Tetra Tech, Inc. — Fiscal 2021 First-Quarter 10-Q
Reporting period: Three months ended December 27, 2020, compared with the three months ended December 29, 2019. Amounts are in U.S. dollars; financial figures below are in millions unless noted. Tetra Tech provides consulting and engineering services focused on water, environment, sustainable infrastructure, resource management, energy, and international development.
Financial results and position
- Revenue: $765.1, down 4.1% year over year. Revenue excluding subcontractor costs was $605.2, down 1.4%; excluding acquisition contributions and the prior-year pipeline business disposal, revenue declined 7.5%.
- Profit: Gross profit was $116.3, up 6.0%; operating income was $66.3, up 4.7%; net income attributable to Tetra Tech was $52.4, up 10.8%. Diluted EPS rose to $0.96 from $0.85.
- Margins: Gross margin was approximately 15.2% of revenue versus 13.8% a year earlier; operating margin was approximately 8.7% versus 7.9%. GSG operating margin on revenue net of subcontractor costs increased to 13.8% from 12.8%; CIG’s increased to 11.4% from 11.1% (10.8% adjusted for the prior-year equipment disposal gain).
- Cash flow: Operating activities generated $33.2, versus $18.0 used in the prior-year quarter, primarily reflecting stronger receivables collections. Investing used $1.8. Financing used $32.8, including $15.0 of share repurchases and $9.2 of dividends.
- Liquidity and debt: Cash and cash equivalents were $163.4 at quarter-end. Credit-agreement borrowings were $288.5; the balance sheet reported current debt and short-term borrowings of $26.2 and long-term debt of $276.0. The company reported $386.3 of available borrowing under its revolving facility and compliance with debt covenants (leverage ratio 1.18x; interest coverage 20.51x).
- Work pipeline: Backlog was $3.188 billion, down from $3.239 billion at fiscal 2020 year-end. Remaining unsatisfied performance obligations were $3.164 billion, of which $1.823 billion was expected to be satisfied within 12 months.
Changes versus the prior-year quarter
- GSG revenue increased 2.5% and operating income increased 13.4%, supported by U.S. state and local water and environmental work, acquisitions, and improved labor utilization.
- CIG revenue declined 11.4% and operating income declined 6.6%, primarily due to pandemic-related impacts on commercial activity. Excluding the pipeline disposal, CIG revenue declined 9.9%.
- U.S. federal revenue rose 8.4%, including acquired business contributions; U.S. commercial revenue fell 13.1%; international revenue fell 12.4% (10.2% excluding the pipeline disposal).
- The effective tax rate fell to 17.0% from 21.1%, partly because excess tax benefits on share-based payments increased to $6.1 from $3.6. Excluding those benefits, the rates were 26.8% and 27.1%, respectively.
Outlook, risks, and unusual items
- Management provided no specific numerical fiscal 2021 earnings or revenue guidance in the supplied filing text. It expected modest growth in U.S. federal revenue, stable international government work, and continued greater pandemic impact on U.S. commercial activity than on government programs. Prolonged pandemic conditions could adversely affect international commercial activity.
- Management said U.S. state and local water and environmental programs were growing and expected further growth next year, while warning that client budget constraints could weigh on results. Increased disaster-response activity could provide upside.
- COVID-19-related travel restrictions delayed some international development projects, and reduced industrial activity affected commercial work. Tetra Tech reported that its offices and project teams continued operating, including through remote support.
- Estimated liabilities for anticipated contract losses were $11.4 at quarter-end, versus $13.2 at fiscal year-end; the related estimated cost to complete was approximately $135. Contract revenue depends on cost-to-cost progress estimates, which can change and result in immediate recognition of projected losses.
- The company disclosed an unresolved False Claims Act and breach-of-contract case concerning remediation work at Hunters Point Naval Shipyard. It could not determine the probability of outcome or reasonably possible loss. It also faces customary professional-liability claims and uncertain tax positions; unfavorable audit resolutions could increase tax expense.
- Management stated that cash, operating cash flow, and borrowing capacity should be sufficient for at least 12 months. This outlook is subject to pandemic effects, client spending, contract execution and estimates, foreign exchange and interest rates, and acquisition performance.
Important facts for investors to verify
- Whether commercial and international demand recover as pandemic-related disruption eases, and how that affects CIG margins and consolidated revenue.
- Conversion and timing of the $3.188 billion backlog, including potential cancellations, deferrals, or scope changes.
- Receivables collection, working-capital movements, and whether operating cash flow remains positive beyond this quarter.
- Debt, revolving-facility availability, covenant headroom, and exposure to variable interest rates and foreign currency movements.
- Developments in the Hunters Point litigation, contract-loss estimates, and uncertain tax examinations.