Tetra Tech(TTEK) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements for Q1 2019 are presented, detailing financial position, performance, and cash flows, highlighting the adoption of ASC 606 and its impact on retained earnings Consolidated Balance Sheet Highlights | | March 31, 2019 (in thousands) | September 30, 2018 (in thousands) | | :--- | :--- | :--- | | Total current assets | $998,420 | $1,050,380 | | Total assets | $1,951,865 | $1,959,421 | | Total current liabilities | $624,442 | $618,093 | | Total liabilities | $961,260 | $992,321 | | Total stockholders' equity | $990,605 | $967,100 | Consolidated Statements of Income Highlights | | Three Months Ended Mar 31, 2019 (in thousands) | Six Months Ended Mar 31, 2019 (in thousands) | | :--- | :--- | :--- | | Revenue | $722,621 | $1,440,052 | | Gross profit | $96,471 | $195,155 | | Income from operations | $47,545 | $103,256 | | Net income attributable to Tetra Tech | $55,911 | $97,907 | | Diluted EPS | $1.00 | $1.74 | Consolidated Statements of Cash Flows Highlights | | Six Months Ended Mar 31, 2019 (in thousands) | Six Months Ended Apr 1, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $99,248 | $23,593 | | Net cash used in investing activities | ($3,383) | ($67,365) | | Net cash (used in) provided by financing activities | ($110,680) | $59,017 | - The company adopted the new revenue recognition standard ASC 606 on October 1, 2018, using the modified retrospective method, which resulted in a cumulative effect adjustment that decreased retained earnings by $2.8 million[32][57] - As of March 31, 2019, the company had Remaining Unsatisfied Performance Obligations (RUPOs) of $2.8 billion, with approximately $1.8 billion expected to be recognized as revenue within the next 12 months[68][69] - In the second quarter of fiscal 2019, the company acquired eGlobalTech (eGT) for a fair value purchase price of $48.4 million, which included a $24.7 million promissory note and $21.1 million in estimated contingent earn-out obligations[75] - A subsidiary, Tetra Tech EC, Inc. (TtEC), is involved in a False Claims Act lawsuit filed by the U.S. Attorney's Office concerning environmental remediation services at the former Hunters Point Naval Shipyard, but the company disputes the claims and is currently unable to determine the range of possible loss[121] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for Q2 and H1 fiscal 2019, covering revenue trends, segment performance, liquidity, and the impact of the new ASC 606 revenue standard Financial Performance Highlights | Metric | Q2 2019 | Q2 2018 | % Change | H1 2019 | H1 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $722.6M | $700.3M | 3.2% | $1,440.1M | $1,460.0M | (1.4)% | | Revenue, net of subcontractor costs | $585.4M | $532.8M | 9.9% | $1,138.7M | $1,077.6M | 5.7% | | Income from operations | $47.5M | $42.7M | 11.3% | $103.3M | $91.3M | 13.1% | | Diluted EPS | $1.00 | $0.51 | 96.1% | $1.74 | $1.32 | 31.8% | | Adjusted EPS | $0.70 | $0.54 | 29.6% | $1.40 | $1.18 | 18.6% | - Revenue from U.S. federal government clients decreased by 6.8% in the first half of fiscal 2019, primarily due to the thirty-day partial U.S. government shutdown that began in late December 2018[143] - International revenue grew 18.6% in H1 2019, driven by increased activity in Canada and contributions from the NDY acquisition, while U.S. state and local government revenue, excluding the RCM segment, grew 3.0% from municipal water infrastructure work[142][145] - The company's cash and cash equivalents decreased by $15.5 million to $130.7 million as of March 31, 2019, compared to the fiscal 2018 year-end, primarily due to financing and investing activities like debt repayment and share repurchases[171] - As of March 31, 2019, the company had $243.8 million in outstanding borrowings under its Amended Credit Agreement and $449.1 million of available credit, and was in compliance with all debt covenants[178][180] - The effective tax rate for H1 2019 was (0.8)% compared to 11.0% for H1 2018, favorably impacted by a $2.6 million deferred tax benefit from finalizing the TCJA analysis and a $22.3 million release of valuation allowances in Australia[155][156] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to financial market risks, primarily interest rate fluctuations on variable-rate debt and foreign currency exchange rate volatility - The company is exposed to interest rate risk through its Amended Credit Agreement, and to mitigate this, it entered into interest rate swaps to fix the rate on $250 million of its term loan[196][197] - The company is subject to foreign currency risk, primarily from the Canadian and Australian dollars, with 28.3% of revenue from international business in H1 2019, and foreign currency translation resulted in a $14.1 million decrease in equity during this period[198][199] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[201] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, internal controls[202] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is subject to ordinary course claims and lawsuits, with a significant False Claims Act lawsuit against subsidiary TtEC regarding environmental remediation services - The company is subject to typical industry claims and lawsuits, primarily for professional errors or omissions, and maintains professional liability insurance to cover such claims[203] - On January 14, 2019, the U.S. Attorney's Office filed complaints against subsidiary TtEC, alleging False Claims Act violations related to environmental remediation contracts at the former Hunters Point Naval Shipyard in San Francisco[205] - TtEC disputes the claims and intends to defend the matter vigorously, but the company is currently unable to determine the probability of the outcome or estimate a range of reasonably possible loss[205] Item 1A. Risk Factors This section details numerous risks that could materially affect the company's operations and financial results, including dependence on government funding, cyclical demand, international operations, and cybersecurity threats - A substantial portion of revenue (47.9% in Q2 2019) is derived from U.S. government agencies, making the company vulnerable to budget disruptions, sequestration, government shutdowns, and changes in spending priorities[219][220] - Demand for services in the oil & gas and mining sectors is cyclical and vulnerable to economic downturns and commodity price volatility, which could lead to project cancellations and reduced revenue[212][214] - International operations (29.1% of Q2 2019 revenue) expose the company to risks such as currency fluctuations, political instability, uncertain tax rules, and compliance with anti-corruption laws like the FCPA[215][217] - The company's growth strategy involves acquisitions, which carry risks such as integration difficulties, diversion of management attention, assumption of undisclosed liabilities, and failure to realize expected synergies[229][231] - As a U.S. government contractor, the company must comply with complex procurement laws (e.g., FAR, CAS), and non-compliance could result in sanctions, contract termination, and reputational harm[226] - Cybersecurity breaches pose a significant threat, with potential for unauthorized access to proprietary and client information, which could lead to operational disruptions, financial loss, and reputational damage[258] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activities, including a new $200 million program authorized in November 2018 and shares repurchased in H1 fiscal 2019 - On November 5, 2018, the Board of Directors authorized a new stock repurchase program for up to $200 million of common stock[287] Stock Repurchase Program Summary | Period | Total Shares Purchased | Average Price Paid per Share | Total Cost (in millions) | | :--- | :--- | :--- | :--- | | H1 FY 2019 | 879,614 | $56.84 | $50.0 | Item 4. Mine Safety Disclosure Information concerning mine safety violations and orders issued under the Mine Act by MSHA is provided in Exhibit 95, as required by the Dodd-Frank Act - Information concerning mine safety violations required by Section 1503 of the Dodd-Frank Act is included in Exhibit 95[289] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q report, including CEO/CFO certifications, the Mine Safety Disclosure, and XBRL formatted financial data - The exhibits filed with this report include: - CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) - Mine Safety Disclosure (Exhibit 95) - XBRL formatted financial data (Exhibit 101)[290]