Tetra Tech, Inc. — FY2016 Form 10-K
Business context and reporting period. Tetra Tech provides consulting and engineering services in water, environment, infrastructure, resource management, energy, and international development. Fiscal 2016 ended October 2, 2016 and comprised 53 weeks; fiscal 2015 comprised 52 weeks. The company reported Water, Environment and Infrastructure (WEI), Resource Management and Energy (RME), and the wind-down of Remediation and Construction Management (RCM).
Key financial results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $2.583 billion | $2.299 billion |
| Gross profit | $330.2 million | $315.8 million |
| Operating income | $135.9 million | $87.7 million |
| Net income attributable to Tetra Tech | $83.8 million | $39.1 million |
| Diluted EPS | $1.42 | $0.64 |
| Cash from operating activities | $142.0 million | $162.8 million |
| Cash and cash equivalents at year-end | $160.5 million | $135.3 million |
| Long-term debt, net of current portion | $331.5 million | $181.0 million |
- Revenue increased 12.4%; acquisitions contributed $320.6 million. Excluding acquired revenue, reported revenue declined 1.6%; ongoing revenue, excluding RCM and acquisitions and adjusted for foreign exchange, increased 1.8%.
- Operating income rose 54.9%, but comparison benefited from the absence of the $60.8 million goodwill and intangible impairment recorded in FY2015. Ongoing operating income, a non-GAAP measure, increased 11.7% to $172.0 million.
- Reported effective tax rate was 32.6%, versus 51.2% in FY2015; FY2015 included the largely non-deductible impairment charge. Management reported adjusted rates of 30.9% and 32.5%, respectively, excluding specified items.
- RME revenue increased 22.4% and operating income increased 20.2%, with Coffey contributing $302.9 million of revenue and $12.5 million of operating income after acquisition. WEI revenue grew 3.5%, while revenue net of subcontractor costs fell 1.3%; segment operating margin on that measure improved to 12.7% from 12.2%.
- RCM recorded an $11.8 million operating loss, including $7.9 million of losses related to uncollectible receivables and claims. Remaining RCM backlog was $26 million, with work expected to be substantially completed in FY2017.
Cash, debt, and liquidity
- Operating cash flow was $142.0 million, down $20.8 million, primarily reflecting $30.5 million in Coffey acquisition and integration expenses paid during the year. Investing activities used $94.0 million, including $81.3 million for the Coffey and INDUS acquisitions.
- Year-end borrowings under the credit agreement totaled $346.8 million: $176.8 million term debt and $170.0 million revolver borrowings. The weighted-average borrowing rate was 1.92%; the effective rate including swaps was 2.52%.
- The company reported $288.7 million of available revolving credit, of which $222.4 million could be borrowed without violating debt covenants. Leverage and fixed-charge coverage ratios were 1.91x and 2.82x, respectively, and the company was in compliance with covenants.
- Fiscal 2016 dividends totaled $0.34 per share. The prior $200 million repurchase authorization was fully used by year-end. In November 2016, the board authorized a new $200 million repurchase program and declared a $0.09 quarterly dividend.
Material changes and management outlook
- Acquisitions of Coffey International and INDUS materially affected results and expanded the company’s international development, geoscience, water data analytics, and federal technology capabilities. Acquisition and integration expenses were $19.5 million; Coffey debt prepayment fees added $1.9 million of interest expense.
- Management attributed underlying growth to broad contract wins and stronger U.S. commercial and state and local government activity, particularly waste management, environmental remediation, and infrastructure. A stronger U.S. dollar reduced FY2016 revenue by $40.7 million and operating income by $1.9 million versus FY2015.
- Management anticipated higher international revenue, growth in U.S. federal and state and local government business, and stable U.S. commercial revenue in FY2017. These are directional expectations; the provided filing text does not give clear numerical FY2017 guidance. Management cautioned that continued low or falling commodity prices could adversely affect international business.
- Backlog was $2.4 billion, up $477 million, or 25%, primarily due to Coffey; approximately 70% was expected to convert to FY2017 revenue. Backlog can be cancelled or adjusted and is not a guarantee of revenue or profit.
Risks, contingencies, and notable items
- Key exposures include government appropriations and contract renewals, competition and pricing pressure, oil and gas and mining cycles, foreign exchange, acquisition integration, project cost overruns, workforce utilization, and collection of receivables and claims.
- Accounts receivable included $45 million related to claims at year-end. Net accounts receivable was $714.3 million, including $356.1 million unbilled; the allowance for doubtful accounts was $35.2 million.
- Most revenue is recognized using percentage-of-completion estimates. FY2016 included $2.3 million of net unfavorable operating-income adjustments from estimate changes; anticipated contract-loss liabilities were $6.7 million, with estimated related costs to complete of $23.6 million.
- Goodwill was $718.0 million and other intangible assets were $49.0 million. No goodwill impairment was recorded in FY2016; the FY2015 $60.8 million charge related to the declining mining practice.
- The company disclosed professional liability claims and lawsuits typical of the industry. Management did not believe their resolution would materially adversely affect results or financial position, while acknowledging uncertainty and potential amounts exceeding insurance coverage. The filing also describes environmental, government-contract audit, cybersecurity, foreign compliance, and safety risks.
- Management and the auditor concluded that internal control over financial reporting was effective as of year-end. The assessment excluded Coffey and INDUS, which together represented 5.8% of assets and 12.4% of revenue.
Most important facts for investors to verify
- How much of reported growth and RME performance is sustainable after separating Coffey and INDUS contributions, currency movements, and acquisition-related costs.
- Whether the $2.4 billion backlog converts as expected, particularly given client cancellation rights and the RCM wind-down.
- Receivable quality and collection progress on unbilled balances and the $45 million of claims, including RCM exposures.
- Debt reduction, covenant headroom, and cash-flow capacity after acquisitions, dividends, and the new share repurchase authorization.
- FY2017 segment performance against management’s directional outlook, especially international markets and commodity-sensitive work.