricing, project cost overruns—especially on fixed-price contracts—staffing and utilization, acquisition integration, foreign exchange, cyber incidents and environmental or professional liability.
- The company’s critical audit matter was estimating total costs on fixed-price contracts. The auditor highlighted the judgment involved in cost-to-complete estimates, cumulative adjustments, anticipated losses and claims. The filing reported $12.7 million of anticipated contract losses and approximately $104 million of estimated costs to complete those contracts.
- A False Claims Act and breach-of-contract case concerns environmental remediation work at the former Hunters Point Naval Shipyard. Tetra Tech disputes the allegations and says it cannot determine the outcome or reasonably possible loss range.
- FY2021 included a $21.6 million non-recurring tax benefit and $3.3 million of gains from contingent earn-out remeasurement. Fiscal 2020 included a $15.8 million goodwill impairment, COVID-19 response costs and gains from non-core equipment disposals.
- On the first day of FY2022, the company moved operations with approximately $170 million of annual revenue from GSG to CIG and created a High Performance Buildings division; it said prior segment comparisons would be revised.
Important facts for investors to verify
- How much of FY2021 earnings growth reflects sustainable operating improvement versus the tax benefit, acquisition contributions and other adjustments; compare reported results with the company’s non-GAAP reconciliations.
- Whether backlog converts into revenue and profit as expected, given client termination rights, funding conditions and scope changes.
- Progress, exposure and any subsequent developments in the Hunters Point litigation, including potential insurance coverage or loss estimates.
- Fixed-price contract cost estimates, anticipated-loss provisions and collection of the approximately $11 million in claims receivable.
- Integration and performance of FY2021 acquisitions, contingent earn-out liabilities, and the impact of the FY2022 segment reorganization.