Tetra Tech, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012; comparison is with fiscal 2011, ended October 2, 2011. The filing also reports fourth-quarter results, but the period is an annual 10-K, not a standalone quarterly filing.
Business context
Tetra Tech provides consulting, engineering, program and construction management, construction, and technical services focused on water, environment, energy, infrastructure, and natural resources. It reported more than 13,000 employees and four segments in FY2012: Engineering and Consulting Services (ECS), Technical Support Services (TSS), Engineering and Architecture Services (EAS), and Remediation and Construction Management (RCM). The company announced that EAS would be eliminated as a reportable segment at the start of FY2013, with its operations reassigned to ECS and TSS.
Financial performance and position
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $2,711.1 million | $2,573.1 million | +5.4% |
| Revenue less subcontractor costs (non-GAAP) | $2,022.1 million | $1,792.3 million | +12.8% |
| Operating income | $166.4 million | $146.4 million | +13.6% |
| Net income attributable to Tetra Tech | $104.4 million | $90.0 million | +15.9% |
| Diluted EPS | $1.63 | $1.43 | +14.0% |
| Operating cash flow | $158.0 million | $131.6 million | +$26.4 million |
Operating margin was approximately 6.1% versus 5.7%; net margin was approximately 3.9% versus 3.5%. EBITDA, a company-defined non-GAAP measure, was $222.3 million versus $198.6 million. Capital expenditures were $25.1 million; operating cash flow less capital expenditures was approximately $132.9 million.
At year-end, cash was $104.8 million, current assets $859.3 million, and current liabilities $503.8 million (current ratio approximately 1.71). Total debt was $83.1 million, including $79.2 million under the revolving facility; $361.8 million remained available under the $460 million facility. The company reported compliance with its debt covenants. Total assets were $1.671 billion and Tetra Tech stockholders’ equity was $1.019 billion. Backlog was $2.1 billion, up 9.7%; management estimated about 80% would be recognized as FY2013 revenue, while cautioning that backlog may be cancelled or adjusted.
Material changes and segment results
- Growth was led by U.S. commercial work, international projects, and acquisitions; U.S. federal government revenue declined. International and U.S. commercial revenue grew 11.3% and 24.3%, respectively, while U.S. federal revenue fell 9.6%. State and local government revenue rose 13.0%.
- ECS revenue increased 11.5% to $1,036.6 million, but operating income was essentially flat at $88.1 million, reflecting weather-related utilization pressure and project mix.
- TSS revenue increased 6.1% to $919.9 million and operating income rose 14.0% to $67.4 million, with growth supported by international development work and acquisitions.
- EAS revenue increased 3.5% to $318.8 million, while operating income fell 44.7% to $12.5 million, including India-related wind-down losses and reorganization costs.
- RCM revenue increased 2.9% to $622.0 million and operating income rose 69.7% to $22.4 million. Improved results compared with FY2011, which included fixed-price project overruns, were partly offset by the wind-down of large U.S. federal projects.
Outlook, commentary, risks, and unusual items
- Management expected continued FY2013 growth in international and U.S. commercial work, and expected state and local government growth to continue, while describing the U.S. federal outlook cautiously. No numerical earnings or revenue guidance was provided.
- Management cited uncertainty around the economy and the U.S. federal budget, including potential sequestration, as risks to government-funded programs. Other key risks include project cost overruns—particularly on fixed-price contracts—contract cancellations, funding and procurement changes, collection risk, acquisition integration, personnel retention, and foreign currency and operating risks.
- FY2012 operating income included a $19.2 million gain from reductions in estimated acquisition earn-out liabilities, including $17.3 million in Q4. The filing says the estimates were lowered in part because expected operating income at acquired businesses was below earlier projections.
- Q4 operating income also included $16.9 million of reorganization-related costs: $6.4 million for severance and retention, $4.4 million for lease and asset-related charges, and $5.2 million of losses winding down India activities. A $0.9 million non-cash goodwill impairment was also recorded. Q4 revenue was $719.4 million, operating income $48.5 million, net income attributable to Tetra Tech $30.4 million, and diluted EPS $0.47.
- Goodwill was $636.0 million at year-end. Besides the recorded impairment, the filing identified a TSS reporting unit with $11.4 million of goodwill and fair value less than 20% above carrying value, making future impairment reasonably possible if performance falls short.
- Two employees and a subsidiary in Quebec were charged in April 2012 with alleged corruption. The company said it believed the allegations related to activity before its acquisition of the subsidiary; the preliminary hearing was scheduled for February 2013, and the financial impact was unknown.
- PwC issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Investor verification priorities
- Assess how much FY2012 earnings depended on the $19.2 million earn-out fair-value gain and compare underlying project profitability after the $16.9 million reorganization costs.
- Track backlog conversion, cancellations, and new awards, especially against the expected FY2013 recognition of approximately 80% of year-end backlog.
- Monitor federal budget actions and the effect of lower DoD activity on revenue and margins, alongside the sustainability of commercial and international growth.
- Review receivables and contract estimates: net receivables were $700.5 million, including $355.8 million unbilled; confirm collection and realization of claims and change orders.
- Follow the Quebec proceedings and potential financial or contracting consequences, and monitor goodwill impairment indicators, particularly in the identified TSS reporting unit.