TETRA TECH INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended
April 2, 2023
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number
0-19655
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(Address of principal executive offices) (Zip Code)
(
626
)
351-4664
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company |
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
At May 1, 2023
,
53,229,493
shares of th
e registrant’s common stock were outstanding.
TETRA TECH, INC.
INDEX
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2
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Tetra Tech, Inc.
Consolidated Balance Sheets
(unaudited - in thousands, except par value)
| ASSETS |
April 2,
2023 |
October 2,
2022 |
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| Current assets: | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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| Accounts receivable, net |
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| Contract assets |
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| Prepaid expenses and other current assets |
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| Total current assets |
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| Property and equipment, net |
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| Right-of-use assets, operating leases |
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| Goodwill |
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| Intangible assets, net |
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| Deferred tax assets |
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| Other non-current assets |
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| Total assets | $ |
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$ |
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| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ |
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$ |
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| Accrued compensation |
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| Contract liabilities |
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| Short-term lease liabilities, operating leases |
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| Current portion of long-term debt |
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| Current contingent earn-out liabilities |
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| Other current liabilities |
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| Total current liabilities |
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| Deferred tax liabilities |
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| Long-term debt |
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| Long-term lease liabilities, operating leases |
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| Non-current contingent earn-out liabilities |
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| Other non-current liabilities |
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Commitments and contingencies (Note 17)
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| Equity: | |||||||||||
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Preferred stock - authorized,
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Common stock - authorized,
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| Additional paid-in capital |
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| Accumulated other comprehensive loss |
(
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(
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| Retained earnings |
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| Tetra Tech stockholders’ equity |
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| Noncontrolling interests |
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| Total stockholders' equity |
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| Total liabilities and stockholders' equity | $ |
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$ |
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See Notes to Consolidated Financial Statements.
3
Tetra Tech, Inc.
Consolidated Statements of Income
(unaudited – in thousands, except per share data)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
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April 2,
2023 |
April 3,
2022 |
April 2,
2023 |
April 3,
2022 |
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| Revenue | $ |
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$ |
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$ |
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$ |
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| Subcontractor costs |
(
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(
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(
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(
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| Other costs of revenue |
(
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(
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(
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(
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| Gross profit |
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| Selling, general and administrative expenses |
(
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(
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(
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(
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| Acquisition and integration expenses |
(
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(
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| Contingent consideration – fair value adjustments |
(
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(
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(
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(
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| Income from operations |
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| Interest expense, net |
(
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(
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(
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(
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| Other non-operating income |
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| Income before income tax expense |
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| Income tax expense |
(
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(
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(
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(
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| Net income |
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| Net income attributable to noncontrolling interests |
(
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(
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(
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(
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| Net income attributable to Tetra Tech | $ |
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$ |
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$ |
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$ |
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| Earnings per share attributable to Tetra Tech: | |||||||||||||||||||||||
| Basic | $ |
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$ |
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$ |
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$ |
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| Diluted | $ |
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$ |
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$ |
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$ |
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| Weighted-average common shares outstanding: | |||||||||||||||||||||||
| Basic |
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| Diluted |
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See Notes to Consolidated Financial Statements.
4
Tetra Tech, Inc.
Consolidated Statements of Comprehensive Income
(unaudited – in thousands)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
April 2,
2023 |
April 3,
2022 |
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| Net income | $ |
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$ |
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$ |
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$ |
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| Other comprehensive income, net of tax | |||||||||||||||||||||||
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Foreign currency translation adjustment,
net of tax
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(
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| Gain (loss) on cash flow hedge valuations, net of tax |
(
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(
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| Net pension adjustments |
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| Other comprehensive income (loss), net of tax |
(
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| Comprehensive income, net of tax | $ |
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$ |
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$ |
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$ |
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| Comprehensive income attributable to noncontrolling interests, net of tax |
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| Comprehensive income attributable to Tetra Tech, net of tax | $ |
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$ |
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$ |
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$ |
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See Notes to Consolidated Financial Statements.
5
Tetra Tech, Inc.
Consolidated Statements of Cash Flows
(unaudited – in thousands)
| Six Months Ended | |||||||||||
|
April 2,
2023 |
April 3,
2022 |
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| Cash flows from operating activities: | |||||||||||
| Net income | $ |
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$ |
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| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization |
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| Equity in income of unconsolidated joint ventures |
(
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(
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| Distributions of earnings from unconsolidated joint ventures |
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| Amortization of stock-based awards |
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| Deferred income taxes |
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| Fair value adjustments to contingent consideration |
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| Loss on sale of property and equipment |
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| Fair value adjustments to foreign currency forward contract |
(
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| Changes in operating assets and liabilities, net of effects of business acquisitions: | |||||||||||
| Accounts receivable and contract assets |
(
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(
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| Prepaid expenses and other assets |
(
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| Accounts payable |
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(
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| Accrued compensation |
(
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(
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| Contract liabilities |
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| Other liabilities |
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| Income taxes receivable/payable |
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| Net cash provided by operating activities |
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| Cash flows from investing activities: | |||||||||||
| Payments for business acquisitions, net of cash acquired |
(
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(
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| Capital expenditures |
(
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(
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| Proceeds from sale of assets |
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| Settlement of foreign currency forward contract |
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| Net cash used in investing activities |
(
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(
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| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowings |
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| Repayments on long-term debt |
(
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(
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| Repurchases of common stock |
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(
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| Taxes paid on vested restricted stock |
(
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(
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| Stock options exercised |
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| Dividends paid |
(
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(
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| Payments of contingent earn-out liabilities |
(
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(
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| Principal payments on finance leases |
(
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(
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| Net cash provided by (used in) financing activities |
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(
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| Effect of exchange rate changes on cash and cash equivalents |
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| Net increase in cash and cash equivalents |
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period | $ |
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$ |
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| Supplemental information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ |
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$ |
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Income taxes, net of refunds received of $
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$ |
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$ |
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See Notes to Consolidated Financial Statements.
6
Tetra Tech, Inc.
Consolidated Statements of Stockholders' Equity
Three Months Ended April 3, 2022 and April 02, 2023
(unaudited – in thousands)
| Common Stock |
Additional
Paid-in Capital |
Accumulated
Other Comprehensive Loss |
Retained
Earnings |
Total
Tetra Tech Equity |
Non-Controlling
Interests |
Total
Equity |
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| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT JANUARY 2, 2022 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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| Net income |
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| Other comprehensive income |
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| Distributions paid to noncontrolling interests |
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(
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(
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Cash dividends of $
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(
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(
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(
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| Stock-based compensation |
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| Restricted & performance shares released |
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(
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(
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(
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| Stock options exercised |
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| Shares issued for Employee Stock Purchase Plan |
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| Stock repurchases |
(
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(
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(
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(
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(
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(
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| BALANCE AT APRIL 3, 2022 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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| BALANCE AT JANUARY 1, 2023 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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| Net income |
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| Other comprehensive income |
(
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(
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(
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(
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Cash dividends of $
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(
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(
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(
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| Stock-based compensation |
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| Restricted & performance shares released |
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(
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(
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(
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| Stock options exercised |
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| BALANCE AT APRIL 2, 2023 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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7
Tetra Tech, Inc.
Consolidated Statements of Stockholders' Equity
Six Months Ended April 3, 2022 and April 02, 2023
(unaudited – in thousands)
| Common Stock |
Additional
Paid-in Capital |
Accumulated
Other Comprehensive Loss |
Retained
Earnings |
Total
Tetra Tech Equity |
Non-Controlling
Interests |
Total
Equity |
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| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT OCTOBER 3, 2021 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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| Net income |
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| Other comprehensive income |
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| Distributions paid to noncontrolling interests |
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(
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(
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Cash dividends of $
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(
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(
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(
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| Stock-based compensation |
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| Restricted & performance shares released |
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(
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(
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(
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(
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| Stock options exercised |
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| Shares issued for Employee Stock Purchase Plan |
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| Stock repurchases |
(
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(
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(
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(
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(
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(
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| BALANCE AT APRIL 3, 2022 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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| BALANCE AT OCTOBER 2, 2022 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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| Net income |
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| Other comprehensive income |
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(
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Cash dividends of $
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(
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(
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(
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| Stock-based compensation |
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| Restricted & performance shares released |
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(
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(
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(
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| Stock options exercised |
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| Shares issued for Employee Stock Purchase Plan |
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| BALANCE AT APRIL 2, 2023 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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See Notes to Consolidated Financial Statements.
8
TETRA TECH, INC.
Notes to Consolidated Financial Statements
1.
Basis of Presentation
The accompanying unaudited consolidated financial statements and related notes of Tetra Tech, Inc. (“we,” “us,” “our” or "Tetra Tech") have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and the notes contained in our Annual Report on Form 10-K for the fiscal year ended October 2, 2022.
These financial statements reflect all normal recurring adjustments that are considered necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full fiscal year or for future fiscal yea
rs. Certain prior year amounts have been reclassified to conform to the current year presentation.
2.
Recent Accounting Pronouncements
In November 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2021-10, Government Assistance (Topic 832), which requires annual disclosures for transactions with a government authority that are accounted for by applying a grant or contribution model by analogy, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity's financial statements. ASU 2021-10 was effective for us beginning in the first quarter of fiscal 2023.
In fiscal 2020, the Canadian federal government implemented the Canadian Emergency Wage Subsidy ("CEWS") program in response to the negative impact of the
coronavirus disease 2019 ("
COVID-19") pandemic on businesses operating in Canada. Our Canadian legal entities qualified for and applied for these CEWS cash benefits to partially offset the impacts of revenue reductions and on-going staffing costs. The $
26.0
million total received was initially recorded in "Other current liabilities" until all potential amendments to the qualification criteria, including some that were proposed with retroactive application, were finalized in fiscal 2022. As there are no further contingencies, beginning in fiscal 2023, the amounts received will be distributed to all Canadian employees. We expect to distribute approximately $
9
million in the next twelve months. Accordingly, this amount was reclassified from "Other current liabilities" to "Accrued compensation" on our consolidated balance sheet at October 2, 2022. The remaining $
17.0
million, which we expect to distribute beyond one year, was reclassified to "Other non-current liabilities". We do not expect there will be any related impact to our operating income, and we have no outstanding applications for further government assistance.
3.
Revenue and Contract Balances
9
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
April 2,
2023 |
April 3,
2022 |
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| Client Sector: | |||||||||||||||||||||||
|
U.S. federal government
(1)
|
$ |
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$ |
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$ |
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$ |
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| U.S. state and local government |
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$ |
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$ |
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| U.S. commercial |
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International
(2)
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| Total | $ |
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$ |
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$ |
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$ |
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| Contract Type: | |||||||||||||||||||||||
| Fixed-price | $ |
|
$ |
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$ |
|
$ |
|
|||||||||||||||
| Time-and-materials |
|
|
|
|
|||||||||||||||||||
| Cost-plus |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
Includes revenue generated under U.S. federal government contracts performed outside the United States.
(2)
Includes revenue generated from non-U.S. clien
ts, primarily in Canada, Australia and the United Kingdom.
Other than the U.S. federal government, no single client accounted for more than 10% of our revenue for the three and six months ended April 2, 2023 and April 3, 2022.
Contract Assets and Contract Liabilities
We invoice customers based on the contractual terms of each contract. However, the timing of revenue recognition may differ from the timing of invoice issuance.
