Tetra Tech, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended July 3, 2022; comparisons are to the periods ended June 27, 2021. Amounts below are in U.S. dollars. Tetra Tech provides consulting and engineering services focused on water, environment, sustainable infrastructure, renewable energy, and international development.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $890.2m | $801.6m | $2,601.5m | $2,321.5m |
| Revenue, net of subcontractor costs | $720.5m | $638.0m | $2,099.5m | $1,843.0m |
| Gross profit | $144.6m | $125.7m | $419.5m | $354.5m |
| Income from operations | $83.9m | $69.8m | $245.6m | $196.9m |
| Net income attributable to Tetra Tech | $58.7m | $51.9m | $180.2m | $149.9m |
| Diluted EPS | $1.09 | $0.95 | $3.32 | $2.74 |
Revenue grew 11.1% in Q3 and 12.1% year to date; excluding contributions from acquisitions without comparable prior-year activity, management reported growth of approximately 5% and 6%, respectively. Year-to-date operating income rose 24.8% and diluted EPS rose 21.2%. Calculated from reported figures, gross margin was approximately 16.2% in Q3 (15.7% prior year) and 16.1% year to date (15.3% prior year); operating margin was approximately 9.4% in Q3 (8.7% prior year) and 9.4% year to date (8.5% prior year).
Cash flow and liquidity: Nine-month operating cash flow was $276.0m, versus $226.5m, with management citing higher earnings and improved working capital. Investing activities used $38.3m, including acquisition payments; financing activities used $182.5m, including $150.0m of share repurchases and $33.9m of dividends. Cash ended at $217.4m, up $50.8m from fiscal year-end. Accounts receivable was $722.9m and net contract liabilities were $147.2m at July 3.
Debt: The balance sheet reports $27.1m of current debt and short-term borrowings and $234.4m of long-term debt. The company separately reports $246.9m outstanding under its amended credit agreement, all in the term loan, with no revolver borrowings. The filing reports $499.3m available under the $500m revolving facility and also states $799.3m of additional borrowing availability; investors should verify the scope of the latter figure. Leverage and interest coverage ratios were 0.85x and 28.19x, respectively, and the company stated it was in covenant compliance.
Business trends and material changes
- CIG led growth: nine-month revenue increased 20.0% and segment operating income increased 33.3%, reflecting commercial environmental work, high-performance buildings, international infrastructure activity, acquisitions, and improved project execution and labor utilization.
- GSG nine-month revenue increased 4.9% and segment operating income increased 14.5%. Growth included state and local water, environmental, and disaster-response work; U.S. federal revenue declined 2.3%, primarily because Afghanistan work ceased, but grew more than 2% excluding Afghanistan.
- By client sector, nine-month revenue increased 19.3% in U.S. state and local government, 18.1% in U.S. commercial, and 20.7% internationally; U.S. federal revenue decreased 2.3%.
- Fiscal 2022 year-to-date results include $5.5m of Employee Retention Credits, recognized when received. Excluding these credits, adjusted operating income increased 22.0% and adjusted diluted EPS was $3.25 versus $2.74. These are non-GAAP measures.
- The company acquired TIGA, Piteau Associates, and other smaller businesses for a reported total fair value of $86.5m. It also reorganized operations, creating a High Performance Buildings division within CIG and transferring certain operations from GSG; prior-period segment figures were reclassified.
Outlook, risks, and unusual items
- Management expected Q4 FY2022 revenue to continue growing year over year on a constant-currency basis and after normalizing for the extra week in Q4 FY2021. It expected growth to continue in state and local, U.S. commercial, international, and U.S. federal work excluding Afghanistan; stronger U.S. dollar effects were expected to slow international growth. No specific earnings or EPS guidance is provided in the supplied filing text.
- Remaining unsatisfied performance obligations were $3.5bn, including $2.18bn expected to be satisfied within 12 months. The company cautions that cancellations, deferrals, scope changes, and termination rights may reduce this amount.
- Foreign currency translation reduced equity by $42.8m year to date, versus a $54.5m increase in the prior-year period. Management also noted potential exposure to variable interest rates, although interest-rate swaps hedge part of the exposure.
- Management said inflation had not materially adversely affected operations and was not expected to do so in the foreseeable future, citing project duration and ability to negotiate prices on new contracts. The company identified no material changes to previously disclosed risk factors.
- The U.S. government’s False Claims Act and breach-of-contract case relating to remediation at Hunters Point Naval Shipyard remains unresolved. Tetra Tech disputes the allegations and stated it cannot determine the probability of outcome or reasonably possible loss. Other professional-liability claims may exceed insurance coverage, though management did not expect them to materially affect the company.
- Estimated liabilities for anticipated contract losses were $11.1m, related to contracts with approximately $84m of estimated costs to complete. The company recorded a net unfavorable $2.8m contract estimate adjustment in Q3, but a net favorable $2.2m adjustment for the first nine months.
- Uncertain tax-position liabilities were $11.3m; audits could result in higher tax expense than currently recorded. Acquisition earn-out liabilities were $83.3m fair value, against maximum outstanding potential consideration of $141.1m.
Most important facts to verify
- Reconcile the reported $799.3m of borrowing availability with the $499.3m available under the revolving facility, and clarify total debt across balance-sheet and credit-agreement disclosures.
- Assess how much reported growth and margin improvement is organic and sustainable after acquisitions and the $5.5m year-to-date Employee Retention Credits.
- Monitor CIG and GSG performance, federal work excluding Afghanistan, and the expected Q4 growth outlook, including foreign-exchange effects.
- Evaluate conversion of the $3.5bn performance-obligation balance into revenue and cash, including cancellations, client termination rights, and contract-loss estimates.
- Track the Hunters Point litigation, tax audits, acquisition earn-outs, and the company’s foreign-currency and variable-rate debt exposures.