Tetra Tech(TTEK) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Total assets decreased to $1.83 billion from $1.96 billion, with quarterly revenue at $717.4 million and net income at $42.0 million, impacted by ASC 606 adoption Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 30, 2018 | Sep 30, 2018 | | :--- | :--- | :--- | | Total Assets | $1,834,889 | $1,959,421 | | Cash and cash equivalents | $66,502 | $146,185 | | Goodwill | $782,564 | $798,820 | | Total Liabilities | $880,586 | $992,321 | | Long-term debt (incl. current) | $260,154 | $277,311 | | Total Stockholders' Equity | $954,303 | $967,100 | Consolidated Statement of Income Highlights (in thousands, except per share data) | Metric | Q1 FY2019 (ended Dec 30, 2018) | Q1 FY2018 (ended Dec 31, 2017) | | :--- | :--- | :--- | | Revenue | $717,431 | $759,749 | | Gross Profit | $98,684 | $94,145 | | Income from Operations | $55,711 | $48,589 | | Net Income attributable to Tetra Tech | $41,997 | $46,034 | | Diluted EPS | $0.75 | $0.81 | Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Q1 FY2019 (ended Dec 30, 2018) | Q1 FY2018 (ended Dec 31, 2017) | | :--- | :--- | :--- | | Net cash used in operating activities | ($15,302) | ($57,682) | | Net cash used in investing activities | ($3,738) | ($19,727) | | Net cash (used in) provided by financing activities | ($59,021) | $61,183 | | Net decrease in cash | ($79,687) | ($16,951) | - The company adopted the new revenue recognition standard ASC 606 on October 1, 2018, using the modified retrospective method, resulting in a cumulative effect adjustment that decreased retained earnings by $2.8 million[24][37][51] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 FY2019 revenue decreased 5.6% due to lower disaster response, while international revenue grew 19.2%, and adjusted operating income increased 12.0%, maintaining strong liquidity Q1 FY2019 vs Q1 FY2018 Performance Summary (in thousands) | Metric | Q1 FY2019 | Q1 FY2018 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $717,431 | $759,749 | (5.6)% | | Revenue, net of subcontractor costs | $553,364 | $544,847 | 1.6% | | Income from Operations | $55,711 | $48,589 | 14.7% | | Net Income attributable to Tetra Tech | $41,997 | $46,034 | (8.8)% | - Excluding contributions from the NDY acquisition and the impact of the divestiture of non-core utility field services, revenue decreased 6.0% in Q1 FY2019 compared to the prior-year quarter[134] - The decrease in U.S. state and local government revenue (down 18.8%) was attributed to a reduction in disaster response work compared to the high activity levels in Q1 FY2018 following hurricanes and fires[135] - International revenue grew 19.2%, or 6.1% excluding the NDY acquisition, driven by increased activity in Canada and infrastructure work in Australia, New Zealand, and the Asia-Pacific region[139] Adjusted (Non-GAAP) Performance | Metric | Q1 FY2019 | Q1 FY2018 | Change (%) | | :--- | :--- | :--- | :--- | | Adjusted Revenue | $715,978 | $752,942 | (4.9)% | | Adjusted Income from Operations | $55,707 | $49,747 | 12.0% | | Adjusted EPS | $0.70 | $0.65 | 7.7% | Segment Results of Operations GSG revenue declined 7.0% due to reduced disaster recovery, while CIG revenue net of subcontractor costs increased 6.8%, boosting operating income 27.3% Government Services Group (GSG) Performance (in thousands) | Metric | Q1 FY2019 | Q1 FY2018 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $411,971 | $442,772 | (7.0)% | | Revenue, net of subcontractor costs | $303,281 | $309,966 | (2.2)% | | Income from Operations | $37,413 | $39,125 | (4.4)% | Commercial/International Services Group (CIG) Performance (in thousands) | Metric | Q1 FY2019 | Q1 FY2018 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $317,793 | $331,513 | (4.1)% | | Revenue, net of subcontractor costs | $249,506 | $233,729 | 6.8% | | Income from Operations | $27,099 | $21,294 | 27.3% | - CIG's operating margin, based on revenue net of subcontractor costs, improved to 10.9% in Q1 FY2019 from 9.1% in the prior year, reflecting improvements in Western Canadian operations[149] Financial Condition, Liquidity and Capital Resources Liquidity is supported by cash from operations and a $1 billion credit facility, with $66.5 million cash and a new $200 million stock repurchase program authorized - On November 5, 2018, the Board authorized a new stock repurchase program for up to $200 million, in addition to the $25 million remaining under the previous program[154] - As of December 30, 2018, the company had $260.0 million in outstanding