Tetra Tech, Inc. — FY2017 Form 10-K
Business context and reporting period. Tetra Tech provides consulting and engineering services focused on water, environment, infrastructure, resource management, energy, and international development. The fiscal year ended October 1, 2017, comprised 52 weeks; comparisons are with the 53-week fiscal 2016. This is an annual filing, not a standalone fourth-quarter report. Fiscal 2017 operations were reported in Water, Environment and Infrastructure (WEI), Resource Management and Energy (RME), and the wind-down Remediation and Construction Management (RCM) segment.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $2.753 billion | $2.583 billion |
| Gross profit | $353.6 million | $330.2 million |
| Operating income | $183.3 million | $135.9 million |
| Net income attributable to Tetra Tech | $117.9 million | $83.8 million |
| Diluted EPS | $2.04 | $1.42 |
| Cash from operating activities | $138.0 million | $142.0 million |
| Cash and cash equivalents at year-end | $190.0 million | $160.5 million |
| Long-term debt, net of current portion | $341.3 million | $331.5 million |
Revenue increased 6.6%; reported operating income rose 35.0% and net income 40.7%. Gross, operating, and net margins were approximately 12.9%, 6.7%, and 4.3%, respectively. Operating cash flow was lower year over year, partly reflecting $21.5 million of tax payments related to prior-period examinations and the timing of collections. The company repurchased $100.0 million of shares and paid $21.7 million in dividends. Total borrowings were $356.4 million; net of cash, debt was approximately $166.5 million. The current ratio was approximately 1.9. The company reported $264 million of available revolving credit and compliance with its debt covenants.
Fourth quarter: Revenue was $735.2 million, operating income $54.6 million, net income attributable to Tetra Tech $34.5 million, and diluted EPS $0.60. In the prior-year fourth quarter, the corresponding figures were $728.5 million, $47.2 million, $31.1 million, and $0.53.
Material changes versus the prior comparable period
- Growth reflected first-half comparisons for Coffey and INDUS, acquired in fiscal 2016. Excluding their first-half contributions, ongoing revenue grew 3.5%; ongoing revenue net of subcontractor costs grew 2.1%.
- WEI revenue rose 11.5% and operating income 22.8%, supported by U.S. state and local infrastructure work and improved resource utilization. Its operating margin on revenue net of subcontractor costs increased to 13.9% from 12.7%.
- RME revenue increased 6.2%, but revenue net of subcontractor costs rose only 2.5% and operating income declined 1.0%. Excluding Coffey’s first-half contribution, RME revenue and revenue net of subcontractor costs fell, largely because of weaker North American oil and gas activity, particularly in Canada.
- RCM revenue fell 65.1% as the company continued exiting non-core construction work; the segment recorded a $14.7 million operating loss, versus an $11.8 million loss in FY2016.
- Reported growth in operating income and EPS benefited from the absence of FY2016 Coffey acquisition and integration costs and debt prepayment fees, as well as a $6.9 million FY2017 gain from contingent consideration fair-value adjustments. Management’s non-GAAP ongoing EPS was $2.13, up 13.3% from $1.88.
Outlook, commentary, risks, and unusual items
- Management expected U.S. state and local government business to continue growing and U.S. federal revenue to grow in FY2018; it anticipated modest growth in U.S. commercial revenue and stable international revenue. No specific consolidated FY2018 revenue or earnings guidance is provided in the supplied filing text.
- Backlog was $2.5 billion, up 6.8% year over year; management estimated about 70% would be recognized as FY2018 revenue. Backlog is funded and authorized work but can be cancelled or adjusted and is not a reliable measure of future earnings.
- Beginning in FY2018, the company reorganized its operations into Government Services Group and Commercial/International Services Group, while continuing to report the RCM wind-down separately.
- Key risks include dependence on government budgets and contract awards, termination or delays of government contracts, competition and pricing pressure, oil and gas and mining cycles, international and currency exposure, fixed-price project overruns, collection and claims risk, acquisition integration, and potential environmental, professional-liability, cybersecurity, and regulatory exposures.
- Accounts receivable included approximately $59 million related to claims and requests for equitable adjustment, up from $45 million. The company cautioned that delayed recovery could affect liquidity and profitability. FY2017 also included $8.0 million of net unfavorable operating-income adjustments from contract estimate revisions and an $8.1 million liability for anticipated contract losses.
- Other notable items: a $4.9 million income-tax benefit from share-based payment accounting; approximately $21.5 million of cash tax payments related to examinations; and a $6.9 million contingent earn-out valuation gain, including the write-down of INDUS’s earn-out liability to zero. The company reported no goodwill impairment in FY2017. After year-end, it acquired Glumac on October 2, 2017.
Most important facts for investors to verify
- Whether backlog converts to revenue and profit as projected, particularly the estimated FY2018 conversion and the remaining RCM work.
- Underlying organic growth and margins after separating Coffey and INDUS acquisition contributions, subcontractor pass-through revenue, and one-time or non-cash items.
- Collectability and timing of the $59 million in claims-related receivables, and exposure to further contract losses or estimate revisions.
- Cash conversion, working-capital requirements, and the effect of continued share repurchases, dividends, acquisitions, and debt service on liquidity.
- Developments in U.S. government funding and procurement, Canadian oil and gas activity, international markets, and the integration and performance of acquired businesses.