Tetra Tech(TTEK) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for the period ended March 31, 2024, show an increase in total assets to $4.07 billion from $3.82 billion at the start of the fiscal year. Revenue for the first six months grew to $2.48 billion from $2.05 billion year-over-year, though net income slightly decreased to $151.4 million from $159.6 million. Cash flow from operations remained stable at $112.2 million Consolidated Balance Sheets As of March 31, 2024, total assets increased to $4.07 billion, driven by growth in goodwill to $1.98 billion and accounts receivable to $1.04 billion. Total liabilities saw a slight decrease in current liabilities to $1.19 billion, while long-term debt rose to $951 million. Total stockholders' equity grew to $1.58 billion from $1.40 billion at the end of fiscal 2023 Balance Sheet Highlights (in thousands) | Balance Sheet Highlights (in thousands) | March 31, 2024 | October 1, 2023 | | :--- | :--- | :--- | | Total Assets | $4,070,574 | $3,820,477 | | Cash and cash equivalents | $210,294 | $168,831 | | Goodwill | $1,977,688 | $1,880,244 | | Total Liabilities | $2,485,724 | $2,416,971 | | Long-term debt | $951,031 | $879,529 | | Total Stockholders' Equity | $1,584,850 | $1,403,506 | Consolidated Statements of Income For the six months ended March 31, 2024, revenue increased by 20.8% year-over-year to $2.48 billion. Income from operations grew significantly to $228.8 million from $153.1 million in the prior year period, which was impacted by acquisition expenses. However, net income attributable to Tetra Tech decreased to $151.4 million from $159.5 million, primarily due to a large non-operating income gain in the prior year. Diluted EPS for the six-month period was $2.81, down from $2.98 Income Statement Highlights (in thousands, except EPS) | Income Statement Highlights (in thousands, except EPS) | Six Months Ended Mar 31, 2024 | Six Months Ended Apr 2, 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | $2,479,883 | $2,052,991 | +20.8% | | Gross Profit | $397,993 | $324,091 | +22.8% | | Income from Operations | $228,764 | $153,061 | +49.5% | | Net Income attributable to Tetra Tech | $151,418 | $159,536 | -5.1% | | Diluted EPS | $2.81 | $2.98 | -5.7% | - The significant increase in income from operations for the six-month period is largely due to the absence of $23.7 million in acquisition and integration expenses and $8.5 million in contingent consideration adjustments that were present in the prior-year period[9] Consolidated Statements of Cash Flows For the first six months of fiscal 2024, net cash provided by operating activities was $112.2 million, nearly flat compared to $113.1 million in the prior year. Net cash used in investing activities decreased significantly to $79.2 million from $755.2 million, as the prior year included a major acquisition payment. Net cash provided by financing activities was $5.6 million, a sharp decrease from $680.5 million in the prior year, which included substantial borrowings to fund the acquisition Cash Flow Summary (in thousands) | Cash Flow Summary (in thousands) | Six Months Ended Mar 31, 2024 | Six Months Ended Apr 2, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $112,181 | $113,123 | | Net cash used in investing activities | ($79,161) | ($755,219) | | Net cash provided by financing activities | $5,633 | $680,491 | | Net increase in cash and cash equivalents | $41,463 | $46,294 | Notes to Unaudited Consolidated Financial Statements The notes detail key accounting policies and financial activities. Revenue from the International client sector grew to 39.1% of total revenue for the first six months of FY2024. The company completed the acquisition of LS Technologies for $102 million. Goodwill increased to $1.98 billion, primarily from this acquisition. Long-term debt stands at $951 million, including $575 million in convertible notes. The company maintains two reportable segments: Government Services Group (GSG) and Commercial/International Services Group (CIG), with CIG generating slightly more revenue Revenue by Client Sector (Six Months Ended) | Client Sector | Revenue (in thousands) - FY2024 | Revenue (in thousands) - FY2023 | % of Total - FY2024 | | :--- | :--- | :--- | :--- | | U.S. federal government | $789,078 | $658,449 | 31.8% | | U.S. state and local government | $298,476 | $300,985 | 12.0% | | U.S. commercial | $423,837 | $407,494 | 17.1% | | International | $968,492 | $686,063 | 39.1% | | Total | $2,479,883 | $2,052,991 | 100.0% | - The company's Remaining Unsatisfied Performance Obligation (RUPO), a measure of future work, was $4.7 billion at March 31, 2024, with approximately $3.3 billion expected to be recognized as revenue within 12 months[33][34] - In Q2 2024, the company acquired LS Technologies for a total fair value of $102 million, which included $76 million in cash and $22 million in contingent earn-out obligations. This resulted in $71 million of goodwill allocated to the GSG segment[36] Segment Performance (Six Months Ended Mar 31, 2024) | Reportable Segment | Revenue (in thousands) | Income from Operations (in thousands) | | :--- | :--- | :--- | | GSG | $1,172,168 | $127,134 | | CIG | $1,340,262 | $147,356 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the 20.8% revenue growth in the first half of fiscal 2024 to increased activity in U.S. federal and international sectors, bolstered by recent acquisitions which contributed $266 million. Excluding acquisitions, revenue grew 7.9%. The International sector saw the largest growth at 41.2%, while U.S. State and Local revenue slightly declined due to the wind-down of disaster response projects. Adjusted operating income increased 23.5% to $228.8 million. The company maintains a strong liquidity position with $210.3 million in cash and over $729 million available under its credit facility Overview of Results and Business Trends Revenue for the first half of fiscal 2024 