Tetra Tech, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended March 29, 2020. Tetra Tech provides consulting and engineering services in water, environment, infrastructure, resource management, energy, and international development. Results are unaudited.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the corresponding prior-year period.
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $734.1 | $722.6 | $1,531.8 | $1,440.1 |
| Gross profit | $97.0 | $96.5 | $206.7 | $195.2 |
| Operating income | $47.5 | $47.5 | $110.8 | $103.3 |
| Net income attributable to Tetra Tech | $36.4 | $55.9 | $83.7 | $97.9 |
| Diluted EPS | $0.66 | $1.00 | $1.51 | $1.74 |
| Operating cash flow | Not separately stated in the provided cash flow statement | Not separately stated | $83.2 | $99.2 |
- Q2 revenue increased 1.6%, but declined 8.8% excluding acquisitions. Six-month revenue rose 6.4%, while declining 2.9% excluding acquisitions.
- Q2 gross margin was approximately 13.2%; six-month gross margin was approximately 13.5%. Q2 operating income was essentially flat; six-month operating income increased 7.3%.
- Net income and EPS fell in both periods. The comparison reflects, among other factors, prior-year tax benefits: the first-half FY2019 effective tax rate was negative 0.8%, versus 19.5% in FY2020. The filing reports prior-year deferred tax benefits and an Australian valuation-allowance release.
- Six-month operating cash flow declined $16.0 million year over year, primarily due to timing of vendor and employee payments. Investing cash outflow was $27.3 million, including the SEG acquisition; financing cash outflow was $39.3 million.
Balance sheet, debt and liquidity
- At March 29, 2020, cash and cash equivalents were $135.0 million; current assets were $1,001.9 million and current liabilities $735.8 million. Total assets were $2,343.2 million.
- Balance-sheet debt was $345.6 million, including $12.5 million current and $333.0 million long-term. The company reported $345.5 million drawn under its credit agreement, with $338.5 million available under the revolving facility. Management separately stated access to an additional $639 million of borrowings.
- Credit-facility covenants were met: consolidated leverage ratio 1.57x against a 3.00x maximum, and interest coverage 16.11x against a 3.00x minimum. The agreement matures in July 2023.
- Operating lease adoption added $262.7 million of right-of-use assets and $282.8 million of lease liabilities; the company said adoption materially affected the balance sheet but not the income statement. Prior-year figures were not adjusted.
Changes, outlook and notable items
- COVID-19 disrupted commercial activity: management reported project delays and cancellations, particularly in industrial markets, while government work was relatively stable. The company said 95% of its workforce could work remotely and its global offices remained operational.
- COVID-19 response and restructuring actions generated $8.2 million of Q2 charges, including technology, relocation, sanitation and severance costs; substantially all were expected to be paid in Q3. Management lowered expectations for second-half FY2020 revenue and operating income relative to prior forecasts. The filing provides no quantified full-year guidance.
- Management expected greater pandemic effects on commercial than government work, and warned that prolonged disruption could significantly affect international commercial activity. State and local government budget constraints were also identified as a potential headwind.
- Backlog was $2.989 billion at March 29, down 3.3% from fiscal year-end; remaining unsatisfied performance obligations were $2.972 billion, of which about $1.717 billion was expected to be satisfied within 12 months. The filing cautions that cancellations, deferrals and scope changes can reduce these amounts.
- GSG six-month operating income declined $4.8 million, mainly reflecting lower disaster-response revenue. CIG six-month operating income increased $5.3 million; reported results included COVID-19 costs and gains on equipment disposals.
- SEG, an IT management consulting firm, was acquired in Q2 for a stated fair value of $41.8 million. The company also reported $134.2 million of first-half revenue from SEG, eGlobalTech and WYG combined.
- Management found no goodwill impairment in Q2, but the Asia Pacific and Remediation and Field Services reporting units had fair-value cushions below 20%; further deterioration could result in impairment. A $1.6 million reduction in estimated acquisition earn-outs produced a gain in operating income.
- The filing describes a False Claims Act and breach-of-contract case concerning environmental remediation at Hunters Point Naval Shipyard. Tetra Tech disputes the allegations; the company could not estimate the outcome or reasonably possible loss.
- The board declared a subsequent quarterly dividend of $0.17 per share on April 27, 2020. The company repurchased $81.7 million of stock in the first half and reported $243.3 million remaining under its repurchase programs.
Important facts for investors to verify
- How COVID-19 project delays, cancellations, client payment capacity and second-half forecasts evolved after the filing date.
- Whether backlog converts to revenue and profit, given the reported decline and clients’ termination, deferral and scope-change rights.
- Credit-facility availability and covenant headroom; reconcile the stated $639 million borrowing access with the $338.5 million revolver availability.
- Potential goodwill impairment in the Asia Pacific and Remediation and Field Services units, and developments in the Hunters Point litigation.
- Underlying earnings trends after separating acquisitions, prior-year tax benefits, COVID-19 charges, disposal gains and contingent earn-out adjustments.