Tetra Tech, Inc. — Q1 Fiscal 2023 10-Q
Business context and period. Tetra Tech provides consulting and engineering services focused on water, environment, sustainable infrastructure, renewable energy and international development. This unaudited quarter ended January 1, 2023; comparisons are with the three months ended January 2, 2022, unless otherwise stated.
Financial performance and position
| Metric | Q1 FY2023 | Comparable period / change |
|---|---|---|
| Revenue | $894.8 million | $858.5 million; up 4.2% |
| Revenue less subcontractor costs | $736.6 million | $679.3 million; up 8.4% (12% on a constant-currency basis) |
| Gross profit / gross margin | $153.2 million / 17.1% | $139.8 million / 16.3% |
| Operating income / operating margin | $92.1 million / 10.3% | $87.2 million / 10.2% |
| Net income attributable to Tetra Tech | $116.7 million | $68.5 million; up 70.4% |
| Diluted EPS | $2.18 | $1.25; up 74.4% |
| Operating cash flow | $25.2 million | $82.4 million |
Revenue growth reflected higher activity across client sectors. U.S. commercial revenue rose 12.5%; international revenue rose 4.2% reported and approximately 14% at constant currency. State and local government revenue declined 3.7%, primarily on lower disaster-response work; excluding disaster response, it increased approximately 10%. Revenue less subcontractor costs rose in both segments: 7.9% in GSG and 8.9% in CIG. Segment operating margins on that measure were 17.1% for GSG and 13.1% for CIG.
Reported earnings included a $68.0 million unrealized foreign-exchange forward-contract gain related to the planned RPS acquisition. The contract settled on January 23, 2023 with a cumulative gain of approximately $109 million. Adjusted EPS, a non-GAAP measure excluding this and other specified items, was $1.34, up 12.6% from $1.19. Adjusted operating income increased 16.9% to $96.7 million. The prior-year comparison included $4.5 million of Employee Retention Credits; current-quarter results included $3.8 million of acquisition and integration expenses and $0.9 million of contingent-consideration fair-value losses. Net interest expense increased to $5.4 million, including a $2.7 million write-off of deferred debt fees. The effective tax rate was 24.5%, versus 18.8%.
At January 1, 2023, cash and cash equivalents were $164.4 million; cash, cash equivalents and restricted cash totaled $172.2 million. Current assets were $1.235 billion and current liabilities $870.6 million. Balance-sheet debt totaled $246.6 million, comprising $12.5 million current and $234.1 million long term; borrowings under the credit agreement were $240.6 million. The company reported $499.3 million available under its revolving facility and compliance with its leverage and interest-coverage covenants. Operating cash flow fell $57.2 million year over year, which management attributed mainly to timing of vendor and employee payments. Financing cash use was $42.3 million, including dividends, taxes on vested restricted stock and net debt repayment.
Outlook, developments and risks
- Management expected growth to continue through the remainder of fiscal 2023 in U.S. federal, state and local, U.S. commercial and international work. It cited federal infrastructure, climate and semiconductor legislation, water infrastructure, renewable energy and sustainability activity. The filing provides no consolidated numerical earnings or revenue guidance.
- Remaining unsatisfied performance obligations were $3.79 billion, with $2.46 billion expected to be satisfied within 12 months. The filing cautions that contracts may be canceled, deferred or revised; certain operations and maintenance contracts can generally be terminated on short notice.
- After quarter-end, Tetra Tech acquired Amyx on January 3, 2023 and RPS on January 23, 2023. RPS’s purchase price, including assumed debt and transaction costs, was approximately GBP 714 million. The company drew the full $500 million new term-loan facility for part of the RPS financing; remaining cash payments for RPS and Amyx were financed with revolver borrowings. The filing does not provide post-acquisition pro forma results or final purchase-price allocations.
- Risks include acquisition integration and increased borrowing, variable interest rates and foreign-currency movements, project cost-estimate changes, and contingent liabilities. The company reported $7.6 million of anticipated contract-loss liabilities. It also disclosed the unresolved False Claims Act and contract-breach litigation concerning Hunters Point Naval Shipyard; the probability and reasonably possible loss could not be determined. Professional-liability claims and uncertain tax positions are additional contingencies.
- Management said inflation had not materially adversely affected operations and was not expected to do so in the foreseeable future, citing project duration and repricing opportunities. The company stated there were no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Separate recurring operating performance from the $68.0 million unrealized FX gain and other adjustments; review the non-GAAP reconciliation and the subsequent settlement gain.
- Assess post-quarter financing and leverage following the RPS and Amyx acquisitions, including the term-loan draw and revolver borrowings.
- Track operating cash flow and working-capital movements, particularly receivables, accrued compensation and contract liabilities.
- Monitor conversion and cancellation risk in the $3.79 billion performance-obligation balance, alongside segment growth and margins.
- Follow the Hunters Point litigation, uncertain tax examinations and contract-loss estimates, for which outcomes or potential losses may be uncertain.