Tetra Tech, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. The filing covers the fiscal quarter and nine months ended June 30, 2013; comparative periods ended July 1, 2012. Tetra Tech provides consulting, engineering, program management, construction management, construction and technical services focused on water, environment, energy, infrastructure and natural resources. Its three reportable segments are Engineering and Consulting Services (ECS), Technical Support Services (TSS), and Remediation and Construction Management (RCM). The company reorganized in fiscal Q1 2013, eliminating its EAS segment and reallocating its activities to ECS and TSS.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $614.8 million | $684.7 million | $1,915.4 million | $1,991.7 million |
| Revenue, net of subcontractor costs (non-GAAP) | $475.1 million | $516.9 million | $1,493.3 million | $1,485.8 million |
| Operating income (loss) | $(99.9) million | $46.3 million | $(20.4) million | $117.9 million |
| Net income (loss) attributable to Tetra Tech | $(78.4) million | $29.1 million | $(27.3) million | $73.9 million |
| Diluted EPS | $(1.21) | $0.45 | $(0.42) | $1.16 |
| Cash from operating activities | Not separately stated for the quarter | $115.3 million | $128.2 million |
Q3 revenue declined 10.2% year over year; nine-month revenue declined 3.8%. Nine-month revenue net of subcontractor costs increased 0.5%. Nine-month EBITDA, a non-GAAP measure, was $25.8 million versus $159.4 million. Excluding the $56.6 million goodwill impairment, the company reported Q3 operating loss of $43.3 million and nine-month operating income of $36.2 million.
Balance sheet, liquidity and capital
- At June 30, 2013, cash and cash equivalents were $146.3 million; current assets were $850.6 million and current liabilities were $462.2 million.
- Balance-sheet debt was $212.4 million, including $4.0 million current and $208.4 million long-term. Credit-agreement borrowings were $209.8 million, at a 1.93% weighted-average rate.
- The amended $665 million senior secured credit facility comprises a $205 million term loan and a $460 million revolving facility, maturing May 2018. The company reported $441.6 million of revolver availability, but only $97.5 million was borrowable without violating covenants; it was seeking covenant amendments to access more.
- At quarter-end, the company reported covenant compliance: leverage ratio 1.91x against a 2.50x maximum and fixed-charge coverage 1.41x against a 1.25x minimum. Management said cash, operating cash flow and available borrowing should meet capital requirements for at least 12 months.
- Nine-month investing cash outflow was $187.2 million, including $168.7 million net cash paid for acquisitions and $20.5 million of capital expenditures. Financing cash inflow was $115.7 million. The company authorized up to $100 million of share repurchases and had repurchased 175,700 shares for $4.1 million.
Material changes and operating drivers
- A $56.6 million non-cash goodwill impairment charge ($48.1 million after tax) related to three ECS reporting units: Tetra Tech Canada, Global Mining Practice and AMT. The company cited weaker Eastern Canadian activity, a mining-sector slowdown, and, to a lesser extent, U.S. federal budget constraints.
- Project charges on four programs reduced Q3 revenue by $29.6 million and operating income by $35.5 million. The charges reflected claims and receivable collectability issues on three government programs and a commercial development project. The company also recognized approximately $17 million in losses related to evaluating claims during the quarter and first nine months.
- Lower Eastern Canada and global mining activity reduced Q3 revenue by $37.5 million and operating income by $28.2 million compared with the prior-year quarter. Right-sizing included staff reductions, office closures and severance; management said these costs were not expected to recur at the same level, though lower revenue was expected to continue near term.
- U.S. federal revenue fell amid funding uncertainty and sequestration. State and local government activity and acquisitions partly offset declines. RCM revenue grew 5.7% in Q3 and 15.6% year to date, largely reflecting acquisitions, but the segment recorded operating losses after project charges and lower utilization. ECS and TSS revenue fell 15.4% and 14.4%, respectively, in Q3.
- Fiscal 2013 acquisitions had aggregate fair-value purchase prices of $244.4 million, including AEG and Parkland. Acquisition-related goodwill and intangible assets increased, while foreign-currency translation reduced equity by $40.2 million year to date.
Outlook, risks and contingencies
- No quantified consolidated earnings or revenue guidance is stated in the provided filing text. Management expected international growth and fiscal 2013 growth in U.S. commercial and state/local government work, while anticipating reductions in Eastern Canada and mining and remaining cautious about U.S. federal demand. It cited potential growth in energy-focused commercial work and essential state/local programs.
- Key risks include U.S. federal sequestration and delayed appropriations, weak or volatile economic conditions, commodity-price-driven mining declines, Quebec procurement disruption, project execution and fixed-price contract risks, and the collectability of unbilled receivables and claims.
- Goodwill impairment could recur if adverse conditions persist. The company recorded $37 million of unbilled claims at June 30, 2013, compared with $21 million at September 30, 2012; it had recognized approximately $17 million of claim-related losses in fiscal 2013.
- Legal matters include corruption-related allegations involving pre-acquisition BPR activities in Quebec and France, a Montreal class action, and a U.S. securities class action filed against Tetra Tech and two officers alleging failures to record necessary charges and misleading guidance. The company said the financial impact was unknown; it considered the securities complaint without merit and intended to defend it vigorously.
- Other unusual items included $6.5 million of lease exit and related asset impairment costs. The nine-month effective tax rate was negative 4.3%, primarily because the goodwill impairment was not tax deductible and the company recorded a deferred-tax valuation allowance.
Important facts for investors to verify
- Whether the claim and project-related receivables are ultimately collected or resolved, and whether further charges are required.
- Whether Eastern Canada and mining demand stabilize, and whether additional goodwill impairment or restructuring costs arise.
- Whether federal budget conditions and sequestration continue to delay or reduce contract funding and awards.
- Whether the company obtains covenant amendments that expand practical access to its revolving credit facility, and whether it remains compliant with debt covenants.
- Developments and potential financial exposure from the BPR-related proceedings and the securities class action.
- Whether management’s stated expectations for international, U.S. commercial and state/local growth are achieved despite near-term weakness in other operations.