Tetra Tech, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2023, ended July 2, 2023. Comparisons are with the periods ended July 3, 2022, unless noted.
Business context and results
Tetra Tech provides consulting, engineering and technology services focused on water, environment, sustainable infrastructure, renewable energy and international development. It reports two segments: Government Services Group (GSG) and Commercial/International Group (CIG). Results include RPS, acquired in January 2023, and Amyx, acquired in the second quarter.
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $1.209 billion | $890.2 million | $3.262 billion | $2.601 billion |
| Gross profit | $188.8 million | $144.6 million | $512.9 million | $419.5 million |
| Income from operations | $97.7 million | $83.9 million | $250.7 million | $245.6 million |
| Net income attributable to Tetra Tech | $60.2 million | $58.7 million | $219.8 million | $180.2 million |
| Diluted EPS | $1.12 | $1.09 | $4.10 | $3.32 |
Q3 revenue rose 35.8% and nine-month revenue rose 25.4%. Excluding RPS, revenue growth was 11.0% for the quarter and 10.4% year to date. Calculated gross margin was approximately 15.6% in Q3 and 15.7% year to date; operating margin was approximately 8.1% and 7.7%, respectively. The nine-month results include an $89.4 million foreign-exchange forward-contract gain in non-operating income. Adjusted diluted EPS, a non-GAAP measure, was $1.15 for Q3 and $3.55 year to date, increases of 6.5% and 9.2%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $246.1 million, down from $276.0 million. Investing cash outflow was $761.9 million, primarily reflecting acquisitions; financing cash inflow was $494.4 million, largely from borrowings.
- Cash was $176.1 million at July 2, 2023, versus $185.1 million at fiscal year-end. The company reported $919.4 million of credit-agreement borrowings, including the RPS-related term loan and revolver borrowings. Year-to-date weighted-average borrowing rate was 5.88% (5.46% including swaps).
- The filing cites $614.3 million of additional borrowing capacity in its capital-requirements discussion and separately reports $314.3 million available under the revolving facility. Investors should verify the scope of these different capacity figures.
- Debt covenants were met: consolidated leverage ratio 2.01x against a 3.25x maximum, and interest coverage 10.95x against a 3.00x minimum. Management said cash, operating flows and borrowing capacity should meet requirements for at least 12 months.
Material changes and management commentary
- RPS contributed $389.9 million of revenue in the first nine months. Its acquisition materially increased CIG revenue and drove higher debt, goodwill and intangible assets. RPS also brought significant amortization expense.
- GSG nine-month revenue grew 14.7%, supported by federal and infrastructure work, including Ukraine-related energy programs; lower disaster-response activity partly offset growth. CIG revenue grew 36.3%, including RPS; excluding RPS, growth was approximately 7% (11% constant currency).
- Management expects federal, state/local water and infrastructure, U.S. commercial clean-energy and international work to continue growing through the remainder of fiscal 2023. No specific full-year revenue or EPS guidance is provided in the filing text.
- Management expects additional RPS integration costs in Q4 FY2023, potentially material. It is evaluating capital-structure and interest-rate hedging strategies to reduce future borrowing costs.
- The board declared a $0.26-per-share quarterly dividend payable September 6, 2023. No shares were repurchased in the first nine months; $347.8 million remained under the repurchase authorization.
Risks, contingencies and unusual items
- RPS-related foreign-exchange gains boosted reported nine-month income, while acquisition and integration costs, $8.5 million of contingent earn-out charges and higher interest expense weighed on results. The $89.4 million recognized gain is non-operating and non-recurring.
- Uncertain tax-position liabilities rose to $48.8 million from $10.6 million at fiscal year-end. Some may decrease as examinations proceed, but less favorable outcomes could increase tax expense.
- The company faces professional-liability claims and a False Claims Act case involving environmental remediation at Hunters Point Naval Shipyard. Management cannot determine the probability or reasonably possible loss range for the latter; it disputes the allegations.
- Other exposures include variable interest rates, foreign-currency translation, contract estimate changes and potential project losses. The filing reports $9.7 million of anticipated contract-loss liabilities and notes that fixed-price work can carry execution risk.
Most important facts for investors to verify
- How much underlying organic growth and future earnings contribution RPS delivers after amortization and integration costs.
- Whether operating cash conversion and working-capital trends improve, and the precise availability of borrowing capacity.
- Debt repayment plans, interest-rate exposure and covenant headroom following the RPS acquisition.
- Progress and potential financial exposure in the Hunters Point litigation and uncertain tax examinations.
- Whether management’s qualitative growth expectations translate into reported results, and how non-GAAP adjusted EPS reconciles to GAAP earnings.