Tetra Tech, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2019, ended June 30, 2019; comparisons are with the periods ended July 1, 2018. Tetra Tech provides consulting and engineering services focused on water, environment, infrastructure, resource management, energy, and international development. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $825.8 million | $764.8 million | $2,265.8 million | $2,224.8 million |
| Gross profit | $118.0 million | $109.6 million | $313.1 million | $295.2 million |
| Income from operations | $64.8 million | $55.5 million | $168.1 million | $146.8 million |
| Net income attributable to Tetra Tech | $49.2 million | $33.3 million | $147.1 million | $108.1 million |
| Diluted EPS | $0.88 | $0.59 | $2.63 | $1.91 |
- Q3 revenue increased 8.0%; nine-month revenue increased 1.8%. Excluding acquisition and divestiture effects, management reported growth of 7.8% and 2.5%, respectively.
- Gross margin was approximately 14.3% in both Q3 periods. Operating margin increased to approximately 7.9% from 7.3% in Q3 and to 7.4% from 6.6% for the nine-month period.
- Adjusted diluted EPS, a non-GAAP measure excluding specified items, was $0.89 versus $0.71 in Q3 and $2.28 versus $1.89 year to date.
- Operating cash flow was $113.4 million, compared with $76.3 million. Capital expenditures were $10.0 million. Investing cash outflow was $44.7 million and financing cash outflow was $47.3 million.
- Cash and cash equivalents were $111.2 million at June 30; cash, cash equivalents, and restricted cash totaled $169.8 million, including cash set aside for the WYG acquisition. Total debt was approximately $336.6 million, including $336.5 million borrowed under the credit agreement. The company reported $353.4 million of available revolving credit and compliance with its debt covenants.
- Current assets were $1,116.5 million and current liabilities were $646.9 million. Accounts receivable, net, were $729.0 million; the allowance for doubtful accounts was $50.5 million, up from $37.6 million at fiscal year-end.
Material changes and business trends
- Government Services Group (GSG) revenue rose 16.1% in Q3 and 3.8% year to date; nine-month operating income rose 14.5%. Growth was driven particularly by U.S. state and local infrastructure work and disaster-response planning.
- Commercial/International Services Group (CIG) revenue declined 1.4% in Q3 and 0.6% year to date, while nine-month revenue net of subcontractor costs rose 6.8%. International activity, especially in Canada, supported growth; Q3 operating income was lower than the prior year.
- U.S. state and local government revenue increased 18.2% for the first nine months. U.S. federal revenue declined 4.5%, primarily reflecting disruption from the 30-day partial government shutdown. U.S. commercial revenue declined 10.4%; international revenue increased 12.7%.
- Remaining unsatisfied performance obligations were $2.82 billion, with $1.79 billion expected to be satisfied within 12 months. The filing cautions that cancellations, deferrals, and scope changes can reduce this amount.
- In October 2018, the company adopted ASC 606 using the modified retrospective method, decreasing opening retained earnings by $2.8 million. Prior-year comparisons were not restated.
Outlook, commentary, and risks
- Management expected U.S. state and local government business to continue growing in the remainder of fiscal 2019, modest growth in U.S. federal and U.S. commercial revenue, and continued international growth at a slower pace than in the first nine months. No consolidated numerical earnings or revenue guidance is provided in the filing.
- Management stated that cash, operating cash flows, and available borrowing capacity should be sufficient for capital requirements for at least the next 12 months. The company had $150 million of remaining stock-repurchase authorization at June 30.
- The nine-month effective tax rate was 7.1%, versus 20.0% a year earlier. It benefited from a $22.3 million release of Australian valuation allowances, tax benefits related to U.S. tax-law changes, and other discrete items. Excluding specified discrete items, management reported an effective rate of 23.4%, versus 25.0%.
- Contract-estimate revisions produced net favorable operating-income adjustments of $8.2 million in Q3 and $5.0 million for the first nine months; the prior-year periods had net unfavorable adjustments. The company also recorded losses on claims tied to completed projects, including $5.9 million in RCM and $4.2 million in CIG for the first nine months.
- After quarter-end, Tetra Tech completed its acquisition of WYG on July 9, 2019, for approximately $67 million including assumed net debt. It had also acquired eGlobalTech for a fair-value purchase price of $48.4 million during the second quarter.
- A July 15, 2019 amended U.S. government complaint alleges False Claims Act violations and breach of contract involving environmental remediation at the former Hunters Point Naval Shipyard. Tetra Tech disputes the allegations; the company stated it could not determine the probability of outcome or reasonably possible loss.
- Key risks include government funding and shutdowns, project-cost estimates and claims recoverability, client collections, fixed-price contract execution, acquisition integration, international and currency exposure, and legal or professional-liability claims. The company had approximately $50 million of receivables related to claims at June 30.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus discrete tax benefits and favorable contract-estimate adjustments.
- Collections and credit quality of receivables, including claims, and the increase in the doubtful-account allowance.
- Whether the $2.82 billion of remaining performance obligations converts to revenue as expected, given cancellation and funding risks.
- Post-acquisition WYG and eGlobalTech performance, integration, and effects on debt and liquidity.
- Developments and potential financial exposure from the Hunters Point litigation, which the filing does not quantify.
- Future borrowing, interest-rate exposure, and capital allocation, including dividends and the remaining repurchase authorization.