Tetra Tech, Inc. — Q3 FY2015 Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2015, ended June 28, 2015. Financial statements are unaudited. Tetra Tech provides consulting, engineering, program management and construction management services. Fiscal 2015 reporting uses three segments: Water, Environment and Infrastructure (WEI); Resource Management and Energy (RME); and Remediation and Construction Management (RCM), which is winding down non-core construction work.
Financial results and position
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $575.1 million | $629.5 million | $1,720.9 million | $1,861.6 million |
| Operating income | $40.7 million | $39.2 million | $107.7 million | $129.1 million |
| Net income attributable to Tetra Tech | $26.2 million | $26.7 million | $70.8 million | $85.7 million |
| Diluted EPS | $0.43 | $0.41 | $1.14 | $1.31 |
| Operating margin | 7.1% | 6.2% | 6.3% | 6.9% |
| Net margin | 4.6% | 4.2% | 4.1% | 4.6% |
- Cash flow: Nine-month operating cash flow was $134.1 million, versus $114.3 million. Investing used $22.0 million; financing used $55.6 million. Cash rose $52.8 million from fiscal year-end to $175.2 million.
- Liquidity and debt: At June 28, cash was $175.2 million and current assets were $870.5 million, against current liabilities of $454.9 million. Credit-facility borrowings were $235.4 million; balance-sheet current and long-term debt totaled $236.2 million. The amended facility matures in May 2020. The company reported $458.7 million of revolving availability, of which $223.8 million was available without violating covenants. Leverage was 1.63x and fixed-charge coverage 3.31x; the company said it was compliant with covenants.
- Capital returns: Repurchased $75.5 million of shares during the first nine months and paid $13.4 million in dividends. A quarterly dividend of $0.08 per share was declared for payment in September 2015.
- Backlog: $1.9 billion, down $146.2 million, or 7.3%, from fiscal year-end.
Changes and operating trends
- Reported revenue fell 8.6% in the quarter and 7.6% year to date, reflecting the planned exit from selected fixed-price construction activities in RCM and adverse foreign-currency translation. Management estimated currency reduced revenue by $15.7 million in the quarter and $48.3 million year to date.
- On management’s non-GAAP core basis—excluding RCM and currency effects—revenue increased 2.1% in the quarter and 1.7% year to date. Core revenue net of subcontractor costs declined 1.4% and 0.3%, respectively. Core operating income increased 13.6% in the quarter and 6.0% year to date; these measures exclude RCM and contingent-consideration adjustments, as well as currency effects.
- WEI quarterly operating income rose 18.9% to $24.6 million, aided by improved utilization and project close-outs. RME operating income was broadly flat; lower mining and upstream oil-and-gas activity offset stronger Western Canadian midstream work. RCM revenue continued to decline as planned; the segment recorded a $0.2 million operating loss for the quarter.
- U.S. commercial activity strengthened, while international results were pressured by currency, weaker mining and upstream oil and gas. Management said core U.S. commercial and state/local government activity was growing, and expected improvement in those businesses during the rest of FY2015.
Outlook, risks and unusual items
- Outlook: No quantified company-wide earnings or revenue guidance is stated in the provided filing text. Management anticipated modestly higher FY2015 international revenue on a constant-currency basis, stable U.S. federal revenue excluding RCM, and continued growth in U.S. commercial and state/local government business excluding RCM. It cautioned that sustained or further declines in oil prices could hurt results. Remaining RCM work was expected to be substantially complete by the end of FY2016. Management believed available cash, operating cash flow and borrowing capacity would meet capital needs for at least 12 months.
- Unusual items: Prior-year operating income included substantially larger gains from contingent earn-out revaluations: $8.9 million in Q3 FY2014 and $34.9 million in the first nine months of FY2014, versus a $3.1 million gain year to date in FY2015. FY2015 year-to-date SG&A included a $3.1 million legal-settlement charge. A third-quarter settlement of two RCM transportation claims generated $29 million cash proceeds and a $2.0 million reduction to revenue and operating income. The company also recognized a $5.3 million gain on equipment sales year to date.
- Contract and accounting exposure: Most contract revenue is recognized using percentage of completion, so estimates, change orders and claims can affect reported profit. Year-to-date contract-estimate adjustments reduced operating income by a net $5.8 million; the anticipated-loss liability was $11.0 million. Accounts receivable included approximately $53 million of claims. The company reported no other third-quarter revenue or operating-income adjustments from updated claims assessments.
- Market and impairment risks: Oil-price weakness, mining-market contraction, foreign-exchange changes (particularly the Canadian dollar), government budgets and contract performance may affect results. Goodwill was $684.9 million; management identified the Global Mining Practice as more sensitive to revenue and market assumptions and said significant declines in its revenue, comparable market prices, or an increase in discount rates could lead to impairment.
- Contingencies and legal matters: The company faces ordinary-course professional claims, some potentially exceeding insurance coverage. Quebec authorities’ criminal charges concerning alleged pre-acquisition conduct at BPR Triax remained ongoing, with proceedings expected to continue into 2016; financial impact was unknown. A separate Montreal class action was dismissed, and the Supreme Court of Canada declined review, closing that matter.
- The company extended its secured credit facility maturity to May 2020 and reported effective disclosure controls, with no material third-quarter change in internal control over financial reporting.
Investor verification priorities
- Reconcile reported performance with management’s non-GAAP “core” measures, including exclusions for RCM, currency and contingent-consideration adjustments.
- Track backlog conversion and whether the stated growth expectations for U.S. commercial, state/local and international work materialize.
- Review cash collection, the $53 million of claims receivables, and the outcome of the ongoing BPR Triax matter.
- Monitor oil and gas, mining and Canadian-dollar exposure, including potential goodwill impairment at the Global Mining Practice.
- Confirm covenant headroom and available revolver capacity, particularly alongside buybacks, dividends, acquisitions and debt repayment.