Business context and reporting period
Tetra Tech, Inc. provides consulting and engineering services in water, environment, infrastructure, resource management, energy and international development. This unaudited Form 10-Q covers fiscal first-quarter 2019, the three months ended December 30, 2018; comparisons are with the three months ended December 31, 2017. Tetra Tech adopted ASC 606 on October 1, 2018 using the modified retrospective method, so prior-year results were not restated.
Financial results and position
| Metric | Q1 FY2019 | Prior-year quarter |
|---|---|---|
| Revenue | $717.4 million | $759.7 million |
| Revenue less subcontractor costs | $553.4 million | $544.8 million |
| Gross profit | $98.7 million | $94.1 million |
| Income from operations | $55.7 million | $48.6 million |
| Net income attributable to Tetra Tech | $42.0 million | $46.0 million |
| Diluted EPS | $0.75 | $0.81 |
| Operating cash flow | $(15.3) million | $(57.7) million |
Gross margin was approximately 13.8% versus 12.4%; operating margin was 7.8% versus 6.4%. Revenue fell 5.6%, while revenue less subcontractor costs rose 1.6%. Operating income increased 14.7%, but net income attributable to Tetra Tech fell 8.8%, principally reflecting the change from a prior-year tax benefit to current-quarter tax expense. The current-quarter effective tax rate was 20.4%, including a $2.6 million additional deferred tax benefit related to the Tax Cuts and Jobs Act; excluding net deferred tax benefits, management reported a 25.3% rate.
Cash and cash equivalents were $66.5 million at December 30, down from $146.2 million at September 30, 2018. Total debt was approximately $260.2 million, comprising $12.6 million current and $247.6 million long term. The company reported $439.1 million available under its revolving credit facility and compliance with its leverage and interest-coverage covenants (1.11x and 15.9x, respectively). Total assets were $1.83 billion and current liabilities were $532.0 million. Cash used in investing activities was $3.7 million; cash used in financing activities was $59.0 million. The quarter included $25.0 million of share repurchases and $6.7 million of dividends.
Material changes versus the prior comparable period
- Revenue declined amid lower disaster-recovery activity and the prior-year comparison; management said revenue excluding acquisition and divestiture effects declined 6.0%.
- U.S. state and local government revenue fell 18.8%, and U.S. commercial revenue fell 16.4%. U.S. federal revenue declined 4.9% amid disruption leading up to the late-December partial government shutdown.
- International revenue grew 19.2%, including $21.6 million from NDY; excluding NDY, growth was 6.1%. Management attributed growth in part to Canadian and Asia-Pacific infrastructure work.
- GSG operating income declined 4.4% to $37.4 million. CIG operating income increased 27.3% to $27.1 million, with its margin on revenue less subcontractor costs improving to 10.9% from 9.1%.
- Net cash used in operations improved by $42.4 million year over year, which management attributed to stronger collections, including settlement of a claim. It nevertheless remained negative.
- ASC 606 adoption reduced retained earnings by $2.8 million at October 1, 2018. For the quarter, adoption increased reported revenue and operating income by $2.2 million and net income attributable to Tetra Tech by $1.7 million.
- Other comprehensive loss was $27.3 million, largely reflecting $23.3 million of foreign-currency translation losses; accumulated other comprehensive loss increased to $154.7 million.
Outlook, commentary, risks and unusual items
Management expected fiscal 2019 growth in U.S. state and local government, U.S. commercial (adjusted for the divestiture) and international revenue, and modest growth in U.S. federal revenue. These are qualitative expectations; the filing provides no specific full-year revenue or EPS guidance. Management cautioned that another prolonged federal shutdown could adversely affect federal work. The company reported $2.77 billion of remaining unsatisfied performance obligations, of which $1.67 billion was expected to be satisfied within 12 months; cancellations, deferrals and scope changes remain possible.
- On January 14, 2019, the U.S. Attorney’s Office intervened in three False Claims Act qui tam actions involving Tetra Tech EC’s environmental-remediation work at Hunters Point Naval Shipyard. The company disputes the allegations; it said the likelihood and reasonably possible loss range could not be determined.
- Anticipated-loss liabilities on contracts were $13.3 million at December 30, 2018. The company reported approximately $74 million in receivables related to claims, including requests for equitable adjustment.
- Other principal risks include government funding and procurement changes, project cost-estimation and fixed-price contract risk, collection and claim-resolution uncertainty, foreign-currency exposure, and acquisition integration. Professional-liability claims may exceed insurance limits.
- The credit agreement matures in July 2023 and contains financial covenants and restrictions on debt, acquisitions, dividends and repurchases. Tetra Tech had hedged the interest rate on $250 million of term debt with swaps.
- Management said existing cash, operating cash flows and borrowing capacity should meet capital requirements for at least 12 months. A new $200 million repurchase authorization was approved; the company also declared a subsequent quarterly dividend of $0.12 per share.
Most important facts for investors to verify
- Whether operating cash flow turns positive and collections remain strong, given the quarter’s cash use and claim-related receivables.
- Whether reported revenue trends and qualitative growth expectations persist, particularly after separating acquisition, divestiture, disaster-response and subcontractor effects.
- Developments and potential financial exposure in the Hunters Point litigation and other contract claims.
- Debt, liquidity and covenant headroom, including the effect of repurchases, dividends and any future acquisitions.
- How estimates under ASC 606, contract costs, anticipated-loss provisions and the final tax effects affect future reported earnings.