Tetra Tech Reports Third Quarter 2018 Results

Tetra Tech, Inc. (NASDAQ: TTEK) today announced results for the third quarter ended July 1, 2018.

Third Quarter Results

For the third quarter, Tetra Tech achieved quarterly record high results for revenue and earnings. Revenue in the third quarter totaled $765 million, up 12% year-over-year. For ongoing¹ operations, revenue totaled $761 million, and revenue, net of subcontractor costs² (net revenue), was $569 million, up 12% and 14%, respectively, year-over year. Operating income for the third quarter was $55 million, and on an ongoing basis totaled $60 million, up 26% year-over-year. EPS was $0.59 on a GAAP basis. Excluding a non-cash charge for the divestiture of non-core assets, ongoing EPS totaled $0.71, up 34% year-over-year. Backlog at the end of the quarter was $2.4 billion.

Nine-Month Results

Revenue for the nine-month period was $2.2 billion and net revenue was $1.6 billion, both up 10%, compared to the same period in fiscal 2017. Operating income for the nine-month period was $147 million and EPS was $1.91, up 14% and 33%, respectively, from the same period in fiscal 2017. On an ongoing basis, EPS totaled $1.89, up 26% year-over-year.

Comments on Results

Tetra Tech’s Chairman and CEO, Dan Batrack, commented, “Tetra Tech generated record third quarter results, exceeding the high end of our guidance range for both net revenue and earnings. We continue to see momentum in our broad-based growth, led by work for U.S. state and local clients, which has increased organically at a double-digit rate for eight consecutive quarters, including 26% growth in the third quarter. Our other key end-markets, including U.S. Federal, Commercial, and International, grew 10% or more. Given the strength of our results and outlook, we are increasing our guidance for both EPS and net revenue for fiscal 2018.”

Amended Credit Facility, Quarterly Dividend, and Share Repurchase Program

Tetra Tech amended and restated its credit agreement on July 30, 2018. This agreement increases the total borrowing capacity to $1 billion and extends the maturity date to July 2023. Additionally, the agreement improves borrowing terms and provides increased flexibility with lower cost.

On July 30, 2018, Tetra Tech’s Board of Directors declared a quarterly dividend of $0.12 per share payable on August 31, 2018 to stockholders of record as of August 16, 2018. Additionally, the Company has $25 million remaining under the previously approved $200 million share repurchase program.

Elected Gary Birkenbeuel as New Board Member

The Board of Directors has elected Gary Birkenbeuel to serve as a new director and member of the Audit and the Nominating and Corporate Governance Committees. Mr. Birkenbeuel spent over 37 years with Ernst & Young LLP, holding senior positions in the areas of audit and forensic accounting. He served as the firm’s Pacific Southwest Managing Partner for its assurance practice prior to his retirement in December 2017. He is currently a Visiting Professor at Claremont McKenna College.

“We are pleased to welcome Gary to our Board of Directors,” said Tetra Tech’s Chairman and CEO, Dan Batrack. “Gary brings to our Board deep accounting and finance acumen. We look forward to benefiting from his leadership and industry experience.”

Business Outlook

The following statements are based on current expectations. These statements are forward-looking and the actual results could differ materially. These statements do not include the potential impact of transactions that may be completed or developments that become evident after the date of this release. The Business Outlook section should be read in conjunction with the information on forward-looking statements at the end of this release.

Tetra Tech expects ongoing EPS for the fourth quarter of fiscal 2018 to range from $0.70 to $0.75. Net revenue for the fourth quarter is expected to range from $550 million to $575 million. For fiscal 2018, Tetra Tech is increasing guidance and now expects ongoing EPS to range from $2.59 to $2.64 and net revenue to range from $2.20 billion to $2.22 billion.

Webcast

Investors will have the opportunity to access a live audio-visual webcast and supplemental financial information concerning the third quarter 2018 results through a link posted on the Company’s website at tetratech.com on August 2, 2018 at 8:00 a.m. (PT).

Reconciliation of Revenue and Operating Results
In thousands (except EPS data)
			Three Months Ended														Nine Months Ended
			July 1, 2018					July 2, 2017					% Y/Y				July 1, 2018					July 2, 2017					% Y/Y
Revenue			$	764,795				$	685,539				12	%			$	2,224,805				$	2,018,171				10	%
RCM segment				(3,336	)				(4,192	)								(11,622	)				(12,401	)
Ongoing revenue			$	761,459				$	681,347				12	%			$	2,213,183				$	2,005,770				10	%
Revenue			$	764,795				$	685,539				12	%			$	2,224,805				$	2,018,171				10	%
Subcontractor costs				(194,443	)				(187,061	)								(576,813	)				(518,188	)
Net revenue				570,352					498,478				14	%				1,647,992					1,499,983				10	%
RCM segment				(1,479	)				(902	)								(2,999	)				(1,006	)
Ongoing net revenue			$	568,873				$	497,576				14	%			$	1,644,993				$	1,500,989				10	%
Operating income			$	55,496				$	45,884				21	%			$	146,801				$	128,695				14	%
Earn-out expense (gain)				192					–									2,110					(7,149	)
RCM segment				485					1,251									2,132					12,759
Non-core divestitures				3,434					–									3,434					–
Ongoing operating income			$	59,607				$	47,135				26	%			$	154,477				$	134,305				15	%
EPS			$	0.59				$	0.52				13	%			$	1.91				$	1.44				33	%
Earn-out expense (gain)				–					–									0.03					(0.08	)
RCM segment				0.01					0.01									0.03					0.14
Non-core divestitures				0.11					–									0.11					–
Revaluation of deferred tax liabilities				–					–									(0.19	)				–
Ongoing EPS			$	0.71				$	0.53				34	%			$	1.89				$	1.50				26	%

