Tetra Tech, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the second quarter and six months ended March 29, 2015. Tetra Tech provides consulting, engineering, program management and construction management services. It reorganized reporting into Water, Environment and Infrastructure (WEI), Resource Management and Energy (RME), and Remediation and Construction Management (RCM), which is winding down non-core construction work. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $564.8 | $586.3 | $1,145.8 | $1,232.1 |
| Operating income | $30.4 | $46.2 | $67.0 | $89.9 |
| Net income attributable to Tetra Tech | $19.0 | $31.7 | $44.6 | $59.0 |
| Diluted EPS | $0.31 | $0.48 | $0.71 | $0.90 |
| Operating cash flow | Not separately provided for the quarter | $24.8 | $56.2 |
- Q2 operating and net margins were approximately 5.4% and 3.4%, respectively, compared with 7.9% and 5.4% a year earlier. First-half margins were approximately 5.8% and 3.9%, versus 7.3% and 4.8%.
- Q2 revenue declined 3.7%; first-half revenue declined 7.0%. Management attributed the reported decline mainly to the RCM construction wind-down and a stronger U.S. dollar. Excluding exited RCM activity and foreign-exchange effects, core revenue grew 3.4% in Q2 and 1.4% for the first half.
- Q2 operating income included a $3.1 million contingent earn-out fair-value gain and a $3.1 million legal-settlement charge. In the prior-year periods, earn-out gains were $21.3 million in Q2 and $26.0 million for the first half. Excluding earn-out gains and the FY2015 legal charge, operating income increased $5.6 million in Q2 and $3.2 million year to date.
- Q2 segment results: WEI revenue was $223.4 million and operating income $15.8 million; RME revenue was $342.2 million and operating income $19.8 million; RCM revenue was $18.2 million and operating income was approximately break-even. WEI’s Q2 operating margin fell to 9.3% from 10.2%, reflecting a greater mix of lower-margin government work.
- For the six months, cash from operations was $24.8 million, investing cash outflow $2.3 million, and financing cash outflow $41.0 million. Cash fell $23.9 million to $98.5 million. Lower operating cash flow reflected payment timing for trade payables and lower client advances, partly offset by improved receivable collections.
Balance sheet, debt and liquidity
- At March 29, 2015, total assets were $1,643.9 million, down from $1,776.4 million at fiscal year-end. Current assets were $831.6 million and current liabilities $427.1 million.
- Credit-agreement borrowings were $237.9 million, including $197.3 million under the term loan and $40.6 million under the revolver. The weighted-average borrowing rate was 1.57%; the effective rate including swaps was 2.65%. Long-term debt on the balance sheet was $228.0 million, with $10.8 million current.
- The company reported $458.7 million available under its revolving facility, of which $115.8 million could be borrowed without violating debt covenants. It was in compliance: consolidated leverage ratio 1.748x versus a 2.50x maximum, and fixed-charge coverage ratio 2.633x versus a 1.25x minimum.
- Goodwill was $671.4 million and net intangible assets $49.1 million. Foreign-currency translation reduced equity by $68.2 million during the first half.
Outlook, commentary and risks
- No numerical earnings or revenue guidance is provided. Management expected modestly higher international revenue in FY2015 on a constant-currency basis; it anticipated stable U.S. federal revenue and continued growth in U.S. commercial and state/local business, excluding RCM.
- Management warned that continued low or lower oil prices could hurt business, particularly upstream oil and gas activity. Mining remained weak, and a stronger U.S. dollar reduced reported revenue and equity. RCM work was expected to be completed primarily in FY2015.
- Backlog was $1.9 billion, down $122.2 million, or 6.1%, from fiscal year-end. The filing cautions that backlog may be cancelled or adjusted and does not ensure future revenue or profit.
- Contract-estimate revisions reduced operating income by $3.5 million in Q2 and $5.9 million in the first half. The liability for anticipated contract losses was $13.6 million, with estimated remaining costs to complete those contracts of $83.9 million. The company also reduced revenue and operating income by $3.0 million in Q2 following an updated assessment of claims for a state and local government client.
- Approximately $80 million of receivables related to claims in the financial-statement note; MD&A separately cites approximately $83 million. Management notes that claim recovery, percentage-of-completion estimates, fixed-price execution, client funding and collections present uncertainty.
- A Quebec criminal matter involving alleged pre-acquisition conduct by former employees of BPR remained ongoing, with the legal process expected to continue into 2016; its financial impact was unknown. A separate Montreal class action was closed after the Supreme Court of Canada dismissed the application on April 23, 2015.
- Subsequent events: Tetra Tech acquired Cornerstone Environmental Group on May 1, 2015, for a purchase price described as not material, and declared a quarterly dividend of $0.08 per share on April 27, 2015. During the first half it repurchased 2.7 million shares for $68.7 million and paid $8.6 million in dividends.
Important facts for investors to verify
- Whether core growth and operating-income improvement can persist after excluding RCM, foreign-exchange effects, earn-out gains and the legal-settlement charge.
- The collectability and resolution timing of contract claims and receivables, including the filing’s approximately $80 million versus $83 million claim disclosures.
- Exposure to oil and gas and mining activity, continued currency movements, and progress on winding down RCM.
- Backlog conversion, contract-loss estimates and the potential for further cost or revenue revisions on percentage-of-completion projects.
- Available borrowing capacity under covenant limits, cash generation after repurchases and dividends, and potential goodwill impairment risk in the Global Mining Practice unit.