Tetra Tech, Inc. — Fiscal 2020 First-Quarter 10-Q
Reporting period: Three months ended December 29, 2019; unaudited. Comparisons are with the three months ended December 30, 2018, unless otherwise noted.
Business context
Tetra Tech provides consulting and engineering services in water, environment, infrastructure, resource management, energy, and international development. It reports Government Services Group (GSG), Commercial/International Services Group (CIG), and the wind-down of Remediation and Construction Management (RCM). Fiscal 2020 Q1 revenue growth included contributions from eGlobalTech and WYG, acquired in fiscal 2019.
Financial performance
| Metric | Fiscal 2020 Q1 | Fiscal 2019 Q1 | Change |
|---|---|---|---|
| Revenue | $797.6 million | $717.4 million | +11.2%; +2.9% excluding acquisitions |
| Gross profit / margin | $109.7 million / 13.8% | $98.7 million / 13.8% | +11.2% |
| Operating income / margin | $63.3 million / 7.9% | $55.7 million / 7.8% | +13.6% |
| Net income attributable to Tetra Tech | $47.3 million | $42.0 million | +12.7% |
| Diluted EPS | $0.85 | $0.75 | +13.3% |
| Adjusted diluted EPS (non-GAAP) | $0.84 | $0.70 | +20.0% |
| Cash from operating activities | $(18.0) million | $(15.3) million | Cash use increased $2.7 million |
Revenue growth reflected acquisitions and organic growth. Excluding acquisitions, GSG revenue increased 4.5%, while CIG revenue increased 0.3%. GSG operating income rose 12.4%; CIG operating income rose 16.7%, including an $0.8 million gain on disposal of non-core equipment. Adjusted operating income excludes that gain and RCM results.
Revenue mix shifted toward international clients, which generated 31.0% of revenue versus 27.4% a year earlier. U.S. federal revenue was 30.8%; U.S. commercial, 22.9%; and U.S. state and local government, 15.3%. Remaining unsatisfied performance obligations were $3.15 billion, and backlog was $3.17 billion, up 2.4% from fiscal year-end.
Financial position and liquidity
- Cash and cash equivalents were $110.8 million at December 29, 2019, down from $120.7 million at September 29, 2019.
- Total debt was approximately $335.0 million, compared with $276.5 million at fiscal year-end. The company had $351.6 million available under its revolving credit facility; borrowings carried a year-to-date weighted-average rate of 3.00% before swap effects and 3.69% including swaps.
- Credit agreement covenants were met: consolidated leverage ratio of 1.47x versus a 3.00x maximum, and interest coverage of 16.71x versus a 3.00x minimum.
- Operating cash use was $18.0 million; investing cash use was $2.9 million; financing activities provided $8.8 million. The operating cash outflow primarily reflected compensation and working-capital timing, including performance-based compensation payments.
- Adoption of lease accounting standard Topic 842 materially increased reported balance-sheet assets and liabilities. The company recorded $223.9 million of operating lease right-of-use assets and $243.1 million of operating lease liabilities; prior-year figures were not restated.
Outlook, commentary, and notable items
- Management expected fiscal 2020 growth in U.S. state and local government work excluding disaster response, U.S. federal work, U.S. commercial work, and international revenue. No consolidated full-year revenue or EPS guidance is provided in the supplied filing text.
- Management said the first half of the fiscal year is seasonally softer, partly due to holidays and weather. It believed existing cash, operating cash flows, and borrowing capacity would meet capital requirements for at least the next 12 months.
- The board declared a $0.15-per-share quarterly dividend payable in February 2020 and authorized a new $200 million share repurchase program. Together with the prior program’s remaining authorization, repurchase capacity was $303.8 million.
- Estimated liabilities for anticipated contract losses were $13.0 million at December 29, 2019, up from $11.5 million at September 29, 2019. Management said first-quarter adjustments to contract estimates were immaterial.
- A U.S. Attorney’s Office complaint alleges False Claims Act violations and breach of contract involving environmental remediation work at the former Hunters Point Naval Shipyard. Tetra Tech disputes the claims; the company said it could not determine the outcome probability or reasonably possible loss range.
- Other risks include government funding and procurement changes, economic and international exposure, project cost or schedule overruns, acquisition integration, foreign exchange and interest-rate movements, and potential claims exceeding insurance coverage. Management reported effective disclosure controls.
Important facts for investors to verify
- How much of revenue and earnings growth is sustainable organic growth versus the contributions of EGT and WYG.
- Whether backlog and performance obligations convert to revenue and cash as expected, given cancellation rights and funding conditions.
- Working-capital and operating cash-flow trends, including collection of receivables and the increase in net contract liabilities.
- Debt, revolving-credit availability, covenant headroom, and the cash demands of dividends and planned repurchases.
- Developments and potential financial exposure in the Hunters Point litigation, along with contract-loss estimates and other contingencies.