Tetra Tech, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2017, ended April 2, 2017. Unaudited results; dollar amounts below are in millions unless otherwise noted.
Business context
Tetra Tech provides consulting and engineering services in water, environment, infrastructure, resource management, energy and international development. Its reportable segments are Water, Environment and Infrastructure (WEI), Resource Management and Energy (RME), and Remediation and Construction Management (RCM). RCM is winding down non-core construction work, expected to be substantially completed in 2017.
Financial performance and liquidity
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $663.8 | $627.4 | $1,332.6 | $1,188.1 |
| Gross profit | $81.0 | $74.8 | $162.4 | $147.9 |
| Operating income | $43.0 | $16.7 | $82.8 | $49.6 |
| Net income attributable to Tetra Tech | $26.9 | $3.7 | $53.4 | $27.0 |
| Diluted EPS | $0.46 | $0.06 | $0.92 | $0.45 |
| Operating cash flow | Not separately provided | Not separately provided | $50.4 | $30.2 |
- Q2 revenue rose 5.8%; first-half revenue rose 12.2%. First-half growth included $213.4 million of revenue from Coffey and INDUS, acquired in FY2016. Excluding those acquisitions, management reported first-half revenue growth of 2.3% overall and 4.6% for ongoing business excluding RCM and the acquisitions.
- Reported operating income includes a $7.1 million gain from lower estimated acquisition earn-out liabilities. Ongoing operating income, a company-defined non-GAAP measure, increased 27.3% in Q2 to $44.3 million and 17.8% in the first half to $87.2 million. Ongoing diluted EPS was $0.48 and $0.97, respectively, versus $0.37 and $0.79 in the prior-year periods.
- WEI first-half revenue increased 19.2% and operating income 29.8%; RME revenue increased 13.2% and operating income 6.5%. RME growth reflected Coffey; excluding Coffey, RME revenue and revenue net of subcontractor costs declined, largely due to weaker oil and gas activity. RCM recorded operating losses of $11.5 million for the first half.
- WEI operating margin, measured against revenue net of subcontractor costs, improved to 11.1% in Q2 from 9.8%, and to 11.8% for the first half from 10.5%.
- Cash and cash equivalents were $171.3 million at April 2, 2017, versus $160.5 million at fiscal year-end. First-half investing cash use was $11.6 million; financing cash use was $26.9 million, including $20.0 million of share repurchases and $10.3 million of dividends.
- Balance-sheet debt was approximately $345.4 million, including $18.6 million current and $326.9 million long-term. Credit Agreement borrowings were $339.1 million at a 2.32% weighted-average rate; the effective rate including swaps was 2.65%. Available revolving credit was $289 million. The company reported compliance with debt covenants, with leverage of 1.64x against a 3.00x maximum and fixed-charge coverage of 2.68x against a 1.25x minimum.
- Total assets were $1.798 billion and total current liabilities were $465.3 million. Backlog was $2.5 billion, up $118.0 million, or 5.0%, from fiscal year-end; backlog includes only funded work authorizations.
Changes, outlook and material items
- Growth was supported by increased U.S. federal and state/local government activity, while North American oil and gas weakness weighed on results. First-half U.S. federal revenue increased 28.5% (15.7% excluding Coffey and INDUS); international revenue increased 7.8%, but fell 15.8% excluding Coffey.
- Management anticipated fiscal 2017 growth in U.S. federal and state/local government revenue, increased international revenue at a slower rate in the second half, and stable U.S. commercial revenue. It cautioned that continued low or falling commodity prices could adversely affect international business. No quantified earnings or revenue guidance is provided in the filing text.
- RCM recognized a $4.5 million revenue reduction and $3.2 million operating loss related to unsettled claims in Q2, plus unfavorable project cost-estimate adjustments. First-half unfavorable operating-income adjustments from contract estimates totaled $8.0 million across RME and RCM. Anticipated contract losses were $11.2 million, with estimated remaining completion costs of $14.4 million.
- Claims-related receivables totaled approximately $48 million. Management said claims may take time to resolve and that some claims may exceed insurance coverage; it did not expect existing legal matters to materially harm financial position, results or cash flows, but acknowledged uncertainty.
- First-half effective tax rate was 30.4%, compared with 38.2%. Q2 included a $2.7 million first-half benefit from tax accounting for share-based awards, a $1.2 million IRS-related tax benefit, and a $2.3 million expense for an international tax position under examination. The company expected an approximately $20 million IRS payment in Q3, described as acceleration of a deferred tax liability. A $23.4 million valuation allowance was recorded against certain foreign tax-loss carryforwards.
- The board authorized a $200 million repurchase program; $20.0 million had been used by April 2. A quarterly dividend of $0.10 per share was declared May 1, up from $0.09 previously.
- Key risks include government funding and procurement changes, project cost overruns and estimate revisions, collection and claim recoveries, commodity-market exposure, acquisition integration, foreign exchange, and professional-liability claims. The company also cited risks from contract cancellations, cybersecurity incidents, and legal or regulatory compliance.
Important facts for investors to verify
- How much reported earnings growth reflects underlying operations versus the $7.1 million earn-out gain and prior-year acquisition/integration charges.
- Progress on RCM wind-down, remaining $14.4 million backlog, project losses, and resolution or collection of the approximately $48 million in claims receivables.
- Whether Coffey and INDUS integration and performance support continued growth, and how weakness in oil, gas and other commodity-linked markets develops.
- Cash generation and liquidity after the expected approximately $20 million IRS payment, while funding dividends, repurchases, acquisitions and debt service.
- Potential changes in U.S. government spending, contract awards and appropriations; backlog is not guaranteed to convert to revenue or profit.
- Contract estimates, contingent liabilities and goodwill remain judgment-sensitive; the filing reported no goodwill impairment in the first half of FY2017.