Tetra Tech(TTEK) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Q2 2019 interim financials show total assets at $2.10 billion, revenue at $2.27 billion, and net income at $147.1 million, post-ASC 606 adoption Consolidated Balance Sheets As of June 30, 2019, total assets reached $2.10 billion, with liabilities at $1.08 billion, and stockholders' equity at $1.02 billion Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Total current assets | $1,116,474 | $1,050,380 | | Goodwill | $851,621 | $798,820 | | Total assets | $2,096,423 | $1,959,421 | | Total current liabilities | $646,897 | $618,093 | | Long-term debt | $324,074 | $264,712 | | Total liabilities | $1,080,630 | $992,321 | | Total stockholders' equity | $1,015,793 | $967,100 | Consolidated Statements of Income Q3 2019 revenue increased to $825.8 million and net income to $49.2 million, with nine-month revenue at $2.27 billion and net income at $147.1 million Financial Performance Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended July 1, 2018 | Nine Months Ended June 30, 2019 | Nine Months Ended July 1, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $825,793 | $764,795 | $2,265,846 | $2,224,805 | | Gross Profit | $117,987 | $109,594 | $313,141 | $295,165 | | Income from Operations | $64,841 | $55,496 | $168,097 | $146,801 | | Net Income Attributable to Tetra Tech | $49,233 | $33,322 | $147,141 | $108,082 | | Diluted EPS | $0.88 | $0.59 | $2.63 | $1.91 | Consolidated Statements of Cash Flows Nine-month operating cash flow increased to $113.4 million, with $44.7 million used in investing and $47.3 million in financing activities Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended June 30, 2019 | Nine Months Ended July 1, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $113,385 | $76,272 | | Net cash used in investing activities | ($44,657) | ($32,852) | | Net cash used in financing activities | ($47,306) | ($12,818) | | Net increase in cash, cash equivalents and restricted cash | $20,910 | $24,054 | Notes to Consolidated Financial Statements Key notes detail ASC 606 adoption, eGlobalTech acquisition, WYG plc intent, goodwill increase, stock repurchases, dividends, and a 7.1% effective tax rate - The company adopted 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[32][44][57] - As of June 30, 2019, the company had $2.8 billion of Remaining Unsatisfied Performance Obligations (RUPOs), with approximately $1.8 billion expected to be recognized as revenue within the next 12 months[68][69] - In Q2 2019, the company acquired eGlobalTech (EGT) for $48.4 million and announced its intent to acquire WYG plc, funding $55 million to an escrow account[75][78] - The effective tax rate for the first nine months of fiscal 2019 was 7.1%, down from 20.0% in the prior year, due to TCJA and a $22.3 million release of valuation allowances[100][102] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 1.8% revenue increase for the first nine months of fiscal 2019, driven by U.S. state and local government and international markets, with strong liquidity and capital allocation Overview of Results and Business Trends Nine-month revenue grew 1.8%, with U.S. state and local government up 18.2% and international up 12.7%, offsetting declines in federal and commercial sectors Revenue Percentage by Client Sector (Nine Months Ended) | Client Sector | June 30, 2019 | July 1, 2018 | | :--- | :--- | :--- | | U.S. state and local government | 18.8% | 16.2% | | U.S. federal government | 30.2% | 32.3% | | U.S. commercial | 23.6% | 26.8% | | International | 27.4% | 24.7% | - U.S. state and local government revenue increased 18.2% in the first nine months of fiscal 2019, driven by municipal water infrastructure projects and disaster response activities[141] - U.S. federal government revenue decreased 4.5% in the first nine months of fiscal 2019, primarily reflecting disruption from the partial U.S. government shutdown[142] - International revenue grew 12.7% in the first nine months of fiscal 2019, with strong performance in Canada and improved infrastructure work in Australia, New Zealand, and the Asia-Pacific region[144] Results of Operations Q3 2019 consolidated revenue rose 8.0% YoY to $825.8 million, with nine-month net income up 36.1% and adjusted EPS at $2.28, driven by Government Services Group Consolidated Results Summary (Nine Months Ended) | Metric | 2019 (in thousands) | 2018 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $2,265,846 | $2,224,805 | 1.8% | | Income from operations | $168,097 | $146,801 | 14.5% | | Net income attributable to Tetra Tech | $147,141 | $108,082 | 36.1% | | Diluted EPS | $2.63 | $1.91 | 37.7% | Adjusted EPS Reconciliation (Nine Months Ended) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Reported EPS | $2.63 | $1.91 | | Adjustments (RCM, Divestitures, Tax, etc.) | ($0.35) | ($0.02) | | Adjusted EPS | $2.28 | $1.89 | Financial Condition, Liquidity and Capital Resources Primary liquidity sources are $113.4 million cash from operations and a $1 billion credit facility, with $336.5 million outstanding and $353.4 million available - Net cash from operating activities for the first nine months of fiscal 2019 was $113.4 million, a $37.1 million increase from the prior-year period[173] - The company repurchased $75 million of its common stock in the first nine months of fiscal 2019 and has $150 million remaining under its authorization as of June 30, 2019[95][168] - As of June 30, 2019, the company had $336.5 million in outstanding borrowings under its Amended Credit Agreement and was in compliance with all financial covenants[180][182] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on variable-rate debt, mitigated by swaps, and foreign currency risk from international operations, managed by matching revenues and expenses - The company is exposed to interest rate risk on its $336.5 million of borrowings, partially mitigated by interest rate swaps fixing the rate on $250 million of its term loan[198][199] - Foreign currency exchange rate exposure exists as 27.4% of consolidated revenue for the first nine months of fiscal 2019 was international, primarily in Canadian and Australian dollars[200][201] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[203] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company faces various claims, including a False Claims Act complaint against Tetra Tech EC, Inc. related to environmental remediation services, which it vigorously disputes - The U.S. Attorney's Office filed a complaint against subsidiary Tetra Tech EC, Inc. alleging False Claims Act violations and breach of contract for environmental remediation services at the Hunters Point Naval Shipyard[120][206] Item 1A. Risk Factors Key risks include dependence on government funding, cyclical demand, international operations, acquisition integration challenges, and liabilities from legal proceedings and regulations - A substantial portion of revenue (50.6% in Q3 2019) comes from U.S. government agencies, making the company vulnerable to disruptions in government funding and spending priorities[220][221] - International operations (25.8% of Q3 2019 revenue) expose the company to risks such as political instability, currency fluctuations, and complex regulations like the FCPA and UK Bribery Act[215][217] - The company's acquisition strategy involves risks such as the inability to successfully integrate acquired companies, which could disrupt operations and prevent the realization of expected benefits[230][232][233] - As a U.S. government contractor, the company is subject to regular audits and complex procurement laws; violations could result in sanctions, contract termination, and reputational harm[227][228](index=228&type=chunk] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1,255,528 shares for $75.0 million in the first nine months of fiscal 2019 at an average price of $59.74 per share Share Repurchase Activity (Nine Months Ended June 30, 2019) | Metric | Value | | :--- | :--- | | Total Shares Purchased | 1,255,528 | | Average Price Paid per Share | $59.74 | | Total Cost (in millions) | $75.0 | | Remaining Authorization (in millions) | $150.0 |