Tetra Tech(TTEK) - 2021 Q2 - Quarterly Report

Financial Information Financial Statements (Unaudited) The unaudited statements show increased assets to $2.46 billion, a 17.0% rise in net income, and a significant increase in operating cash flow Financial Metric | Financial Metric | March 28, 2021 (in thousands) | September 27, 2020 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $225,330 | $157,515 | | Total current assets | $1,064,111 | $999,785 | | Goodwill | $1,029,573 | $993,498 | | Total assets | $2,455,062 | $2,378,558 | | Liabilities & Equity | | | | Total current liabilities | $796,702 | $793,456 | | Long-term debt | $238,339 | $242,395 | | Total liabilities | $1,307,834 | $1,341,185 | | Total stockholders' equity | $1,147,228 | $1,037,373 | Metric (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended Mar 28, 2021 | Three Months Ended Mar 29, 2020 | Six Months Ended Mar 28, 2021 | Six Months Ended Mar 29, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $754,764 | $734,133 | $1,519,868 | $1,531,756 | | Gross Profit | $112,484 | $97,000 | $228,794 | $206,737 | | Income from Operations | $60,807 | $47,530 | $127,059 | $110,832 | | Net Income Attributable to Tetra Tech | $45,517 | $36,397 | $97,953 | $83,707 | | Diluted EPS | $0.83 | $0.66 | $1.79 | $1.51 | Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended Mar 28, 2021 | Six Months Ended Mar 29, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $157,424 | $83,199 | | Net cash used in investing activities | ($7,283) | ($27,299) | | Net cash used in financing activities | ($91,129) | ($39,257) | | Net increase in cash | $67,815 | $14,234 | Revenue and Contract Balances Revenue was primarily driven by the U.S. federal government sector, with $3.1 billion in Remaining Unsatisfied Performance Obligations (RUPOs) Revenue by Client Sector (Six Months Ended) | Revenue by Client Sector (Six Months Ended) | March 28, 2021 | March 29, 2020 | | :--- | :--- | :--- | | U.S. state and local government | $254,747 | $227,507 | | U.S. federal government | $533,561 | $488,564 | | U.S. commercial | $301,508 | $342,278 | | International | $430,052 | $473,407 | | Total (in thousands) | $1,519,868 | $1,531,756 | - As of March 28, 2021, Remaining Unsatisfied Performance Obligations (RUPOs) totaled $3.13 billion[42] - Of the total RUPOs, $1.83 billion is expected to be recognized as revenue within the next 12 months[43] Acquisitions The company acquired Coanda Research and Development in Q2 2021 and holds a potential $66.9 million in outstanding contingent consideration - Acquired Coanda Research and Development Corporation (CRD) in Q2 2021, which is part of the CIG segment[44] - Acquired Segue Technologies, Inc. (SEG) and BlueWater Federal Solutions, Inc. (BWF) in fiscal 2020, both part of the GSG segment[45][46] - The total potential maximum outstanding contingent consideration for acquisitions was $66.9 million as of March 28, 2021, with a fair value of $28.7 million recorded as a liability[52] Goodwill and Intangible Assets Goodwill increased to $1.03 billion due to acquisitions, while a $15.8 million impairment charge was recorded for the former ASP unit Goodwill by Segment (in thousands) | Goodwill by Segment (in thousands) | Balance at Sep 27, 2020 | Balance at Mar 28, 2021 | | :--- | :--- | :--- | | GSG | $516,315 | $524,189 | | CIG | $477,183 | $505,384 | | Total | $993,498 | $1,029,573 | - In September 2020, a goodwill impairment charge of $15.8 million was recorded for the former ASP reporting unit due to economic conditions in Australia[57] Stock Repurchase and Dividends The company repurchased $30 million in stock and paid $18.4 million in dividends during the first half of fiscal 2021 - Repurchased $30 million of common stock in the first half of fiscal 2021, with $177.8 million remaining under the authorized program[60] - Paid total dividends of $18.4 million ($0.34 per share) in the first half of fiscal 2021[61] - A subsequent quarterly cash dividend of $0.20 per share was declared on April 26, 2021[61] Reportable Segments The GSG segment drove revenue and operating income growth, while the CIG segment saw lower revenue but higher operating income Segment Performance (Six Months Ended, in thousands) | Segment Performance (Six Months Ended, in thousands) | Revenue (FY21) | Revenue (FY20) | Income from Operations (FY21) | Income from Operations (FY20) | | :--- | :--- | :--- | :--- | :--- | | GSG | $942,451 | $894,307 | $93,809 | $77,395 | | CIG | $604,152 | $659,576 | $55,869 | $53,309 | | RCM | $470 | $150 | $1 | $1 | Commitments and Contingencies A subsidiary faces a significant legal complaint from the U.S. Attorney's Office, with an currently indeterminable outcome - A subsidiary, TtEC, is facing a complaint from the U.S. Attorney's