Tetra Tech, Inc. — Form 10-Q Summary
Business context and reporting period
Global consulting and engineering services provider focused on water, environment, infrastructure, resource management, energy and international development. This unaudited filing covers the quarter and nine months ended June 28, 2020. Results reflect the COVID-19 disruption; prior-year lease figures were not restated for the company’s adoption of new lease accounting rules.
Key financial metrics
| Metric | Quarter ended June 28, 2020 | Nine months ended June 28, 2020 | Prior-year comparison |
|---|---|---|---|
| Revenue | $709.8 million | $2,241.5 million | Down 14.0% and 1.1%, respectively |
| Revenue less subcontractor costs (non-GAAP) | $560.3 million | $1,758.8 million | Down 10.1% and 0.2%, respectively |
| Operating income | $63.5 million | $174.4 million | Down 2.0%; up 3.7% |
| Net income attributable to Tetra Tech | $45.5 million | $129.2 million | Down 7.6% and 12.2% |
| Diluted EPS | $0.83 | $2.34 | Down 5.7% and 11.0% |
| Cash from operating activities | Not separately stated in the supplied filing text | $194.6 million | Compared with $113.4 million |
Balance sheet and liquidity: At June 28, 2020, cash and cash equivalents were $141.7 million. Current and long-term debt totaled approximately $277.3 million; the company reported $403.4 million available under its revolving credit facility. It also reported $261.9 million of operating lease liabilities following adoption of the new lease standard. Credit covenants were met: consolidated leverage ratio 1.31x and interest coverage ratio 16.11x. Nine-month financing cash outflow was $152.6 million, including $102.2 million of share repurchases and $25.6 million of dividends.
Other indicators: Backlog was $3.07 billion, down 0.8% from fiscal year-end; $3.05 billion of remaining unsatisfied performance obligations included $1.76 billion expected to be satisfied within 12 months. Net contract liabilities were $82.6 million. Anticipated contract-loss liabilities increased to $19.5 million from $11.5 million.
Material changes versus the prior comparable period
- Quarterly revenue declined sharply, reflecting lower disaster-response work and COVID-19 impacts. Over nine months, revenue was nearly flat overall, but excluding acquisitions, disposals and disaster-response effects, management reported a 3.4% decline.
- Government Services Group (GSG) nine-month revenue rose 0.4%, including acquisitions, while operating income fell 10.5%, mainly due to lower disaster-response revenue. Commercial/International Services Group (CIG) revenue fell 3.8%, while operating income rose 9.6%, including disposition gains.
- U.S. state and local revenue fell 24.5% over nine months, largely due to lower disaster-response activity. U.S. federal revenue increased 6.6% including acquisitions; U.S. commercial revenue declined 3.7%. International revenue increased 8.8% including acquisitions and the prior-year pipeline disposal, but declined 4.4% excluding those effects.
- Nine-month operating cash flow improved by $81.2 million, primarily from stronger receivable collections. Accounts receivable and contract assets generated a $144.2 million cash-flow benefit, while accounts payable used $98.0 million.
- The nine-month effective tax rate rose to 21.2% from 7.1%, in part because the prior-year period included a $22.3 million Australian valuation-allowance release and other tax benefits. Excluding specified tax items, management reported a 25.5% rate in both periods.
Outlook, management commentary, risks and unusual items
- Management said government work, about 60% of revenue, had been relatively stable, while commercial work was more affected by project delays and cancellations. It expected COVID-19 effects on U.S. commercial revenue to remain more significant than on government programs; prolonged disruption could materially affect international commercial activity. Some state and local clients may face budget constraints.
- Management reported no significant COVID-related deterioration in liquidity to date and said cash, operating cash flow and borrowing capacity should meet requirements for at least 12 months. It did not provide a quantified earnings or revenue forecast in the supplied filing text.
- COVID-19 response and severance costs totaled $8.2 million in the second quarter, substantially paid in cash in the third quarter. The company recorded $7.5 million of gains over nine months from selling equipment associated with the Canadian pipeline business. These items, along with earn-out adjustments and RCM, affect comparisons of reported and adjusted results.
- Goodwill was $958.2 million. COVID-19-related impairment reviews found no impairment, but management said the Asia Pacific and Remediation and Field Services reporting units had fair values less than 30% above carrying value; further deterioration could trigger impairment.
- Key contingencies include a U.S. government False Claims Act and breach-of-contract case involving remediation work at Hunters Point Naval Shipyard. The company disputes the allegations and said it cannot estimate the probability of outcome or reasonably possible loss. Other professional-liability claims may exceed insurance coverage.
- Other risks include contract cancellations or scope reductions, fixed-price cost overruns, collection and credit risk, government funding and procurement changes, acquisition integration, foreign exchange, cybersecurity, and interest-rate exposure. Backlog and contract obligations may be canceled, deferred or changed.
Important facts for investors to verify
- Track whether commercial and international demand, project delays and cancellations, and disaster-response revenue recover or worsen.
- Assess cash conversion and receivable collectability, including the effects of unbilled balances, claims and the increased allowance for doubtful accounts.
- Review the reconciliation of reported and adjusted results, particularly COVID-19 costs, equipment-sale gains, earn-out changes and tax items.
- Monitor debt, available revolver capacity, covenant headroom, lease obligations and capital returns; the filing gives different headline measures of additional borrowing access, so confirm the applicable facility availability.
- Follow potential contract losses, goodwill headroom in the identified reporting units, and developments in the Hunters Point litigation and other contingencies.
- Confirm backlog conversion and funding: clients may cancel or revise work, and certain operations and maintenance contracts can be terminated on short notice.