Contract assets represent revenue recognized in excess of the amounts for which we have the contractual right to bill our customers. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones or completion of a contract. In addition, many of our time and materials arrangements are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Contract retentions, included in contract assets, represent amounts withheld by clients until certain conditions are met or the project is completed, which may extend beyond one year.
| Balance at | |||||||||||
|
April 2,
2023 |
October 2, 2022 | ||||||||||
|
Contract assets
(1)
|
$ |
|
$ |
|
|||||||
| Contract liabilities |
|
|
|||||||||
| Net contract liabilities | $ |
(
|
$ |
(
|
|||||||
In the first half of fiscal 2023 and 2022, we recognized revenue of approximately $
121
million and $
93
million, respectively, from the amounts included in the contract liability balances at the end of fiscal 2022 and 2021, respectively.
10
favorable revenue and operating income adjustments of $
4.0
million and $
5.0
million in the first hal
ves of fiscal 2023 and 2022, respectively.
C
hanges in revenue and cost estimates could also result in a projected loss, determined at the contract level, which would be recorded immediate
ly in earnings. At April 2, 2023 and October 2, 2022, our consolidated balance sheets included liabilities for anticipated losses of $
7.8
million and $
10.0
million, respectively. The estimated cost to complete these related contracts at April 2, 2023 and October 2, 2022 was approximately $
67
million and $
80
million, respectively.
Accounts Receivable, Net
Net accounts receivable consisted of the following (in thousands):
| Balance at | |||||||||||
|
April 2,
2023 |
October 2,
2022 |
||||||||||
| Billed | $ |
|
$ |
|
|||||||
| Unbilled |
|
|
|||||||||
| Total accounts receivable |
|
|
|||||||||
| Allowance for doubtful accounts |
(
|
(
|
|||||||||
| Total accounts receivable, net | $ |
|
$ |
|
|||||||
Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at April 2, 2023 and October 2, 2022.
Remaining Unsatisfied Performance Obligations (“RUPO”)
We expect to satisfy our RUPO at April 2, 2023 over the following periods (in thousands):
| Amount | |||||
| Within 12 months | $ |
|
|||
| Beyond |
|
||||
| Total | $ |
|
|||
11
4.
Acquisitions
On September 23, 2022, we made an all cash offer to acquire all of the outstanding shares of RPS Group plc ("RPS"), a publicly traded company on the London Stock Exchange for 222 pence per share, through a scheme of arrangement, which was unanimously recommended by RPS' Board of Directors. On November 3, 2022, RPS' shareholders approved the scheme of arrangement.
On January 19, 2023, the court-sanctioned scheme of arrangement to purchase RPS was approved, and we completed the acquisition on January 23, 2023. RPS employs approximately
5,000
associates in the United Kingdom, Europe, Asia Pacific and North America, delivering high-end solutions, especially in energy transformation, water and program management for government and commercial clients. Substantially all of RPS is included in our CIG segment.
The total purchase price of RPS was approximately £
633
million ($
784
million). In the second quarter and first half of fiscal 2023, we incurred $
19.9
million and $
23.7
million, respectively, related to acquisition and integration costs primarily for professional fees, substantially all of which were paid as of the end of the second quarter of fiscal 2023. On January 23, 2023, we also settled a foreign exchange forward contract that was integral to our plan to finance the RPS acquisition developed in the fourth quarter of fiscal 2022. The cash gain of $
109.3
million did not qualify for hedge accounting. As a result, the gain was recognized as non-operating income over the life of the contract and not included in the purchase price allocation below. However, the cash proceeds of $
109.3
million economically reduced the purchase price for the shares of RPS to approximately $
675
million. This forward contract is explained further in Note 15, "Derivative Financial Instruments".
12
| Amount | |||||
| Cash and cash equivalents | $ |
|
|||
| Accounts receivable and contract assets |
|
||||
| Prepaid expenses and other current assets |
|
||||
| Income taxes receivables |
|
||||
| Property and equipment |
|
||||
| Right-of-use assets, operating leases |
|
||||
| Intangible assets |
|
||||
| Deferred income taxes |
|
||||
| Other long-term assets |
|
||||
| Total assets acquired |
|
||||
| Accounts payable | $ |
(
|
|||
| Accrued compensation |
(
|
||||
| Contract liabilities |
(
|
||||
| Income tax payable |
(
|
||||
| Short-term lease liabilities, operating leases |
(
|
||||
| Other current liabilities |
(
|
||||
| Long-term debt |
(
|
||||
| Long-term lease liabilities, operating leases |
(
|
||||
| Other long-term liabilities |
(
|
||||
| Deferred tax liabilities |
(
|
||||
| Total liabilities assumed |
(
|
||||
| Fair value of net assets acquired |
|
||||
| Goodwill |
|
||||
| Total purchase consideration | $ |
|
|||
The following table summarizes the estimated fair values that were assigned to intangible assets at the acquisition date:
| Fair Value | Weighted-Average Estimated Useful Life | ||||||||||
| (in thousands) | (in years) | ||||||||||
| Backlog | $ |
|
|
||||||||
| Trade names |
|
|
|||||||||
| Client relations |
|
|
|||||||||
| Total intangible assets acquired | $ |
|
|
||||||||
Supplemental Pro Forma Information (Unaudited)
13
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
April 2,
2023 |
April 3,
2022 |
||||||||||||||||||||
| Revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Net Income including noncontrolling interests | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
For the period from January 23, 2023 through April 2, 2023, RPS had revenue o
f $
169.5
million. RPS' net income, including interest expense, for this period was a loss of $
2.0
million, or $
0.03
per share, before intangible amortization. Intangible amortization for RPS was $
7.7
million, or $
0.11
per share
.
In the second quarter of fiscal 2023, we also acquired Amyx, Inc. (“Amyx”), an enterprise technology services, cybersecurity and management consulting firm. Based in Reston, Virginia, Amyx, with over
500
employees, provides application modernization, cybersecurity, systems engineering, financial management and program management support on over
30
Federal Government programs. Amyx is included in our GSG segment. The total fair value of the purchase price of Amyx was $
120.9
million, comprised of a $
100.0
million payable in a promissory note issued to the sellers (paid subsequent to closing), $
8.7
million of payables related to estimated post-closing adjustments, and $
12.2
million for the estimated fair value of contingent earn-out obligations, with a maximum of $
25.0
million, based upon the achievement of specified operating income targets in each of the three years following the acquisition date. Amyx was not considered significant to our consolidated financial statements. As a result, no pro forma information has been provided.
In fiscal 2022, we acquired The Integration Group of America ("TIGA"), Piteau Associates (“PAE”) and two other financially immaterial acquisitions.
TIGA is based in Spring, Texas and is an industry leader in process automation and system integration solutions, including customized software and platform (SaaS/PaaS) applications, advanced data analytics, cloud data integration and platform virtualization. PAE is based in Vancouver, British Columbia and is a global leader in sustainable natural resource analytics including hydrologic numerical modeling and dewatering system design. PAE is part of our CIG segment, and TIGA and the other financially immaterial acquisitions are part of our GSG segment. The total fair value of the purchase price for all
four
acquisitions was $
88.3
million. This amount is comprised of $
44.0
million in initial cash payments made to the sellers, $
2.5
million of receivables (net) related to estimated post-closing adjustments for the net assets acquired, $
15.5
million payable in a promissory note issued to the sellers along with related transaction expenses of the sellers (which were subsequently paid in July 2022), and $
31.3
million for the estimated fair value of contingent earn-out obligations, with a maximum of $
47.0
million, based upon the achievement of specified operating income targets in each of the
to
five years
following the acquisitions.
These acquisitions were not considered significant, individually or in the aggregate, to our consolidated financial statements. As a result, no pro forma information has been provided.
The majority of the goodwill from the fiscal 2023 acquisitions is not deductible for tax purposes, while the majority of the goodwill from the fiscal 2022 acquisitions is deductible for tax purposes. The results of fiscal 2022 and 2023 acquisitions were included in our consolidated financial statements beginning on the respective closing dates.
Goodwill additions resulting from the fiscal 2023 business combinations are primarily attributable to the significant technical expertise residing in embedded workforces that are sought out by clients, synergies expected to arise after the acquisitions in the areas of enterprise technology services, data management, energy transformation, water, program management, and data analytics and the long-standing reputations of RPS and Amyx. These acquisitions further expand and complement our market-leading positions in water, renewable energy and sustainable infrastructure; enhanced by a combined suite of differentiated data analytics and digital technologies, and expansion into existing and new geographies. Our fiscal 2022 goodwill additions are primarily attributable to the significant technical expertise residing in embedded workforces that are sought out by clients, long-term management experience, the industry reputations and the synergies expected to arise after the acquisitions in the areas of data management, digitization, modeling, water and natural resources. These acquired capabilities, when combined with our exis
ting global consulting and engineering business, result in opportunities that allow us to provide services under contracts that could not have been pursued individually by either us or the acquired companies.
Intangible assets with finite lives arise from business acquisitions and are amortized based on the period over which the contractual or economic benefit of the intangible assets are expected to be realized or on a straight-line basis over the useful lives of the underlying assets, ranging from
to
eight years
. These consist of client relations, backlog and trade names. For detailed information regarding our intangible assets, see Note 5, “Goodwill and Intangible Assets”.
Most of our acquisition agreements include contingent earn-out agreements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based on our valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of any earn-out arrangements are included as part of the purchase price of the acquired companies on their respective
14
acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Current contingent earn-out liabilities” and “Non-current contingent earn-out liabilities” on the consolidated balance sheets. We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former owners of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination.
We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We use a probability-weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally
to
five years
), and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the contingent earn-out liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows.
We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income.
For the first half of fiscal 2023, we evaluated our estimates for contingent consideration liabilities for the remaining earn-out periods for each individu
al acquisition, which included a review of their financial results to-date, the status of ongoing projects in their RUPO, and the inventory of prospective new contract awards.
During the first half of fiscal 2023, we recorded adjustments to our contingent earn-out liabilities and reported a related net loss in operating income of $
8.5
million (largely in the second quarter). The net loss primarily resulted from increased valuations of the contingent consideration liabilities for our prior acquisitions of Segue Technologies, Inc. (SEG), Hoare Lea, LLP (HLE) and TIGA reflecting financial performance that exceeded our previous expectations.
For the second quarter and first half of fiscal 2022, we had no material adjustments to our contingent earn-out liabilities in operating income.
At April 2, 2023, there was a total potential maximum of $
143.9
million of outstanding contingent consideration related to acquisitions. Of this amount, $
88.1
million was estimated as the fair value and accrued on our consolidated balance sheet at April 2, 2023.
5.
Goodwill and Intangible Assets
The following table summarizes the changes in the carrying value of goodwill by reportable segment (in thousands):
| GSG | CIG | Total | ||||||||||||||||||
| Balance at October 2, 2022 | $ |
|
$ |
|
$ |
|
||||||||||||||
| Acquisition activity |
|
|
|
|||||||||||||||||
| Translation adjustments |
|
|
|
|||||||||||||||||
| Balance at April 2, 2023 | $ |
|
$ |
|
$ |
|
||||||||||||||
The foreign currency translation adjustments resulted from our foreign subsidiaries with functional currencies that are different than our reporting currency.
These goodwill amounts are presented net of reductions from historical impairment adjustments.
The gross amounts
for GSG were $
644.9
million and $
536.8
million at April 2, 2023 and October 2, 2022, respectively, excluding accumulated impairment of $
17.7
million at each date. The gross amounts of goodwill for CIG were $
1,350.7
million and $
712.8
million at April 2, 2023 and October 2, 2022, respectively, excluding accumulated impairment of $
121.5
million at each date.
