Government contracting can have pitfalls, as investors in Tetra Tech Inc. learned in a double dose of bad news last week.
The Pasadena engineering services company announced June 18 that it was taking $95 million in charges for the current quarter, mostly due to problems with government contracts in the United States and Canada. Instead of an anticipated profit of at least 32 cents a share, Tetra Tech is expected to report a loss of between 30 and 50 cents a share for the quarter ending June 30.
That news sent its shares tumbling 14 percent June 19 to close at $23.09. The company was the second-biggest loser on the LABJ Stock Index. (See page 72.)
Simultaneously, Michael Gaugler, an analyst with Brean Capital LLC in New York, downgraded Tetra Tech to “hold” from “buy.”
“Tetra Tech’s preannouncement implies that it will be several quarters before the company regains its footing in terms of overall profitability,” Gaugler said.
In the United States, federal agencies that awarded four contracts to Tetra Tech have so far refused to pay for roughly $45 million in additional costs the company has incurred, citing sequestration-related budget pressures. Although Tetra Tech Chief Executive Dan Batrack said the company eventually expects to be paid, accounting rules dictate that the costs be set aside as charges.
Meanwhile, in eastern Canada, where Tetra Tech has a substantial amount of work in mining and infrastructure projects, contract awards have ground to a near halt amid a huge public works contracting scandal that has forced several high-profile resignations throughout Quebec including in Montreal’s city government. According to numerous media reports, contractors routinely overcharged public agencies that were doling out Canadian federal stimulus money for infrastructure projects, sometimes colluding with each other to inflate bids.
Although none of the allegations appears to involve Tetra Tech, the company acknowledged in an April 8 press release that the scandal has had an impact on its efforts to win or extend contracts.
Adding to the problems has been a cyclical slowdown in the mining sector as precious metal prices have declined sharply over the past year.
“This deceleration among mining customers is finally impacting Tetra Tech,” said David Rose, an analyst with Wedbush Securities Inc. in downtown Los Angeles who covers the company.
As a result of the corruption scandal and the mining downturn, Tetra Tech has begun closing offices in eastern Canada and laying off staff, leading to a $50 million restructuring charge for the quarter.