UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-19655
TETRA TECH, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4148514
-------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
670 N. Rosemead Boulevard, Pasadena, California 91107
---------------------------------------------------------
(Address of principal executive offices)
(626) 351-4664
-----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of August 3, 1998, the total number of outstanding shares of the Registrant's
common stock was 22,863,478.
TETRA TECH, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Risk Factors 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 21
-2-
PART I. FINANCIAL INFORMATION
ITEM 1.
Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
In thousands, except share data June 28, September 28,
1998 1997
-------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,872 $ 12,262
Accounts receivable - net 60,566 30,089
Unbilled receivables - net 46,367 35,145
Prepaid and other current assets 6,733 2,522
Deferred income taxes 867 867
---------- ----------
Total Current Assets 121,405 80,885
---------- ----------
PROPERTY AND EQUIPMENT:
Leasehold improvements 1,307 1,177
Equipment, furniture and fixtures 20,797 16,838
---------- ----------
Total 22,104 18,015
Accumulated depreciation and amortization (12,672) (9,592)
---------- ----------
PROPERTY AND EQUIPMENT - NET 9,432 8,423
INTANGIBLE ASSETS - NET 71,939 69,439
OTHER ASSETS 1,317 766
---------- ----------
TOTAL ASSETS $ 204,093 $ 159,513
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,639 $ 11,621
Accrued compensation 10,819 10,981
Other current liabilities 4,835 6,386
Current portion of long-term obligations 19,522 8,000
Income taxes payable 400 1,358
---------- ----------
Total Current Liabilities 52,215 38,346
---------- ----------
LONG-TERM OBLIGATIONS 10,000 --
---------- ----------
MINORITY INTEREST 1,956 --
---------- ----------
REDEEMABLE PREFERRED STOCK -- 13,526
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock - authorized, 2,000,000
shares of $.01 par value; issued and
outstanding 0 and 1,231,840 shares at
June 28, 1998 and September 28, 1997,
respectively -- --
Common stock - authorized, 30,000,000
shares of $.01 par value; issued and
outstanding 22,621,565 and 20,714,254
shares at June 28, 1998 and September
28, 1997, respectively 226 207
Additional paid in capital 81,700 63,502
Retained earnings 57,996 43,932
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 139,922 107,641
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 204,093 $ 159,513
========== ==========
</Table)
See accompanying notes to the condensed consolidated financial statements.
-3-
Tetra Tech, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
In thousands, except per Three Months Ended Nine Months Ended
share data --------------------- ---------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Gross Revenue $ 98,231 $ 60,922 $257,396 $171,406
Subcontractor costs 23,082 12,301 56,777 38,447
---------- ---------- ---------- ----------
Net Revenue 75,149 48,621 200,619 132,959
Cost of Net Revenue 54,405 35,660 149,530 100,077
---------- ---------- ---------- ----------
Gross Profit 20,744 12,961 51,089 32,882
Selling, General and
Administrative Expenses 9,333 6,754 23,627 17,390
---------- ---------- ---------- ----------
Income From Operations 11,411 6,207 27,462 15,492
Interest Expense 624 84 1,433 127
Interest Income (114) (88) (254) (210)
---------- ---------- ---------- ----------
Income Before Income Taxes
and Minority Interest 10,901 6,211 26,283 15,575
Income to Minority Interest 1,194 -- 1,397 --
---------- ---------- ---------- ----------
Income Before Income Taxes 9,707 6,211 24,886 15,575
Income Tax Expense 4,214 2,567 10,822 6,464
---------- ---------- ---------- ----------
Net Income $ 5,493 $ 3,644 $ 14,064 $ 9,111
========== ========== ========== ==========
Basic Earnings Per Share $ 0.24 $ 0.20 $ 0.63 $ 0.51
========== ========== ========== ==========
Diluted Earnings Per Share $ 0.24 $ 0.19 $ 0.61 $ 0.49
========== ========== ========== ==========
Weighted Average Common Shares
Outstanding:
Basic 22,518 18,543 22,205 18,025
========== ========== ========== ==========
Diluted 23,361 19,252 23,196 18,635
========== ========== ========== ==========
See accompanying notes to the condensed consolidated financial statements.
