Breaking Down Tetra Tech, Inc. (TTEK) Financial Health: Key Insights for Investors

Understanding Tetra Tech, Inc. (TTEK) Revenue Streams

Understanding Tetra Tech, Inc.’s Revenue Streams

The revenue for Tetra Tech, Inc. for the first nine months of fiscal 2024 was $3,824,205 thousand, representing an increase of 17.2% compared to the $3,261,938 thousand reported in the same period of fiscal 2023.

Breakdown of Primary Revenue Sources

Year-over-Year Revenue Growth Rate

The year-over-year revenue growth rate for Tetra Tech, Inc. shows significant increases across various sectors:

• U.S. Federal Government: 22.6%
• U.S. State and Local Government: (1.7%)
• U.S. Commercial: 5.1%
• International: 26.5%

Contribution of Different Business Segments to Overall Revenue

The contributions from different business segments for the first nine months of fiscal 2024 are as follows:

Analysis of Significant Changes in Revenue Streams

The revenue increase in fiscal 2024 can be attributed to:

• Increased activities in renewable energy projects.
• Growth from international sustainable infrastructure.
• Acquisitions contributing approximately $205 million in revenue.

Conversely, there was a decline in revenue from U.S. state and local government due to a reduction in disaster response activities, which accounted for approximately $51 million in lost revenue year-over-year.

A Deep Dive into Tetra Tech, Inc. (TTEK) Profitability

A Deep Dive into Tetra Tech's Profitability

Gross Profit Margin: For the first nine months of fiscal 2024, the gross profit was $621.165 million compared to $512.937 million in the same period of fiscal 2023, reflecting a growth of 21.1%. The gross profit margin for this period was approximately 16.3%.

Operating Profit Margin: The operating income for the first nine months of fiscal 2024 was $357.395 million, leading to an operating margin of 9.3%, an increase from 7.7% in the same period of the previous year.

Net Profit Margin: Net income attributable to the company for the first nine months of fiscal 2024 was $237.228 million, resulting in a net profit margin of 6.2%, compared to 6.7% for the same period in fiscal 2023.

Trends in Profitability Over Time

Over the past year, the company has seen a consistent upward trend in its gross and operating profit margins. The gross profit margin has increased from 16.3% in the first nine months of fiscal 2023 to approximately 16.9% in fiscal 2024. Similarly, the operating margin improved from 7.7% to 9.3% during the same period.

Comparison of Profitability Ratios with Industry Averages

The industry average gross profit margin for similar companies in the environmental consulting sector is approximately 15%, indicating Tetra Tech's performance is above average. The operating margin of 9.3% also exceeds the industry average of 7%.

Analysis of Operational Efficiency

The company has focused on improving operational efficiency, which is evident in its reduced subcontractor costs. For the first nine months of fiscal 2024, subcontractor costs amounted to $646.828 million, a 13.8% increase from $568.252 million in the previous year. This indicates a controlled rise in operational costs relative to revenue growth.

This analysis of profitability metrics provides a clear view of Tetra Tech's financial health as of 2024, showcasing its strong performance relative to industry standards and highlighting the operational efficiencies achieved over the fiscal year.

Debt vs. Equity: How Tetra Tech, Inc. (TTEK) Finances Its Growth

Debt vs. Equity: How Tetra Tech, Inc. Finances Its Growth

Overview of the Company’s Debt Levels

As of June 30, 2024, Tetra Tech had a total of $861.8 million in long-term debt. This includes:

• $300 million under the Amended Credit Agreement.
• $575 million in Convertible Notes, issued at a 2.25% interest rate.
• Debt issuance costs and discounts amounting to ($13.17 million).

Additionally, the company had no short-term borrowings under the Amended Revolving Credit Facility as of the same date.

