TETRA TECH INC annual report, FY2014

全文

Tetra Tech, Inc. — FY2014 Form 10-K

Business and reporting period. Tetra Tech provides consulting, engineering, program and construction management services focused on water, environment, infrastructure, resource management and energy. Fiscal 2014 was the 52-week year ended September 28, 2014. The filing also reports unaudited fourth-quarter results.

Financial performance

  • Full-year revenue: $2.484 billion, down 5.0% from $2.614 billion in FY2013; excluding foreign exchange effects, revenue declined 3.4%. Revenue less subcontractor costs, a company-defined non-GAAP measure, was $1.860 billion, down 8.1%.
  • Profit: Operating income was $153.8 million versus $20.2 million in FY2013; net income attributable to Tetra Tech was $108.3 million versus a $2.1 million loss. Diluted EPS was $1.66 versus a $0.03 loss. Approximate operating margin was 6.2% versus 0.8%; FY2014 included significant non-cash acquisition-related gains.
  • Cash flow: Operating cash flow was $127.4 million, down from $137.8 million. Investing activities used $41.2 million; financing activities used $87.7 million. Cash and equivalents ended the year at $122.4 million, down $6.9 million.
  • Liquidity and debt: Current assets were $898.6 million and current liabilities $503.9 million. Debt was $203.8 million, including $193 million of long-term debt net of current portion. The company reported $460 million of revolving-facility capacity, but only $155.3 million could be borrowed without violating debt covenants. It was in compliance with covenants: leverage ratio 1.53x versus a 2.50x maximum and fixed-charge coverage 2.22x versus a 1.25x minimum.
  • Fourth quarter: Revenue was $622.2 million, operating income $24.8 million, net income attributable to Tetra Tech $22.6 million, and diluted EPS $0.35. RCM reported a $35.1 million segment loss.

Changes and notable items

  • Revenue weakness reflected reduced U.S. federal spending, lower mining and Eastern Canada activity, foreign exchange, and winding-down transportation and construction work. U.S. commercial revenue grew, supported by oil and gas and acquisitions.
  • FY2014 operating income included a $58.7 million net gain from remeasurement of contingent acquisition earn-outs, compared with $9.6 million in FY2013. Management said operating income increased $22.8 million excluding acquisition-accounting-related items.
  • FY2014 project-related charges were $30.6 million, primarily in RCM, including $20.5 million on federal fixed-price projects and $9.1 million on state transportation projects. The company also recorded $4.0 million of RCM restructuring and lease-exit charges. Costs to complete the affected projects were estimated at approximately $50 million and $70 million, respectively; higher costs could produce further losses.
  • By comparison, FY2013 included a $56.6 million goodwill impairment charge and $35.5 million of project charges. FY2014 had no goodwill impairment, although some reporting units had limited valuation headroom.
  • In Q4, the company decided to exit or wind down non-core fixed-price construction activities. From FY2015 it planned to report two core segments, Water, Environment and Infrastructure (WEI) and Resource Management and Energy (RME), while reporting the wind-down separately. Management expected the realignment to improve margins and predictability.

Outlook, risks and contingencies

  • Management anticipated higher international revenue in FY2015 as oil and gas grew and Eastern Canada and mining stabilized, but expected continued caution around federal-government growth and a further decline in U.S. state and local revenue as large transportation projects ended. No specific consolidated revenue or EPS guidance is provided in the supplied filing text.
  • Backlog was $2.0 billion, up 5.1%; about 70% was expected to be recognized as FY2015 revenue. Backlog can be canceled or adjusted and is not a guarantee of revenue or profit. Growth was principally driven by oil and gas.
  • Key exposures include government budget and contract-funding changes, commodity-price and oil-and-gas spending cycles, fixed-price project overruns, client collections, foreign exchange, and environmental and professional liability. Receivables included approximately $79 million of claims and requests for equitable adjustment, compared with $41 million a year earlier; delayed collection contributed to weaker operating cash flow.
  • Goodwill was $714.2 million. Four reporting units had fair values less than 20% above carrying values; further underperformance could trigger impairment. Management also identified approximately $134 million of combined goodwill associated with Parkland and AEG as potentially exposed if projections deteriorate further.
  • Legal contingencies include Quebec-related allegations concerning pre-acquisition activities at BPR; the company said the ultimate financial impact was unknown. It reported that a separate French case and a Montreal class-action appeal had been dismissed. Management did not expect pending claims and lawsuits, individually or together, to materially affect results, but noted uncertainty.
  • The company said existing cash, operating cash flow and borrowing capacity should meet capital needs for at least 12 months. After year-end, the Board authorized a new $200 million share-repurchase program over two years and declared a $0.07 quarterly dividend.

Most important facts for investors to verify

  • How much of FY2014 earnings came from the $58.7 million earn-out remeasurement gain, and whether core operating performance supports the reported improvement.
  • Progress, final costs and collections on the fixed-price projects, including the estimated $50 million and $70 million costs to complete and outstanding claims.
  • Whether the $79 million of claims receivable is collected, and how receivables and cash conversion develop.
  • FY2015 results under the WEI/RME structure, including the performance of oil and gas, mining, federal work and the RCM wind-down.
  • Available borrowing capacity under covenants, compliance headroom, and the cash requirements of the repurchase program and dividends.
  • Goodwill valuation headroom and developments in the Quebec-related legal matters.