-4-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands Nine Months Ended
------------------------
June 28, June 29,
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,064 $ 9,111
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,102 2,929
Undistributed earnings to minority interest 1,397 --
Other (631) (71)
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable (16,655) 10
Unbilled receivables 1,074 (8,849)
Prepaid and other assets (4,981) (305)
Accounts payable 4,937 2,844
Accrued compensation (304) (3,976)
Other current liabilities (4,511) (1,214)
Income taxes payable (1,346) 174
---------- ----------
Net Cash Used In Operating Activities (1,854) (5,035)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,374) (1,832)
Proceeds from sale of property and equipment -- 44
Payments for business acquisitions, net of
cash acquired (25,948) (1,124)
---------- ----------
Net Cash Used In Investing Activities (28,322) (2,912)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (27,519) (1,842)
Proceeds from issuance of long-term debt 49,000 8,000
Proceeds from payable to stockholder -- 5,479
Net proceeds from issuance of common stock 3,305 2,974
---------- ----------
Net Cash Provided By Financing Activities 24,786 14,611
---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (5,390) 6,664
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 12,262 6,129
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,872 $ 12,793
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid during the period for:
Interest $ 1,197 $ 83
========== ==========
Income taxes $ 12,168 $ 9,513
========== ==========
(Continued)
-5-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands Nine Months Ended
------------------------
June 28, June 29,
1998 1997
---------- ----------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In the nine months ended June 29, 1997, the
Company purchased all of the capital stock
of IWA Engineers, FLO Engineering, Inc.,
SCM Consultants, Inc., Whalen & Company, Inc.
and Whalen Service Corps Inc. In conjunction
with these acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $ 60,255
Cash paid (8,811)
Issuance of common stock (35,789)
Other acquisition costs (1,926)
----------
Liabilities assumed $ 13,729
==========
In December 1997, the Company, through its
wholly-owned subsidiary Tetra Tech NUS, Inc.,
purchased the assets of certain environmental
services businesses of Brown & Root, Inc. and
Halliburton NUS Corporation, both of which
were subsidiaries of Halliburton Company. In
conjunction with this acquisition, liabilities
were assumed as follows:
Fair value of assets acquired $ 27,794
Cash paid (24,872)
Other acquisition costs (325)
----------
Liabilities assumed $ 2,597
==========
In March 1998, the Company, through its wholly-
owned subsidiary Whalen Service Corps Inc.,
purchased certain assets of TANCO LLC, dba
Integration Technologies from ANTEC Corporation.
This purchase was related to a limited liability
company agreement between Whalen Service Corps
Inc. and Sentrex Cen-Comm. In conjunction with
this acquisition, liabilities were assumed
as follows:
Fair value of assets acquired $ 1,572
Cash paid (623)
----------
Liabilities assumed $ 949
==========
In March 1998, the Company purchased all of the
capital stock of C.D.C. Engineering, Inc.
In conjunction with this acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $ 2,299
Cash paid (323)
Issuance of common stock (1,294)
Other acquisition costs (70)
----------
Liabilities assumed $ 612
==========
See accompanying notes to the condensed consolidated financial statements.
(Concluded)
-6-
TETRA TECH, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheets as of June 28, 1998,
the condensed consolidated statements of income for the three-month and nine-
month periods ended June 28, 1998 and June 29, 1997 and the condensed
consolidated statements of cash flows for the nine-month periods ended June 28,
1998 and June 29, 1997 are unaudited, and in the opinion of management include
all adjustments, consisting of only normal and recurring adjustments, necessary
for a fair presentation of the financial position and the results of operations
for the periods presented.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 1997.
The results of operations for the three and nine months ended June 28, 1998
are not necessarily indicative of the results to be expected for the fiscal year
ending October 4, 1998.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE, which the
Company has adopted in the accompanying financial statements. The Statement
replaces the presentation of primary Earnings Per Share (EPS) with a
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. The Statement also requires the dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Accounting Principles Board Opinion No. 15. EPS
for 1997 have been restated to reflect the requirement of SFAS 128. Basic and
diluted EPS reflect, on a retroactive basis, a 5-for-4 stock split, effected in
the form of a 25% stock dividend, wherein one additional share of stock was
issued on December 1, 1997 for each four shares outstanding as of the record
date of November 14, 1997.
3. CURRENT ASSETS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents totaled $6,872,000 and $12,262,000 at June 28, 1998 and September
28, 1997, respectively.
-7-
4. MERGERS AND ACQUISITIONS
On March 26, 1998, the Company acquired 100% of the capital stock of C.D.C.
Engineering, Inc. (CDCE), a consulting and engineering firm specializing in
civil engineering, transportation engineering, structural engineering and land
surveying. The purchase has been valued at approximately $1,617,000 consisting
of Company common stock and cash, and is subject to a purchase price adjustment
based on CDCE's Net Asset Value as of March 26, 1998 as described in the related
purchase agreement.