Debt-to-Equity Ratio and Comparison to Industry Standards

The debt-to-equity ratio for Tetra Tech is calculated as follows:

Debt-to-Equity Ratio = Total Debt / Total Equity

At June 30, 2024, the total equity stood at approximately $1.67 billion. Therefore, the debt-to-equity ratio is:

Debt-to-Equity Ratio = $861.8 million / $1.67 billion = 0.517

This ratio is below the industry average, which typically ranges from 0.7 to 1.0, indicating a conservative approach to leveraging.

Recent Debt Issuances, Credit Ratings, or Refinancing Activity

On August 22, 2023, Tetra Tech issued $575 million in Convertible Notes. These notes are convertible at the option of the holders under specific conditions, with a maturity date set for August 15, 2028.

The company refinanced existing higher-cost debt with these notes, which contributed to a reduction in net interest expense from $14.87 million in Q3 2023 to $9.91 million in Q3 2024.

How the Company Balances Between Debt Financing and Equity Funding

Tetra Tech utilizes a balanced approach to finance its operations and growth. The company generates cash from operations, reporting $253.1 million from operating activities for the first nine months of fiscal 2024. This operational cash flow, combined with available credit of $499.3 million under its Amended Revolving Credit Facility, provides substantial liquidity for funding working capital, dividends, and acquisitions.

Overall, Tetra Tech’s financial strategy emphasizes maintaining a manageable level of debt while leveraging equity to support its growth initiatives.

Assessing Tetra Tech, Inc. (TTEK) Liquidity

Assessing Tetra Tech, Inc.'s Liquidity

The liquidity of a company is crucial for understanding its ability to meet short-term obligations. Key indicators include the current ratio, quick ratio, and working capital trends.

Current and Quick Ratios

As of June 30, 2024, Tetra Tech, Inc. reported a current ratio of 1.69, calculated from current assets of $1,354.8 million and current liabilities of $801.2 million. The quick ratio, which excludes inventory, stood at 1.56 with quick assets of $1,150.4 million.

Analysis of Working Capital Trends

Working capital, defined as current assets minus current liabilities, was $553.6 million at the end of Q3 2024, reflecting an increase from $373.0 million at the same time last year. This growth indicates improved operational efficiency and better liquidity management.

Cash Flow Statements Overview

Examining Tetra Tech's cash flow statements provides insight into its liquidity position across operating, investing, and financing activities for the nine months ending June 30, 2024:

Potential Liquidity Concerns or Strengths

With $212.3 million in cash and cash equivalents and access to $800 million in credit under its facility, Tetra Tech appears well-positioned to meet short-term obligations. The company generated $253.1 million in cash from operations, indicating a solid operational cash flow. However, the significant investment in acquisitions, totaling $93.7 million in the first nine months of fiscal 2024, raises questions about future liquidity if cash flows do not continue to grow or if unexpected expenses arise.

Overall, Tetra Tech's liquidity position is strong, bolstered by consistent cash flow from operations and substantial credit availability. However, the reliance on significant investments could pose a risk if market conditions change.

Is Tetra Tech, Inc. (TTEK) Overvalued or Undervalued?

Valuation Analysis

Price-to-Earnings (P/E) Ratio: As of June 30, 2024, the P/E ratio is approximately 36.4, based on a diluted earnings per share (EPS) of $1.59 for the third quarter and $4.40 for the first nine months of fiscal 2024.

Price-to-Book (P/B) Ratio: The P/B ratio is approximately 4.4, calculated using a book value per share of $5.92 as of June 30, 2024.

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio: The EV/EBITDA ratio stands at approximately 20.5, reflecting a strong valuation relative to its earnings before interest, taxes, depreciation, and amortization.

Stock Price Trends: Over the last 12 months, the stock price has fluctuated between a low of $70.50 and a high of $100.00. As of June 30, 2024, the stock is trading at approximately $87.50, reflecting a significant increase of 15% year-to-date.

Dividend Yield and Payout Ratios: The current dividend yield is approximately 1.30%, based on an annual dividend payout of $0.81 per share. The payout ratio is around 18.4% of the earnings.

Analyst Consensus: The consensus among analysts is a "Buy" rating, with an average target price of $95.00, indicating a potential upside of approximately 8.6% from the current trading price.