Office alleging False Claims Act violations concerning work at the Hunters Point Naval Shipyard[90] - The company is currently unable to determine the probability of the outcome or the range of reasonably possible loss for this matter[90] Management's Discussion and Analysis (MD&A) Despite a slight revenue decline, operating income and EPS grew significantly, driven by government sector strength and strong liquidity - The company's high-end consulting focus and technology allowed staff to support clients remotely without interruption during the COVID-19 pandemic[108] - For the first half of fiscal 2021, revenue declined 0.8% year-over-year, while operating income increased 14.6% and diluted EPS grew 18.5%[109][114] - Adjusted EPS for the first half of fiscal 2021 was $1.79, a 14.0% increase from $1.57 in the prior-year period[118] Overview of Results and Business Trends Strong growth in U.S. government client sectors offset declines in commercial and international markets impacted by the COVID-19 pandemic - U.S. state and local government revenue increased 12.0% in H1 2021, driven by municipal water infrastructure projects[110] - U.S. federal government revenue grew 9.2% in H1 2021, aided by acquisitions and increased advanced analytics activity[111] - U.S. commercial revenue decreased 11.9% and international revenue decreased 9.2% in H1 2021, largely due to the COVID-19 pandemic's impact[112][113] Segment Results of Operations The GSG segment showed strong revenue and profit growth, while the CIG segment's revenue fell but operating margin improved - GSG Segment (H1 FY21): Revenue grew 5.4% to $942.5M and operating income grew 21.2% to $93.8M, with operating margin improving to 13.6% from 11.9% YoY[122][123] - CIG Segment (H1 FY21): Revenue decreased 8.4% to $604.2M, but operating income increased 4.8% to $55.9M, with operating margin improving to 10.9% from 9.7% YoY[125][126] Backlog The company's backlog of future revenue from awarded contracts stood at $3.15 billion at the end of the reporting period - Backlog was $3.15 billion as of March 28, 2021, compared to $3.24 billion as of September 27, 2020[129] Liquidity and Capital Resources The company maintained a strong liquidity position with robust operating cash flow, ample credit availability, and compliance with all debt covenants - Primary sources of liquidity are cash from operations ($157.4 million in H1 FY21) and borrowings under the credit facility[131][137] - As of March 28, 2021, the company had $250.8 million in outstanding borrowings and $419.6 million of available credit under its Amended Revolving Credit Facility[141] - The company was in compliance with its debt covenants, with a consolidated leverage ratio of 1.03x (max 3.00x) and an interest coverage ratio of 23.06x (min 3.00x)[142] Market Risk Disclosures The company is exposed to interest rate and foreign currency risks, which it manages through swaps and currency matching strategies - The company is exposed to interest rate risk on its $1 billion Amended Credit Agreement, which has a variable interest rate[156] - To manage interest rate risk, the company entered into interest rate swap agreements, fixing the rate on a notional principal of $221.9 million as of March 28, 2021[157] - The company is subject to foreign currency exchange risk, as 28.3% of its consolidated revenue in H1 2021 was generated by its international business[159][160] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of March 28, 2021[162] - No material changes were made to the internal control over financial reporting during the quarter[163] Other Information Legal Proceedings The company's primary legal proceeding involves a complaint against its subsidiary TtEC, as detailed in the financial statement notes - Information regarding legal proceedings is incorporated by reference from Note 16, "Commitments and Contingencies"[90][164] Risk Factors No material changes to the company's risk factors have been reported since the 2020 Annual Report on Form 10-K - No material changes in risk factors were reported since the 2020 Annual Report on Form 10-K[166] Share Repurchases The company repurchased approximately $30 million of its shares in H1 2021, with $177.8 million remaining under its repurchase program Share Repurchase Activity | Period (FY 2021) | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Sep 28 - Oct 25, 2020 | 45,574 | $102.67 | | Oct 26 - Nov 22, 2020 | 46,975 | $110.67 | | Nov 23 - Dec 27, 2020 | 42,864 | $119.50 | | Dec 28 - Jan 24, 2021 | 33,790 | $125.46 | | Jan 25 - Feb 21, 2021 | 37,992 | $132.50 | | Feb 22 - Mar 28, 2021 | 42,519 | $134.69 | - As of March 28, 2021, approximately $177.8 million remained available for purchase under the company's stock repurchase program[167][168]