On March 2, 1998, Whalen Service Corps Inc. (WSC) agreed to participate in
a partnership with Sentrex Cen-Comm and ANTEC Corporation to provide design,
engineering, information management and construction services to support
advanced communication system upgrades to the broadband information transport
industries. WSC holds a 51% majority interest in Whalen/Sentrex LLC, a
California limited liability company. The agreement required the purchase of
certain assets of TANCO LLC from ANTEC Corporation for a price in cash of
approximately $623,000.
On December 31, 1997, the Company, through its wholly-owned subsidiary
Tetra Tech NUS, Inc., acquired the assets of certain environmental services
businesses of Brown & Root, Inc. and Halliburton NUS Corporation, both of which
are subsidiaries of Halliburton Company (collectively, NUS). NUS provides
consulting, engineering and design services for the environmental remediation of
contaminated air, water and soil conditions. The purchase price of
approximately $24,872,000, as adjusted, consisted of cash.
On July 11, 1997, the Company acquired 100% of the capital stock of
CommSite Development Corporation (CDC), a wireless telecommunications site
development service firm. The purchase has been valued at approximately
$5,702,000, consisting of cash and 318,079 shares of Company common stock, as
adjusted based on CDC's Net Asset Value on July 11, 1997 as described in the
related purchase agreement.
On June 11, 1997, the Company acquired 100% of the capital stock of Whalen
& Company, Inc. and Whalen Service Corps Inc. (collectively, WAC). WAC, a
telecommunications firm, provides a full range of services including
telecommunications site development services for PCS, cellular, ESMR, air-to-
ground, microwave, paging, fiber optic and switching centers technology. In
addition, WAC provides consulting, engineering, design services and construction
management with respect to the cable television industry. The purchase has been
valued at approximately $41,738,000, consisting of cash and 3,639,800 shares of
Company common stock. The common stock was issued in a private placement and
had a value of $31,972,000. The Company's stock was valued based upon the
extended restriction period and economic factors specific to the Company's
circumstances which resulted in a fair valuation approximately 28% below the
then prevailing market price. On the business day prior to the merger, WAC
distributed to its stockholders (i) cash in the amount of $4,138,000 and (ii)
accounts receivable having a net value of $18,456,000.
On March 20, 1997, the Company acquired 100% of the capital stock of SCM
Consultants, Inc. (SCM), a consulting and engineering firm, providing design of
irrigation, water and wastewater systems, as well as facility and infrastructure
engineering services, to state and local government,
-8-
private and industrial customers. The purchase was valued at approximately
$2,431,000, consisting of cash and 197,572 shares of Company common stock, as
adjusted based upon SCM's Net Asset Value on March 30, 1997 as described in the
related purchase agreement.
On December 18, 1996, the Company acquired 100% of the capital stock of FLO
Engineering, Inc. (FLO), a consulting and engineering firm specializing in water
resource engineering involving hydraulic engineering and hydrographic data
collection. The purchase was valued at approximately $724,000, consisting of
cash and 40,138 shares of Company common stock, as adjusted based upon FLO's Net
Asset Value on December 29, 1996 as described in the related purchase agreement.
On December 11, 1996, the Company acquired 100% of the capital stock of IWA
Engineers (IWA), an architecture and engineering firm providing a wide range of
planning, engineering, and design capabilities in water, wastewater, and
facility design, and serving state and local government and private customers.
The purchase was valued at approximately $1,632,000, consisting of cash and
95,675 shares of Company common stock, as adjusted based upon IWA's Net Asset
Value on December 29, 1996 as described in the related purchase agreement.
All of the acquisitions above have been accounted for as purchases and,
accordingly, the purchase prices of the businesses acquired have been allocated
to the assets and liabilities acquired based upon their fair market values. The
excess of the purchase cost of the acquisitions over the fair value of the net
assets acquired was recorded as goodwill and is included in Intangible Assets -
Net in the accompanying balance sheets. The final determination of such excess
amount for CDCE, NUS and CDC is subject to a final determination of the value of
the consideration paid and the net assets acquired as various studies and
valuations are not yet complete. The results of operations of each of the
companies acquired have been included in the Company's financial statements from
their respective acquisition effective dates as set forth in the related
purchase agreements.
The effect of unaudited pro forma operating results of the CDCE, SCM, FLO
and IWA transactions, had they been acquired on September 30, 1996, is not
material.
Pro forma operating results assuming the Company had acquired NUS, CDC and
WAC on September 30, 1996 is presented in Note 7. UNAUDITED PRO FORMA OPERATING
RESULTS.