borrowings under its Amended Credit Agreement and $439.1 million of available credit[163][164] - The company was in compliance with its debt covenants, with a consolidated leverage ratio of 1.11x (max 3.00x) and an interest coverage ratio of 15.9x (min 3.00x)[166] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk on its variable-rate credit agreement with $250 million in swaps and mitigates foreign currency exposure, primarily CAD and AUD, by matching revenues and expenses - The company is exposed to interest rate risk under its Amended Credit Agreement, with borrowings outstanding at December 30, 2018, totaling $260.0 million[178] - To manage interest rate risk, the company entered into five interest rate swaps to fix the variable rate on its $250 million Amended Term Loan Facility[179] - The company is subject to foreign currency transaction and translation risk, primarily related to the Canadian and Australian dollar, with 27.4% of consolidated revenue generated by the international business for Q1 FY2019[177][181] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of December 30, 2018, with no material changes to internal control over financial reporting - The principal executive officer and principal financial officer concluded that as of the end of the period, the company's disclosure controls and procedures were effective[183] - No changes occurred during the quarter ended December 30, 2018, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[184] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company faces legal proceedings, including False Claims Act allegations against its subsidiary TtEC regarding environmental remediation at Hunters Point Naval Shipyard - On January 14, 2019, the U.S. Attorney's Office filed complaints in intervention in three qui tam actions against subsidiary Tetra Tech EC, Inc. ("TtEC")[186] - The complaints allege False Claims Act violations and breach of contract related to environmental remediation services at the former Hunters Point Naval Shipyard in San Francisco, with the company currently unable to determine the outcome or potential loss[186] Item 1A. Risk Factors Risks include global economic uncertainty, reliance on U.S. government contracts, international operational challenges, acquisition integration, goodwill impairment, and compliance with complex regulations - A substantial amount of revenue (48.5% in Q1 FY2019) is derived from U.S. federal, state, and local government agencies, making the business vulnerable to disruptions in government funding, budget cuts, or shutdowns[200][201] - International operations (27.4% of revenue in Q1 FY2019) expose the company to risks such as currency fluctuations, political instability, and compliance with laws like the FCPA and U.K. Bribery Act[196][217] - Acquisitions are a key growth strategy but involve risks such as integration difficulties, potential goodwill impairment ($782.6 million as of Dec 30, 2018), and assumption of undisclosed liabilities[210][216] - The company faces risks from fixed-price contracts, where cost overruns can reduce or eliminate profitability, and the potential for inaccurate cost and revenue estimates under the percentage-of-completion accounting method[230][231] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds A new $200 million stock repurchase program was authorized, with 430,559 shares repurchased for $25.0 million in Q1 FY2019 - A new stock repurchase program of up to $200 million was authorized on November 5, 2018[269] Share Repurchase Activity (Q1 FY2019) | Period | Total Shares Purchased | Average Price Paid per Share | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | Oct 1 - Oct 28, 2018 | 0 | $— | $0 | | Oct 29 - Nov 25, 2018 | 85,938 | $65.97 | $5.7M | | Nov 26 - Dec 30, 2018 | 344,621 | $56.09 | $19.3M | | Total Q1 FY2019 | 430,559 | $58.06 | $25.0M | Item 4. Mine Safety Disclosure The company provides mine safety disclosures as required by the Dodd-Frank Act, with violation information detailed in Exhibit 95 - The company may act as a mining operator under the Mine Act when performing services at a mine and is required to disclose safety violations[272] - Information concerning mine safety violations as required by the Dodd-Frank Act is included in Exhibit 95[272] Item 6. Exhibits This section lists key exhibits to the Form 10-Q, including CEO/CFO certifications, Mine Safety Disclosure, and XBRL financial statements - Lists key exhibits filed with the report, including CEO/CFO certifications, Mine Safety Disclosure, and XBRL data[273]