Tetra Tech, Inc. — FY2013 Form 10-K
Business context and reporting period. Tetra Tech provides consulting, engineering, program management, construction management and technical services focused on water, environment, energy, infrastructure and natural resources. The fiscal year ended September 29, 2013 and contained 52 weeks. The filing is an annual report; it also presents fourth-quarter results.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $2,613.8 million | $2,711.1 million |
| Revenue less subcontractor costs (non-GAAP) | $2,024.8 million | $2,022.1 million |
| Operating income | $20.2 million | $166.4 million |
| Net income (loss) attributable to Tetra Tech | $(2.1) million | $104.4 million |
| Diluted EPS | $(0.03) | $1.63 |
| Cash from operating activities | $137.8 million | $158.0 million |
| Cash and cash equivalents at year-end | $129.3 million | $104.8 million |
| Total debt, including current portion | $207.7 million | $83.1 million |
| Total assets | $1,799.1 million | $1,671.0 million |
| Tetra Tech stockholders’ equity | $997.8 million | $1,019.0 million |
Operating margin was approximately 0.8%, versus 6.1% in FY2012; net margin was approximately -0.1%, versus 3.9%. Fiscal 2013 included a $56.6 million non-cash goodwill impairment and significant project and restructuring charges. Excluding the goodwill impairment, operating income was $76.8 million.
Net cash used in investing activities was $196.6 million, primarily reflecting $171.3 million of net acquisition payments; capital expenditures were $27.5 million. Financing activities provided $85.6 million. Year-end current assets were $871.6 million and current liabilities were $483.1 million. The company reported $205.0 million outstanding under its term loan and $447.6 million of revolving-credit availability, of which $265.5 million could be borrowed without violating debt covenants. It was in compliance with its covenants, reporting leverage of 1.33x and fixed-charge coverage of 2.21x.
Material changes versus the prior comparable period
- Revenue declined 3.6%, while revenue less subcontractor costs was essentially flat. Operating income fell 87.8%, and the company reported a net loss.
- U.S. federal revenue fell 17.7%; U.S. commercial revenue declined 3.4%. International revenue grew 5.1%, and U.S. state and local government revenue grew 22.7%.
- By segment, ECS revenue declined 10.3% and operating income declined 53.6%; TSS revenue declined 8.7% while operating income was essentially flat; RCM revenue increased 16.7% but reported a $6.7 million operating loss, versus $22.4 million of operating income in FY2012.
- Fiscal 2013 goodwill impairment was $56.6 million, compared with $0.9 million in FY2012. Project-related charges on four programs reduced revenue by $29.6 million and operating income by $40.1 million. Weakness and right-sizing in Eastern Canada and global mining reduced operating income by $48.4 million year over year.
- Backlog was $1.9 billion, down $225.7 million, or 10.6%. Management estimated approximately 70% would be recognized as FY2014 revenue, while cautioning that backlog is not a reliable predictor of earnings.
Fourth-quarter FY2013 revenue was $698.4 million, operating income $40.6 million and net income attributable to Tetra Tech $25.2 million, compared with $719.4 million, $48.5 million and $30.4 million, respectively, in fourth-quarter FY2012.
Outlook, commentary, risks and unusual items
- Management expected international business to grow in FY2014, tempered by anticipated reductions in Eastern Canada and global mining. It expected U.S. commercial growth, slight declines in U.S. federal revenue, and continued growth in state and local government work focused on essential programs. These are management expectations, not guarantees.
- Management cited federal budget uncertainty and sequestration, reduced customer spending, slower mining activity, weak Eastern Canadian conditions and the Quebec corruption investigation as pressures on results and backlog. Oil and gas growth partially offset some declines.
- Other significant risks include project cost overruns—particularly on fixed-price contracts—contract claims and collection uncertainty, client cancellations, government funding and contract-award delays, acquisitions and integration, foreign exchange, and legal, environmental and regulatory exposure.
- Fiscal 2013 included a $3.3 million out-of-period tax adjustment that increased tax expense and the reported net loss. Management said that, had the errors been recorded in their proper periods, FY2013 would have shown net income of $1.1 million; it concluded the errors were not material to FY2013 or prior financial statements.
- Contingencies include Quebec-related proceedings concerning pre-acquisition BPR activities and a securities class action filed against the company and two officers. The filing states that their financial impact was unknown; the company said it intended to defend the securities action.
- The company reported an effective tax rate of 112.0%, primarily due to largely non-deductible goodwill impairment and a valuation allowance. It also reported $25.9 million of unrecognized tax benefits.
- PwC issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of year-end. The board authorized a $100 million share repurchase program; $20.0 million had been repurchased in FY2013. No cash dividend was planned.
Investor verification priorities
- Review the drivers, recoverability and potential for further impairment of the $722.8 million goodwill balance, including the FY2013 $56.6 million charge.
- Assess project claims and receivables: year-end net accounts receivable was $660.8 million, the doubtful-account allowance was $44.6 million, and the company recorded approximately $30.2 million of claim-related losses in FY2013.
- Track backlog conversion, new awards and funding, especially U.S. federal work and the anticipated Eastern Canada and mining reductions.
- Evaluate debt and covenant flexibility, including the $205.0 million term loan, the revolving-credit availability subject to covenants, and the temporary covenant EBITDA add-backs.
- Monitor RCM’s return to profitability, utilization and project execution, along with whether restructuring costs and project charges recur.
- Follow the Quebec-related proceedings, securities litigation, tax audits and the effect of the tax correction and deferred-tax valuation allowance.