Tetra Tech, Inc. (TETRA) - Q1 Fiscal 2010 Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 27, 2009 (First Quarter of Fiscal 2010). Tetra Tech, Inc. is a leading provider of consulting, engineering, program management, construction, and technical services focusing on resource management, infrastructure, and the environment. The company operates through four reportable segments: Environmental Consulting Services (ECS), Technical Support Services (TSS), Engineering and Architecture Services (EAS), and Remediation and Construction Management (RCM).
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $541,957 | $638,683 |
| Revenue (Net of Subcontractor Costs) | $343,493 | $330,026 |
| Gross Profit | $69,783 | $64,341 |
| Income from Operations | $31,117 | $28,616 |
| Net Income | $18,709 | $16,308 |
| Diluted EPS | $0.30 | $0.27 |
| Cash and Cash Equivalents | $81,112 | $29,124 |
| Net Cash Used in Operating Activities | ($5,158) | ($27,677) |
| Total Debt Outstanding | $0 | $0 |
Margins (Net of Subcontractor Costs): Gross Profit margin was 20.3% (vs. 19.5% prior year); Operating margin was 9.1% (vs. 8.7% prior year); Net Income margin was 5.4% (vs. 4.9% prior year).
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 15.1% to $541.9 million, primarily due to the completion of large wind energy and Iraq-related contracts and reduced commercial activity. However, revenue net of subcontractor costs increased 4.1% due to a shift in contract mix and lower subcontracting activity.
- Profitability Improvement: Net income increased 14.7% to $18.7 million. Gross profit grew 8.5%, outpacing revenue growth due to improved project execution and cost controls.
- Segment Performance:
- ECS: Revenue (net) grew 41.0% driven by the Wardrop acquisition and federal government programs.
- TSS: Revenue (net) grew 7.7% due to increased demand from USAID and DoD.
- EAS: Revenue (net) declined 20.3% due to weakness in commercial real estate and state/local government budgets.
- RCM: Revenue (net) declined 15.1% due to project completions, though gross profit increased 2.3% due to project close-outs and cost reductions.
- Cash Flow: Net cash used in operating activities improved significantly (decreased usage by $22.5 million) due to better collections and timing of compensation payments, despite higher tax payments.
Guidance, Outlook, and Risks
Outlook: Management forecasts revenue to be flat in Fiscal 2010, lower than originally anticipated due to a lack of new opportunities in construction management. While the American Recovery and Reinvestment Act (ARRA) is expected to provide opportunities, the timing and magnitude remain uncertain. International business is expected to grow, though global economic weakness poses risks to mining and energy projects.
Key Risks and Contingencies:
- Legal Proceedings: A lawsuit involving a former subsidiary (AMT) regarding trade secrets remains on appeal. The company estimates a reasonably possible exposure range of $0 to $14.5 million but has recorded a liability for the probable loss and a corresponding receivable from indemnifying former owners.
- Tax Matters: The company is in the appeals process with the IRS (fiscal years 2002-2004) and under examination by the California Franchise Tax Board regarding R&E Credits. Resolution is expected within 12 months; an unfavorable outcome could materially increase tax expense.
- Government Funding: 61.7% of revenue (net of subcontractor costs) comes from government agencies. Delays in appropriations or budget constraints could adversely affect future revenues.
- Goodwill Impairment: Goodwill totaled $327.0 million. Management notes that changes in economic conditions could lead to impairment charges.
Investor Verification Checklist
- Verify the status and potential financial impact of the AMT trade secrets litigation and the indemnification agreement with former owners.
- Monitor the resolution of IRS and state tax audits regarding R&E Credits for potential adjustments to effective tax rates.
- Assess the actual realization of ARRA-funded projects versus management's current "flat revenue" forecast for Fiscal 2010.
- Review the composition of the $1.6 billion backlog to understand the risk of cancellations or funding delays, particularly in commercial and state/local sectors.
- Confirm the sustainability of the gross margin expansion (20.3%) given the shift away from high-subcontracting projects.