Tetra Tech, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Third quarter ended June 27, 2021; year-to-date figures cover the nine months ended on that date. Comparisons are with the periods ended June 28, 2020. Tetra Tech provides consulting and engineering services in water, environment, sustainable infrastructure, renewable energy, and international development.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Revenue | $801.6m | $709.8m | $2,321.5m | $2,241.5m |
| Gross profit | $125.7m | $114.4m | $354.5m | $321.1m |
| Operating income | $69.8m | $63.5m | $196.9m | $174.4m |
| Net income attributable to Tetra Tech | $51.9m | $45.5m | $149.9m | $129.2m |
| Diluted EPS | $0.95 | $0.83 | $2.74 | $2.34 |
| Operating cash flow | Not separately stated | Not separately stated | $226.5m | $194.6m |
Q3 revenue rose 12.9% and diluted EPS rose 14.5%; nine-month revenue increased 3.6% and diluted EPS increased 17.1%. Calculated consolidated gross margin was approximately 15.7% in Q3 and 15.3% year to date, versus 16.1% and 14.3% in the comparable periods. Calculated operating margin was approximately 8.7% in Q3 and 8.5% year to date, versus 9.0% and 7.8%. The company also reports “revenue, net of subcontractor costs,” a non-GAAP measure: $638.0m in Q3 and $1,843.0m for nine months, up 13.9% and 4.8%, respectively.
At June 27, 2021, cash and cash equivalents were $234.3m, versus $157.5m at fiscal 2020 year-end. Long-term debt was $234.0m and current debt and other short-term borrowings were $16.3m on the balance sheet. The company separately reported $246.5m borrowed under its credit agreement and $421.0m available under its revolving facility. Nine-month investing cash use was $23.1m; financing cash use was $137.5m. Total assets were $2,510.9m and stockholders’ equity was $1,192.5m.
Material changes and business trends
- Q3 growth was broad-based: GSG revenue increased 13.1% and CIG revenue increased 12.5%. Nine-month GSG revenue rose 7.9%; CIG revenue declined 2.0%, though CIG revenue net of subcontractor costs increased 0.7%.
- For the first nine months, U.S. state and local government revenue grew 20.3% and U.S. federal revenue grew 9.2%. U.S. commercial revenue fell 11.0%, primarily reflecting reduced industrial activity associated with COVID-19. International revenue increased 0.4%.
- Operating cash flow improved by $32.0m year over year, reflecting higher earnings and improved working capital. Repurchases were $45.0m, compared with $102.2m in the prior-year period; dividends paid were $29.2m.
- Backlog was $3.25bn at June 27, 2021, including $3.23bn of remaining unsatisfied performance obligations. The company cautions that cancellations, deferrals, scope changes, and termination provisions may affect conversion.
Outlook, risks, and unusual items
- No numerical full-year guidance is provided. Management expected U.S. state and local, U.S. federal, and international government work to grow for the remainder of FY2021. It also expected U.S. commercial revenue to grow, while warning that prolonged or worsening pandemic conditions could undermine that outlook.
- Management said government work, about 60% of revenue, had been stable; commercial activity was relatively more affected, with industrial project delays. Staff redeployment and remote-working capabilities helped sustain operations.
- Management stated existing cash, operating cash flow, and borrowing capacity should meet capital requirements for at least 12 months. The company reported compliance with debt covenants: leverage ratio 0.98x against a 3.00x maximum, and interest coverage 25.08x against a 3.00x minimum.
- Contract estimates are a key uncertainty: cost-to-cost revenue estimates can trigger cumulative adjustments or immediate recognition of projected losses. The company recorded $2.8m of net favorable operating income adjustments in the first nine months; anticipated contract-loss liabilities were $8.0m, down from $13.2m at fiscal year-end.
- The Hunters Point Naval Shipyard matter includes government False Claims Act and contract allegations against a subsidiary. Tetra Tech disputes the claims and said it cannot determine the probability of outcome or reasonably possible loss. Other professional-liability claims may exceed insurance coverage.
- Uncertain tax-position liabilities were $12.8m. Management warned that unfavorable audit outcomes could result in additional tax expense; the filing also noted potential valuation-allowance changes, particularly in the U.K.
- Foreign exchange affects international results and equity; the company also has variable-rate debt, partly hedged with swaps. On July 26, 2021, after quarter-end, it acquired Hoare Lea and declared a $0.20-per-share dividend.
Important facts for investors to verify
- Whether government growth and the expected recovery in commercial markets continue, particularly given COVID-19-related project delays.
- Whether backlog and RUPOs convert to revenue as anticipated, and how contract estimates, claims, and loss provisions evolve.
- Developments in the Hunters Point litigation, tax audits, and any resulting financial exposure.
- Debt, available borrowing capacity, covenant compliance, and the effect of interest-rate and foreign-exchange movements.
- Acquisition performance, including Hoare Lea, and the company’s capital allocation through dividends and repurchases.