Tetra Tech, Inc. — Fiscal 2024 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2023; comparable period ended January 1, 2023. Tetra Tech provides consulting, engineering, program management and technology services focused on water, environment, sustainable infrastructure, renewable energy and international development. The interim financial statements are unaudited.
Financial results and position
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $1,228.3 million | $894.8 million | +37.3% |
| Revenue, net of subcontractor costs (non-GAAP) | $1,015.2 million | $736.6 million | +37.8% |
| Gross profit | $190.5 million | $153.2 million | +24.3% |
| Income from operations | $111.1 million | $92.1 million | +20.7% |
| Net income attributable to Tetra Tech | $75.0 million | $116.7 million | -35.8% |
| Diluted EPS | $1.40 | $2.18 | -35.8% |
| Operating cash flow | $9.2 million | $25.2 million | Down $15.9 million |
- Gross margin was approximately 15.5% of revenue, versus 17.1% a year earlier; operating margin was approximately 9.0%, versus 10.3%.
- FY2023 first-quarter results included a $68.0 million non-operating unrealized foreign-exchange forward-contract gain related to the RPS acquisition. Excluding specified prior-year acquisition, earn-out and financing items and that gain, adjusted diluted EPS was $1.40 versus $1.34, up 4.5%. Management reported no comparable non-recurring EPS items in Q1 FY2024.
- Cash and cash equivalents were $198.7 million at quarter-end, up from $168.8 million at fiscal year-end. Operating cash flow was affected primarily by the timing of vendor and employee payments. Investing cash use was $3.4 million; financing provided $18.4 million.
- Long-term debt was $945.3 million, including $575 million of convertible notes and $385 million of credit-facility borrowings, net of debt costs and discount. The credit facility’s weighted-average borrowing rate was 6.75%. Available revolving credit was $434.3 million; management said cash, operating cash flow and borrowing capacity should meet requirements for at least 12 months.
- Debt covenants were met: consolidated leverage ratio 1.84x against a 3.25x maximum; interest coverage 9.49x against a 3.00x minimum. Total stockholders’ equity was $1,537.7 million.
Material changes and business drivers
- Revenue growth included RPS, acquired in January 2023, which was not in the prior-year comparable quarter. Excluding RPS, revenue increased more than 13%, according to management.
- International revenue rose 77.4%, including RPS; excluding RPS, it rose 9.3%. U.S. federal revenue increased 38.4%, including approximately $65 million of additional Ukraine international-development program revenue year over year. U.S. state and local revenue declined 1.5%, but increased 23.6% excluding lower disaster-response activity. U.S. commercial revenue grew 11.8%.
- Government Services Group revenue increased 22.1% and operating income 4.6%; its margin on revenue net of subcontractor costs fell to 14.3% from 17.1%, reflecting contract mix and fewer favorable project adjustments. Commercial/International Group revenue rose 52.2% and operating income 42.5%; its comparable margin measure was 12.5% versus 13.1%, or 13.4% excluding RPS versus 13.1%.
- Backlog was $4.737 billion and remaining unsatisfied performance obligations were $4.707 billion at December 31, 2023; approximately $3.149 billion of RUPO was expected to be satisfied within 12 months. These amounts can change through cancellations, deferrals or scope changes.
- Contract liabilities increased to $382.9 million from $335.0 million at fiscal year-end, while contract assets declined to $89.1 million from $113.9 million. Favorable contract-estimate adjustments added $5.7 million to revenue and operating income; anticipated contract-loss liabilities were $9.2 million.
Outlook, risks and unusual items
- Management expects fiscal 2024 growth in U.S. federal, state and local, U.S. commercial and international work, citing infrastructure investment programs, water infrastructure, clean energy and sustainability-related activity. The filing does not provide a clear numerical full-year revenue or earnings forecast.
- Management notes first-half seasonality from holidays and weather, which can reduce billable hours and project work. It does not expect inflation or changing prices to materially harm operations in the foreseeable future, citing project duration and repricing opportunities.
- RPS acquisition-related financing, amortization and integration affect comparisons. Net interest expense rose to $9.6 million from $5.4 million, primarily due to acquisition-related borrowings; the prior-year period also included the foreign-exchange gain described above.
- Risks include interest-rate and foreign-currency exposure, execution and margin risks on fixed-price contracts, estimates of contract costs and losses, acquisition integration and goodwill recoverability. International business generated 38.5% of revenue, increasing exposure to currency translation.
- The company faces professional-liability claims and a False Claims Act and contract dispute concerning environmental remediation work at Hunters Point Naval Shipyard. Tetra Tech disputes the claims; management could not determine the probability of outcome or reasonably possible loss. Management does not expect other professional-liability claims to have a material adverse effect, while acknowledging uncertainty.
- Uncertain tax-position liabilities were $61.7 million; unfavorable audit outcomes could result in additional tax expense. Standby letters of credit totaled $58.1 million across the credit agreement and other facilities. The filing says potential payments under certain performance guarantees cannot be estimated.
Important facts for investors to verify
- How much of reported growth and future performance reflects organic demand versus RPS and the Ukraine program, and whether these drivers persist.
- Whether operating margins recover, particularly in GSG, and whether contract mix or project-estimate changes affect profitability.
- Cash conversion and working-capital trends, given operating cash flow of $9.2 million and the increase in receivables to $1,040.5 million.
- Debt costs, refinancing and covenant headroom, including the 2026 term-loan maturity and 2028 convertible notes.
- Developments in the Hunters Point litigation, uncertain tax audits, contract-loss estimates and any changes to backlog or RUPO.