15
We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our most recent annual review at July 4, 2022 (i.e. the first day of our fourth quarter in fiscal 2022) indicated that we had
no
impairment of goodwill, and all of our reporting units had estimated fair values that were in excess of their carrying values, including goodwill. At July 4, 2022, and after the reallocation of goodwill on the first day of fiscal 2022, we had no reporting units that had estimated fair values that exceeded their carrying val
ues by less than
165
%.
We also regularly evaluate whether events and circumstances have occurred that may indicate a potential change in the recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, such as a deterioration in general economic conditions; an increase in the competitive environment; a change in management, key personnel, strategy or customers; negative or declining cash flows; or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. Although we believe that our estimates of fair value for these reporting units are reasonable, if financial performance for these reporting units falls significantly below our expectations or market prices for similar business decline, the goodwill for these reporting units could become impaired.
The following table presents the gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives included in “Intangible assets, net” on the consolidated balance sheets ($ in thousands):
| Period Ended | |||||||||||||||||||||||||||||||||||||||||
| April 2, 2023 | October 2, 2022 | ||||||||||||||||||||||||||||||||||||||||
|
Weighted-
Average Remaining Life (in Years) |
Gross
Amount |
Accumulated
Amortization |
Net Amount |
Gross
Amount |
Accumulated
Amortization |
Net Amount | |||||||||||||||||||||||||||||||||||
| Client relations |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||||||||||||
| Backlog |
|
|
(
|
|
|
(
|
|
||||||||||||||||||||||||||||||||||
| Trade names |
|
|
(
|
|
|
(
|
|
||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||||
Amortization expense for the three and six
months e
nded April 2, 2023 w
as $
12.1
million and $
15.5
million, compared to $
3.2
million and $
5.9
million for the prior-year periods.
Estimated amortization expense for the remainder of fiscal 2023
and succeeding years is as follows (in thousands):
| Amount | |||||
| 2023 (remaining) | $ |
|
|||
| 2024 |
|
||||
| 2025 |
|
||||
| 2026 |
|
||||
| 2027 |
|
||||
| Beyond |
|
||||
| Total | $ |
|
|||
6.
Property and Equipment
16
| Balance at | |||||||||||
|
April 2,
2023 |
October 2,
2022 |
||||||||||
| Equipment, furniture and fixtures | $ |
|
$ |
|
|||||||
| Leasehold improvements |
|
|
|||||||||
| Total property and equipment |
|
|
|||||||||
| Accumulated depreciation |
(
|
(
|
|||||||||
| Property and equipment, net | $ |
|
$ |
|
|||||||
7.
Stock Repurchase and Dividends
On October 5, 2021, our Board of Directors authorized a new stock repurchase program under which we could repurchase up to $
400
million of our common stock
. We did not repurchase any shares of our common stock in the first half of fiscal 2023. At April 2, 2023, we had a remaining balance of $
347.8
million under our stock repurchase program.
The following table presents dividends declared and paid in the first halves of fiscal 2023 and 2022:
| Declare Date | Dividend Paid Per Share | Record Date | Payment Date |
Dividend Paid
(in thousands) |
||||||||||||||||||||||
| November 7, 2022 | $ |
|
November 21, 2022 | December 9, 2022 | $ |
|
||||||||||||||||||||
| January 30, 2023 | $ |
|
February 13, 2023 | February 24, 2023 |
|
|||||||||||||||||||||
| Total dividend paid as of April 2, 2023 | $ |
|
||||||||||||||||||||||||
| November 15, 2021 | $ |
|
December 2, 2021 | December 20, 2021 | $ |
|
||||||||||||||||||||
| January 31, 2022 | $ |
|
February 11, 2022 | February 25, 2022 |
|
|||||||||||||||||||||
| Total dividend paid as of April 3, 2022 | $ |
|
||||||||||||||||||||||||
Subsequent Event.
On May 8, 2023, our Board of Directors declared a quarterly cash dividend of $
0.26
per share payable on June 6, 2023 to stockholders of record as of the close of business on May 24, 2023.
8.
Leases
Our operating leases are primarily for corporate and project office spaces.
To a much lesser extent, we have operating leases for vehicles and equipment. Our operating leases have remaining lease terms of
one month
to
ten years
, some of which may include options to extend the leases for up to
five years
.
We determine if an arrangement is a lease at inception. Operating leases are included in "Right-of-use assets, operating leases", "Short-term lease liabilities, operating leases" and "Long-term lease liabilities, operating leases" in the consolidated balance sheets. Our finance leases are immaterial.
Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, incremental borrowing rates are used based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset at the commencement date also includes any lease payments made to the lessor at or before the commencement date and initial direct costs less lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
17
The components of lease costs are as follows (in thousands):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
April 2,
2023 |
April 3,
2022 |
||||||||||||||||||||
| Operating lease cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Sublease income |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Total lease cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Supplemental cash flow information related to leases is as follows (in thousands):
| Six Months Ended | ||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
|||||||||||||
| Operating cash flows for operating leases | $ |
|
$ |
|
||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities |
|
|
||||||||||||
Supplemental balance sheet and other information related to leases are as follows (in thousands):
| Balance at | |||||||||||
|
April 2,
2023 |
October 2, 2022 | ||||||||||
| Operating leases: | |||||||||||
| Right-of-use assets | $ |
|
$ |
|
|||||||
| Lease liabilities: | |||||||||||
| Current |
|
|
|||||||||
| Non-current |
|
|
|||||||||
| Total operating lease liabilities | $ |
|
$ |
|
|||||||
| Weighted-average remaining lease term: | |||||||||||
| Operating leases |
|
|
|||||||||
| Weighted-average discount rate: | |||||||||||
| Operating leases |
|
% |
|
% | |||||||
At April 2, 2023,
we have
no material operating leases that have not yet commenced.
18
A maturity analysis of the future undiscounted cash flows associated with our lease liabilities at April 2, 2023 is as follows (in thousands):
|
Operating
Leases |
||||||||
| 2023 (remaining) | $ |
|
||||||
| 2024 |
|
|||||||
| 2025 |
|
|||||||
| 2026 |
|
|||||||
| 2027 |
|
|||||||
| Beyond |
|
|||||||
| Total lease payments |
|
|||||||
| Less: imputed interest |
(
|
|||||||
| Total present value of lease liabilities | $ |
|
||||||
9.
Stockholders’ Equity and Stock Compensation Plans
10.
Earnings per Share (“EPS”)
19
The following table presents the number of weighted-average shares used to compute basic and diluted EPS (in thousands, except per share data):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
April 2,
2023 |
April 3,
2022 |
||||||||||||||||||||
| Net income attributable to Tetra Tech | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Weighted-average common shares outstanding – basic |
|
|
|
|
|||||||||||||||||||
| Effect of dilutive stock options and unvested restricted stock |
|
|
|
|
|||||||||||||||||||
| Weighted-average common shares outstanding – diluted |
|
|
|
|
|||||||||||||||||||
| Earnings per share attributable to Tetra Tech: | |||||||||||||||||||||||
| Basic | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Diluted | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
11.
Income Taxes
The effective tax rates for the first halves of fiscal 2023 and 2022 were
28.7
% and
21.9
%, respectively. Income tax expense was reduced by $
1.8
million and $
4.8
million of excess tax benefits on share-based payments in the first halves of fiscal 2023 and 2022, respectively. In addition, income tax expense in the first half of fiscal 2023 (all in the second quarter) included non-operating income tax expenses of $
6.7
million to recognize the tax liability for foreign earnings, primarily in the U.K. and Australia, that are no longer indefinitely reinvested and to increase the liability for an uncertain tax position. Excluding the impact of the excess tax benefits on share-based payments and the non-operating tax expenses in the second quarter of fiscal 2023, our effective tax rates in the first halves of fiscal 2023 and 2022 were
26.5
% and
25.0
%, respectively.
At April 2, 2023 and October 2, 2022, the liability for income taxes associated with uncertain tax positions was $
42.4
million and $
10.6
million, respectively. These liabilities could materially decrease within the next 12 months as some related examinations have commenced. These liabilities represent our current estimates of the additional tax liabilities that we may be assessed when the related audits are concluded. If these audits are resolved in a manner more unfavorable than our current expectations, our additional tax liabilities could be materially higher than the amounts currently recorded resulting in additional tax expense.
12.
Reportable Segments
We manage our operations under
two
reportable segments. Our GSG reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our CIG reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies.
GSG provides high-end consulting and engineering services primarily to U.S. government clients (federal, state and local) and development agencies worldwide. GSG supports U.S. government civilian and defense agencies with services in water, environment, sustainable infrastructure, information technology and disaster management. GSG also provides engineering design services for U.S. based federal and municipal clients, especially in water infrastructure, flood protection and solid waste. GSG also leads our support for development agencies worldwide, especially in the United States, United Kingdom and Australia.
CIG primarily provides high-end consulting and engineering services to U.S. commercial clients, and international clients inclusive of the commercial and government sectors. CIG supports commercial clients across the Fortun
e 500, renewable energy, industrial, high performance buildings and aerospace markets. CIG also provides sustainable infrastructure and related environmental, engineering and project management services to commercial and local government clients
across Canada, in Asia Pacific (primarily Australia and New Zealand), the United Kingdom, as well as Brazil and Chile.
20
Management evaluates th
e performance of these reportable segments based upon their respective segment operating income before the effect of amortization expense related to acquisitions, and other unallocated corporate expenses. We account for inter-segment revenues and transfers as if they were to third parties; that is, by applying a negotiated fee onto the costs of the services performed. All significant intercompany balances and transactions are eliminated in consolidation. In the second quarter and first half of fiscal 2023, our Corporate segment operating losses included $
19.9
million and $
23.7
million of acquisition and integration expenses, respectively, as described in Note 4, “Acquisitions”.
The following tables summarize financial information regarding our reportable segments (in thousands):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
April 2,
2023 |
April 3,
2022 |
||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| GSG | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| CIG |
|
|
|
|
|||||||||||||||||||
| Elimination of inter-segment revenue |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Total revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Income from operations | |||||||||||||||||||||||
| GSG | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| CIG |
|
|
|
|
|||||||||||||||||||
|
Corporate
(1)
|
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Total income from operations | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
Includes amortization of intangibles, other costs and other income not allocable to our reportable segments.
| Balance at | |||||||||||
|
April 2,
2023 |
October 2,
2022 |
||||||||||
| Total Assets | |||||||||||
| GSG | $ |
|
$ |
|
|||||||
| CIG |
|
|
|||||||||
|
Corporate
(1)
|
|
|
|||||||||
| Total assets | $ |
|
$ |
|
|||||||
13.
Fair Value Measurements
14.
Credit Facility
On October 26, 2022, we entered into a Third Amended and Restated Credit Agreement that provides for an additional $
500
million senior secured term loan facility (the "New Term Loan Facility") increasing our total borrowing capacity to $
1.55
billion.
On January 23, 2023, we drew the entire amount of the New Term Loan Facility to partially finance the RPS acquisition. The remaining purchase price was financed with existing cash on hand and borrowings under the existing Amended
21
Revolving Credit Facility. The New Term Loan Facility is not subject to any amortization payments of principal and matures on the third anniversary of the RPS acquisition closing date.