About Tetra Tech

Tetra Tech is a leading, global provider of consulting and engineering services. We are differentiated by Leading with Science^® to provide innovative technical solutions to our clients. We support global commercial and government clients focused on water, environment, infrastructure, resource management, energy, and international development. With more than 17,000 associates worldwide, Tetra Tech provides clear solutions to complex problems. For more information about Tetra Tech, please visit tetratech.com, follow us on Twitter (@TetraTech), or like us on Facebook.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as "anticipate," "expect," "could," "may," "intend," "plan" and "believe," among others, generally identify forward-looking statements. These forward-looking statements are based on currently available operating, financial, economic and other information, and are subject to a number of risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results. A variety of factors, many of which are beyond our control, could cause actual future results or events to differ materially from those projected in the forward-looking statements in this release, including but not limited to: continuing worldwide political and economic uncertainties; the U.S. Administration’s potential changes to fiscal policies; the cyclicality in demand for our overall services; the fluctuation in demand for oil and gas, and mining services; risks related to international operations; concentration of revenues from U.S. government agencies and potential funding disruptions by these agencies; dependence on winning or renewing U.S. government contracts; the delay or unavailability of public funding on U.S. government contracts; the U.S. government’s right to modify, delay, curtail or terminate contracts at its convenience; compliance with government procurement laws and regulations; credit risks associated with certain clients in certain geographic areas or industries; acquisition strategy and integration risks; goodwill or other intangible asset impairment; the failure to comply with worldwide anti-bribery laws; the failure to comply with domestic and international export laws; the failure to properly manage projects; the loss of key personnel or the inability to attract and retain qualified personnel; the ability of our employees to obtain government granted eligibility; the use of estimates and assumptions in the preparation of financial statements; the ability to maintain adequate workforce utilization; the use of the percentage-of-completion method of accounting; the inability to accurately estimate and control contract costs; the failure to adequately recover on our claims for additional contract costs; the failure to win or renew contracts with private and public sector clients; growth strategy management; backlog cancellation and adjustments; risks relating to cyber security breaches; the failure of partners to perform on joint projects; the failure of subcontractors to satisfy their obligations; requirements to pay liquidated damages based on contract performance; the adoption of new legal requirements; changes in resource management, environmental or infrastructure industry laws, regulations or programs; changes in capital markets and the access to capital; credit agreement covenants; industry competition; liability related to legal proceedings, investigations, and disputes; the availability of third-party insurance coverage; the ability to obtain adequate bonding; employee, agent, or partner misconduct; employee risks related to international travel; safety programs; conflict of interest issues; liabilities relating to reports and opinions; liabilities relating to environmental laws and regulations; force majeure events; protection of intellectual property rights; stock price volatility; the ability to impede a business combination based on Delaware law and charter documents; and other risks and uncertainties as may be described in Tetra Tech’s periodic filings with the Securities and Exchange Commission, including those described in the “Risk Factors” section of Tetra Tech’s Annual Report on Form 10-K for the year ended October 1, 2017, and Tetra Tech’s Quarterly Reports on Form 10-Q for fiscal year 2018, as well as in Tetra Tech’s other filings with the SEC. Readers should not place undue reliance on forward-looking statements since such information speaks only as of the date of this release. Tetra Tech does not intend to update forward-looking statements and expressly disclaims any obligation to do so.

Non-GAAP Financial Measures

To supplement the financial results presented in accordance with generally accepted accounting principles in the United States (“GAAP”), we present certain non-GAAP financial measures within the meaning of Regulation G under the Securities Exchange Act of 1934, as amended. We provide these non-GAAP financial measures because we believe they provide a valuable perspective on our financial results. However, non-GAAP measures have limitations as analytical tools and should not be considered in isolation and are not in accordance with, or a substitute for, GAAP measures. In addition, other companies may define non-GAAP measures differently which limits the ability of investors to compare non-GAAP measures of Tetra Tech to those used by our peer companies. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in this release.

___________________________

¹ Measures presented for ongoing operations are non-GAAP financial measures. Refer to Reconciliation of Revenue and Operating Results table for a reconciliation to GAAP.

² Tetra Tech’s revenue includes a significant amount of subcontractor costs and, therefore, the Company believes revenue, net of subcontractor costs, which is a non-GAAP financial measure, provides a valuable perspective on its business results. Refer to Reconciliation of Revenue and Operating Results table for a reconciliation to GAAP.

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