Tetra Tech, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, ended December 30, 2012; comparisons are with the three months ended January 1, 2012. Amounts below are in U.S. dollars.
Business context and results
Tetra Tech provides consulting, engineering, program and construction management, construction, and technical services focused on water, environment, energy, infrastructure, and natural resources. It reorganized in the quarter, eliminating the Engineering and Architecture Services segment and reallocating its operations to ECS and TSS; prior-year segment data was recast.
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $658.5 million | $682.6 million | Down 3.5% |
| Revenue less subcontractor costs (non-GAAP) | $497.2 million | $492.1 million | Up 1.0% |
| Operating income | $41.8 million | $36.1 million | Up 15.8% |
| Operating margin on revenue | 6.3% | 5.3% | Up about 1.0 percentage point |
| Operating margin on revenue less subcontractor costs | 8.4% | 7.3% | Up 1.1 percentage points |
| Net income attributable to Tetra Tech | $26.2 million | $22.6 million | Up 16.0% |
| Diluted EPS | $0.41 | $0.36 | Up 13.9% |
| EBITDA (non-GAAP) | $54.1 million | $51.1 million | Up 5.9% |
Management attributed improved earnings and margins to a shift from lower-margin U.S. federal work toward higher-margin commercial work, including oil and gas, lower acquisition-related amortization, and reduced overhead. Revenue from U.S. federal government programs fell $44.0 million; growth in commercial and international activity helped offset the decline.
Segments, markets, cash flow, and financial position
- Segments: ECS revenue was $278.2 million, down 0.4%, while operating income fell 11.7% to $19.3 million, partly due to delayed Canadian municipal and mining project funding. TSS revenue declined 4.4% to $243.9 million, but operating income rose 27.4% to $22.3 million. RCM revenue declined 1.5% to $158.4 million; operating income increased 20.2% to $7.1 million, including a $1.1 million federal construction claim-settlement gain.
- Client sectors: International revenue increased 4.7% to $167.5 million; U.S. commercial revenue declined 2.4% to $173.1 million; U.S. federal revenue fell 16.2% to $227.4 million; and state and local government revenue increased 22.5% to $90.5 million.
- Cash flow: Operating activities provided $17.8 million, versus $38.3 million a year earlier. Investing used $18.5 million, including $14.5 million for acquisitions. Financing provided $47.9 million, including $89.2 million of borrowings and $22.4 million of earn-out payments. Cash rose $46.8 million to $151.6 million.
- Liquidity and debt: Current assets were $893.9 million and current liabilities $437.9 million at quarter-end; cash was $151.6 million. Long-term debt was $147.8 million, plus $1.9 million current. The company reported a $460 million revolving facility, $294.8 million available credit, and covenant compliance, with a 0.95x consolidated leverage ratio and 1.60x fixed-charge coverage ratio. The filing also describes facility borrowings and multicurrency borrowings; investors should verify their scope and reconciliation to balance-sheet debt.
- Other indicators: Backlog was $1.9 billion, consisting of funded contracts with work authorizations received. Accounts receivable, net, was $674.9 million, including $325.3 million unbilled; approximately $17 million of unbilled receivables related to claims and equitable-adjustment requests.
Outlook, risks, contingencies, and unusual items
- Management expected international and U.S. commercial business to grow in fiscal 2013, including energy-focused work, and anticipated continued state and local growth tied to essential programs. It remained cautious about federal business amid budget uncertainty and expected sequestration, then scheduled for fiscal 2013’s second quarter. No quantified earnings or revenue guidance is provided.
- The company said cash, operating cash flow, and borrowing availability should meet capital requirements for at least the next 12 months. Its business is seasonal, with revenue and operating income typically lower in the first half.
- On December 31, 2012, Tetra Tech acquired American Environmental Group; on January 28, 2013, it acquired Parkland Pipeline. Both were assigned to RCM. Neither transaction was included in the quarter ended December 30.
- Two employees of a Canadian subsidiary and the subsidiary itself faced Quebec corruption allegations relating, in management’s view, to activities before Tetra Tech’s acquisition of the business. The legal process was expected to continue into fiscal 2014; financial impact was unknown. The company also disclosed professional-liability claims and lawsuits, some potentially beyond insurance coverage, while stating it did not expect them to have a material adverse effect.
- Key risks include federal spending reductions or funding delays, economic weakness affecting commercial and government clients, project cost overruns and fixed-price contract exposure, collectability of receivables and claims, acquisition integration and earn-out estimates, foreign-exchange exposure, and litigation or compliance matters.
- Foreign-currency translation reduced equity by $5.6 million in the quarter, compared with a $10.8 million increase in the prior-year quarter. The retroactive extension of federal research credits was expected to produce a tax benefit in Q2 FY2013. The effective tax rate was 35.0%, versus 34.7%.
Important facts for investors to verify
- Whether federal budget actions and sequestration further affect contract funding, awards, and the company’s federal revenue mix.
- Whether improved margins persist as higher-margin commercial and oil-and-gas work offsets federal declines, and how much results relied on the RCM claim-settlement gain.
- Cash conversion and working-capital movements, especially unbilled receivables, claims, and collection timing.
- Debt and facility disclosures: reconcile reported borrowings, multicurrency borrowings, available credit, and balance-sheet debt.
- Integration and performance of the AEG and Parkland acquisitions, associated financing, and contingent earn-out obligations.
- Developments in the Quebec allegations and other insured or uninsured claims, including any change in estimated financial exposure.