On February 18, 2022, we entered into Amendment No. 2 to Second Amended and Restated Credit Agreement (“Amended Credit Agreement”) with a total borrowing capacity of $
1.05
billion that will mature in February 2027. The Amended Credit Agreement is a $
750
million senior secured,
five-year
facility that provides for a $
250
million term loan facility (the “Amended Term Loan Facility”) and a $
500
million revolving credit facility (the “Amended Revolving Credit Facility”). In addition, the Amended Credit Agreement includes a $
300
million accordion feature that allows us to increase the Amended Credit Agreement to $
1.05
billion subject to lender approval. The Amended Credit Agreement provides for, among other things, (i) refinance indebtedness under our Credit Agreement dated at July 30, 2018; (ii) finance open market repurchases of common stock, acquisitions, and cash dividends and distributions; and (iii) utilize the proceeds for working capital, capital expenditures and other general corporate purposes. The Amended Credit Agreement provides for a reduction in the interest grid for meeting certain sustainability targets related to the (i) reduction of greenhouse gas emissions through the Company’s projects and operational sustainability initiatives and (ii) improvement of peoples’ lives as a result of
the Company’s projects that provide environmental, social and governance benefits. The Amended Revolving Credit Facility includes a $
100
million sublimit for the issuance of standby letters of credit, a $
20
million sublimit for swingline loans and a $
300
million sublimit for multicurrency borrowings and letters of credit.
The entire Amended Term Loan Facility was drawn on February 18, 2022. The Amended Term Loan Facility is subject to quarterly amortization of principal at
5
% annually commencing June 30, 2022. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a benchmark rate plus a margin that ranges from
1.000
% to
1.875
% per annum, or (b) a base rate for loans in U.S. dollars (the highest of the U.S. federal funds rate plus
0.50
% per annum, the bank’s prime rate or the Secured Overnight Financing Rate ("SOFR") rate plus
1.00
%, plus a margin that ranges from
0
% to
0.875
% per annum. In each case, the applicable margin is based on our Consolidated Leverage Ratio, calculated quarterly. The Amended Term Loan Facility is subject to the same interest rate provisions. The Amended Credit Agreement expires on February 18, 2027, or earlier at our discretion upon payment in full of loans and other obligations.
The Amended Credit Agreement contains certain affirmative and restrictive covenants, and customary events of default. The financial covenants provide for a maximum Consolidated Leverage Ratio of
3.25
to 1.00 (total funded debt/EBITDA, as defined in the Amended Credit Agreement) and a minimum Consolidated Interest Coverage Ratio of
3.00
to 1.00 (EBITDA/Consolidated Interest Charges, as defined in the Amended Credit Agreement). Our obligations under the Amended Credit Agreement are guaranteed by certain of our domestic subsidiaries and are secured by first priority liens on (i) the equity interests of certain of our subsidiaries, including those subsidiaries that are guarantors or borrowers under the Amended Credit Agreement, and (ii) the accounts receivable, general intangibles and intercompany loans and those of our subsidiaries that are guarantors or borrowers.
15.
Derivative Financial Instruments
We use certain interest rate derivative contracts to hedge interest rate exposures on our variable rate debt. We also enter into foreign currency derivative contracts with financial institutions to reduce the risk that cash flows and earnings could adversely be affected by foreign currency exchange rate fluctuations. Our hedging program is not designated for trading or speculative purposes.
We recognize derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as cash flow hedges in our consolidated balance sheets as accumulated other comprehensive income, and in our consolidated statements of income for those derivatives designated as fair value hedges. Our derivative contracts are categorized within Level 2 of the fair value hierarchy.
In the fourth quarter of fiscal 2022, we entered into a forward contract to acquire GBP
714.0
million at a rate of
1.0852
for a total of USD
774.8
million that was integrated with our plan to acquire RPS. This contract matured on December 30, 2022. On December 28, 2022, we entered into
an extension of the integrated forward contr
act to acquire GBP
714.0
million at a rate of
1.086
for a total of USD
775.4
million, extending the maturity date to January 23, 2023, the closing date of the RPS acquisition.
Although an effective economic hedge of our foreign exchange risk related to this transaction, the forward contract did not qualify for hedge accounting. As a result, the forward contract was marked-to-market with changes in fair value recogni
zed in earnings each period. The intrinsic value of the forward contract was immaterial at inception as the GBP/USD spot and forward exchange rates were essentially the same. The fair value of the forward contract at October 2, 2022 was $
19.9
million, and an unrealized gain of the same amount was recognized in our fourth quarter of fiscal 2022 results. On January 23, 2023, the forward contract was settled at the fair value of $
109.3
million. We recognized additional gains of
22
$
68.0
million and $
21.4
million in the first and second quarters of fiscal 2023, respectively. All gains related to this transaction were reported in “Other non-operating income" on our consolidated income statements for the respective periods.
In fiscal 2018, we enter
ed into
five
interest rate swap agreements that we designated as cash flow hedges to fix the interest rate on the borrowings under our term loan facility. At April 2, 2023, the notional principal of our outstanding interest swap agreements was $
193.8
million ($
38.8
million each.) The interest rate swaps have a fixed interest rate of
2.79
% and expire in July 2023 for all
five
agreements. At April 2, 2023 and October 2, 2022, the fair values of the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect were unrealized gains of $
1.4
million and $
2.4
million, respectively, which were reported in "Other non-current assets" on our consolidated balance sheets. Additionally, the related loss of $
0.9
million and $
1.0
million for the three and six months ended April 2, 2023, compared to the related gain of $
4.9
million and $
7.6
million for the prior-year periods, were recognized and reported on our consolidated statements of comprehensive income. We expect to reclassify a credit of $
1.4
million from accumulated other comprehensive loss to interest expense during the second half of fiscal 2023, up to the expiration date in July 2023. There were no other derivative instruments designated as hedging instruments for the first half of fiscal 2023.
16.
Reclassifications Out of Accumulated Other Comprehensive Income
23
| Three Months Ended | |||||||||||||||||||||||
|
Foreign
Currency Translation Adjustments |
Gain (Loss)
on Derivative Instruments |
Net Pension Adjustments | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
| Balance at January 2, 2022 | $ |
(
|
$ |
(
|
|
$ |
(
|
||||||||||||||||
| Other comprehensive income before reclassifications |
|
|
|
|
|||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
|
Interest rate contracts, net of tax
(1)
|
— |
(
|
|
(
|
|||||||||||||||||||
| Net current-period other comprehensive income |
|
|
|
|
|||||||||||||||||||
| Balance at April 3, 2022 | $ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
| Balance at January 1, 2023 | $ |
(
|
$ |
|
|
$ |
(
|
||||||||||||||||
| Other comprehensive income (loss) before reclassifications |
(
|
(
|
|
(
|
|||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
|
Interest rate contracts, net of tax
(1)
|
— |
|
|
|
|||||||||||||||||||
| Net current-period other comprehensive income (loss) |
(
|
(
|
|
(
|
|||||||||||||||||||
| Balance at April 2, 2023 | $ |
(
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||
| Six Months Ended | |||||||||||||||||||||||
|
Foreign
Currency Translation Adjustments |
Gain (Loss)
on Derivative Instruments |
Net Pension Adjustments | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
| Balance at October 3, 2021 | $ |
(
|
$ |
(
|
|
$ |
(
|
||||||||||||||||
| Other comprehensive income before reclassifications |
|
|
|
|
|||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
|
Interest rate contracts, net of tax
(1)
|
— |
(
|
|
(
|
|||||||||||||||||||
| Net current-period other comprehensive income |
|
|
|
|
|||||||||||||||||||
| Balance at April 3, 2022 | $ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
| Balance at October 2, 2022 | $ |
(
|
$ |
|
|
$ |
(
|
||||||||||||||||
| Other comprehensive income (loss) before reclassifications |
|
(
|
|
|
|||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
|
Interest rate contracts, net of tax
(1)
|
— |
|
|
|
|||||||||||||||||||
| Net current-period other comprehensive income (loss) |
|
(
|
|
|
|||||||||||||||||||
| Balance at April 2, 2023 | $ |
(
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||
(1)
This accumulated other comprehensive component is reclassified to “Interest expense” in our consolidated statements of income. See Note 15 “Derivative Financial Instruments”, for more information.
24
17.
Commitments and Contingencies
18.
Related Party Transactions
We often provide services to unconsolidated joint ventures. Our revenue related t
o services we provided to unconsolidated joint ventures for the three and six months of fiscal 2023 was approximately $
20
million and $
43
million, respectively, compared to $
24
million and $
50
million for the same periods last year. Our related reimbursable costs for the three and six months of fiscal 2023 were approximately $
19
million and $
41
million, respectively. Our related reimbursable costs for the three and six months of fiscal 2022 were approximately $
22
million and $
47
million, respectively.
Our consolidated balance sheets also included the following amounts related to these services (in thousands):
| Balance at | |||||||||||
|
April 2,
2023 |
October 2, 2022 | ||||||||||
| Accounts receivable, net | $ |
|
$ |
|
|||||||
| Contract assets |
|
|
|||||||||
| Contract liabilities |
|
|
|||||||||
25
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor provisions created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “continues,” “may,” variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below under “Part II, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
GENERAL OVERVIEW
Tetra Tech, Inc.
is a leading global provider of high-end consulting and engineering services that focuses on water, environment, sustainable infrastructure, renewable energy and international development. We are a global company that is
Leading with Science
®
to provide innovative solutions for our public and private clients. We typically begin at the earliest stage of a project by identifying technical solutions and developing execution plans tailored to our clients' needs and resources.
Our reputation for high-end consulting and engineering services and our ability to develop solutions for water and environmental management has supported our growth for more than 50 years. Today, we are proud to be making a difference in people’s lives worldwide through our high-end consulting, engineering and technology service offerings. In fiscal 2022, we worked on over 80,000 projects in more than 100 countries on all seven continents. We are
Leading with Science
®
throughout our operations, with domain experts across multiple disciplines supported by our advanced analytics, artificial intelligence, machine learning and digital technology solutions. Our ability to provide innovative and first-of-kind solutions is enhanced by partnerships with our forward-thinking clients. We are diverse, equitable and inclusive, embracing the breadth of experience across our talented workforce worldwide with a culture of innovation and entrepreneurship. We are disciplined in our business, and focused on delivering value to customers and high performance for our shareholders. In supporting our clients, we seek to add value and provide long-term sustainable consulting, engineering and technology
solutions.
By combining ingenuity and practical experience, we
have helped to advance sustainability by managing water, protecting the environment, providing clean energy, restoring ecosystems and engineering green solutions for our cities and communities.
We derive income from fees for professional, technical, program management, and construction management services. As primarily a professional services company, we are labor-intensive rather than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. We provide services to a diverse base of U.S. federal government, U.S. state and local government, U.S. commercial and international clients.
26
The following table presents the percentage of our revenue by client sector:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
April 2,
2023 |
April 3,
2022 |
||||||||||||||||||||
| Client Sector | |||||||||||||||||||||||
|
U.S. federal government
(1)
|
33.0 | % | 29.7 | % | 32.1 | % | 30.4 | % | |||||||||||||||
| U.S. state and local government | 12.8 | 18.3 | 14.7 | 18.4 | |||||||||||||||||||
| U.S. commercial | 18.0 | 20.1 | 19.8 | 20.4 | |||||||||||||||||||
|
International
(2)
|
36.2 | 31.9 | 33.4 | 30.8 | |||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
(1)
Includes revenue generated under U.S. federal government contracts performed outside the United States.
(2)
Includes revenue generated from non-U.S. clien
ts, primarily in Canada, Australia and the United Kingdom.
We manage our operations under two reportable segments. Our Government Services Group ("GSG") reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our Commercial/International Group ("CIG") reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies.
Government Services Group (
“
GSG
”
).
GSG provides high-end consulting and engineering services primarily to U.S. government clients (federal, state and local) and development agencies worldwide. GSG supports U.S. government civilian and defense agencies with services in water, environment, sustainable infrastructure, information technology and disaster management. GSG also provides engineering design services for U.S. based federal and municipal clients, especially in water infrastructure, flood protection and solid waste. GSG also leads our support for development agencies worldwide, especially in the United States, United Kingdom and Australia.
