Tetra Tech, Inc. — Q1 FY2018 10-Q
Reporting period: Three months ended December 31, 2017; comparison is the three months ended January 1, 2017. Amounts below are in U.S. dollars.
Business context and results
Tetra Tech provides consulting and engineering services focused on water, environment, infrastructure, resource management, energy and international development. Fiscal 2018 reporting groups are Government Services Group (GSG), Commercial/International Services Group (CIG), and the wind-down Remediation and Construction Management (RCM) segment.
| Metric | Q1 FY2018 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $759.7 million | $668.9 million | +13.6% |
| Revenue less subcontractor costs | $544.8 million | $489.6 million | +11.3% |
| Gross profit | $94.1 million | $81.4 million | +15.7% |
| Income from operations | $48.6 million | $39.9 million | +21.9% |
| Net income attributable to Tetra Tech | $46.0 million | $26.6 million | +73.3% |
| Diluted EPS | $0.81 | $0.46 | +76.1% |
Gross margin was approximately 12.4%, versus 12.2%; operating margin was approximately 6.4%, versus 6.0%. Management’s non-GAAP ongoing EPS, excluding RCM and specified adjustments, was $0.65 versus $0.49. The filing says ongoing revenue grew 14.0%; excluding Glumac’s $13.2 million contribution, ongoing revenue grew 12.0%.
Cash flow, debt and liquidity
- Operating cash flow was negative $66.5 million, compared with negative $58.7 million. Management attributed the use of cash mainly to working-capital needs, payment timing for vendors and employees, and receivable collections.
- Investing cash flow was negative $19.7 million, including $18.3 million for acquisitions. Financing cash flow was positive $70.0 million, primarily reflecting net borrowings.
- Cash was $173.0 million at December 31, down $17.0 million from fiscal year-end. Long-term debt was $447.9 million, including current debt; borrowings under the credit agreement totaled $447.6 million at a 2.69% weighted-average rate.
- Available revolving credit was $169.1 million. The company reported compliance with its debt covenants: leverage ratio 2.01x against a 3.00x maximum, and fixed-charge coverage 2.68x against a 1.25x minimum. Management said available cash, operating cash flows and borrowing capacity should meet requirements for at least 12 months.
Material changes and management outlook
- GSG revenue increased 22.0% and operating income increased 29.7%; growth was led by U.S. state and local government work, including emergency-response projects following 2017 hurricanes and fires. GSG’s operating margin on revenue less subcontractor costs rose to 12.6% from 11.7%.
- CIG revenue increased 4.2%, but operating income fell 1.2%. Environmental activity was offset by weaker Canadian oil and gas work. RCM revenue declined 17.3% as the company continued winding down non-core construction activities; remaining backlog was immaterial.
- Management expected U.S. state and local government business to continue growing in FY2018; modest growth in U.S. federal and U.S. commercial revenue excluding Glumac; and a modest overall international decline, with growth excluding Canadian oil and gas. A prolonged federal shutdown could adversely affect federal work.
- Backlog was $2.4 billion, down $112.4 million, or 4.4%, from fiscal year-end. The company cautioned that backlog may be canceled or adjusted and is not a certain indicator of future earnings.
- Glumac was acquired on October 2, 2017, for a preliminary fair-value purchase price of $38.4 million, including contingent consideration. A definitive agreement to acquire NDY, an Australian-based engineering design firm, was announced January 17, 2018; closing was expected in Q2 FY2018, subject to customary conditions.
Tax, risks and contingencies
- The quarter included a $10.1 million one-time deferred tax benefit from the Tax Cuts and Jobs Act, contributing to a reported $0.6 million tax benefit and a negative 1.4% effective tax rate. Excluding that benefit, management reported a 20.9% effective rate. Excluding discrete items and the one-time law change, the rate was 28.0%; management expected approximately 28.0% for the remainder of FY2018 and 26.0% in FY2019. Tax-law calculations remained provisional, with final adjustments expected by fiscal year-end.
- Accounts receivable included approximately $61 million related to contract claims. Claims and estimates under percentage-of-completion accounting can affect revenue, profit and collections; the company recorded $0.7 million of net unfavorable estimate adjustments in CIG during the quarter.
- Key disclosed risks include project cost overruns and schedule delays, collection and claim-resolution risk, dependence on government funding and contract awards, cyclical oil and gas and mining demand, acquisition integration, foreign currency exposure, and potential uninsured or underinsured professional-liability claims. Management did not expect the disclosed legal matters to materially affect results, but noted uncertainty in their resolution.
Important facts for investors to verify
- Whether the strong state and local government growth, including disaster-response work, is sustainable beyond the quarter.
- Receivable aging, collections and resolution of the approximately $61 million in claims-related receivables, alongside the working-capital cash outflow.
- Final tax-law measurements and the resulting effective tax rate, distinguishing recurring earnings from the one-time deferred tax benefit.
- Debt, covenant headroom and funding needs for the announced NDY acquisition and other acquisition commitments.
- Backlog conversion, Canadian oil and gas exposure, and any changes in project estimates, contingencies or legal claims.