Tetra Tech, Inc. — Fiscal 2019 Form 10-K
Reporting period: Fiscal year ended September 29, 2019 (52 weeks). The filing is an annual report; fiscal 2019 fourth-quarter figures are identified separately below. Tetra Tech provides consulting and engineering services in water, environment, infrastructure, resource management, energy, and international development.
Key financial results and position
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $3.107 billion | $2.964 billion | +4.8% |
| Revenue, net of subcontractor costs (non-GAAP) | $2.390 billion | $2.201 billion | +8.6% |
| Gross profit | $408.2 million | $384.5 million | +6.2% |
| Income from operations | $188.8 million | $190.1 million | -0.7% |
| Net income attributable to Tetra Tech | $158.7 million | $136.9 million | +15.9% |
| Diluted EPS | $2.84 | $2.42 | +17.4% |
| Operating cash flow | $208.5 million | $185.7 million | +$22.8 million |
GAAP gross, operating, and net margins were approximately 13.1%, 6.1%, and 5.1%, respectively, based on reported revenue. Capital expenditures were $16.2 million; operating cash flow less capital expenditures was approximately $192.3 million. The effective tax rate was 9.3%, versus 21.5%, including a $23.4 million Australian tax valuation-allowance release and tax benefits associated with U.S. tax reform. Management reported a 21.9% FY 2019 effective rate excluding the TCJA-related deferred tax benefits and Australian valuation-allowance release.
At year-end, cash and cash equivalents were $120.7 million ($120.9 million including restricted cash); total debt was $276.5 million, including $12.6 million current and $263.9 million long-term. The company had $413.3 million available under its revolving facility and reported leverage and interest-coverage ratios of 1.30x and 16.51x, respectively, within covenant limits. Current assets were $1.080 billion and current liabilities $770.0 million. Backlog was $3.1 billion, up 16.1%; approximately 62% was expected to be recognized as revenue in FY 2020, subject to cancellation and scope-change risk.
Business and segment performance
- Government Services Group (GSG): Revenue of $1.821 billion, up 7.4%; operating income of $185.3 million, up 10.1%. Growth was led by state and local government infrastructure and disaster-response work.
- Commercial/International Services Group (CIG): Revenue of $1.343 billion, up 1.5%; operating income of $79.6 million, up 7.0%. Revenue net of subcontractor costs rose 7.8%; reported results included claim and Canadian pipeline-disposal charges.
- Remediation and Construction Management (RCM): Wind-down segment with no remaining backlog; FY 2019 operating loss was $5.9 million, primarily from updated estimates of claims on completed projects.
Material changes and unusual items
- State and local government revenue grew 25.2%; international revenue grew 17.4% (8.9% excluding acquisitions). U.S. federal revenue declined 3.4%, partly due to a 30-day partial government shutdown. U.S. commercial revenue declined 8.8%, or 2.2% excluding the prior-year utility field-services divestiture.
- Reported operating income included $10.4 million of WYG acquisition and integration expenses, $10.9 million of charges for the planned disposal of Canadian turn-key pipeline activities, and a $7.8 million goodwill impairment. It also included a $13.7 million revenue reduction and corresponding operating-income charge for a remediation claim resolved in Q4, relating to work substantially performed in prior years.
- Adjusted operating income, a non-GAAP measure excluding specified items, was $240.5 million, up 11.2%; adjusted diluted EPS was $3.17, up 20.1%. These measures are not substitutes for GAAP results.
- Fourth-quarter revenue was $841.5 million; operating income was $20.7 million and net income attributable to Tetra Tech was $11.5 million, reflecting the cited charges. WYG was acquired in Q4 for $54.2 million in cash, with $11.5 million of assumed net debt subsequently repaid. EGT was acquired earlier in FY 2019.
- The company repurchased $100 million of shares in FY 2019 and paid $29.7 million in dividends ($0.54 per share). A further $125 million remained authorized for repurchases at year-end.
Outlook, risks, and contingencies
Management expected FY 2020 growth in state and local government work excluding disaster response, U.S. federal work, U.S. commercial work at a modest pace, and international revenue. No numerical revenue or earnings guidance was provided. Management stated that available cash, operating cash flows, and borrowing capacity should be sufficient for capital requirements for at least the next 12 months.
Key risks include dependence on government funding and procurement, possible shutdowns or contract termination, competitive pricing and fixed-price cost overruns, project estimates and collections, international and foreign-exchange exposure, acquisition integration, and potential goodwill impairment. The RFS reporting unit’s estimated fair value equaled carrying value after impairment, leaving limited headroom; further underperformance or a higher discount rate could cause additional impairment.
The U.S. Attorney’s Office intervened in three False Claims Act qui tam actions concerning Tetra Tech EC’s remediation work at the former Hunters Point Naval Shipyard. The company disputes the allegations; it stated that it could not determine the probability of outcome or reasonably possible loss. The filing also disclosed approximately $15 million of receivables tied to claims and ongoing tax examinations. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; WYG was excluded from the control assessment following its acquisition.
Important facts for investors to verify
- Whether FY 2020 growth develops as anticipated, particularly in government-funded programs and state/local work excluding disaster-response activity.
- Progress and potential financial exposure from the Hunters Point litigation and resolution of outstanding project claims.
- Whether the Canadian pipeline disposal is completed as planned and whether the RFS reporting unit avoids further goodwill impairment.
- Cash conversion, receivables and allowance growth, contract estimates, and the sustainability of reported margins and non-GAAP adjusted results.
- Integration and performance of WYG and EGT, contingent earn-out obligations, debt levels, and continued compliance with credit covenants.