Tetra Tech, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 27, 2010. Amounts are in U.S. dollars; financial statement figures are unaudited. Tetra Tech provides consulting, engineering, program management, construction, and technical services focused on resources, infrastructure, and the environment.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $562.4 million | $551.4 million | $1,573.9 million | $1,712.4 million |
| Operating income | $32.7 million | $32.8 million | $87.3 million | $89.2 million |
| Net income | $20.6 million | $31.0 million | $53.7 million | $66.5 million |
| Diluted EPS | $0.33 | $0.51 | $0.86 | $1.10 |
| Operating margin | 5.8% | 5.9% | 5.5% | 5.2% |
- Q3 revenue increased 2.0%, while nine-month revenue declined 8.1%. Acquisitions contributed approximately $19 million and $102 million to revenue growth in those periods, respectively; excluding acquisitions, revenue declined in both periods.
- Net income fell 33.4% in Q3 and 19.3% for nine months, primarily reflecting higher income tax expense. The nine-month effective tax rate was 37.9%, versus 23.5% a year earlier; the prior-year period benefited from IRS settlement and research-credit benefits.
- Cash from operations was $64.5 million for nine months, down 39.9% year over year. The filing attributes the decrease primarily to a $40 million IRS tax settlement refund and substantial prior-year collections on large fixed-price contracts.
- Cash and equivalents were $120.3 million at June 27, 2010, versus $89.2 million at September 27, 2009. Operating cash flow less investing cash use was $27.4 million. Investing used $37.1 million, including $23.4 million for acquisitions and $15.9 million in capital expenditures.
- Total debt was approximately $9.5 million, consisting of $5.2 million current and $4.3 million long-term. The company had no revolver borrowings, $18.1 million in standby letters of credit, and $281.9 million available under its $300 million facility. Reported leverage and fixed-charge coverage ratios were 0.27x and 2.44x, respectively.
- Current assets were $696.2 million and current liabilities $409.2 million; the resulting current ratio was approximately 1.70. Goodwill was $342.5 million and net intangible assets were $29.8 million.
Changes and segment trends
- Q3 segment revenue increased in Environmental Consulting Services (17.1%) and Engineering and Architecture Services (9.9%); it declined in Technical Support Services (4.2%) and Remediation and Construction Management (2.0%). For the nine months, Environmental Consulting Services grew 18.6%, while the other three segments declined.
- International revenue grew 40.5% in Q3, state and local government revenue grew 22.8%, federal government revenue declined 3.3%, and commercial revenue declined 6.8%.
- Commercial revenue for the first nine months fell to $360.7 million from $574.0 million, reflecting prior-year project completions and weaker activity. Revenue from federal, state and local government clients represented 68.7% of nine-month revenue.
- Segment operating income is reported before acquisition-related amortization and unallocated corporate expenses. Consolidated operating income includes those items.
Outlook, risks, and unusual items
- Management expected fiscal 2010 revenue to be lower than fiscal 2009, citing a slow economic recovery and delays in new construction-management opportunities. It expected federal revenue to decrease slightly, state and local revenue to increase moderately, commercial revenue to decline, and international revenue to grow.
- Management said ARRA awards had been fewer and smaller than anticipated, and their eventual contribution remained uncertain. Delays in federal construction-management awards and continuing weakness in commercial markets were also cited.
- Backlog was $1.7 billion. The company cautioned that backlog may be canceled or adjusted and is not a reliable indicator of future earnings.
- Three companies were acquired in the first nine months. After quarter-end, the company signed definitive agreements for two more acquisitions, expected to close in Q4 using cash on hand.
- IRS appeals and a California tax examination remain ongoing, with management believing resolution within 12 months is reasonably possible. An unfavorable outcome could materially increase income tax expense.
- A trade-secrets lawsuit involving acquired subsidiary AMT remained on appeal. The estimated reasonably possible exposure, including attorneys’ fees, was $0 to approximately $14.5 million; the company recorded a liability and an equal receivable based on the expected indemnification by AMT’s former owners.
- Key risks include government funding, contract delays or termination, fixed-price project cost overruns, collection and client-credit risks, acquisition integration, goodwill impairment, and economic weakness. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether fiscal 2010 revenue and the stated segment outlook were achieved, particularly given delayed government awards and weak commercial demand.
- Whether cash conversion and receivables remain sound: net accounts receivable was $517.2 million, including $267.4 million unbilled; federal government unbilled receivables, net of progress payments, were $109.7 million.
- Resolution and financial impact of the IRS and California tax matters, including any effect of research-credit claims.
- Outcome of the AMT litigation and whether the indemnification receivable is ultimately collected.
- Completion, funding, and integration of the announced acquisitions, and the outcome of the annual goodwill impairment review.
- Whether backlog converts to funded work and profitable revenue, and whether credit-facility covenants and liquidity remain comfortably satisfied.