5. ACCOUNTS RECEIVABLE
Accounts receivable are presented net of a valuation allowance to provide
for doubtful accounts and for the potential disallowance of billed and unbilled
costs. The allowance for doubtful accounts as of June 28, 1998 and September
28, 1997 was $792,000 and $1,346,000, respectively. The allowance for disallowed
costs as of June 28, 1998 and September 28, 1997 was $10,034,000 and $9,807,000,
respectively. Disallowance of billed and unbilled costs is primarily associated
with contracts with the U.S. government which contain clauses that subject
contractors to several levels of audit. Management believes that resolution of
these matters will not have a material adverse impact on the Company's financial
position or results of operations.
-9-
6. SUBSEQUENT EVENT
On July 9, 1998, the Company acquired 100% of the capital stock of McNamee,
Porter & Seeley, Inc. (MPS), a provider of water, wastewater and engineering
services to the public sector and industrial clients. The purchase price of
approximately $15,000,000 consisted of cash and Company common stock and is
subject to a purchase price adjustment. In conjunction with the acquisition,
MPS distributed to its shareholders accounts receivable having a net value of
$8,040,000. The acquisition will be accounted for as a purchase. In order to
support this acquisition, the Company increased its line of credit from
$55,000,000 to $70,000,000. Unaudited pro forma operating results, assuming MPS
had been acquired on September 30, 1996 is presented in Note 7. UNAUDITED PRO
FORMA OPERATING RESULTS.
7. UNAUDITED PRO FORMA OPERATING RESULTS
The following table presents summarized unaudited pro forma operating
results assuming that the Company had acquired MPS, NUS, CDC and WAC on
September 30, 1996:
Pro Forma Nine Months Ended
------------------------------
June 28, 1998 June 29, 1997
------------- -------------
(In thousands, except
per share data)
Gross revenue $ 304,053 $ 314,238
Income from operations 29,740 28,685
Net income 14,535 14,768
Basic earnings per share 0.65 0.68
Diluted earnings per share 0.62 0.66
Weighted average shares outstanding:
Basic 22,425 21,799
Diluted 23,416 22,409
-10-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents the percentage relationship of selected items
in the Company's condensed consolidated Statements of Income to net revenue, and
the percentage increase or (decrease) in the dollar amount of such items:
% Relationship % Relationship
to Net Revenue to Net Revenue
------------------ ------------------
Three Months Ended Period Nine Months Ended Period
------------------ to ------------------ to
June 28, June 29, Period June 28, June 29, Period
1998 1997 Change 1998 1997 Change
-------- -------- -------- -------- -------- --------
Net revenue 100.0% 100.0% 54.6% 100.0% 100.0% 50.9%
Cost of net revenue 72.4 73.3 52.6 74.5 75.3 49.4
-------- -------- -------- -------- -------- --------
Gross profit 27.6 26.7 60.0 25.5 24.7 55.4
Selling, general
and administrative
expenses 12.4 13.9 38.2 11.8 13.1 35.9
-------- -------- -------- -------- -------- --------
Income from
operations 15.2 12.8 83.8 13.7 11.6 77.3
Net interest
(expense) income (0.7) -- nm* (0.6) 0.1 nm*
-------- -------- -------- -------- -------- --------
Income before income
taxes and minority
interest 14.5 12.8 75.5 13.1 11.7 68.8
Income to minority
interest (1.6) -- nm* (0.7) -- nm*
-------- -------- -------- -------- -------- --------
Income before income
taxes 12.9 12.8 56.3 12.4 11.7 59.8
Income tax expense 5.6 5.3 64.2 5.4 4.9 67.4
-------- -------- -------- -------- -------- --------
Net income 7.3% 7.5% 50.7% 7.0% 6.8% 54.4%
======== ======== ======== ======== ======== ========
* not meaningful
- ---------
Gross revenue increased by 61.2% to $98,231,000 for the three months ended
June 28, 1998 compared to $60,922,000 for the comparable prior year period. For
the nine months ended June 28, 1998, gross revenue increased by 50.2% to
$257,396,000 from $171,406,000 in the prior year. Net revenue increased by
54.6% to $75,149,000 for the quarter from $48,621,000 a year ago. For the nine
months ended June 28, 1998, net revenue increased by 50.9% to $200,619,000 from
$132,959,000 last year. For both gross and net revenue, growth in actual
dollars was experienced in all client sectors.
