Tetra Tech, Inc. — Q1 Fiscal 2022 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 2, 2022; comparisons are with the three months ended December 27, 2020. The company reorganized operations and established a High Performance Buildings division in CIG, reclassifying prior-year segment results.
Financial results
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $858.5 million | $765.1 million | +12.2% |
| Revenue, net of subcontractor costs | $679.3 million | $605.2 million | +12.3% |
| Gross profit | $139.8 million | $116.3 million | +20.2% |
| Income from operations | $87.2 million | $66.3 million | +31.6% |
| Net income attributable to Tetra Tech | $68.5 million | $52.4 million | +30.6% |
| Diluted EPS | $1.25 | $0.96 | +30.2% |
| Cash from operating activities | $82.4 million | $33.2 million | +$49.2 million |
Gross margin was approximately 16.3% of revenue, versus 15.2%; operating margin was approximately 10.2%, versus 8.7%. Excluding $4.5 million of COVID-19 Employee Retention Credits (ERCs), adjusted operating income was $82.8 million, up 24.9%, and adjusted diluted EPS was $1.19, up 24.0%. These are non-GAAP measures.
Revenue growth included acquisition contributions; excluding those contributions, management reported approximately 7% growth. GSG revenue rose 7.4% and operating income rose 19.9%; CIG revenue rose 16.8% and operating income rose 31.1%. Segment operating margins on revenue net of subcontractor costs improved to 15.6% for GSG and 12.9% for CIG, or 14.7% and 12.5%, respectively, excluding ERCs.
Cash, debt, and liquidity
- Cash and equivalents were $205.5 million at January 2, 2022, up from $166.6 million at fiscal year-end October 3, 2021. Operating cash flow improved year over year, which management attributed partly to higher earnings and faster receivables collections.
- Long-term debt was $246.9 million and current debt and other short-term borrowings were $16.7 million. Credit-agreement borrowings totaled $259.4 million; $399.3 million was available under the revolving facility. The company also reported $699 million of additional borrowing capacity, including the broader facility capacity described in the filing.
- Credit covenants were met: consolidated leverage ratio was 1.01x against a 3.00x maximum, and interest coverage was 27.52x against a 3.00x minimum. Management said available cash, operating cash flow, and borrowing capacity should cover capital requirements for at least 12 months.
- Net cash used in investing activities was $6.9 million, including acquisition-related payments; net cash used in financing was $36.4 million, including $50.0 million of share repurchases and $10.8 million of dividends.
Outlook, commentary, and risks
- Management expected continued growth through the remainder of fiscal 2022 in state and local government water and environmental programs, U.S. commercial environmental work and high-performance buildings, and international activity supported by infrastructure stimulus and sustainability requirements. It also expected U.S. federal revenue to grow, citing advanced analytics and infrastructure, climate, and development priorities. The filing provides no quantified company-wide financial guidance.
- Remaining unsatisfied performance obligations were $3.4 billion, with about $2.0 billion expected to be satisfied within 12 months. The company cautioned that cancellations, deferrals, and scope changes can reduce this amount.
- Management described the business as seasonal, with revenue and operating income typically lower in the first half of the fiscal year. COVID-19 effects included project delays in some industrial markets; management reported no significant pandemic-related deterioration in liquidity to date.
- Key exposures include project-estimate changes and potential contract losses, acquisition execution and contingent earn-outs, foreign-exchange movements, and variable-rate debt. Contract liabilities exceeded contract assets by $121.1 million; liabilities for anticipated contract losses were $14.2 million.
- The company disclosed professional-liability claims and a False Claims Act and breach-of-contract case involving environmental remediation at Hunters Point Naval Shipyard. It could not determine the probability or reasonably possible loss for the Hunters Point matter. Management said resolution of other claims was not expected to materially harm the company, while acknowledging uncertainty.
- Uncertain tax-position liabilities were $13.4 million; unfavorable audit resolutions could increase tax expense. The filing reported no material change in risk factors from the 2021 10-K.
Most important facts for investors to verify
- How much of reported growth and margin expansion is sustainable after excluding the $4.5 million ERC benefit and acquisition contributions.
- Whether cash conversion remains strong as receivables, contract assets, and contract liabilities change.
- The realization, timing, and cancellation risk in the $3.4 billion RUPO, and the profitability of projects with anticipated losses.
- Debt costs and available liquidity as the credit agreement approaches its July 2023 maturity, including covenant headroom.
- Developments in the Hunters Point litigation, tax examinations, and acquisition earn-out obligations.