Tetra Tech, Inc. — Form 10-Q Summary
Business context and period. Tetra Tech provides consulting, engineering, program and construction management, and technical services focused on water, environment, energy, infrastructure, and natural resources. This unaudited report covers the third quarter and first nine months of fiscal 2012, ended July 1, 2012; comparisons are with the corresponding 2011 periods unless noted. Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $684.7 | $673.8 | $1,991.7 | $1,897.5 |
| Revenue, net of subcontractor costs (non-GAAP) | $516.9 | $480.5 | $1,485.8 | $1,316.4 |
| Operating income | $46.3 | $39.4 | $117.9 | $103.0 |
| Operating margin | 6.8% | 5.8% | 5.9% | 5.4% |
| Net income attributable to Tetra Tech | $29.1 | $23.8 | $73.9 | $63.6 |
| Diluted EPS | $0.45 | $0.38 | $1.16 | $1.01 |
| EBITDA (non-GAAP) | $59.1 | $52.5 | $159.4 | $142.2 |
- For the first nine months, operating cash flow was $128.2, versus $98.4; capital expenditures were $14.9. Investing cash outflow was $67.3, including $52.2 for acquisitions, compared with $219.8 outflow and $206.1 of acquisition payments in 2011. Financing cash outflow was $12.3.
- Cash was $140.7 at July 1, 2012, compared with $90.5 at October 2, 2011. Total current assets were $898.8 and current liabilities $530.4.
- Balance-sheet current and long-term debt totaled $142.8. The company reported $138.8 of revolving-facility borrowings at a 2.16% weighted-average rate, plus $13.8 of multicurrency borrowings under the facility; $293.3 of facility availability remained. Reported leverage and fixed-charge coverage ratios were 1.06x and 2.28x, respectively, within covenant limits of 2.5x maximum and 1.25x minimum.
- Net accounts receivable was $697.2, including $360.3 unbilled; management said most unbilled receivables were expected to be billed and collected within 12 months. Receivables included about $25 million of claims and requests for equitable adjustment.
Material changes and business drivers
- Q3 revenue rose 1.6%, while nine-month revenue rose 5.0%; revenue net of subcontractor costs grew 7.6% and 12.9%, respectively. Net income attributable to Tetra Tech increased 21.9% for Q3 and 16.2% year to date.
- Growth came chiefly from U.S. commercial and international work and acquisitions. Nine-month U.S. commercial revenue increased 24.5%, international revenue 11.9%, and state and local government revenue 12.8%. U.S. federal government revenue declined 9.7%, principally as large Army Corps of Engineers hurricane-protection and remediation programs wound down.
- By segment, nine-month revenue increased 12.8% in ECS, 7.3% in TSS, and 10.9% in EAS, and declined 3.9% in RCM. Operating income rose in ECS, TSS, and RCM but declined 6.7% in EAS. EAS profitability was pressured by subcontracting and business-development costs.
- Q3 operating income benefited from growth and comparison with prior-year project overruns. Nine-month comparisons also reflect prior-year RCM incentive fees and an EAS project settlement. SG&A increased 11.7% year to date, partly from business development, risk management, international expansion, and acquisitions.
- The nine-month effective tax rate was 34.8%, up from 33.4%; the prior-year rate benefited from a $1.2 million research-credit benefit. The federal research credit had expired at December 31, 2011.
- Fiscal 2012 acquisitions had aggregate purchase consideration of approximately $65 million. Goodwill increased to $627.2 million from $569.4 million at fiscal year-end, including acquisition additions and currency effects.
Outlook, risks, and unusual items
- Management expected moderate fiscal 2012 revenue growth versus fiscal 2011. It anticipated continued international and U.S. commercial growth and expected state and local government growth to offset federal-government weakness, while remaining cautious about U.S. federal budget uncertainty and potential weakness in parts of the commercial economy.
- Backlog was $2.1 billion. It includes only funded contracts with work authorizations; management cautioned that backlog may be canceled or adjusted and does not assure revenue or profit.
- Key operating risks include government budget reductions and procurement delays, contract awards and renewals, fixed-price cost overruns, workforce utilization and retention, acquisition integration, client collections, foreign exchange, and seasonal weather effects. Most contract revenue is recognized using percentage of completion, requiring estimates of total contract costs; revisions can reduce or reverse previously recorded revenue and profit.
- Quebec authorities charged BPR Triax and two employees with alleged corruption in April 2012. The company said it was conducting an internal investigation and that the financial impact was unknown; BPR Triax generated approximately $7 million in annual revenue. A court hearing was scheduled for October 10, 2012.
- In a separate ITC lawsuit involving acquired subsidiary AMT, AMT paid a $14.4 million judgment in April 2012 and former owners reimbursed Tetra Tech in full under an indemnification agreement. A motion for additional attorneys’ fees remained pending.
- Management stated that ordinary-course professional-liability claims were not expected to have a material adverse effect, while noting some claims may exceed insurance limits or be uninsured. The filing also identifies foreign anti-corruption compliance, contingent acquisition earn-outs, and impairment of goodwill as risks.
- Management reported effective disclosure controls as of July 1, 2012, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether U.S. federal contract demand and funding stabilize, and whether commercial and international growth continues as management expected.
- Collection, billing, and realization of unbilled receivables and contract claims, alongside changes in receivables and cash conversion.
- Developments in the BPR Triax allegations, including any disclosed facts, legal or client consequences, and financial impact.
- Actual contract margins and cost estimates, particularly on fixed-price work, and the sustainability of segment operating performance.
- Acquisition integration, earn-out valuations and payments, and any impairment indicators affecting goodwill and intangible assets.
- Facility availability, covenant compliance, and debt and liquidity needs, including potential acquisition funding.