The following table presents the percentage of net revenue for each client
sector:
Percentage of Net Revenue
------------------------------------------------
Three Months Ended Nine Months Ended
------------------ ------------------
June 28, June 29, June 28, June 29,
Client Sector 1998 1997 1998 1997
- ------------- -------- -------- -------- --------
Federal government 51 50 50 55
State & local government 11 14 12 15
Commercial 36 34 36 27
International 2 2 2 3
For the quarter ended June 28, 1998, acquisitions made subsequent to June
29, 1997 contributed $16,050,000 of the $26,528,000 growth in net revenue, of
which $11,726,000 was in the Federal government sector, $554,000 was in the
state and local government sector and
-11-
$3,770,000 was in the commercial sector. For the nine months ended June 28,
1998, acquisitions made subsequent to June 29, 1997 contributed $32,294,000 of
the $67,660,000 growth in net revenue, of which $22,661,000 was in the Federal
government sector, $896,000 was in the state and local government sector and
$8,737,000 was in the commercial sector.
Cost of net revenue increased 52.6% to $54,405,000 for the three months
ended June 28, 1998 compared to $35,660,000 for the comparable prior year
period. For the nine months ended June 28, 1998, cost of net revenue increased
49.4% to $149,530,000 from $100,077,000 in the prior year. As a percentage of
net revenue, cost of net revenue decreased in the quarter and in the nine months
from 73.3% and 75.3% last year to 72.4% and 74.5% this year, respectively. The
Company continues to emphasize strong project management techniques.
Selling, general and administrative (SG&A) expenses, inclusive of
amortization, increased 38.2% to $9,333,000 for the three months ended June 28,
1998 compared to $6,754,000 for the comparable prior year period. For the
quarter ended June 28, 1998, this increase was primarily due to the amortization
of goodwill associated with acquisitions, as well as increases in SG&A expenses
as a result of acquisitions. For the nine months ended June 28, 1998, SG&A
increased 35.9% to $23,627,000 from $17,390,000 in the comparable period last
year. As a percentage of net revenue, SG&A expenses decreased to 12.4% for the
quarter ended June 28, 1998 from 13.9% for the comparable period last year, and
for the nine months ended June 28, 1998, SG&A expenses decreased to 11.8% from
13.1% for the comparable period last year. These decreases were primarily
attributable to increases in net revenue volume without commensurate increases
in SG&A expenses.
For the quarter ended June 28, 1998, net interest expense of $510,000 was
recognized compared to net interest income of $4,000 in the quarter ended June
29, 1997, primarily due to interest on borrowings on the Company's revolving
credit facility related to acquisitions. For the nine months ended June 28,
1998, net interest expense increased to $1,179,000, compared to net interest
income of $83,000 in the prior year. This increase was also the result of
interest on acquisition related borrowings.
Income tax expense increased to $4,214,000 and $10,822,000 for the quarter
and nine months ended June 28, 1998, respectively, from $2,567,000 and
$6,464,000 for the comparable prior year period due to higher income before
income taxes and the non-deductibility of certain goodwill amortization for
income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 28, 1998, the Company's cash and cash equivalents totaled
$6,872,000. In addition, the Company has a credit agreement (the "Credit
Agreement") with a bank which provides for a revolving credit facility of
$55,000,000. Under the Credit Agreement, the Company may also request standby
letters of credit up to the aggregate sum of $10,000,000 outstanding at any one
time. As of June 28, 1998, outstanding borrowings totaled $29,500,000 and
standby letters of credit totaled $1,780,000. Subsequent to June 28, 1998, the
Company amended the Credit Agreement to provide for a revolving credit facility
of $70,000,000 and standby letters of credit up
-12-
to an aggregate sum of $20,000,000 in order to support the July 9, 1998
acquisition of McNamee, Porter & Seeley, Inc. as described in Note 6.
SUBSEQUENT EVENT.
In the nine months ended June 28, 1998, cash used in operating activities
was $1,854,000 compared to $5,035,000 for the comparable prior year period. The
decrease is primarily attributable to the timing of invoicing and payments to
subcontractors. The Company has targeted, as an ongoing practice, to increase
its efficiency in the timing of invoicing and to accelerate the collecting of
receivables. For the nine months ended June 28, 1998, cash used in investing
activities was $28,322,000 compared to $2,912,000 for the comparable prior year
period. This increase was primarily due to business acquisitions. For the nine
months ended June 28, 1998, cash provided by financing activities was
$24,786,000 compared to $14,611,000 for the comparable prior year period. This
increase was primarily attributable to the incurrence of long-term debt related
to acquisitions.
The Company continuously evaluates the marketplace for strategic
acquisition opportunities. Once an opportunity is identified, the Company
examines the effect an acquisition may have on the business environment, as well
as on the Company's results of operations. The Company proceeds with an
acquisition only if it determines that the acquisition is anticipated to have an
accretive effect on future operations. The Company's strategy is to position
itself to address existing and emerging markets. The Company views acquisitions
as a key component of its growth strategy, and intends to use both cash and its
securities, as it deems appropriate, to fund such acquisitions.