Commercial/International Group (
“
CIG
”
).
CIG primarily provides high-end consulting and engineering services to U.S. commercial clients, and international clients inclusive of the commercial and government sectors. CIG supports commercial clients across the Fortun
e 500, renewable energy, industrial, high performance buildings and aerospace markets. CIG also provides sustainable infrastructure and related environmental, engineering and project management services to commercial and local government clients
across Canada, in Asia Pacific (primarily Australia and New Zealand), the United Kingdom, as well as Brazil and Chile.
The following table presents the percentage of our revenue by reportable segment:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
April 2,
2023 |
April 3,
2022 |
||||||||||||||||||||
| Reportable Segment | |||||||||||||||||||||||
| GSG | 48.6 | % | 52.6 | % | 50.4 | % | 52.9 | % | |||||||||||||||
| CIG | 52.7 | 48.9 | 51.1 | 48.7 | |||||||||||||||||||
| Inter-segment elimination | (1.3) | (1.5) | (1.5) | (1.6) | |||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
27
Our services are performed under three principal types of contracts with our clients: fixed-price, time-and-materials and cost-plus. The following table presents the percentage of our revenue by contract type:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
April 2,
2023 |
April 3,
2022 |
||||||||||||||||||||
| Contract Type | |||||||||||||||||||||||
| Fixed-price | 35.7 | % | 37.1 | % | 36.1 | % | 37.8 | % | |||||||||||||||
| Time-and-materials | 46.1 | 47.9 | 46.5 | 47.0 | |||||||||||||||||||
| Cost-plus | 18.2 | 15.0 | 17.4 | 15.2 | |||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
Under fixed-price contracts, clients agree to pay a specified price for our performance of the entire contract or a specified portion of the contract. Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and paid for other expenses. Under cost-plus contracts, some of which are subject to a contract ceiling amount, we are reimbursed for allowable cost
s plus fees,
which may be fixed or performance-based. Profitability on these contracts is
driven by billable headcount and our cost control. We recognize revenue from contracts using the cost-to-cost measure of progress method to estimate the progress towards completion to determine the amount of revenue and profit to recognize.
Changes in those estimates could result in the recognition of cumulative catch-up adjustments to the contract’s inception-to-date revenue, costs and profit in the period in which such changes are made. On a quarterly basis, we review and assess our revenue and cost estimates for each significant contract. Changes in revenue and cost estimates could also result in a projected loss that would be recorded immediately in earnings.
Other contract costs include professional compensation and related benefits, together with certain direct and indirect overhead costs such as rents, utilities and travel. Professional compensation represents a large portion of these costs. Our "Selling, general and administrative expenses" ("SG&A") are comprised primarily of marketing and bid and proposal costs, and our corporate headquarters’ costs related to the executive offices, finance, accounting, administration and information technology. Our SG&A expenses also include a portion of stock-based compensation and depreciation of property and equipment related to our corporate headquarters, and the amortization of identifiable intangible assets. Most of these costs are unrelated to specific clients or projects, and can vary as expenses are incurred to support company-wide activities and initiatives.
We experience seasonal trends in our business. Our revenue and operating income are typically lower in the first half of our fiscal year, primarily due to the Thanksgiving (in the U.S. and Canada), Christmas and New Year’s holidays. Many of our clients’ employees, as well as our own employees, take vacations during these holiday periods. Further, seasonal inclement weather conditions occasionally cause some of our offices to close temporarily or may hamper our project field work in the northern hemisphere's temperate and arctic regions. These occurrences result in fewer billable hours worked on projects and, correspondingly, less revenue recognized.
ACQUISITIONS AND DIVESTITURES
Acquisitions.
We continuously evaluate the marketplace for acquisition opportunities to further our strategic growth plans. Due to our reputation, size, financial resources, geographic presence and range of services, we have numerous opportunities to acquire privately and publicly held companies or selected portions of such companies. We evaluate an acquisition opportunity based on its ability to strengthen our leadership in the markets we serve, the technologies and solutions they provide and the additional new geographies and clients they bring. Also, during our evaluation, we examine an acquisition's ability to drive organic growth, its accretive effect on long-term earnings and its ability to generate return on investment. Generally, we proceed with an acquisition if we believe that it will strategically expand our service offerings, improve our long-term financial performance and increase shareholder returns.
We view acquisitions as a key component in the execution of our growth strategy, and we intend to use cash, debt or equity, as we deem appropriate, to fund acquisitions. We may acquire other businesses that we believe are synergistic and will ultimately increase our revenue and net income, strengthen our ability to achieve our strategic goals, provide critical mass with existing clients and further expand our lines of service. We typically pay a purchase price that results in the recognition of goodwill, generally representing the intangible value of a successful business with an assembled workforce specialized in our areas of interest. Acquisitions are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful or will not have a material adverse effect on our financial position, results of operations or cash flows. All acquisitions require the approval of our Board of Directors.
28
On January 23, 2023, we completed the acquisition of RPS Group plc ("RPS"), a publicly traded company on the London Stock Exchange in an all cash transaction totaling $784 million. We funded the RPS acquisition with debt, net of $109 million in proceeds from a foreign exchange forward contract that we entered into at the same time we made the formal offer to acquire RPS on September 23, 2022.
RPS employs approximately 5,000 associates in the United Kingdom, Europe, Asia Pacific and North America, delivering high-end solutions, especially in energy transformation, water and program management for government and commercial clients. In the second quarter of fiscal 2023, RPS contributed revenue of $169.5 million to our consolidated results. RPS contributed no material operating income to our results in the second quarter of fiscal 2023, as it was offset by $7.7 million of intangible amortization. Substantially all of RPS is included in our CIG segment.
In the second quarter of fiscal 2023, we also acquired Amyx, Inc. (“Amyx”), an enterprise technology services, cybersecurity and management consulting firm. Based in Reston, Virginia, Amyx, with over 500 employees, provides application modernization, cybersecurity, systems engineering, financial management and program management support on over 30 Federal Government programs. Amyx is included in our GSG segment.
For detailed information regarding acquisitions, see Note 4, “Acquisitions” of the “Notes to Consolidated Financial Statements”.
Divestitures.
We regularly review and evaluate our existing operations to determine whether our business model should change through the divestiture of certain businesses. Accordingly, from time to time, we may divest or wind-down certain non-core businesses and reallocate our resources to businesses that better align with our long-term strategic direction.
OVERVIEW OF RESULTS AND BUSINESS TRENDS
General.
In the first half of fiscal 2023, revenue increased 20.0% compared to the prior-year period.
This year-over-year growth reflects increased activity in all of our client sectors and the aforementioned RPS acquisition. Excluding RPS, our revenue increased 10.1% in the first half of fiscal 2023 compared to the year-ago period.
U.S. Federal Government.
Our U.S. federal government revenue increased 26.6% in the first half of fiscal 2023 compared to the same quarter last year.
This increase was primarily due to more international development and broad-based increases in our water and environmental programs. During periods of economic volatility, our U.S. federal government business has historically been the most stable and predictable. We expect our U.S. federal government revenue to continue to grow in the remainder of fiscal 2023. Approximately $1 trillion in new U.S. federal funding passed in 2021 through the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the CHIPS and Science Act. Each of these programs include substantial planned investments in our key end markets including water, environment and sustainable infrastructure over the next five to ten years.
U.S. State and Local Government.
Our U.S. state and local government revenue decreased 4.5% in the first half of fiscal 2023 compared to the same quarter last year
due to lower disaster response activity. Excluding disaster response, our state and local government revenue incre
ased 20.2% in the first half of fiscal 2023 compared to the same period last year. The increase reflects continued broad-based growth in our U.S. state a
nd local government infrastructure business, particularly with increased revenue from municipal water infrastructure work, including digital water projects. Most of our work for the U.S. state and local governments relates to critical water and environmental programs, which we expect to continue to grow in the remainder of fiscal 2023.
U.S. Commercial.
Our U.S. commercial revenue increased 16.9% in the first half of fiscal 2023 compared to the same quarter last year. Excluding the contribution from RPS, our U.S. commercial revenue increased 11.0% in the first half of fiscal 2023 compared to the first half of fiscal 2022.
This increase was primarily due to more activity on renewable energy and environmental programs, including meeting net zero carbon goals and designing high performance buildings. We expect growth in our U.S. commercial work to continue in the remainder of fiscal 2023.
International.
Our international revenue increased 30.1% in the first half of fiscal 2023 compared to the same quarter last year. Excluding the contribution from RPS, our international revenue increased approximately 3%
despite a stronger U.S. dollar and the adverse impact on our foreign currency translation year-over-year. On a constant currency basis, our international revenue, excluding RPS, increased approximately 12% in the first half of fiscal 2023 compared to the first six month of last year. This revenue growth reflects government stimulus spending on infrastructure and commercial activities related to an increased focus on sustainability. We expect growth in our international work to continue in the remainder of fiscal 2023.
29
RESULTS OF OPERATIONS
Consolidated Results of Operations
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
Change | April 2, 2023 | April 3, 2022 | Change | ||||||||||||||||||||||||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 1,158,226 | $ | 852,744 | $ | 305,482 | 35.8% | $ | 2,052,991 | $ | 1,711,255 | $ | 341,736 | 20.0% | |||||||||||||||||||||||||||||||||
| Subcontractor costs | (188,661) | (153,103) | (35,558) | (23.2) | (346,865) | (332,280) | (14,585) | (4.4) | |||||||||||||||||||||||||||||||||||||||
|
Revenue, net of subcontractor costs
(1)
|
969,565 | 699,641 | 269,924 | 38.6 | 1,706,126 | 1,378,975 | 327,151 | 23.7 | |||||||||||||||||||||||||||||||||||||||
| Other costs of revenue | (798,719) | (564,468) | (234,251) | (41.5) | (1,382,035) | (1,104,035) | (278,000) | (25.2) | |||||||||||||||||||||||||||||||||||||||
| Gross profit | 170,846 | 135,173 | 35,673 | 26.4 | 324,091 | 274,940 | 49,151 | 17.9 | |||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (82,347) | (60,480) | (21,867) | (36.2) | (138,848) | (113,001) | (25,847) | (22.9) | |||||||||||||||||||||||||||||||||||||||
| Acquisition and integration expenses | (19,944) | — | (19,944) | NM | (23,705) | — | (23,705) | NM | |||||||||||||||||||||||||||||||||||||||
| Contingent consideration - fair value adjustments | (7,544) | (173) | (7,371) | NM | (8,477) | (199) | (8,278) | NM | |||||||||||||||||||||||||||||||||||||||
| Income from operations | 61,011 | 74,520 | (13,509) | (18.1) | 153,061 | 161,740 | (8,679) | (5.4) | |||||||||||||||||||||||||||||||||||||||
| Interest expense | (13,323) | (3,144) | (10,179) | (323.8) | (18,695) | (6,048) | (12,647) | (209.1) | |||||||||||||||||||||||||||||||||||||||
| Other non-operating income | 21,407 | — | 21,407 | NM | 89,402 | — | 89,402 | NM | |||||||||||||||||||||||||||||||||||||||
| Income before income tax expense | 69,095 | 71,376 | (2,281) | (3.2) | 223,768 | 155,692 | 68,076 | 43.7 | |||||||||||||||||||||||||||||||||||||||
| Income tax expense | (26,254) | (18,327) | (7,927) | (43.3) | (64,212) | (34,144) | (30,068) | (88.1) | |||||||||||||||||||||||||||||||||||||||
| Net income | 42,841 | 53,049 | (10,208) | (19.2) | 159,556 | 121,548 | 38,008 | 31.3 | |||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (11) | (9) | (2) | (22.2) | (20) | (19) | (1) | (5.3) | |||||||||||||||||||||||||||||||||||||||
| Net income attributable to Tetra Tech | $ | 42,830 | $ | 53,040 | $ | (10,210) | (19.2) | $ | 159,536 | $ | 121,529 | $ | 38,007 | 31.3 | |||||||||||||||||||||||||||||||||
| Diluted earnings per share | $ | 0.80 | $ | 0.98 | $ | (0.18) | (18.4)% | $ | 2.98 | $ | 2.23 | $ | 0.75 | 33.6% | |||||||||||||||||||||||||||||||||
(1)
We believe that the presentation of “Revenue, net of subcontractor costs”, which is a non-U.S. GAAP financial measure, enhances investors’ ability to analyze our business trends and performance because it substantially measures the work performed by our employees. While providing services, we routinely subcontract various services and, under certain U.S. Agency for International Development programs, issue grants. Generally, these subcontractor costs and grants are passed through to our clients and, in accordance with U.S. GAAP and industry practice, are included in our revenue when it is our contractual responsibility to procure or manage these activities. The grants are included as part of our subcontractor costs. Because subcontractor services can vary significantly from project to project and period to period, changes in revenue may not necessarily be indicative of our business trends. Accordingly, we segregate subcontractor costs from revenue to promote a better understanding of our business by evaluating revenue exclusive of costs associated with external service providers.
