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Tetra Tech (TTEK) Tops Q2 Earnings Estimates, Ups FY19 View

Zacks Equity Research

Tetra Tech, Inc. TTEK kept its earnings streak alive in the second quarter of fiscal 2019 (ended Mar 31, 2019), with earnings surpassing estimates by 9.4%. Also, the quarter’s adjusted net sales surpassed estimates by 6.7%.

The company’s adjusted earnings per share in the reported quarter were 70 cents, surpassing the Zacks Consensus Estimate of 64 cents. Also, the bottom line increased 29.6% from the year-ago quarter’s 54 cents on the back of strengthening businesses related to sustainable infrastructure, water and renewable energy.

Backlog Solid, Revenues Up Y/Y

In the reported quarter, Tetra Tech generated adjusted revenues of $727.4 million, reflecting year-over-year growth of 3.2%. Alternatively, adjusted net revenues (adjusted revenues minus subcontractor costs) were $590.1 million, reflecting growth of 10.8% from the year-ago quarter.

Further, the top line surpassed the Zacks Consensus Estimate of $553.3 million.

Backlog at the end of the quarter was $2,814 million, reflecting growth of 12% from the year-ago figure.

Based on customers, revenues from the U.S. Federal (accounted for 28% of the quarter’s revenues) were flat year over year or grew 9%, excluding adverse impacts of partial shutdown of the government. Conversely, the U.S. Commercial sales (24% of the quarter’s revenues) grew 5% year over year, and the U.S. State and Local sales (17% of the quarter’s revenues) increased 39%. International sales (31% of the quarter’s revenues) increased 23% on account of growth in infrastructure, and oil & gas programs.

The company reports revenues under the segments discussed below:

Net sales of Government Services Group were $316 million, up 8.8% year over year. This improvement was driven by healthy growth in disaster response and recovery planning as well as municipal water infrastructure businesses.

Revenues from Commercial / International Services Group totaled $274.1 million, reflecting year-over-year growth of 13.3%. Results were driven by healthy growth in oil & gas business in Canada, and the U.S. environmental business.

Margins Improve

In the reported quarter, Tetra Tech’s subcontractor costs totaled $137.2 million, reflecting a decline of 17.6% from the year-ago quarter. Other costs of revenues were $488.9 million, up 10.8% year over year. Selling, general and administrative expenses were $47.9 million, up 2.4% year over year.

Adjusted operating income in the reported quarter increased 20.8% year over year to $54.5 million while adjusted margin improved 70 basis points to 9.2%.

Balance Sheet and Cash Flow

Exiting the fiscal second quarter, Tetra Tech had cash and cash equivalents of $130.7 million, up 96.6% from $66.5 million recorded at the end of the last reported quarter. Long-term debt was down 6.6% sequentially at $231.3 million.

In the first half of fiscal 2019, the company generated net cash of $99.2 million from operating activities, significantly above $23.6 million generated in the year-ago comparable period. Capital expenditure was $7.2 million, up from $4.6 million in the first half of fiscal 2018.

During the first half, the company bought back shares worth $50 million and distributed dividends totaling $13.3 million. It had $175 million authorization left under the share buyback program at the end of the fiscal second quarter.

A couple of days before the earnings release, the company’s board of directors authorized a 25% hike in the quarterly dividend rate, which now stands at 15 cents versus the earlier 12 cents. The revised quarterly dividend will be paid to shareholders of record as of May 15. The payment will be made on May 31.

Outlook

Tetra Tech stands to gain from healthy demand for sustainable infrastructure, increased federal spending, municipal water infrastructure, disaster recovery planning and others. Also, the company noted that the acquisition of eGlobalTech (in March 2019) is predicted to solidify its business from government and commercial customers. The company will integrate eGlobalTech with its Government Services Group.

For the fiscal third quarter (ending June 2019), net revenues are anticipated to be $575-$625 million and earnings per share are likely to be 75-80 cents.

For fiscal 2019 (ending September 2019), the company anticipates net revenues of $2.3-$2.4 billion versus the previously stated $2.2-$2.4 billion. Sales are projected to grow 5% (versus the earlier 2%) from the U.S. Federal, 5% from the U.S. Commercial, 15% (versus the earlier 10%) from the U.S. State and Local, and 10% from International customers.

Earnings per share for the year will likely be $2.95-$3.05, up from $2.80-$2.95 stated earlier. Effective tax rate in the year is anticipated to be 24%.

Tetra Tech, Inc. Price, Consensus and EPS Surprise

 

Tetra Tech, Inc. Price, Consensus and EPS Surprise | Tetra Tech, Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of approximately $3.6 billion, Tetra Tech currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Industrial Products sector are DXP Enterprises, Inc. DXPE, Roper Technologies, Inc. ROP and Dover Corporation DOV. While both DXP Enterprises and Roper currently sport a Zacks Rank #1 (Strong Buy), Dover carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for all the three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 46.55% for DXP Enterprises, 8.43% for Roper and 8.61% for Dover.
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