Tetra Tech, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
Tetra Tech provides consulting and engineering services focused on water, environment, infrastructure, resource management, and energy. This 10-K covers the 52-week fiscal year ended September 27, 2015; quarterly figures below identify the fourth quarter where relevant. Fiscal 2015 reporting segments were Water, Environment and Infrastructure (WEI), Resource Management and Energy (RME), and Remediation and Construction Management (RCM), which is winding down non-core construction work.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $2.299 billion | $2.484 billion |
| Operating income | $87.7 million | $153.8 million |
| Net income attributable to Tetra Tech | $39.1 million | $108.3 million |
| Diluted EPS | $0.64 | $1.66 |
| Operating cash flow | $162.8 million | $127.4 million |
| Cash and cash equivalents at year-end | $135.3 million | $122.4 million |
| Long-term debt, net of current portion | $181.0 million | $192.8 million |
- Reported operating margin was approximately 3.8% in FY2015 versus 6.2% in FY2014; net margin was approximately 1.7% versus 4.4%.
- FY2015 operating cash flow rose $35.5 million year over year, principally reflecting stronger receivable collections, including claims, and lower income tax payments, partly offset by higher payments to suppliers.
- Net cash used in investing was $21.0 million; net cash used in financing was $123.6 million, including $100.5 million of share repurchases and $18.2 million of dividends.
- Current assets were $823.8 million and current liabilities $450.4 million at year-end. The current ratio was approximately 1.83. Total debt was $192.9 million; cash exceeded debt by approximately $57.6 million.
- Available revolving credit was $458.7 million, of which $381.6 million was borrowable without violating covenants. The company reported leverage of 1.11x and fixed-charge coverage of 3.91x, within required limits.
- FY2015 dividends were $0.30 per share. The board declared a further $0.08 quarterly dividend for December 2015.
Material changes versus the prior comparable period
- Revenue declined 7.4%, driven mainly by the planned reduction of RCM construction activity and adverse foreign-exchange translation, especially the Canadian dollar. On a constant-currency basis, ongoing revenue excluding RCM increased 0.9%; ongoing operating income, excluding specified adjustments, increased 12.0% to $157.1 million. These are company-presented adjusted measures, not GAAP results.
- Operating income fell 43.0% and net income fell 63.9%. FY2015 included a $60.8 million non-cash goodwill and intangible-asset impairment charge, while FY2014 included $58.7 million of gains from reduced acquisition earn-out liabilities, compared with $3.1 million in FY2015.
- Fourth-quarter FY2015 revenue was $578.4 million; operating loss was $20.0 million and net loss attributable to Tetra Tech was $31.7 million. The quarter included the $60.8 million mining-related impairment charge.
- Mining revenue declined 25% in Q4 year over year amid reduced customer capital spending. The company wrote off all goodwill and identifiable intangible assets of its Global Mining Practice (GMP) and decided to redeploy resources. GMP ceased to be a reporting unit at the start of FY2016.
- WEI revenue was down 0.9% and operating income down 1.1%; RME revenue was down 4.5% while operating income increased 10.4%, supported especially by Western Canadian midstream oil and gas work. RCM revenue declined 60.8%; its operating loss narrowed to $8.6 million from $45.2 million.
- Backlog was $1.9 billion, down 5.4% from FY2014 year-end. Excluding RCM and currency effects, backlog grew 4.0%.
Outlook, commentary, risks, and unusual items
- Management expected stable international revenue in FY2016 on a constant-currency basis, continued year-over-year improvement in U.S. commercial revenue, and stable U.S. federal revenue and growth in state and local government revenue, each excluding RCM where specified. These are qualitative expectations, not quantified earnings guidance.
- Approximately 70% of year-end backlog was estimated to convert to revenue in FY2016. Backlog is not a guarantee of revenue or profit and may be reduced by cancellations, scope changes, or termination rights.
- The remaining RCM backlog was $61 million; related work was expected to be substantially complete by the end of FY2016. FY2015 RCM losses included updated assessments of claim collectability, legal costs, and estimated completion costs.
- Management identified continued commodity weakness, especially in mining and oil and gas, foreign-exchange movements, government funding and procurement uncertainty, client credit and collection risk, fixed-price project overruns, competition, and workforce availability as material business risks.
- Accounts receivable included approximately $53 million related to claims at year-end. The filing also describes unresolved project claims, cost-estimation uncertainties, and potential further losses or recoveries. Remaining estimated costs on certain exited transportation projects were approximately $37 million.
- The effective tax rate was 51.2%, elevated principally because most of the impairment charge was not tax deductible. Excluding specified impairment and earn-out items, the company reported an effective rate of 32.3% versus 36.2% in FY2014.
- After year-end, Tetra Tech announced a proposed acquisition of Coffey International for approximately $76 million, subject to customary conditions, including reaching a 90% ownership threshold; closing was expected in FY2016 Q2.
- The independent auditor expressed an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective at year-end.
Most important facts for investors to verify
- Whether core WEI and RME growth and margins continue, separate from RCM wind-down and currency effects.
- Whether mining and oil-and-gas market weakness worsens, and whether further goodwill or intangible impairment is required, including for the solid-waste reporting unit with limited valuation headroom.
- Whether the $1.9 billion backlog converts as expected, and whether the remaining RCM projects and $37 million estimated completion costs stay within current estimates.
- Collection and final resolution of the approximately $53 million of claims-related receivables, and any material change in project-loss estimates or legal contingencies.
- Cash generation, working-capital trends, debt covenant headroom, and the funding and integration implications of the proposed Coffey acquisition and capital returns.