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Tetra Tech (TTEK) Reports Outstanding Q2 Earnings Beat

After reporting in-line earnings for the past three quarters, Tetra Tech Inc. TTEK finally scored a healthy beat in second-quarter fiscal 2016 results. The technical services company reported adjusted earnings from ongoing operations of 38 cents per share, surpassing the Zacks Consensus Estimate of 35 cents by 8.6%.

The company fared even better in year over year comparison, as adjusted earnings reflected an impressive growth of nearly 36% relative to the prior-year quarter’s tally of 28 cents. The company’s earnings benefited from a strong revenue growth and operating efficiency, coupled with stringent cost-management initiatives.

Inside the Headlines

Net revenues rose an impressive 11% year over year to $478.8 million, outpacing the Zacks Consensus Estimate of $467 million. The top line was driven by the global expansion of commercial, municipal and international development projects. On a constant currency basis, revenues were up 14%.

Revenues improved on the back of strong performance in Resource Management and Energy as well as Remediation and Construction Management (RCM) segment, while lackluster growth in Water, Environment and Infrastructure segments constrained the top line.

On a segment basis, Water, Environment and Infrastructure continued to show weakness, as its net revenue fell 9.2% year over year to $166.4 million. However, net revenue from Resource Management and Energy rose 25% year over year to $309.4 million. Further, RCM charted a striking growth, as its net revenues grew 42.9% year over year and came in at $3 million.

In 2014, Tetra Tech had announced a strategic operational review of its RCM segment as it had been facing persistent sluggishness owing to unfavorable conditions in the construction market. Post restructuring, this segment was slated to be absorbed by other two businesses of the company, namely, the Engineering and Consulting Services and the Technical Support Services. The RCM segment is not part of the company’s ongoing operations.

In the quarter under review, total backlog from ongoing operations rose a remarkable 18% year over year to $2.1 billion. Also, ongoing operating income increased 27% year over year to $34.8 million.

Liquidity & Cash Flow

At the quarter end, Tetra Tech’s cash and cash equivalents were $113.7 million, compared with $135.3 million as of Sep 27, 2015. Long-term debt was $343.1 million, up substantially from $181 million as of Sep 27, 2015.

For the six months ended Mar 27, 2016, the company’s cash generated from operations escalated 22.1% year over year to $30.2 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 $50 million remaining under this program.

Dividend Hike

Concurrent with the earnings release, Tetra Tech ushered in good news for investors. The company approved a quarterly cash dividend of 9 cents per share, reflecting an increase of 13% from the prior payment. The dividend will be paid on May 27, 2016 to shareholders of record as of May 13.

Acquisition Update

Last year, Tetra Tech had announced its plans to acquire an Australia-based multi-disciplined consulting firm, Coffey International Limited. 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. The latter believes this acquisition will help it strengthen footprint in the Australian and Asia-Pacific regions as well as boost growth in its international development business.

Additionally, last month Tetra Tech acquired Vienna, VA-based INDUS Corporation. INDUS is an IT solutions firm which is focused on data analytics, secure infrastructure, geospatial analysis, and software applications management for the U.S. federal government. The acquisition will bring considerable federal contracts from the IT sector to Tetra Tech, thus fortifying its presence in the space. Also, the integration of their 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 third-quarter fiscal 2016 earnings, which are expected in a range of 47–52 cents. Net revenues for third-quarter 2016 are projected within $475–$525 million.

For fiscal 2016, the company expects earnings per share in a range of $1.80–$1.95 on revenues in a range of $1.8–$2 billion.

To Conclude

Going forward, we believe Tetra Tech's robust backlog levels, coupled with a robust pipeline of billion-dollar awards from major government organizations like U.S. Department of State, U.S. Army Corp. of Engineers and U.S. Air Force, provide Tetra Tech with a solid base for future growth. The company’s recent acquisitions have also unlocked new growth opportunities

As a matter of fact, the Coffey acquisition brings 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, who have a combined annual budget of over $90 billion. Its recent Indus buyout will expand its smart water and federal IT growth strategies further.

Moreover, Tetra Tech plans to enhance Engineering and Consulting Services in both Australia and Asia-Pacific regions from now on. Previously, 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.

Tetra Tech currently has a Zacks Rank #3 (Hold). Other favorably placed stocks in the broader sector include The Timken Co. TKR, Global Brass and Copper Holdings, Inc. BRSS and SKF AB SKFRY, each carrying a Zacks Rank #2 (Buy).

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