Tetra Tech, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 27, 2020 (52 weeks). This is an annual report, not a standalone fourth-quarter filing. Tetra Tech provides consulting and engineering services focused on water, environment, sustainable infrastructure, resource management, energy, and international development.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $2,994.9 million | $3,107.3 million | Down 3.6% |
| Revenue less subcontractor costs (non-GAAP) | $2,348.6 million | $2,389.6 million | Down 1.7% |
| Gross profit | $446.5 million | $408.2 million | Up 9.4% |
| Income from operations | $241.1 million | $188.8 million | Up 27.7% |
| Net income attributable to Tetra Tech | $173.9 million | $158.7 million | Up 9.6% |
| Diluted EPS | $3.16 | $2.84 | Up 11.3% |
| Cash provided by operating activities | $262.5 million | $208.5 million | Up $54.0 million |
Gross margin was approximately 14.9% of revenue, compared with 13.1% in FY2019; operating margin was approximately 8.1%, versus 6.1%. Management's adjusted operating income, a non-GAAP measure excluding specified items, was $243.2 million, up 1.1%; adjusted diluted EPS was $3.26, up 2.8%.
- Segments: GSG revenue was $1,778.9 million, down 2.3%, and operating income was $168.7 million, down 9.0%; its margin on revenue less subcontractor costs was 13.0%, versus 13.9%. CIG revenue was $1,266.1 million, down 5.7%, while operating income rose 43.2% to $114.0 million. Excluding specified pipeline-disposal, COVID-19, and prior-year claim items, CIG operating income rose 7.5% and its comparable margin improved to 10.7% from 9.7%.
- Cash, debt, and liquidity: Cash and cash equivalents were $157.5 million at year-end. Total debt and other short-term borrowings were $291.7 million, including $33.6 million of bank overdrafts; long-term debt was $242.4 million. The company reported $422.4 million available on its revolving facility and stated it had sufficient liquidity for at least 12 months. Leverage and interest-coverage ratios were 1.10x and 19.76x, respectively, within covenant limits.
- Cash uses and shareholder returns: Investing activities used $63.0 million and financing activities used $163.0 million. The company repurchased $117.2 million of shares and paid $34.7 million of dividends ($0.64 per share) during FY2020. The board declared a subsequent quarterly dividend of $0.17 per share.
- Backlog: Remaining unsatisfied performance obligations were approximately $3.2 billion, up 4.8%; management estimated about 58% would be recognized as FY2021 revenue. Backlog is subject to cancellation, deferrals, and scope changes.
Material changes and unusual items
- Reported revenue fell, reflecting COVID-19-related weakness in U.S. commercial and international business, lower California wildfire disaster-response work, and the prior-year disposal of Canadian turnkey pipeline activities. Acquisitions contributed $210.5 million of FY2020 revenue. Management said revenue excluding acquisitions, disposals, wildfire activity, and a prior-year claim resolution declined 3.9%.
- U.S. federal revenue increased 5.6% (down 1.5% excluding acquisitions); U.S. state and local revenue declined 25.3%, largely due to lower wildfire response work; U.S. commercial revenue declined 6.2%. International revenue rose 3.2% reported, but fell 5.5% excluding acquisitions and the prior-year pipeline disposal.
- Operating income included a $15.0 million net gain from revised acquisition earn-out estimates, a $15.8 million non-cash goodwill impairment, and $8.2 million of COVID-19 response costs. FY2019 included a $7.8 million goodwill impairment, $10.9 million of pipeline-disposal charges, $10.4 million of WYG acquisition/integration costs, and a $13.7 million claim charge. These items complicate year-over-year comparisons.
- The goodwill impairment followed weaker forecasts for the Asia/Pacific reporting unit amid Australia's recession; that unit's estimated fair value equaled its carrying value at year-end. Further deterioration could lead to additional impairment.
- For the fourth quarter specifically, revenue was $753.4 million, operating income $66.7 million, net income attributable to Tetra Tech $44.7 million, and diluted EPS $0.82. The quarter included approximately $13.5 million of net earn-out gains and the $15.8 million goodwill impairment.
Outlook, commentary, and risks
Management said remote-work capabilities enabled continued service delivery during the pandemic, with 95% of the workforce working remotely at the height of the response and all 450 offices operational. It expected modest growth in U.S. federal revenue in FY2021, stable international government work, and continued pressure on U.S. commercial revenue; prolonged pandemic conditions could materially affect international commercial activity. State and local water-infrastructure work was expected to increase, but client budget constraints were a risk. These are expectations, not guarantees; the filing does not provide a specific consolidated FY2021 earnings or revenue forecast.
- Key risks include COVID-19 and economic uncertainty; government budget, appropriations, procurement, and contract-renewal risks; commercial and international demand; foreign exchange; competition and pricing pressure; and attracting and retaining qualified staff.
- Project profitability depends on cost and schedule estimates, especially for fixed-price contracts, and revenue recognition relies on cost-to-cost estimates that can be revised. The filing reports $13.2 million of liabilities for anticipated contract losses and approximately $14 million of receivables related to claims.
- The U.S. government intervened in three False Claims Act qui tam actions concerning environmental remediation at Hunters Point Naval Shipyard. Tetra Tech disputes the allegations; management could not determine the probability of outcome or reasonably possible loss.
- Other exposures include environmental and professional-liability claims, government audits and compliance requirements, cybersecurity, and contingent earn-outs. Insurance may not cover all losses.
- PwC issued an unqualified audit opinion and concluded internal control over financial reporting was effective. The audit identified critical audit matters involving fixed-price contract cost estimates and the Asia/Pacific goodwill impairment assessment.
Important facts for investors to verify
- Whether pandemic-related commercial and international demand recovered as expected, and whether FY2021 federal and state/local work grew.
- How much of the $3.2 billion backlog converted to revenue and profit, including the effects of cancellations and scope changes.
- Whether the $15.0 million earn-out gain and other unusual items distort underlying earnings comparisons; review the company's non-GAAP reconciliations.
- Whether Asia/Pacific performance supports the goodwill carrying value and whether further impairment is required.
- The status and potential financial exposure of the Hunters Point litigation, contract claims, and anticipated contract losses.
- Cash conversion, receivable collections, debt and bank overdrafts, covenant headroom, and remaining share-repurchase authorization.