Tetra Tech, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, ended January 1, 2012; comparisons are with the three months ended January 2, 2011 unless otherwise noted. Tetra Tech provides consulting, engineering, program and construction management, and technical services focused on water, environment, energy, infrastructure, and natural resources.
Financial results
- Revenue: $682.6 million, up 11.7%. Revenue less subcontractor costs, a company-defined non-GAAP measure, was $492.1 million, up 21.3%.
- Operating income: $36.1 million, up 5.2%; operating margin was approximately 5.3%, versus 5.6%.
- Net income attributable to Tetra Tech: $22.6 million, up 1.4%. Basic and diluted EPS were both $0.36, unchanged year over year. The effective tax rate increased to 34.7% from 31.1%.
- EBITDA: $51.1 million versus $47.3 million; this is a non-GAAP measure.
- Cash flow: Operating cash flow was $38.3 million, versus $8.9 million. Investing used $6.8 million, compared with $171.0 million, largely reflecting the prior-year BPR acquisition. Financing used $17.5 million, including debt repayment and earn-out payments.
- Liquidity and debt: Cash was $105.7 million. Current assets were $846.3 million and current liabilities $504.4 million. Long-term debt was $134.6 million, with $2.3 million current; total debt was approximately $136.8 million. The $460 million revolving facility had $133.7 million drawn, $29.7 million in letters of credit, and $296.6 million available. The company reported compliance with its debt covenants.
- Working-capital items: Net accounts receivable was $665.0 million, including approximately $19 million of unbilled claims and equitable-adjustment requests, primarily involving U.S. federal contracts. The allowance for doubtful accounts was $36.6 million.
Changes versus the prior period
- Growth was driven by fiscal 2011 acquisitions and stronger international and U.S. commercial activity; management cited increased work for Fortune 500 clients. Federal revenue declined amid reduced or winding-down activity on several programs.
- By client sector, international revenue rose 26.4%, U.S. commercial rose 31.3%, U.S. state and local rose 12.1%, and U.S. federal revenue fell 4.3%.
- Segment revenue and operating income: Engineering and Consulting Services revenue rose 19.6% and income rose 6.5%; Technical Support Services revenue rose 2.5% and income fell 1.8%; Engineering and Architecture Services revenue rose 20.1% and income fell 7.1%; Remediation and Construction Management revenue rose 11.2% and income rose 89.3%.
- Operating income benefited from growth and improved execution on fixed-price contracts, but was tempered by higher SG&A and acquisition-related amortization; prior-year operating results included favorable claim settlements. Fiscal 2011 R&E credits also reduced the prior-year tax rate.
- Management realigned certain operating units among reportable segments; prior-year segment figures were reclassified for comparability. No divestitures occurred in either comparison period.
Outlook, risks, and unusual items
- Management expected moderate fiscal 2012 revenue growth. It anticipated continued strong international growth, moderate growth in U.S. commercial, stable U.S. federal revenue, and slow growth in state and local government work. The company described the U.S. recovery as gradual and noted federal budget uncertainty.
- Management said cash balances, operating cash flow, and available credit were expected to meet capital requirements for at least the next 12 months. Backlog was $1.9 billion; it includes funded, authorized work but may be cancelled or adjusted and is not a guarantee of future revenue or profit.
- Key operating risks include government budget and procurement changes, economic weakness affecting commercial and public clients, project delays and cost overruns (particularly on fixed-price contracts), collection and estimation risks, employee retention and utilization, acquisition integration, currency movements, and seasonality. Revenue and operating income are typically lower in the first half of the fiscal year.
- An Ohio lawsuit involving acquired subsidiary AMT remained under appeal. The company reported a reasonably possible exposure range of $0 to approximately $14.5 million, recorded a liability for its best estimate of probable loss, and recorded an equal indemnification receivable because it believed recovery from former owners was probable. Enforcement was stayed pending the Ohio Supreme Court appeal; a $13.4 million bond was in place.
- Professional liability claims may exceed insurance coverage. Management did not believe such claims would materially affect the company, while acknowledging uncertainty about their resolution.
- Disclosure controls were judged effective as of January 1, 2012, and the company reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth converts into sustained operating-margin and earnings improvement, given SG&A growth, contract mix, and segment-level differences.
- Cash-flow durability and collection of the substantial receivables balance, including unbilled amounts and federal contract claims.
- Federal budget decisions, award timing, and changes in defense and other government programs, alongside the reported backlog’s funding and cancellation risks.
- Progress and outcome of the AMT litigation appeal, the recorded liability estimate, and collectability of the indemnification receivable.
- Revolver availability and covenant compliance as debt, acquisition obligations, and operating needs evolve.