The Company expects that existing cash balances, internally generated
funds, and its credit facility will be sufficient to meet the Company's capital
requirements through the end of fiscal 1998. However, as acquisition
opportunities present themselves, the Company may seek to expand its borrowing
capabilities to accommodate such opportunities.
The Company is working to resolve the potential impact of the year 2000 on
its business processes and the ability of the Company's computerized information
systems to accurately process information that may be date-sensitive. Any of
the Company's programs that recognize a date using "00" as the year 1900 rather
than the year 2000 could result in errors or system failures. The Company
utilizes a number of computer programs across its entire operation. The Company
began its risk assessment in 1995. Since that time, the Company has procured
certain financial reporting systems that are deemed to be year 2000 compliant.
To date, the Company has spent approximately $1,200,000 on the procurement of
these systems, the conversion of data from historical systems to these systems,
and on implementation and testing of these systems. The Company has not
completed its full assessment, but currently believes that the cost of
addressing this issue will not have a material adverse impact on the Company's
financial position. However, if the Company and third parties upon which it
relies are unable to address this issue in a timely manner, it could result in a
material financial risk to the Company. The Company plans to devote all
resources required to resolve any significant year 2000 issues in a timely
manner.
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RISK FACTORS
STATEMENTS REGRARDING THE COMPANY'S PERFORMANCE PROSPECTS COULD CONTAIN
FORWARD-LOOKING INFORMATION THAT INVOLVES RISK AND UNCERTAINTIES SUCH AS THE
LEVEL OF DEMAND FOR THE CONPANY'S SERVICES, FUNDING DELAYS FOR PROJECTS, LACK OF
REGULATORY CLARITY AFFECTING THE MARKETPLACE AND INDUSTRY-WIDE COMPETITIVE
FACTORS. THE FOLLOWING RISK FACTORS SHOULD BE REVIEWED IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q.
POTENTIAL LIABILITY AND INSURANCE. Because of the type of projects in
which the Company is or may be involved, the Company's current and anticipated
future services may involve risks of potential liability under Superfund, common
law or contractual indemnification agreements. It is difficult to assess
accurately the magnitude of potential risk to the Company.
The Company maintains two comprehensive general liability policies, both in
the amount of $1,000,000. These policies, together with two $9,000,000 umbrella
policies, provide total general liability coverage of $10,000,000 for the
resource management and infrastructure business areas and coverage of
$10,000,000 for the telecommunications business area. The Company's
professional liability insurance (E&O) policy, which includes pollution
coverage, for 1998 provides $10,000,000 in coverage for resource management and
infrastructure business areas, with a $100,000 self-insured retention. The same
E&O policy covers the telecommunications business area with a sublimit of
$1,000,000 for each claim and $1,000,000 in the aggregate. The Company procures
insurance coverage through a broker who is experienced in the engineering field.
The broker, together with the Company's Risk Manager, reviews the Company's
risk/insurance programs with those of the Company's competitors and clients.
This review, combined with historical experience, claims history and contractual
requirements, allows the Company to determine the adequate amount of insurance.
However, because there are various exclusions and retentions under the Company's
insurance policies, there can be no assurance that all liabilities that may be
incurred by the Company are subject to insurance coverage. In addition, the E&O
policy is a "claims made" policy which only covers claims made during the term
of the policy. If a policy terminates and retroactive coverage is not obtained,
a claim subsequently made, even a claim based on events or acts which occurred
during the term of the policy, would not be covered by the policy. In the event
the Company expands its services into new markets, no assurance can be given
that the Company will be able to obtain insurance coverage for such activities
or, if insurance is obtained, that the dollar amount of any liabilities incurred
in connection with the performance of such services will not exceed policy
limits. The premiums to be paid by the Company for its E&O policies during
fiscal 1998 are approximately $890,000.
The Company evaluates and determines the risk associated with uninsured
claims. In the event the Company determines that an uninsured claim has
potential liability, the Company establishes an appropriate reserve. The
Company does not establish a reserve if it determines that the claim has no
merit. The Company's historical levels of insurance coverage and reserves have
been shown to be adequate. However, a partially or completely uninsured claim,
if successful and of significant magnitude, could have a material adverse effect
on the Company.
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SIGNIFICANT COMPETITION. The market for the Company's services is highly
competitive. The Company competes with many other firms, ranging from small
local firms to large national firms having greater financial and marketing
resources than the Company. The Company performs engineering and consulting
services across a broad spectrum of business areas, primarily in the resource
management, infrastructure, and the telecommunication service business areas.
