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Tetra Tech (TTEK) Posts In-Line Q3 Earnings, Sales Up Y/Y

In its third quarter fiscal 2016 results, Tetra Tech Inc. TTEK reported adjusted earnings from ongoing operations of 50 cents, in line with the Zacks Consensus Estimate.

 

The technical services company fared better in year over year comparison, with adjusted earnings reflecting an impressive growth of 16% relative to the prior-year quarter’s tally of 43 cents. The company’s earnings benefited from a strong top line growth and operating efficiency, coupled with cost-management initiatives.

Inside the Headlines

Net revenues rose an impressive 11% year over year to $498.6 million, beating the Zacks Consensus Estimate of $496 million by a whisker. Moreover, the company’s ongoing revenues grew 19% year over year on the back of strong growth in U.S. federal government and state and local projects.

The top line was driven by the expansion of U.S. Federal, municipal and international development projects. On a constant currency basis, the revenues were up 19%.

Revenues improved on the back of strong performance in Resource Management and Energy segment, while the top line was constrained by lackluster growth in Water, Environment and Infrastructure segments.

Water, Environment and Infrastructure continued to show weakness, as its net revenue fell 1.5% year over year to $191.3 million. However, net revenue from Resource Management and Energy continued to demonstrate robust momentum, rising 37.3% year over year to $304.9 million.

Further, RCM segment’s net revenues dropped to $2.4 million from $5.8 million in the year-ago quarter. In 2014, faced with persistent sluggishness arising from unfavorable conditions in the construction market, Tetra Tech had announced a strategic operational review of its RCM segment. Post restructuring, RCM was to merge with the other two businesses, namely, the Engineering and Consulting Services, and the Technical Support Services. The RCM segment is now not part of the company’s ongoing operations.

In the quarter under review, total backlog from ongoing operations reached a record high of $2.3 billion, a remarkable jump of 21% year over year, driven by a number of single-award contracts from USAID and DoD. Also, ongoing operating income increased 8% year over year to $44 million.

Liquidity & Cash Flow

At quarter-end, Tetra Tech’s cash and cash equivalents were $153.9 million, down from $175.2 million a year ago. Long-term debt was $349.2 million, substantially up from $181 million as of Sep 27, 2015.

For the nine months ended Jun 26, 2016, the company’s cash generated from operations plunged 33% year over year to $89.8 million.

Tetra Tech is strongly committed toward rewarding its shareholders through dividends and share buyback programs. Previously, the company had launched a repurchase program with a gross value of $200 million. At the end of the quarter, the company had $25 million remaining under this program.

Acquisition Update

Last year, Tetra Tech had announced its plans to acquire Coffey International Limited, an Australia-based multi-disciplined consulting firm. The buyout offer was administered through Bid Implementation Agreement.

On Jan 18, 2016, Coffey, which had reported revenues of approximately $400 million for fiscal 2015, was finally absorbed into Tetra Tech. Tetra Tech believes this acquisition will help it grow its footprint in the Australian and Asia-Pacific regions, as well as boost growth in its international development business.Coffey’s margins have already doubled from 4% to 8% since the acquisition.

Additionally, in the last quarter, Tetra Tech acquired INDUS Corporation, a Vienna, Virginia-based IT Solutions firm. INDUS is focused on data analytics, secure infrastructure, geospatial analysis, and software applications management for the U.S. federal government. Given that the acquisition will bring considerable federal contracts from the IT sector to Tetra Tech, it’s expected that this will fortify its presence in the IT space. Also, their combined capabilities will enable them to help clients in managing huge data repositories, while allowing Tetra Tech to expand its smart water services.

Outlook

Concurrent with the quarterly earnings release, the company provided guidance for fourth-quarter fiscal 2016 earnings, which is expected in a range of 55–60 cents. Net revenues for fourth-quarter 2016 are projected within $500–$550 million.

For fiscal 2016, the company expects earnings per share in a range of $1.85–$1.90 on revenues in a range of $1.9–$2 billion.

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To Conclude

Going forward, we believe Tetra Tech has a solid base for future growth given its advantages, some of which are its robust backlog levels, plus a robust pipeline with major government organizations like the U.S. Department of State, U.S. Army Corp. of Engineers and U.S. Air Force awarding it billion-dollar deals. Tetra Tech’s recent acquisitions have also unlocked new growth opportunities for it to explore.

As a matter of fact, the Coffey acquisition uncovers lucrative prospects for the company in Water, Environment, Oil & Gas and International development markets. The company has already started to realize the synergies of their combined platforms, especially in international development. Tetra Tech can now work across multiple international development funding agencies like USAID, UKAID and Australian Aid, whose combined annual budget is over $90 billion. Its recent Indus buyout will stretch its smart water and federal IT growth strategies further.

Moreover, from now on, Tetra Tech plans to enhance investment in the Engineering and Consulting Services in both Australia and Asia-Pacific regions. Some time before, the company had declared that it anticipates approximately $100 billion of investment in the infrastructure market of Australia through a combination of federal and private investments. This bodes well for the company in the long term.

However, adverse impact of currency translation, softness in the mining business and volatility in oil & gas prices remain formidable headwinds for this Zacks Rank #4 (Sell) stock’s financials.

Some better-ranked stocks in the broader sector include Worthington Industries, Inc. WOR, Global Brass and Copper Holdings, Inc. BRSS and Norsk Hydro ASA NHYDY, each carrying a Zacks Rank #2 (Buy).

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