30
In the second quarter of fiscal 2023, revenue and revenue, net of subcontractor costs, increased $305.5 million, or 35.8%, and $269.9 million, or 38.6%, respectively, compared to the second quarter of fiscal 2022. Excluding the contribution from RPS, our revenue increased 15.9% in the second quarter of fiscal 2023 compared to the year-ago quarter. Our GSG segment's revenue and revenue, net of subcontractor costs, increased $114.3 million, or 25.5%, and $98.1 million, or 29.1%, respectively, in the second quarter of fiscal 2023 compared to the same quarter last year. Our CIG segment's revenue increased $193.4 million, or 46.4%, and revenue, net of subcontractor costs, increased $171.8 million, or 47.5% in the second quarter of fiscal 2023 compared to the year-ago quarter. Excluding the contribution from RPS, our CIG segment's revenue increased approximately 7% in the second quarter of fiscal 2023 compared to the same period in fiscal 2022 (11% on a constant currency basis).
In the first half of fiscal 2023, revenue and revenue, net of subcontractor costs, increased $341.7 million, or 20.0%, and $327.2 million, or 23.7%, respectively, compared to the same period in fiscal 2022. Excluding the contribution from RPS, our revenue increased 10.1% in the first half of fiscal 2023 compared to the year-ago first half. Our GSG segment's revenue and revenue, net of subcontractor costs, increased $129.3 million, or 14.3%, and $124.0 million, or 18.7%, respectively, in the first half of fiscal 2023 compared to the same period last year. Our CIG segment's revenue increased $216.7 million, or 26.0%, and revenue, net of subcontractor costs, increased $203.1 million, or 28.4% in the first half of fiscal 2023 compared to the year-ago first half. Excluding the contribution from RPS, our CIG segment's revenue increased approximately 6% in the first half of this fiscal year compared to the same period in fiscal 2022 (11% on a constant currency basis). Our quarterly and first half results for our GSG and CIG segments are described below under "Government Services Group" and "Commercial/International Group", respectively.
The following table reconciles our reported results to non-U.S. GAAP adjusted results, which exclude acquisition expenses related to the RPS acquisition and losses from adjustments to contingent consideration liabilities in the second quarter and first half of fiscal 2023 and a non-operating benefit from Employee Retention Credits ("ERC's") received in the first quarter of fiscal 2022. Our adjusted earnings per share ("EPS") for the second quarter and first half of fiscal 2023 also excludes non-operating gains on a foreign exchange contract of $21.4 million and $89.4 million, respectively. This gain is reported as "Other non-operating income" in our consolidated statements of income. Further, our adjusted EPS excludes acquisition costs and the write-off of previously deferred debt origination fees reflected as additional interest expense, of $21.0 million in the second quarter and $27.5 million in the first half of fiscal 2023 related to the RPS acquisition. The effective tax rates applied to the adjustments to EPS to arrive at adjusted EPS average 26% for both fiscal 2023 and 2022. We applied the relevant marginal statutory tax rate based on the nature of the adjustments and the tax jurisdiction in which it occurred. Both EPS and adjusted EPS were calculated using diluted weighted-average common shares outstanding for the respective periods as reflected in our consolidated statements of income.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
Change |
April 2,
2023 |
April 3,
2022 |
Change | ||||||||||||||||||||||||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||
| Income from operations | $ | 61,011 | $ | 74,520 | $ | (13,509) | (18.1)% | $ | 153,061 | $ | 161,740 | $ | (8,679) | (5.4)% | |||||||||||||||||||||||||||||||||
| COVID-19 Credits | — | — | — | NM | — | (4,451) | 4,451 | NM | |||||||||||||||||||||||||||||||||||||||
| Acquisition & integration expenses | 19,944 | — | 19,944 | NM | 23,705 | — | 23,705 | NM | |||||||||||||||||||||||||||||||||||||||
| Earn-Out adjustments | 7,544 | — | 7,544 | NM | 8,477 | — | 8,477 | NM | |||||||||||||||||||||||||||||||||||||||
|
Adjusted income from operations
(1)
|
$ | 88,499 | $ | 74,520 | $ | 13,979 | 18.8% | $ | 185,243 | $ | 157,289 | $ | 27,954 | 17.8% | |||||||||||||||||||||||||||||||||
| EPS | $ | 0.80 | $ | 0.98 | $ | (0.18) | (18.4)% | $ | 2.98 | $ | 2.23 | $ | 0.75 | 33.6% | |||||||||||||||||||||||||||||||||
| COVID-19 Credits | — | — | — | NM | — | (0.06) | 0.06 | NM | |||||||||||||||||||||||||||||||||||||||
| Acquisition & integration expenses | 0.43 | — | 0.43 | NM | 0.52 | — | 0.52 | NM | |||||||||||||||||||||||||||||||||||||||
| Earn-out adjustments | 0.12 | — | 0.12 | NM | 0.13 | — | 0.13 | NM | |||||||||||||||||||||||||||||||||||||||
| Foreign exchange forward contract gain | (0.29) | — | (0.29) | NM | (1.23) | — | (1.23) | NM | |||||||||||||||||||||||||||||||||||||||
|
Adjusted EPS
(1)
|
$ | 1.06 | $ | 0.98 | $ | 0.08 | 8.2% | $ | 2.40 | $ | 2.17 | $ | 0.23 | 10.6% | |||||||||||||||||||||||||||||||||
31
NM = not meaningful
(1)
Non-GAAP financial measure
Operating income decreased $13.5 million, or 18.1%, in the second quarter of fiscal 2023 compared to the second quarter of last year. In the first half of fiscal 2023, operating income decreased $8.7 million, or 5.4%, compared to the first half of fiscal 2022. The second quarter and first half of fiscal 2023 results include $19.9 million and $23.7 million of acquisition and integration expenses (primarily legal and other professional fees), respectively, for the RPS acquisition. The second quarter and first half of fiscal 2023 results also include losses of $7.5 million and $8.5 million, respectively, related to changes in the estimated fair value of contingent earn-out liabilities. The first half of fiscal 2022 results (all in the first quarter) included the benefit of ERC's totaling $4.5 million, which represents reimbursement from the U.S. federal government under the Coronavirus Aid, Relief and Economic Security Act for the costs that we incurred during the second quarter of fiscal 2020 to address the COVID-19 pandemic. These amounts were recognized in fiscal 2022 when the funds were received due to the uncertainty related to the computation of qualifying amounts and delayed processing times for our application. These amounts were primarily reflected as a reduction to "Other costs of revenue" in our consolidated statement of income and an increase to "Net cash provided by operating activities" in our consolidated statement of cash flows for fiscal 2022, consistent with the presentation of the related costs recognized in the second quarter of fiscal 2020.
We expect to incur additional integration expenses related to the RPS acquisition, primarily for information technology systems integration and real estate consolidation, in the second half of fiscal 2023. These costs may be material to our consolidated financial results.
Excluding the acquisition expenses, earn-out losses and the ERC's our adjusted operating income increased $14.0 million, or 18.8% in the second quarter and $28.0 million, or 17.8%, in the first half of fiscal 2023 compared to the same periods last year. These increases reflect improved results in both GSG and CIG segments, which are described below under "Government Services Group" and "Commercial/International Group", respectively.
Our net interest expense was $13.3 million in the second quarter and $18.7 million in the first half of fiscal 2023 compared to $3.1 million and $6.0 million, respectively, in the same periods of last year. Net interest expense in the first quarter of fiscal 2023 included $2.7 million of additional expense for the write-off of previously deferred debt origination fees due to the cancellation of the bridge loan facility that we entered to support our offer to acquire RPS, which was replaced with an amendment to our existing debt facility. Net interest expense in the second quarter of fiscal 2023 included $1.1 million of additional expense for the write-off of previously deferred debt origination fees due to the repayment and cancellation of RPS' debt facilities. Excluding these write-offs, our interest expense increased $9.1 million in the second quarter and $8.9 million in the first half of fiscal 2023 compared to the same periods last year primarily due to the additional borrowings to fund the RPS acquisition.
Other non-operating income of $21.4 million and $89.4 million in the second quarter and first half of fiscal 2023, respectively, reflect gains on a foreign exchange forward contract integrated with the RPS acquisition. Although an effective economic hedge of our foreign exchange risk related to this transaction, the forward contract did not qualify for hedge accounting. As a result, the forward contract was marked-to-market with changes in fair value recognized in earnings each period. The forward contract was settled on January 23, 2023, together with the closing of the RPS acquisition, with a cumulative gain of approximately $109 million.
The effective tax rates for the first halves of fiscal 2023 and 2022 were 28.7% and 21.9%, respectively. Income tax expense was reduced by $1.8 million and $4.8 million of excess tax benefits on share-based payments in the first halves of fiscal 2023 and 2022, respectively. In addition, income tax expense in the first half of fiscal 2023 (all in the second quarter) included non-operating income tax expenses of $6.7 million to recognize the tax liability for foreign earnings, primarily in the U.K. and Australia, that are no longer indefinitely reinvested and to increase the liability for an uncertain tax position. Excluding the impact of the excess tax benefits on share-based payments and the non-operating tax expenses in the second quarter of fiscal 2023, our effective tax rates in the first halves of fiscal 2023 and 2022 were 26.5% and 25.0%, respectively.
Our EPS was $0.80 and $2.98 in the second quarter and first half of fiscal 2023 compared to $0.98 and $2.23 in the prior-year periods. Excluding the aforementioned non-operating and non-recurring items, our adjusted EPS was $1.06 in the second quarter of fiscal 2023 compared to $0.98 in the year-ago quarter, an increase of 8.2%. On the same basis, our first half adjusted EPS was $2.40 in fiscal 2023 compared to $2.17 last year, an increase of 10.6%. We estimate that RPS was $0.03 dilutive to our adjusted EPS in the second quarter and first half of fiscal 2023 before intangible amortization, which reduced our EPS by an additional $0.11
. Excluding RPS, our adjusted EPS was $1.20 in the second quarter and $2.54 in the first half of fiscal 2023 representing increases of 22.4% and 17.1%, respectively, compared to the same periods in fiscal 2022.