Services within these business areas are provided to a client base including
Federal (Departments of Defense, the Interior and Energy; U.S Environmental
Protection Agency; and the U.S. Postal Service), state and local agencies, as
well as the commercial sector. The range of competitors for any one procurement
can vary from 10 to 100 firms, depending upon the relative value of the project,
the financial terms and risks associated with the work, and any restrictions
placed upon competition by the customer. Historically, competition has been
based primarily on the quality and timeliness of service. However, the Company
believes that price has become an increasingly important competitive factor.
The Company believes that its principal competitors include Dames & Moore, Inc.,
E A Engineering Science & Technology, ICF Kaiser International, Inc.,
International Technology Corp., TRC Companies, Inc., URS Consultants, Inc., Roy
F. Weston, Inc., Castle Tower Corporation, OSP Consultants, Inc. and Mastec,
Inc.
CONTRACTS. The Company's contracts with the Federal and state governments
and some of its other client contracts are subject to termination at the
discretion of the client. Some contracts made with the Federal government are
subject to annual approval of funding and audits of the Company's rates.
Limitations imposed on spending by Federal government agencies may limit the
continued funding of the Company's existing contracts with the Federal
government and may limit the Company's ability to obtain additional contracts.
These limitations, if significant, could have a material adverse effect on the
Company.
All of the Company's contracts with the Federal government are subject to
audit by the government, primarily by the DCAA, which reviews the Company's
overhead rates, operating systems and cost proposals. During the course of its
audit, the DCAA may disallow costs if it determines that the Company improperly
accounted for such costs in a manner inconsistent with Cost Accounting
Standards. A disallowance of costs by the DCAA could have a material adverse
effect on the Company. Historically, the Company has not had any material cost
disallowances by the DCAA as a result of audit except as further described.
There can be no assurance that DCAA audits will not result in material cost
disallowances in the future. The Company's government contracts are also
subject to renegotiation of profits in the event of a change in the contractual
scope of the work to be performed.
In September 1995, the Company acquired Tetra Tech EM Inc. (formerly known
as PRC Environmental Management, Inc., "EMI"). EMI likewise contracts with the
Federal government and such contracts are subject to the same auditing standards
as those of the Company. Audits and negotiations for the years 1987 through
1993 have recently been completed and cost disallowances as a result of audit
and negotiation totaled approximately $2,900,000. Audits for the years 1994 and
1995 have yet to be completed. At the time of acquisition, reserves for such
cost disallowances were established. The Company does not believe that the
ultimate resolution of such audits and disallowances will have a material
adverse effect on the Company.
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The Company enters into various contracts with its clients, which include
fixed-price contracts. To date, in fiscal 1998, 27.3% of the Company's net
revenue was derived from fixed-price contracts. Under a fixed-price contract,
the customer agrees to pay a specified price for the Company's performance of
the entire contract. Fixed-price contracts carry inherent risks, including
risks of losses from underestimating costs, problems with new technologies and
economic and other changes that may occur over the contract period. Losses
under fixed-price contracts, should they occur, could have a material adverse
effect on the Company.
The Company contracts with both domestic and international customers.
Certain contracts with international customers are denominated in a currency
other than the U.S. dollar. Contracts denominated in any currency other than
the U.S. dollar contain certain inherent risks, including risks on foreign
currency translation and risks in expatriating funds from foreign countries. To
date, in fiscal 1998, 2.7% of the Company's net revenue was derived from the
international marketplace. To the extent the Company's net revenue derived from
the international marketplace increases, so increases risks associated in
realizing the full contract value of those contracts denominated in foreign
currencies. The Company is currently evaluating options to hedge future
potential losses from foreign currency transactions.
CONFLICTS OF INTEREST. Many of the Company's clients are concerned about
potential or actual conflicts of interest in retaining consultants and
engineers. For example, Federal government agencies have formal policies
against continuing or awarding contracts that would create actual or potential
conflicts of interest with other activities of a contractor. These policies,
among other things, may prevent the Company in certain cases from bidding for or
performing contracts resulting from or relating to certain work the Company has
performed for the government. In addition, services performed for a private
client may create a conflict of interest which precludes or limits the Company's
ability to obtain work from other public or private entities. The Company has,
on occasion, declined to bid on a project because of an actual or potential
conflict of interest.
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the Company's
common stock may be significantly affected by factors such as quarter-to-quarter
variations in the Company's results of operations, changes in environmental
legislation and changes in investors' perception of the business risks and
conditions in the environmental and telecommunication services business. In
addition, market fluctuations, as well as general economic or political
conditions, may adversely affect the market price of the Company's common stock,
regardless of the Company's actual performance.