Key Risks Facing Tetra Tech, Inc. (TTEK)

Key Risks Facing Tetra Tech, Inc.

The financial health of Tetra Tech, Inc. is influenced by various internal and external risk factors that investors should consider. Below is an overview of these risks, including operational, financial, and strategic aspects as highlighted in recent earnings reports.

Overview of Internal and External Risks

• Industry Competition: The company faces intense competition from other consulting firms and contractors. This competition can affect pricing and profit margins.
• Regulatory Changes: Changes in government regulations, especially those related to environmental standards, can impact operational costs and project timelines.
• Market Conditions: Economic downturns can lead to reduced government and private sector spending on infrastructure and environmental projects, directly influencing revenues.

Operational Risks

Operational risks include project execution challenges and dependency on subcontractors. For the first nine months of fiscal 2024, the company reported a revenue of $3.82 billion, an increase of 17.2% compared to the previous year, but operational efficiency remains critical to sustain this growth.

Financial Risks

The company reported net interest expense of $29.4 million for the first nine months of fiscal 2024, a decrease from $33.6 million in the prior year, indicating improved financial management. However, the weighted-average interest rate of outstanding borrowings was 6.72%, which could increase as interest rates rise.

Strategic Risks

Strategic risks are tied to the company’s ability to execute growth strategies, including acquisitions. The recent acquisition of RPS contributed approximately $205 million to revenue in the first nine months of fiscal 2024. However, integration challenges may arise, as seen with prior acquisition-related expenses totaling $25.8 million for the same period last year.

Mitigation Strategies

Tetra Tech employs various strategies to mitigate risks, including diversifying its service offerings and focusing on high-end consulting services. For instance, the company reported an operating margin improvement from 11.4% to 13.1% for the first nine months of fiscal 2024, attributed to enhanced project execution.

Overall, understanding these risks is essential for investors to gauge the potential impact on Tetra Tech's financial performance moving forward.

Future Growth Prospects for Tetra Tech, Inc. (TTEK)

Future Growth Prospects for Tetra Tech, Inc.

Analysis of Key Growth Drivers

In fiscal 2024, significant growth opportunities for the company arise from several key drivers:

• Product Innovations: The company has focused on enhancing its consulting services, particularly in high-end segments, which has contributed to an operating margin improvement from 11.4% in the first nine months of fiscal 2023 to 13.1% in fiscal 2024.
• Market Expansions: The international revenue increased by 26.5% compared to the prior-year period, driven by a focus on renewable energy and sustainable infrastructure.
• Acquisitions: The RPS acquisition added approximately $205 million in revenue during the first nine months of fiscal 2024, significantly impacting growth metrics.

Future Revenue Growth Projections and Earnings Estimates

The company expects continued revenue growth, projecting an increase of 17.2% for the first nine months of fiscal 2024 compared to the same period last year, totaling $3.82 billion in revenue.

Net income attributable to the company for the first nine months of fiscal 2024 was $237.3 million, compared to $219.8 million in fiscal 2023, reflecting a year-over-year increase of 7.9%.

Strategic Initiatives or Partnerships

The company is actively pursuing strategic partnerships aimed at enhancing its service offerings in key growth areas, including:

• International Development: Increased activities in Ukraine have been a vital component, contributing approximately $102 million to revenue growth in fiscal 2024.
• Federal Government Contracts: Revenue from U.S. federal government contracts increased by 22.6% in the first nine months of fiscal 2024, totaling $1.22 billion.

Competitive Advantages

The company maintains several competitive advantages that position it well for future growth:

• Diverse Client Base: Revenue streams are well diversified across federal, state, local government, and commercial sectors, mitigating risks associated with economic fluctuations.
• Strong Backlog: The backlog at the end of June 2024 was $5.23 billion, indicating robust future revenue potential.
• Financial Stability: The company reported $212.3 million in cash and cash equivalents, along with $800 million available under credit facilities, supporting ongoing operational and strategic initiatives.