32
Segment Results of Operations
Government Services Group
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
Change | April 2, 2023 | April 3, 2022 | Change | ||||||||||||||||||||||||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 563,254 | $ | 448,956 | $ | 114,298 | 25.5% | $ | 1,034,322 | $ | 905,054 | $ | 129,268 | 14.3% | |||||||||||||||||||||||||||||||||
| Subcontractor costs | (127,704) | (111,480) | (16,224) | (14.6) | (245,725) | (240,482) | (5,243) | (2.2) | |||||||||||||||||||||||||||||||||||||||
| Revenue, net of subcontractor costs | $ | 435,550 | $ | 337,476 | $ | 98,074 | 29.1 | $ | 788,597 | $ | 664,572 | $ | 124,025 | 18.7 | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 52,210 | $ | 50,344 | $ | 1,866 | 3.7% | $ | 112,557 | $ | 101,524 | $ | 11,033 | 10.9% | |||||||||||||||||||||||||||||||||
Revenue increased $114.3 million, or 25.5%, and revenue, net of subcontractor costs, increased $98.1 million, or 29.1%, in the second quarter of fiscal 2023 compared to the year-ago quarter. For the first half of fiscal 2023, revenue increased $129.3 million. or 14.3%, and revenue, net of subcontractor costs, increased $124.0 million, or 18.7%, compared to the first half of last year. These increases include approximately $70 million in revenue in the second quarter of fiscal 2023 related to international development funded energy programs in Ukraine. In addition, the increases reflect higher U.S. state and local government activities related to digital water and federal programs for civilian agencies, partially offset by lower disaster response revenue.
Operating income increased $1.9 million and $11.0 million in the second quarter and first half of fiscal 2023, respectively, compared to the prior-year periods. Operating income in the second quarter of fiscal 2023 from the aforementioned work in Ukraine was more than offset by lower operating income on disaster response projects. In addition, last year's first quarter and first half results included $3.1 million of the aforementioned ERC's. Our operating margin, based on revenue, net of subcontractor costs, declined to 14.3% in the first half of fiscal 2023 compared to 15.3% in the first half of fiscal 2022. Excluding last year's ERC's, our operating margin was 14.9% in the first half of fiscal 2022. The lower operating margin in fiscal 2023 was due to a higher proportion of international development revenue in the first half of fiscal 2023 compared to the same period last year. Our international development revenue, including the activity in Ukraine this year, tends to have a lower operating margin than the rest of our revenue in the GSG segment.
Commercial/International Group
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
|
April 2,
2023 |
April 3,
2022 |
Change | April 2, 2023 | April 3, 2022 | Change | ||||||||||||||||||||||||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 610,358 | $ | 416,945 | $ | 193,413 | 46.4% | $ | 1,049,914 | $ | 833,231 | $ | 216,683 | 26.0 | % | ||||||||||||||||||||||||||||||||
| Subcontractor costs | (76,343) | (54,780) | (21,563) | (39.4) | (132,385) | (118,828) | (13,557) | (11.4) | |||||||||||||||||||||||||||||||||||||||
| Revenue, net of subcontractor costs | $ | 534,015 | $ | 362,165 | $ | 171,850 | 47.5 | $ | 917,529 | $ | 714,403 | $ | 203,126 | 28.4 | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 52,518 | $ | 40,485 | $ | 12,033 | 29.7% | $ | 102,626 | $ | 85,792 | $ | 16,834 | 19.6 | % | ||||||||||||||||||||||||||||||||
Revenue increased $193.4 million, or 46.4%, and revenue, net of subcontractor costs, increased $171.9 million, or 47.5%, in the second quarter of fiscal 2023 compared to last year's second quarter. For the first half of fiscal 2023, revenue increased $216.7 million, or 26.0%, and revenue, net of subcontractor costs, increases $203.1 million, or 28.4%, compared to
33
the first half of fiscal 2022. The RPS acquisition contributed approximately $170 million to revenue growth in the second quarter and first half of fiscal 2023. The remaining revenue growth in both the second quarter and first half of fiscal 2023 primarily reflects increased activity on high performance buildings and renewable energy.
Operating income increased $12.0 million and $16.8 million, in the second quarter and first half of fiscal 2023, respectively, compared to the same periods last year. The RPS acquisition contributed approximately $7 million to operating income in the second quarter and first half of fiscal 2023. The fiscal 2022 operating income included $1.4 million of the aforementioned ERC's. Our operating margin, based on revenue, net of subcontractor costs, was 11.2% in the first half of fiscal 2023 compared to 12.0% in the prior-year period. Excluding RPS and the ERC's, our operating margin was 12.3% in the first half of fiscal 2023 compared to 11.8%% in the first half of fiscal 2022. The improved operating margin was primarily due to our increased focus on high-end consulting services, project execution and labor utilization.
Backlog
Backlog generally represents the dollar amount of revenues we expect to realize in the future when we perform the work. The difference between remaining unsatisfied performance obligations
("
RUPO") and backlog relates to contract terms. Specifically, our backlog does not consider the impact of termination for convenience clauses within the contracts. The contract term and thus remaining performance obligation on certain of our operations and maintenance contracts, are limited to the notice period required for contract termination (usually 30, 60, or 90 day
s). At April 2, 2023 and October 2, 2022,
the differences between our backlog and RUPO of $4.2 billion for each period were immaterial.
Financial Condition, Liquidity and Capital Resources
Capital Requirements.
At April 2, 2023, we h
ad $231.4 million of cash and cash equivalents and access to an additional
$459.3 million
of borrowings available under our amended credit facility described below. During the first half of fiscal 2023, we generated $113.1 million of cash from operations. Our primary sources of liquidity are cash flows from operations and borrowings under our credit facilities. Our primary uses of cash are to fund working capital, cash dividends, capital expenditures and repayment of debt, as well as to fund acquisitions and earn-out obligations from prior acquisitions.
We believe that our existing cash and cash equivalents, operating cash flows and borrowing capacity under our credit agreement as amended for the RPS acquisition in the second quarter of fiscal 2023, as described below, will be sufficient to meet our capital requirements for at least the next 12 months.
We use a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We plan to repatriate undistributed foreign earnings as they become available to supplement our liquidity in the United States including to pay down the borrowings used to fund the RPS acquisition.
On October 5, 2021, our Board of Directors authorized a new stock repurchase program under which we could repurchase up to $400 million of our common stock. In the first half of fiscal 2023, we did not repurchase any shares of our common stock. At April 2, 2023, we had a remaining balance of $347.8 million under our stock repurchase program.
On November 7, 2022, our Board of Directors declared a quarterly cash dividend of $0.23 per share payable on December 9, 2022 to stockholders of record as of the close of business on November 21, 2022. On January 30, 2023, our Board of Directors declared a quarterly cash dividend of $0.23 per share payable on February 24, 2023 to stockholders of record as of the close of business on February 13, 2023.
Subsequent Event.
On May 8, 2023, our Board of Directors declared a quarterly cash dividend of
$0.26
per share payable on June 6, 2023 to stockholders of record as of the close of business on May 24, 2023.
Cash and Cash Equivalents..
At April 2, 2023, our cash and cash equivalents were $231.4 million, an increase of $46.3 million compared to the fiscal 2022 year-end. The increase was primarily due to cash provided by operating activities and cash obtained in the RPS acquisition.
Operating Activities
.
For the first half of fiscal 2023,
net cash provided by operating activities was $113.1 million, a decrease of $64.4 million compared t
o the prior-year period.
The decrease was primarily due to the timing of payments to our vendors and employees.
Investing Activities
.
For the first half of fiscal 2023,
net cash used in investing activities was $755.2 million, an increase of $719.7 million compared to the
year-ago period.
The increase was primarily due to the RPS acquisition in the second quarter of fiscal 2023.
34
Financing Activities
.
For the first half of fiscal 2023,
net cash provided by financing activities was $680.5 million, compared to net cash used in financing activities of $115.8 million in the prior-year period
.
The financing activities in the first half of fiscal 2023 primarily consisted of additional borrowings to fund the RPS acquisition.
Debt Financing.
On October 26, 2022, we entered into a Third Amended and Restated Credit Agreement that provides for an additional $500 million senior secured term loan facility (the "New Term Loan Facility") increasing our total borrowing capacity to $1.55 billion.
On January 23, 2023, we drew the entire amount of the New Term Loan Facility to partially finance the RPS acquisition. The New Term Loan Facility is not subject to any amortization payments of principal and matures on the third anniversary of the RPS acquisition closing date.
On February 18, 2022, we entered into Amendment No. 2 to our Second Amended and Restated Credit Agreement (“Amended Credit Agreement”) with a total borrowing capacity of $1.05 billion that will mature in February 2027. The Amended Credit Agreement is a $750 million senior secured, five-year facility that provides for a $250 million term loan facility (the “Amended Term Loan Facility”) and a $500 million revolving credit facility (the “Amended Revolving Credit Facility”). In addition, the Amended Credit Agreement includes a $300 million accordion feature that allows us to increase the Amended Credit Agreement to $1.05 billion subject to lender approval. The Amended Credit Agreement provides for, among other things, (i) refinance indebtedness under our Credit Agreement dated as of July 30, 2018; (ii) finance open market repurchases of common stock, acquisitions and cash dividends and distributions; and (iii) utilize the proceeds for working capital, capital expenditures and other general corporate purposes. The Amended Credit Agreement provides for a reduction in the interest grid for meeting certain sustainability targets related to the (i) reduction of greenhouse gas emissions through the Company’s projects and operational sustainability initiatives and (ii) improvement of peoples’ lives as a result of the Company’s projects that provide environmental, social and governance benefits. The Amended Revolving Credit Facility includes a $100 million sublimit for the issuance of standby letters of credit, a $20 million sublimit for swingline loans and a $300 million sublimit for multicurrency borrowings and letters of credit.
The entire Amended Term Loan Facility was drawn on February 18, 2022. The Amended Term Loan Facility is subject to quarterly amortization of principal at 5% annually commencing June 30, 2022. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a benchmark rate plus a margin that ranges from 1.000% to 1.875% per annum, or (b) a base rate for loans in U.S. dollars (the highest of the U.S. federal funds rate plus 0.50% per annum, the bank’s prime rate or the Secured Overnight Financing Rate ("SOFR") rate plus 1.00%, plus a margin that ranges from 0% to 0.875% per annum. In each case, the applicable margin is based on our Consolidated Leverage Ratio, calculated quarterly. The Amended Term Loan Facility is subject to the same interest rate provisions. The Amended Credit Agreement expires on February 18, 2027, or earlier at our discretion upon payment in full of loans and other obligations.
At April 2, 2023, we had
$1.08 billion in outstanding borrowings under the Amended Credit Agreement, which was comprised of $237.5 million under the Amended Term Loan Facility, $500 million under the New Term Loan Facility, and $340 million under the Amended Revolving Credit Facility. The year-to-date weighted-average interest rate of the outstanding borrowings during April 2, 2023 is 5.46%. In addition, we had $0.7 million in standby letters of credit under the Amended Credit Agreement. Our year-to-date weighted-average interest rate on borrowings outstanding under the Amended Credit Agreement, including the effects of interest rate swap agreements described in Note 15, “Derivative Financial Instruments” of the “Notes to Consolidated Financial Statements”, was 5.03%. At April 2, 2023, we had $159.3 million of available credit under the Amended Revolving Credit Facility, all of which could be borrowed without a violation of our debt covenants.
