Tetra Tech, Inc. — FY2011 Form 10-K Summary
Business context and reporting period. Tetra Tech provides consulting, engineering, program and construction management, and technical services in water, natural resources, environment, infrastructure, and energy. This annual report covers the 52-week fiscal year ended October 2, 2011; the prior fiscal year had 53 weeks. The company reported four segments: Engineering and Consulting Services (ECS), Technical Support Services (TSS), Engineering and Architecture Services (EAS), and Remediation and Construction Management (RCM).
Key financial results
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $2.573 billion | $2.201 billion | +16.9% |
| Revenue less subcontractor costs (non-GAAP) | $1.792 billion | $1.460 billion | +22.7% |
| Operating income | $146.4 million | $124.5 million | +17.6% |
| Operating margin | 5.7% | 5.7% | Broadly flat |
| Net income attributable to Tetra Tech | $90.0 million | $76.8 million | +17.2% |
| Diluted EPS | $1.43 | $1.24 | +15.3% |
| EBITDA (non-GAAP) | $198.6 million | $157.6 million | +26.0% |
| Cash from operations | $131.6 million | $106.8 million | +$24.8 million |
Revenue growth reflected acquisitions, especially in Canada, and demand for international mining, energy, water, and infrastructure work. FY2010’s extra week contributed an estimated $45 million of revenue and $30 million of revenue less subcontractor costs, tempering the underlying year-over-year comparison. The effective tax rate fell to 33.8% from 37.6%, chiefly due to research and experimentation credits and foreign expansion.
Liquidity and debt. Year-end cash was $90.5 million, down from $220.9 million; working capital was $307.4 million versus $377.5 million. Total debt was $147.4 million, including $143.8 million under a $460 million revolving facility; reported availability was $287.7 million. The company reported compliance with its covenants, with leverage of 1.22x against a 2.5x maximum and fixed-charge coverage of 2.34x against a 1.25x minimum. Management said cash, operating cash flow, and available borrowing should cover requirements for at least 12 months.
Investing activities used $293.8 million, primarily for acquisitions and earn-outs; financing activities provided $31.4 million. Acquisition spending materially exceeded operating cash flow in the year.
Changes versus the prior comparable period
- ECS revenue rose 51.7% to $1.108 billion, largely from acquisitions and international mining and energy demand; segment operating income increased 65.7% to $100.8 million.
- TSS revenue increased 7.7% to $568.3 million, but revenue less subcontractor costs rose only 1.9%; operating income grew 4.4% to $40.9 million.
- EAS revenue rose 4.8% to $308.1 million; operating income increased 85.3% to $22.6 million, helped by lower facility costs, collections, a favorable $2.3 million claim settlement, and project close-outs.
- RCM revenue declined 4.4% to $725.6 million and operating income fell 44.3% to $18.7 million. Lower construction-management activity and roughly $20 million of cost overruns on fixed-price construction and energy projects weighed on results.
- International revenue grew 184.9% and rose to 23.2% of company revenue from 9.5%, reflecting acquisitions and demand in mining and energy markets. U.S. federal revenue declined 2.3%; state and local revenue declined 13.2%; commercial revenue grew 10.3%.
- Backlog increased 5.2% to $1.95 billion. Management estimated approximately 80% would be recognized as revenue in FY2012, subject to cancellations, scope changes, funding, and execution.
Outlook, commentary, risks, and unusual items
- Management expected moderate overall revenue growth in FY2012, supported by international activity and recent acquisitions. It forecast relatively flat U.S. federal business, slow-to-modest state and local growth, moderate commercial growth, and continued strong international growth.
- Management cited delayed awards on large construction-management projects, U.S. federal budget uncertainty, and weak state and local government finances. Federal agencies may delay, reduce, or terminate work; many contracts depend on annual appropriations.
- Fixed-price contracts accounted for 40.4% of revenue. Cost overruns, schedule delays, inaccurate cost-to-complete estimates, and unresolved change orders or claims can reduce margins or reverse previously recognized revenue and profit.
- Other material risks include acquisition integration and goodwill impairment, client credit and collection risk, international and foreign-exchange exposure, regulatory and government-contract audits, environmental and professional liability, competition, and retaining skilled staff.
- FY2011 results included $10.6 million of government incentive award fees on a major remediation program, favorable project close-outs and claim settlements, and a $1.8 million gain from reducing acquisition earn-out liabilities. These benefits were partly offset by project overruns and $1.3 million of lease-exit costs.
- Goodwill was $569.4 million and identifiable intangible assets were $81.1 million at year-end. The annual goodwill test found no impairment; future impairment remains a risk if expectations or market conditions deteriorate.
- A pending ITC lawsuit against acquired subsidiary AMT had an estimated exposure range of $0 to approximately $14.5 million, including attorneys’ fees. Tetra Tech recorded a liability and a matching receivable based on its expectation that former owners would honor their indemnity; a $13.4 million bond was posted.
- The independent auditor issued an unqualified opinion and concluded internal control over financial reporting was effective. The filing reports no unresolved SEC staff comments.
Most important facts for investors to verify
- How much FY2012 growth and backlog conversion is organic, and how dependent is it on acquisitions and international mining and energy demand?
- Whether RCM project execution improves and fixed-price overruns, change-order recovery, and claims remain contained.
- Whether operating cash flow can support acquisition spending, earn-outs, and debt service while cash remains below the prior-year level.
- Whether federal budget actions, delayed awards, and state and local budget constraints affect funded backlog and collections.
- Whether the AMT indemnification receivable is collected and whether goodwill, earn-out estimates, or other contingencies require material revisions.