Tetra Tech, Inc. — Form 10-Q summary
Reporting period: Second quarter and first six months of fiscal 2011, ended April 3, 2011. The filing is unaudited. Tetra Tech provides consulting, engineering, program and construction management, and technical services across water, environment, energy, natural resources, and infrastructure.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Revenue | $612.6m | $469.5m | $1,223.7m | $1,011.5m |
| Operating income | $29.3m | $23.5m | $63.6m | $54.6m |
| Net income attributable to Tetra Tech | $17.5m | $14.3m | $39.8m | $33.0m |
| Diluted EPS | $0.28 | $0.23 | $0.64 | $0.53 |
| Operating margin | 4.8% | 5.0% | 5.2% | 5.4% |
- Revenue increased 30.5% in Q2 and 21.0% for the half. Excluding acquisitions, revenue grew 10.1% and 3.2%, respectively. Revenue net of subcontractor costs, a company-presented non-GAAP measure, rose 32.0% in Q2 and 24.9% for the half.
- Six-month net cash from operations was $42.6m, versus $40.1m. Investing used $197.5m, chiefly for acquisitions and earn-out payments; financing provided $24.4m. Cash fell from $220.9m at fiscal year-end to $90.9m.
- At April 3, 2011, total debt was $146.0m, including $4.4m current debt; cash was $90.9m. The $460m revolving facility had $140m drawn, $29m in standby letters of credit, and $291m available. The company reported compliance with covenants: leverage ratio 1.33x against a 2.5x maximum and fixed-charge coverage 2.65x against a 1.25x minimum.
- Current assets were $751.3m and current liabilities $436.6m. Goodwill was $561.2m and net intangible assets $78.5m.
Material changes and operating drivers
- The October 2010 BPR acquisition and other Canadian acquisitions materially increased ECS revenue and expanded Canadian operations. The BPR purchase price was approximately $186m, funded initially with cash and credit-facility borrowings; contingent earn-outs may total up to approximately $40m.
- International revenue rose to $150.0m in Q2 from $39.8m, reflecting acquisitions and demand in mining and energy. Federal revenue increased 13.9%; state and local revenue declined 14.8%; commercial revenue increased 9.3%.
- Segment results were mixed. ECS revenue increased 66.0% in Q2, including acquisitions; EAS operating income increased from $0.8m to $5.2m. TSS operating income declined 9.3% to $9.0m, and RCM operating income declined 30.7% to $3.7m. RCM’s first-half revenue fell 2.4% and operating income fell 44.4%.
- Consolidated operating income improved in dollars, but operating margin declined year over year. Management cited acquisition-related amortization, fixed-price project overruns, and pricing pressure; higher incentive fees and favorable project close-outs provided offsets.
- The first-half effective tax rate was 32.8%, down from 38.9%, mainly reflecting extended research credits and growth in foreign operations. A $1.2m benefit for prior-period research credits was recorded in Q1.
Outlook, risks, and contingencies
- Management expected significant fiscal 2011 revenue growth, driven by acquisitions and anticipated business growth. It forecast modest growth in federal and commercial business, a decline in state and local business, and significant international growth. No numerical earnings or revenue guidance was provided.
- Management described a slow, gradual U.S. recovery and stronger growth and demand in international markets. It cited continuing delays in some large construction-management awards and weakness in state/local infrastructure spending.
- Key risks include government budget, appropriation and procurement delays; exposure to defense spending and client concentration; economic weakness and client credit/collection risk; fixed-price cost overruns; project execution and contract-estimate uncertainty; acquisition integration and earn-out variability; workforce retention and utilization; foreign currency and international operating risks; and litigation or uninsured claims.
- Backlog was $2.0bn, limited to funded contracts and received work authorizations, but management cautioned it may be canceled or adjusted and is not a reliable indicator of future earnings.
- In the ITC/AMT litigation, the disclosed reasonably possible exposure ranged from $0 to approximately $14.5m. Tetra Tech recorded its best estimate of probable loss and an equal receivable from former AMT owners under an indemnity, which management considered probable of collection. The matter remained subject to appeal.
- Management said operating cash flow, cash balances, and available credit were expected to meet capital requirements for at least the next 12 months. The filing also reports that disclosure controls were effective and that no material change in internal control occurred during the quarter.
Investor facts to verify
- How much reported growth and future performance depends on acquisitions versus organic growth, particularly in ECS and Canada.
- Whether RCM’s project overruns, pricing pressure, and construction-management weakness persist, and whether other segments sustain margin improvement.
- Cash conversion and working-capital trends, including collections of billed and unbilled receivables, alongside the reduced cash balance after acquisition spending.
- Progress on the $2.0bn backlog, new government awards and appropriations, and the exposure to federal and defense spending.
- Final purchase accounting, contingent earn-out amounts, and the outcome and indemnification recovery in the ITC/AMT litigation.