Tetra Tech, Inc. — Q1 Fiscal 2014 Form 10-Q
Reporting period: Three months ended December 29, 2013; comparisons are with the three months ended December 30, 2012. Unaudited results. Tetra Tech provides consulting, engineering, construction-management and technical services focused on water, the environment, energy, infrastructure and natural resources.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $645.8 million | $658.5 million | Down 1.9% |
| Revenue less subcontractor costs (non-GAAP) | $483.0 million | $497.2 million | Down 2.9% |
| Operating income | $43.7 million | $41.8 million | Up 4.6% |
| Net income attributable to Tetra Tech | $27.3 million | $26.2 million | Up 4.2% |
| Diluted EPS | $0.42 | $0.41 | Up $0.01 |
| Operating cash flow | $41.7 million | $17.8 million | Up $24.0 million |
| EBITDA (non-GAAP) | $59.4 million | $54.1 million | Up 9.9% |
Operating margin was approximately 6.8% versus 6.3%; net margin was approximately 4.2% versus 4.0%. The effective tax rate declined to 33.8% from 35.0%, primarily due to higher federal deductions and credits and certain U.S. tax benefits related to foreign operations.
Segment trends: ECS revenue fell 15.6% to $234.9 million, while operating income rose 3.7% to $20.0 million. TSS revenue fell 9.5% to $220.7 million, while operating income rose 2.1% to $22.8 million. RCM revenue grew 35.2% to $214.2 million and operating income rose 20.4% to $8.5 million, largely reflecting acquisitions completed in fiscal 2013.
Financial position and liquidity
- Cash and cash equivalents were $160.8 million at December 29, 2013, up from $129.3 million at fiscal year-end.
- Total debt was approximately $206.9 million, including $6.0 million current and $200.9 million long-term. The company reported $205.0 million outstanding under its term loan.
- Current assets were $880.3 million and current liabilities were $455.4 million; the current ratio was approximately 1.93.
- Cash from operations of $41.7 million funded $11.5 million of investing outflows and $3.8 million of financing inflows. Capital expenditures were $6.6 million; acquisition payments, net of cash acquired, were $10.7 million.
- The $665 million credit agreement matures in May 2018. At quarter-end, the company reported $447.6 million of revolving-facility availability, of which $216.5 million could be borrowed without violating debt covenants. Leverage and fixed-charge coverage ratios were 1.48x and 3.08x, respectively, versus covenant limits of 2.50x maximum and 1.25x minimum.
- Management said cash, operating cash flows and borrowing capacity should be sufficient for capital requirements for at least the next 12 months.
Material changes and drivers
- Revenue and earnings were broadly stable despite reduced U.S. federal work, weaker Eastern Canada and global mining activity, and unfavorable foreign-currency translation. Fiscal 2013 acquisitions contributed $52.6 million of revenue in the quarter.
- U.S. federal government revenue declined 14.2%, reflecting sequestration-related funding pressure and the October 2013 shutdown. U.S. commercial revenue grew 7.6%, and state and local government revenue grew 11.0%.
- Operating income increased despite lower revenue, aided by a $4.6 million net gain from contingent earn-out fair-value adjustments, lower overhead and favorable project close-outs. Higher amortization and interest expense were offsets.
- Operating cash flow improved from the prior-year quarter, principally due to more favorable changes in accounts payable, accrued compensation and advance billings.
- Foreign-currency translation reduced equity by $22.1 million in other comprehensive income, compared with a $5.6 million reduction in the prior-year quarter.
Outlook, risks and unusual items
- No numerical full-year earnings or revenue guidance is stated in the provided filing text. Management expected stable international results in the first half, with improving year-over-year comparisons from Q3; it expected continued growth in U.S. commercial and state/local businesses, while remaining cautious on federal growth. Management noted that the first half is typically seasonally weaker.
- Management cited uncertain economic conditions, federal funding constraints, cyclical mining demand, project execution and fixed-price contract risks, acquisitions and integration, and Canadian-dollar movements as factors that could affect results.
- Backlog was $1.9 billion, up $3.9 million (0.2%) from fiscal year-end. The company cautioned that backlog may be canceled or adjusted and is not a reliable measure of future earnings.
- Contingent earn-out liabilities had a maximum outstanding amount of $102.9 million, of which $80.5 million was recorded at fair value. The fair-value estimate relies on significant unobservable operating-income projections and probability assumptions.
- Legal matters include Quebec corruption-related proceedings and a Montreal class action concerning pre-acquisition BPR conduct; the financial impact was unknown. A U.S. securities class action was dismissed without prejudice on January 17, 2014. The filing states that ordinary-course professional liability claims may exceed insurance coverage.
- The board subsequently authorized a stock-repurchase amendment committing $30 million of the existing $100 million authorization to be spent before fiscal year-end. No repurchases occurred in this quarter.
Important facts for investors to verify
- Whether federal-program funding and the 2013 Budget Act translate into improved contract activity and revenue.
- Whether growth in commercial and state/local markets offsets continued weakness in mining and Eastern Canada, including currency effects.
- Whether operating-income growth persists excluding the contingent-consideration gain and project close-out benefits.
- Cash conversion, receivables and claims collection, covenant headroom, and the impact of acquisition and earn-out payments.
- Developments in BPR-related legal proceedings, associated costs or sanctions, and any change in management’s assessment of financial exposure.