Tetra Tech, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Second quarter and six months ended April 3, 2022; comparisons are to periods ended March 28, 2021. Unaudited interim results. Tetra Tech provides consulting and engineering services focused on water, environment, sustainable infrastructure, clean energy, and international development.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $852.7 million | $754.8 million | $1,711.3 million | $1,519.9 million |
| Gross profit | $135.2 million | $112.5 million | $274.9 million | $228.8 million |
| Income from operations | $74.5 million | $60.8 million | $161.7 million | $127.1 million |
| Net income attributable to Tetra Tech | $53.0 million | $45.5 million | $121.5 million | $98.0 million |
| Diluted EPS | $0.98 | $0.83 | $2.23 | $1.79 |
Q2 revenue rose 13.0%, operating income 22.6%, and diluted EPS 18.1%. For the first half, revenue increased 12.6%, operating income 27.3%, and diluted EPS 24.6%. Excluding acquired-business contributions, management reported revenue growth of approximately 7% in both periods.
Gross margin was approximately 15.8% in Q2 versus 14.9% a year earlier, and 16.1% for the first half versus 15.1%. Operating margin was approximately 8.7% in Q2 versus 8.1%, and 9.5% for the first half versus 8.4%. First-half adjusted operating income was $157.3 million and adjusted diluted EPS was $2.17, excluding $4.5 million of Employee Retention Credits (ERCs); these are non-GAAP measures.
Segments and revenue mix
- GSG: First-half revenue increased 5.6% to $905.1 million; operating income increased 20.6% to $101.5 million. Growth reflected state and local water, environmental, and disaster-response work. First-half segment operating margin on revenue net of subcontractor costs was 15.3%, or 14.8% excluding ERCs.
- CIG: First-half revenue increased 20.4% to $833.2 million; operating income increased 31.0% to $85.8 million. Growth came from commercial environmental work, high-performance buildings, international infrastructure activity, and acquisitions. First-half segment operating margin on revenue net of subcontractor costs was 12.0%, or 11.8% excluding ERCs.
- By client sector, first-half revenue increased 23.7% from U.S. state and local government, 15.6% from U.S. commercial, and 22.7% internationally; U.S. federal revenue declined 2.5%, primarily reflecting lower international development activity, especially in Afghanistan.
Cash flow, liquidity, and debt
- Six-month operating cash flow: $177.5 million, compared with $157.4 million a year earlier. Management attributed the improvement to higher earnings and better working capital, including faster receivables collections.
- Investing cash flow: $35.6 million used, primarily reflecting acquisition payments. Financing cash flow: $115.8 million used, including $100.0 million of share repurchases and $21.6 million of dividends.
- Cash and cash equivalents were $194.4 million at April 3, 2022, up $27.8 million from fiscal year-end. Current assets were $1,081.6 million and current liabilities $855.2 million.
- Long-term debt was $237.5 million on the balance sheet; total borrowings under the credit agreement were $250.0 million, all under the term loan, with no revolving borrowings. The company reported $499.3 million available under its $500 million revolving facility and $799.3 million of total available borrowing capacity.
- The amended credit agreement matures in February 2027 and has maximum leverage and minimum interest-coverage covenants. At quarter-end, reported ratios were 0.82x and 28.09x, respectively, and the company was in compliance. The year-to-date effective borrowing rate including swaps was 3.50%.
- Management believes cash, operating cash flow, and borrowing capacity will be sufficient for capital requirements for at least the next 12 months.
Outlook, notable items, and risks
- Management expected second-half FY2022 revenue to continue growing year over year at a rate similar to the first half, after normalizing for the extra week in FY2021’s fourth quarter. It expected continued growth in state and local government, federal government, U.S. commercial, and international work, while noting federal growth expectations were partly tied to advanced analytics and infrastructure and climate priorities.
- Remaining unsatisfied performance obligations were $3.59 billion, with $2.17 billion expected to be satisfied within 12 months. These obligations may change due to cancellations, deferrals, or scope adjustments; certain operations and maintenance contracts can be terminated on short notice.
- First-half results included $4.5 million of ERCs received in Q1 and recognized as a benefit; adjusted results exclude this item. Revenue and profit also depend on contract estimates: favorable cumulative catch-up adjustments were $5.0 million in the first half, and accrued anticipated contract losses were $11.6 million at quarter-end.
- Fiscal 2022 acquisitions had a purchase price fair value of $70.0 million, including estimated contingent consideration. Outstanding acquisition earn-outs had a $139.6 million maximum potential value, of which $79.1 million was accrued at fair value.
- Professional-liability claims and lawsuits are typical for the industry; some damages sought may exceed insurance or be uninsured. The Hunters Point Naval Shipyard False Claims Act and breach-of-contract case remains unresolved; the company said it cannot determine the probability of outcome or reasonably possible loss.
- Uncertain tax-position liabilities were $13.9 million. Tax audits could result in additional expense if resolved less favorably than expected. The company cited interest-rate and foreign-currency exposure; it reported no material change in its previously disclosed risk factors.
- A previously disputed $11 million RCM claim was settled in May 2022; management expected an immaterial gain in Q3 FY2022. The board declared a $0.23-per-share dividend in May, up from $0.20 per share in the prior two quarterly declarations.
Key facts for investors to verify
- How much reported growth reflects organic activity versus acquisitions, particularly in CIG and international markets.
- Whether second-half growth expectations were achieved and how margins developed after excluding the one-time ERC benefit.
- Conversion and collectability of the $3.59 billion RUPO, contract assets, and unbilled receivables, including the effect of cancellations and contract-estimate revisions.
- Debt levels, borrowing costs, covenant headroom, and the cash demands of acquisitions, earn-outs, repurchases, and dividends.
- Developments in the Hunters Point litigation, professional-liability matters, tax examinations, and other contingencies.