Tetra Tech, Inc. — Q3 Fiscal 2014 Form 10-Q
Reporting period: Quarter and nine months ended June 29, 2014. Financial statements are unaudited. Tetra Tech provides consulting, engineering, program and construction management, construction, and technical services across water, environment, energy, infrastructure, and natural resources.
Key financial results
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2013 periods.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $629.5; up 2.4% | $1,861.6; down 2.8% |
| Revenue less subcontractor costs (non-GAAP) | $458.8; down 3.4% | $1,397.7; down 6.4% |
| Operating income (loss) | $39.2, versus $(99.9) | $129.1, versus $(20.4) |
| Net income (loss) attributable to Tetra Tech | $26.7, versus $(78.4) | $85.7, versus $(27.3) |
| Diluted EPS | $0.41, versus $(1.21) | $1.31, versus $(0.42) |
| EBITDA (non-GAAP) | $51.6, versus $(82.5) | $170.3, versus $25.8 |
| Operating margin | 6.2%, versus (16.2)% | 6.9%, versus (1.1)% |
Year-to-date operating cash flow was $114.3 million, compared with $115.3 million; capital expenditures were $14.9 million. Cash increased to $188.9 million from $129.3 million at fiscal year-end. The filing reports $202.4 million of credit-agreement borrowings; cash less stated borrowings was approximately $(13.5) million. The company had $458.7 million of revolver availability, of which $239.0 million could be borrowed without violating debt covenants. Debt covenants were met: leverage ratio 1.31x and fixed-charge coverage ratio 2.58x.
Current assets were $930.8 million and current liabilities $478.2 million. The balance sheet reported total debt of approximately $203.9 million, including current and long-term portions. Nine-month effective tax rate was 29.4%; it was affected by non-taxable contingent-consideration gains.
Material changes and business performance
- Comparisons with 2013 earnings are substantially affected by prior-year charges: a $56.6 million goodwill impairment, $10.3 million of restructuring costs, and $35.5 million of project-related charges in the third quarter of 2013. Excluding those charges, management said operating income rose $36.7 million in the quarter and $47.1 million year to date.
- Fiscal 2014 operating income included gains from lower estimated acquisition earn-outs of $8.9 million for the quarter and $34.9 million year to date, versus $7.7 million and $8.7 million in 2013. The gains followed reduced projections for AEG and Parkland; management described the performance impacts as temporary at the time of filing.
- Year-to-date revenue weakness reflected foreign-exchange effects, lower U.S. federal activity, weaker Eastern Canada and mining operations, and construction declines from project wind-downs, weather, and exits from selected fixed-price work. Excluding foreign exchange and prior-year project charges, revenue was down 2.4% year to date.
- Segment revenue and operating income for the nine months: ECS $708.0 million and $50.3 million; TSS $674.0 million and $69.0 million; RCM $549.9 million and $0.8 million. RCM reported a $2.2 million operating loss in the quarter, including $5.0 million of project cost-overrun charges.
- Foreign-currency translation reduced equity by $18.6 million in the first nine months. The Canadian dollar was the principal currency exposure.
Outlook, risks, and contingencies
- The filing gives no specific consolidated revenue or earnings guidance. Management expected international revenue to remain lower for the rest of fiscal 2014, U.S. state and local revenue to decrease as large transportation projects wound down, and expressed caution about growth in U.S. federal work.
- Management was reviewing RCM businesses to focus on higher-margin work and potentially exit or restructure selected businesses, particularly fixed-price construction. It warned this review could adversely affect fourth-quarter and fiscal 2014 results. If construction performance did not improve, approximately $48 million of related goodwill could be impaired.
- Goodwill was $722.6 million. Four of five identified reporting units had estimated fair value less than 20% above carrying value; weaker performance or market valuations could prompt impairment.
- Contract claims and estimates are significant: claims-related receivables were approximately $86 million, including an oil-and-gas project in Western Canada under negotiation. The company also disclosed $49.2 million of receivables on four previously charged projects; recovery of claims and change orders was uncertain, and further losses or gains were possible. Percentage-of-completion estimate changes reduced operating income by $5.0 million in the quarter and $10.3 million year to date.
- Other risks include fixed-price cost overruns, client and government funding delays, foreign-exchange movements, project collection and claims resolution, and economic or commodity-market weakness. BPR-related Canadian corruption proceedings and a Montreal class-action appeal remained unresolved; their financial impact was unknown. French charges against BPR and its former president had been dismissed finally.
- Management stated that cash, operating cash flow, and borrowing capacity should cover capital requirements for at least 12 months. The company paid $0.07 per-share quarterly dividends and, after quarter-end, declared another $0.07 dividend and authorized repurchases of the remaining amount under its $100 million program through September 2014 without pricing parameters.
Most important facts for investors to verify
- Whether operating improvement persists after excluding prior-year charges and current-period contingent earn-out gains.
- Collection and resolution of claims-related receivables, especially the Western Canada project and the four previously charged programs.
- RCM project execution, any restructuring or exits, and possible goodwill impairment.
- Trends in federal, state and local government spending, mining, Eastern Canada, oil and gas, and foreign-exchange effects.
- Available revolver capacity under covenant limits, debt compliance, and cash requirements for earn-outs, repurchases, and dividends.
- Developments in BPR-related legal proceedings and any resulting financial or certification consequences.