The Amended Credit Agreement contains certain affirmative and restrictive covenants, and customary events of default. The financial covenants provide for a maximum Consolidated Leverage Ratio of 3.25 to 1.00 (total funded debt/EBITDA, as defined in the Amended Credit Agreement) and a minimum Consolidated Interest Coverage Ratio of 3.00 to 1.00 (EBITDA/Consolidated Interest Charges, as defined in the Amended Credit Agreement). Our obligations under the Amended Credit Agreement are guaranteed by certain of our domestic subsidiaries and are secured by first priority liens on (i) the equity interests of certain of our subsidiaries, including those subsidiaries that are guarantors or borrowers under the Amended Credit Agreement, and (ii) the accounts receivable, general intangibles and intercompany loans, and those of our subsidiaries that are guarantors or borrowers. At April 2, 2023, we were in compliance with these covenants with a consolidated leverage ratio of
2.44x and a consolidated interest coverage ratio of 14.24x.
In addition to the Amended Credit Agreement, we maintain other credit facilities, which may be used for short-term cash advances and bank guarantees. At April 2, 2023, there were
no borrowings under these facilities, and the aggregate amount of standby letters of credit outstanding was $56.5 million. At April 2, 2023, we had no bank overdrafts related to our disbursement bank accounts.
Inflation.
We believe our operations have not been, and, in the foreseeable future, are not expected to be, materially adversely affected by inflation or changing prices due to the average duration of our projects and our ability to negotiate prices as contracts end and new contracts begin.
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Dividends.
Our Board of Directors has authorized the following dividends in fiscal 2023:
|
Dividend
Per Share |
Record Date |
Total Maximum
Payment (in thousands) |
Payment Date | ||||||||||||||||||||
| November 7, 2022 | $ | 0.23 | November 21, 2022 | $ | 12,186 | December 9, 2022 | |||||||||||||||||
| January 30, 2023 | $ | 0.23 | February 13, 2023 | $ | 12,242 | February 24, 2023 | |||||||||||||||||
| May 8, 2023 | $ | 0.26 | May 24, 2023 | N/A | June 6, 2023 | ||||||||||||||||||
Income Taxes
We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and adjust the allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The ability or failure to achieve the forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets.
Based on projected future operating results in certain jurisdictions, it is unlikely that the current valuation allowance positions of those jurisdictions could be adjusted in the next 12 months.
At
April 2, 2023 and October 2, 2022, the liability for income taxes associated with uncertain tax positions was
$42.4 million an
d $10.6 million, respectively.
It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions may significantly decrease within the next 12 months.
These liabilities represent our current estimates of the additional tax liabilities that we may be assessed when the related audits are concluded. If these audits are resolved in a manner more unfavorable than our current expectations, our additional tax liabilities could be materially higher than the amounts currently recorded resulting in additional tax expense.
Off-Balance Sheet Arrangements
In the ordinary course of business, we may use off-balance sheet arrangements if we believe that such arrangements would be an efficient way to lower our cost of capital or help us manage the overall risks of our business operations. We do not believe that such arrangements have had a material adverse effect on our financial position or our results of operations.
The following is a summary of our off-balance sheet arrangements:
•
Letters of credit and bank guarantees are used primarily to support project performance and insurance programs. We are required to reimburse the issuers of letters of credit and bank guarantees for any payments they make under the outstanding letters of credit or bank guarantees. Our Amended Credit Agreement and additional letter of credit facilities cover the issu
ance of our standby letters of credit and bank guarantees and are critical for our normal operations. If we default on the Amended Credit Agreement or additional credit facilities, our inability to issue or renew standby letters of credit and bank guarantees would impair our ability to maintain normal operations. At April 2, 2023, we had
$0.7 million in standby letters of credit outstanding under our Amended Credit Agreement and $56.5 million i
n standby letters of credit outstanding under our additional letter of credit facilities.
•
From time to time, we provide guarantees and indemnifications related to our services. If our services under a guaranteed or indemnified project are later determined to have resulted in a material defect or other material deficiency, then we may be responsible for monetary damages or other legal remedies. When sufficient information about claims on guaranteed or indemnified projects is available and monetary damages or other costs or losses are determined to be probable, we recognize such guaranteed losses.
•
In the ordinary course of business, we enter into various agreements as part of certain unconsolidated subsidiaries, joint ventures and other jointly executed contracts where we are jointly and severally liable. We enter into these agreements primarily to support the project execution commitments of these entities. The potential payment amount of an outstanding performance guarantee is typically the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts. However, we are not able to estimate other amounts that may be required to be paid in excess of estimated costs to complete contracts and, accordingly, the total potential payment amount under our outstanding performance guarantees cannot be
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estimated. For cost-plus contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract. For lump sum or fixed-price contracts, this amount is the cost to complete the contracted work less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete. In those cases where costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors, for claims.
•
In the ordinary course of business, our clients may request that we obtain surety bonds in connection with contract performance obligations that are not required to be recorded in our consolidated balance sheets. We are obligated to reimburse the issuer of our surety bonds for any payments made thereunder. Each of our commitments under performance bonds generally ends concurrently with the expiration of our related contractual obligation.
Critical Accounting Policies
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended October 2, 2022. To date, there have been no material changes in our critical accounting policies as reported in our 2022 Annual Report on Form 10-K.
New Accounting Pronouncements
For information regarding recent accounting pronouncements, see “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report.
Financial Market Risks
We do not enter into derivative financial instruments for trading or speculation purposes. In the normal course of business, we have exposure to both interest rate risk and foreign currency transaction and translation risk, primarily related to the Canadian and Australian dollar, and British Pound.
We are exposed to interest rate risk under our Amended Credit Agreement. We can borrow, at our option, under both the Amended Term Loan Facility and Amended Revolving Credit Facility. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a Eurocurrency rate plus a margin that ranges from 1.000% to 1.875% per annum, or (b) a base rate for loans in U.S. dollars (the highest of the U.S. federal funds rate plus 0.50% per annum, the bank’s prime rate or the SOFR rate plus 1.00%) plus a margin that ranges from 0% to 0.875% per annum.
In each case, the applicable margin is based on our Consolidated Leverage Ratio, calculated quarterly. The Amended Term Loan Facility is subject to the same interest rate provisions.
Borrowings at the base rate have no designated term and may be repaid without penalty any time prior to the Facility’s maturity date. Borrowings at a SOFR rate have a term no l
ess than 30 days and no greater than 180 days and may be prepaid without penalty. Typically, at the end of such term, such borrowings may be rolled over at our discretion into either a borrowing at the base rate or a borrowing at a SOFR rate with similar terms, not to exceed the maturity date of the Facility. The Facility matures on February 18, 2027. At April 2, 2023, we had
$1.08 billion in outstanding borrowings under the Amended Credit Agreement, which was comprised of $237.5 million under the Amended Term Loan Facility, $500 million under the New Term Loan Facility, and $340 million under the Amended Revolving Credit Facility. The year-to-date weighted-average interest rate of the outstanding borrowings during fiscal 2023 was 5.46%.
In August 2018, we entered into five interest rate swap agreements with five banks to fix the variable interest rate on $250 million of our Amended Term Loan Facility. The objective of these interest rate swaps was to eliminate the variability of our cash flows on the amount of interest expense we pay under our Credit Agreement. At April 2, 2023, the notional principal of our outstanding interest swap agreements was $193.8 million ($38.8 million each.) Our year-to-date average effective interest rate on borrowings outstanding under the Credit Agreement, including the effects of interest rate swap agreements, at April 2, 2023, was 5.03%. For more information, see Note 15, “Derivative Financial Instruments
” of the “Notes to Consolidated Financial Statements”.
The majority of our transactions are in U.S. dollars; however, some of our subsidiaries conduct business in foreign currencies, primarily the Canadian and Australian dollar, and British Pound. Therefore, we are subject to currency exposure and volatility because of currency fluctuations. We attempt to minimize our exposure to these fluctuati
ons by matching revenue and expenses in the same currency for our contracts. We report our foreign currency gains and losses in “Selling, general and administrative expenses” on our consolidated statements of income.
The impact of the foreign currency gains and losses was immaterial for the first halves of fiscal 2023 and 2022.
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We have foreign currency exchange rate exposure in our results of operations and equity primarily because of the currency translation related to our foreign subsidiaries where the local currency is the functional currency. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions will result in reduced revenue, operating expenses, assets and liabilities. Similarly, our revenue, operati
ng expenses, assets and liabilities will increase if the U.S. dollar weakens against foreign currencies. For the first halves of fiscal 2023 and 2022,
33.4% and 30.8% of our consolidated revenue, respectively, was generated by our international business. For the first half of fiscal 2023, the effect of foreign exchange rate translation on the consolidated balance sheets was an increase in our equity by $25.0 million
compared to an increase in equity of $2.1 million in the first half of fiscal 2022. These amounts were recognized as adjustments to equity through other comprehensive income.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Please refer to the information we have included under the heading “Financial Market Risks” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2 of this Form 10-Q which is incorporated herein by reference.
Item 4.
Controls and Procedures
Evaluation of disclosure controls and procedures and changes in internal control over financial reporting.
At April 2, 2023, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Consistent with the guidance issued by the Securities and Exchange Commission Staff, the evaluation excluded Amyx, which we acquired on January 3, 2023, and RPS, which we acquired on January 23, 2023. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), were effective.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the quarter ended April 2, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II.
OTHER INFORMATION
Item 1.
Legal Proceedings
For information regarding legal proceedings
, see Note
17
, "
Commitments and Contingencies"
included in the "Notes to Consolidated Financial Statements" included in Part I, Item 1 of this Form 10-Q which is incorporated herein by reference.
38
Item 1A.
Risk Factors
There have been no material changes in our risk factors disclosed in Part I, Item 1A in our 2022 Annual Report on Form 10-K. For updated disclosures related to interest and exchange rate risks, see
“Financial Market Risks” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2 of this Form 10-Q which is incorporated herein by reference.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
On October 5, 2021, our Board of Directors authorized a new stock repurchase program under which we could repurchase up to $400 million of our common stock. In the first half of fiscal 2023, we did not repurchase any shares of our common stock. At April 2, 2023, we had a remaining balance of $347.8 million under our stock repurchase program.
Item 4.
Mine Safety Disclosures
Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires domestic mine operators to disclose violations and orders issued under the Mine Act by Mine Safety and Health Administration. We do not act as the owner of any mines, but we may act as a mining operator as defined under the Mine Act where we may be an independent contractor performing services or construction at such mine. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K is included in Exhibit 95.
Item 6.
Exhibits
The following documents are filed as Exhibits to this Report:
| 101 | The following financial information from our Company’s Quarterly Report on Form 10-Q, for the period ended April 2, 2023, formatted in Inline eXtensible Business Reporting Language: (i) Consolidated Balance Sheets (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Equity, (vi) Notes to Consolidated Financial Statements. | ||||
| 104 | Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101). | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: May 11, 2023 | TETRA TECH, INC. | ||||||||||
| By: | /s/ DAN L. BATRACK | ||||||||||
| Dan L. Batrack | |||||||||||
| Chairman and Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
| By: | /s/ STEVEN M. BURDICK | ||||||||||
| Steven M. Burdick | |||||||||||
| Executive Vice President, Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
| By: | /s/ BRIAN N. CARTER | ||||||||||
| Brian N. Carter | |||||||||||
| Senior Vice President, Corporate Controller | |||||||||||
| (Principal Accounting Officer) | |||||||||||
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TABLE OF CONTENTS
Part IItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 4. Mine Safety DisclosuresItem 6. Exhibits