increased 20.8% to $2.48 billion. U.S. Federal revenue grew 19.8%, driven by international development in Ukraine and contributions from acquisitions. International revenue surged 41.2%, reflecting higher renewable energy activity and acquisitions. U.S. Commercial revenue grew 4.0% from renewable energy projects. U.S. State and Local revenue saw a slight 0.8% decline, as a 19.9% increase in advanced water treatment projects was offset by a $41 million reduction in disaster response revenue Revenue by Client Sector (Six Months Ended) | Client Sector | H1 FY2024 Revenue (in thousands) | H1 FY2023 Revenue (in thousands) | YoY Growth | | :--- | :--- | :--- | :--- | | U.S. federal government | $789,078 | $658,449 | 19.8% | | U.S. state and local government | $298,476 | $300,985 | (0.8)% | | U.S. commercial | $423,837 | $407,494 | 4.0% | | International | $968,492 | $686,063 | 41.2% | | Total | $2,479,883 | $2,052,991 | 20.8% | - Excluding the impact of recent acquisitions, total revenue increased by 7.9% compared to the first half of fiscal 2023[120] Results of Operations For the first half of fiscal 2024, consolidated revenue grew 20.8% to $2.48 billion, and revenue net of subcontractor costs grew 21.2% to $2.07 billion. Gross profit increased 22.8% to $398.0 million. Income from operations rose 49.5% to $228.8 million, benefiting from the absence of prior-year acquisition costs. Adjusted EPS for the first half increased 17.1% to $2.81 from an adjusted $2.40 in the prior year. The Government Services Group (GSG) saw revenue grow 13.3%, while the Commercial/International Group (CIG) revenue grew 27.7%, with CIG's operating margin improving by 150 basis points Adjusted EPS Reconciliation (Six Months Ended) | Metric | H1 FY2024 | H1 FY2023 (Adjusted) | YoY Growth | | :--- | :--- | :--- | :--- | | Adjusted EPS | $2.81 | $2.40 | 17.1% | - The GSG segment's revenue growth was driven by advanced water treatment and international development activities, partially offset by lower disaster response revenue. Its operating margin slightly decreased due to the contract mix[135][136] - The CIG segment's revenue growth was driven by renewable energy, international infrastructure, and the RPS acquisition. Its operating margin improved significantly due to a focus on high-end consulting and better project execution[138][139] Financial Condition, Liquidity and Capital Resources As of March 31, 2024, the company had a strong liquidity position with $210.3 million in cash and an additional $729.3 million available under its credit facilities. Cash from operations for the first half of fiscal 2024 was $112.2 million. The company's debt includes $390 million outstanding under its Amended Credit Agreement and $575 million in convertible notes. The company was in compliance with all debt covenants, with a consolidated leverage ratio of 1.73x against a maximum of 3.25x - Primary sources of liquidity are cash from operations and borrowings under credit facilities, used for working capital, dividends, capital expenditures, debt repayment, and acquisitions[141] - The company is in compliance with its debt covenants, with a consolidated leverage ratio of 1.73x (covenant: max 3.25x) and an interest coverage ratio of 10.98x (covenant: min 3.00x)[150] - The stock repurchase program, authorized at $400 million, had a remaining balance of $347.8 million as of March 31, 2024, with no shares repurchased in fiscal 2024[153] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk through its variable-rate Amended Credit Agreement, under which $390 million was outstanding with a weighted-average interest rate of 6.75% for the first half of fiscal 2024. It is also exposed to foreign currency risk, primarily from the Canadian and Australian dollars, the Euro, and the British Pound. For the first half of fiscal 2024, 39.1% of revenue was generated internationally. The company attempts to mitigate this risk by matching revenue and expenses in the same currency - The company has interest rate exposure on its $390 million in borrowings under the Amended Credit Agreement, which have variable rates tied to benchmarks like SOFR[162] - Foreign currency translation risk exists as 39.1% of H1 FY2024 revenue was generated internationally. A strengthening U.S. dollar would reduce reported revenue and earnings from foreign subsidiaries[164] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2024. No material changes were made to the internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[166] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[167] PART II. OTHER INFORMATION Legal Proceedings The company's subsidiary, Tetra Tech EC, Inc. ("TtEC"), is involved in a legal proceeding regarding a complaint filed by the U.S. Attorney's Office alleging False Claims Act violations and breach of contract related to environmental remediation services at the former Hunters Point Naval Shipyard. TtEC disputes the claims and the company is currently unable to determine the outcome or potential loss - A subsidiary, Tetra Tech EC, Inc., is defending against a U.S. government complaint alleging False Claims Act violations related to environmental remediation at the Hunters Point Naval Shipyard[100] - The company is currently unable to determine the probability of the outcome or the range of reasonably possible loss for this matter[100] Risk Factors There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the fiscal year 2023 - No material changes in risk factors have occurred since the company's 2023 Annual Report on Form 10-K[170] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares of its common stock during fiscal 2024. As of March 31, 2024, $347.8 million remained available for repurchase under the existing stock repurchase program authorized in October 2021 - No shares of common stock were repurchased in fiscal 2024. The remaining authorization under the stock repurchase program is $347.8 million[171]