Tetra Tech, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended July 1, 2018; comparable periods ended July 2, 2017. Unaudited. Unless noted, amounts are U.S. dollars.
Business context and results
Tetra Tech provides consulting and engineering services in water, environment, infrastructure, resource management, energy and international development. From fiscal 2018, it reported Government Services Group (GSG), Commercial/International Services Group (CIG), and the wind-down of Remediation and Construction Management (RCM).
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $764.8m | $685.5m | $2,224.8m | $2,018.2m |
| Gross profit | $109.6m | $90.3m | $295.2m | $252.6m |
| Income from operations | $55.5m | $45.9m | $146.8m | $128.7m |
| Net income attributable to Tetra Tech | $33.3m | $30.0m | $108.1m | $83.4m |
| Diluted EPS | $0.59 | $0.52 | $1.91 | $1.44 |
Q3 revenue rose 11.6% and operating income rose 20.9%; nine-month revenue rose 10.2% and operating income 14.1%. Gross margin was approximately 14.3% in Q3 versus 13.2%, and 13.3% for nine months versus 12.5%. Operating margin was approximately 7.3% versus 6.7% in Q3, and 6.6% versus 6.4% for nine months. The company’s non-GAAP ongoing diluted EPS was $0.71 for Q3 and $1.89 for nine months, compared with $0.53 and $1.50, respectively.
For the first nine months, revenue growth excluding the $87.0m contribution from Glumac and NDY was about 5.9% on a reported basis. GSG revenue grew 15.8% and operating income 23.0%; CIG revenue grew 2.9% and operating income 5.5%. RCM remained loss-making, but its operating loss narrowed to $2.1m from $12.8m.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $67.4m, versus $71.6m; investing cash outflow was $32.9m and financing cash outflow $4.0m. Cash increased $24.1m from fiscal year-end to $214.0m.
- Management attributed weaker operating cash generation, excluding tax-examination payments, primarily to working capital needs from revenue growth and the timing of milestone collections. Accounts receivable increased to $847.2m from $788.8m.
- At July 1, cash was $214.0m; current assets were $1,133.9m and current liabilities $563.1m. Long-term debt was $419.0m and current debt $18.7m. Borrowings under the credit agreement were $434.2m, at a weighted-average rate of 3.10%; the company reported covenant compliance.
- Nine-month capital allocation included $75.0m of share repurchases and $17.8m in dividends. The quarterly dividend was raised to $0.12 per share from $0.10 earlier in fiscal 2018.
Material changes, outlook and unusual items
- Growth reflected state and local infrastructure and disaster-recovery work, federal government activity and acquisitions. Glumac and NDY contributed $87.0m of nine-month revenue. The company divested its non-core utility field services operations for $30.2m net proceeds; the business had generated about $70m in annual revenue. Divestitures and other non-core asset sales produced a $3.4m pretax loss.
- Management expected state and local government business to continue growing in the rest of FY2018, but at a slower pace as emergency-response activity moderated. It anticipated similar growth in U.S. federal revenue, modest growth in U.S. commercial revenue excluding Glumac, and international growth excluding Canadian oil and gas activities. This is qualitative outlook, not quantified full-year guidance.
- The nine-month effective tax rate was 20.0%, versus 30.4%, including a $10.1m one-time deferred-tax benefit from the U.S. Tax Cuts and Jobs Act. Excluding that benefit, the reported nine-month effective rate was 27.4%. Tax calculations remained provisional; the company had not yet estimated the potential effect of GILTI rules.
- Backlog was $2.4bn, down $105.6m, or 4.2%, from fiscal year-end. Management cautioned that backlog may be cancelled or adjusted and is not a reliable guarantee of future earnings.
- Foreign currency translation reduced equity by $32.8m over nine months. The company had $68m of receivables related to claims, including requests for equitable adjustment; no material claim gains or losses were recorded in the period. Contract estimates resulted in $2.4m of net unfavorable operating-income adjustments in the first nine months.
- The USAO was evaluating potential penalties and damages related to radiation-remediation work at Hunters Point, San Francisco. The company said it could not determine the likelihood of an outcome or reasonably possible loss range. It also disclosed other professional-liability claims, some potentially beyond insurance coverage.
- After quarter-end, on July 30, the company entered into a new credit agreement maturing in 2023, with $700m of facilities and a $300m accordion subject to lender approval; the full $250m term loan was drawn. The company also completed a one-time repatriation of approximately $117m of foreign earnings and said most would be used to repay U.S. debt.
Important facts for investors to verify
- Whether operating cash flow and receivable collections improve, given the increase in accounts receivable and working-capital demands.
- Whether disaster-recovery work moderates as management anticipated, and whether infrastructure growth offsets ongoing weakness in Canadian oil and gas.
- The final tax effects of the TCJA, including deferred-tax estimates and the unresolved GILTI accounting assessment.
- Developments in the Hunters Point matter, other claims, and the $68m claims-related receivable balance; the filing provides no clear potential-loss estimate for Hunters Point.
- Post-quarter debt levels, borrowing costs and covenant headroom after the new facility and term-loan draw, alongside acquisition and repurchase spending.
- Whether the $2.4bn backlog converts to revenue and profit; backlog can be cancelled or changed.