Tetra Tech, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended October 3, 2010. The year contained 53 weeks, versus 52 weeks in FY2009. The filing also reports unaudited fourth-quarter results; this is an annual filing, not a standalone quarterly filing.
Business context and reporting period
Tetra Tech provides consulting, engineering, program and construction management, and technical services focused on water, the environment, natural resources, infrastructure, and energy. It reported four segments: Engineering and Consulting Services (ECS), Technical Support Services (TSS), Engineering and Architecture Services (EAS), and Remediation and Construction Management (RCM). The company had approximately 12,000 employees and acquired Canadian engineering firm EBA during FY2010.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $2.201 billion | $2.287 billion |
| Revenue, net of subcontractor costs | $1.460 billion | $1.386 billion |
| Operating income | $124.5 million | $121.9 million |
| Net income | $76.8 million | $87.0 million |
| Diluted EPS | $1.24 | $1.43 |
| Cash from operations | $106.8 million | $198.2 million |
- Revenue fell 3.8%, while revenue net of subcontractor costs, a company-presented non-GAAP measure, rose 5.3%. The latter benefited from acquisitions and the extra fiscal week; excluding acquisitions, it declined slightly.
- Operating income increased 2.1%. Approximate operating margin improved to 5.7% from 5.3%; net margin declined to 3.5% from 3.8%. The effective tax rate rose to 37.6% from 27.0%, contributing to lower net income and EPS.
- FY2010 investing cash outflow was $97.4 million, including $78.9 million for acquisitions and $21.6 million in capital expenditures. Cash increased to $220.9 million from $89.2 million; financing provided $121.4 million, including $120 million in credit-facility borrowings.
- Working capital was $371.7 million; total assets were $1.382 billion and stockholders’ equity $748.1 million. Total debt was $127.5 million, including $120 million drawn on a $300 million revolving facility. Facility availability was $152.2 million after letters of credit. Leverage ratio was 1.2x against a 2.5x maximum; fixed-charge coverage was 2.71x against a 1.25x minimum.
- FY2010 revenue by segment: RCM 34.5%, ECS 33.2%, TSS 24.0%, and EAS 13.3%, before intersegment eliminations. ECS operating income rose 29.1%; TSS rose 4.3%; EAS fell 10.3%; and RCM fell 11.8%.
- Fourth-quarter FY2010 revenue was $627.4 million, operating income $37.1 million, and net income $23.1 million, compared with $575.1 million, $32.7 million, and $20.5 million, respectively, in Q4 FY2009.
Material changes versus prior period
- Commercial revenue fell 29.3%, reflecting completed wind projects and reduced or delayed real estate, industrial, remediation, and water work. Federal revenue declined 1.9%, including the completion of Iraq-related work; state and local revenue grew 17.4%, and international revenue grew 100.5%, supported by acquisitions and mining projects.
- RCM revenue declined 20.2%, largely from completed wind and Iraq-related contracts and delayed federal awards. ECS grew 21.5%, substantially supported by acquisitions. EAS revenue declined 1.9%, while TSS grew 0.9%.
- Federal, state, and local government clients together represented 66.7% of revenue; the DoD alone represented 28.6%. Commercial clients represented 23.8%, down from 32.4% in FY2009; international revenue represented 9.5%, up from 4.6%.
- Backlog increased 17.1% to $1.9 billion. Management estimated approximately 75% would be recognized as FY2011 revenue, but stated backlog is not a reliable indicator of future earnings.
Outlook, risks, contingencies, and unusual items
- Management expected moderate revenue growth in FY2011, driven by acquisitions and anticipated business growth, while describing the economic recovery as slow. It expected federal, state/local, and commercial revenue to be flat; international revenue was expected to grow significantly, subject to delays or cancellations in mining and energy projects.
- Management said ARRA awards had been fewer and smaller than anticipated, making any FY2011 benefit uncertain. Federal construction-management awards were delayed, although front-end water and environmental work was described as strong.
- Principal risks include government budget, funding, procurement and contract-renewal uncertainty; defense-spending shifts and insourcing; commercial client credit and project weakness; fixed-price cost overruns; workforce utilization and retention; acquisition integration and leverage; and environmental, professional-liability, and international compliance exposures.
- Cash from operations fell 46.1%, partly because FY2009 included a $40 million IRS tax refund and significant collections on large commercial fixed-price contracts. FY2010 net income also included a higher tax burden; FY2009 benefited from tax settlements and previously unclaimed research and experimentation credits.
- Goodwill was $394.4 million and other intangible assets $46.0 million. The annual goodwill impairment test found no impairment, but future impairment remains possible. Acquisition earn-out liabilities were $20.5 million; maximum potential payments for FY2010 acquisitions were approximately $26.5 million.
- An acquired subsidiary’s trade-secret litigation had a reasonably possible exposure range of $0 to approximately $14.5 million. Tetra Tech recorded its best estimate of probable loss and an equal indemnification receivable from the former owners; appellate proceedings were pending.
- The auditor reported fairly presented financial statements and effective internal control over financial reporting as of year-end. The company stated it paid no cash dividends and did not expect to do so in the foreseeable future.
Important facts for investors to verify
- Whether FY2011 growth, especially international mining-related growth, materialized and how much came from acquisitions versus organic activity.
- Whether government funding, delayed awards, defense-program changes, and ARRA activity affected backlog conversion and margins.
- Whether commercial-sector weakness and receivables quality improved; FY2010 net accounts receivable was $566.6 million, including $271.6 million unbilled.
- Whether operating cash generation recovered and acquisition-related borrowing was managed within credit-facility covenants and maturity requirements.
- Whether acquisition integration, earn-outs, goodwill, and the ITC/AMT litigation and indemnification were resolved without material adverse effects.