QUALIFIED PROFESSIONALS. The Company's ability to attract and retain
qualified scientists and engineers is an important factor in determining the
Company's future growth and success. The market for environmental and
telecommunication professionals is competitive and there can be no assurance
that the Company will continue to be successful in its efforts to attract and
retain such professionals.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 26, 1998, the Company acquired 100% of the capital stock of
C.D.C. Engineering, Inc., a California corporation (CDCE), through the merger of
the Company's wholly-owned subsidiary with and into CDCE (the "CDCE Merger").
In connection with the CDCE Merger, subsequent to the purchase price adjustment
required by the Agreement and Plan of Reorganization relating to the CDCE
Merger, the Company issued an aggregate of 56,848 shares of its common stock,
$.01 par value ("Common Stock") to the former shareholders of CDCE. For
purposes of the CDCE Merger, each share of Common Stock was valued at $23.375.
The issuances of Common Stock were made by private placement in reliance on the
exemption from the registration provisions of the Securities Act of 1933, as
amended (the "Act"), provided for in Section 4(2) of the Act.
On July 9, 1998, the Company acquired 100% of the capital stock of
McNamee, Porter & Seeley, Inc., a Michigan corporation (MPS), through stock
purchases from the former shareholders of MPS (the "Stock Purchase"). In
connection with the Stock Purchase, the Company issued an aggregate of 219,911
shares of Common Stock to the former shareholders of MPS. For purposes of the
Stock Purchase, each share of Common Stock was valued at $23.51. The issuances
of Common Stock were made by private placement in reliance on the exemption from
the registration provisions of the Act provided for in Section 4(2) of the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 1, 1995).
3.2 Bylaws of the Company as amended to date (incorporated
herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-43723).
3.3 Certificate of Amendment of Certificate of Incorporation
of the Company (incorporated herein by reference to Exhibit
3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 28, 1997).
10.1 Credit Agreement dated as of September 15, 1995 between the
Company and Bank of America Illinois, as amended by the First
Amendment to Credit Agreement dated as of November 27, 1995
(incorporated herein by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 1, 1995).
-17-
10.2 Second Amendment dated as of June 20, 1997 to the Credit
Agreement dated as of September 15, 1995 between the Company
and Bank of America Illinois (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 1997).
10.3 Third Amendment dated as of December 15, 1997 to the Credit
Agreement dated as of September 15, 1995 between the Company
and Bank of America National Trust and Savings Association
(incorporated herein by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1997).
10.4 Fourth Amendment dated as of January 30, 1997 to the Credit
Agreement dated as of September 15, 1995 between the Company
and Bank of America National Trust and Savings Association.
(incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 28, 1997).
10.5 Fifth Amendment dated as of July 6, 1998 to the Credit
Agreement dated as of September 15, 1995 between the Company
and Bank of America National Trust and Savings Association.
10.6 Security Agreement dated as of September 15, 1995 among the
Company, GeoTrans, Inc., Simons Li & Associates, Inc.,
Hydro-Search, Inc., PRC Environmental Management, Inc. and
Bank of America Illinois (incorporated herein by reference
to Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 1, 1995).
10.7 Pledge Agreement dated as of September 15, 1995 between the
Company and Bank of America Illinois (incorporated herein by
reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 1, 1995).
10.8 Guaranty dated as of September 15, 1995, executed by the
Company in favor of Bank of America Illinois (incorporated
herein by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 1,
1995).
10.9 1989 Stock Option Plan dated as of February 1, 1989
(incorporated herein by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, No. 33-43723).
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10.10 Form of Incentive Stock Option Agreement executed by the
Company and certain individuals in connection with the
Company's 1989 Stock Option Plan (incorporated herein by
reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1, No. 33-43723).
10.11 Executive Medical Reimbursement Plan (incorporated herein by
reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1, No. 33-43723).
10.12 1992 Incentive Stock Plan (incorporated herein by reference
to Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 3, 1993).
10.13 Form of Incentive Stock Option Agreement used by the Company
in connection with the Company's 1992 Incentive Stock Plan
(incorporated herein by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 3, 1993).
10.14 1992 Stock Option Plan for Nonemployee Directors
(incorporated herein by reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 3, 1993).
10.15 Form of Nonqualified Stock Option Agreement used by the
Company in connection with the Company's 1992 Stock Option
Plan for Nonemployee Directors (incorporated herein by
reference to Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 3, 1993).
10.16 1994 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 10.22 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 2, 1994).
10.17 Form of Stock Purchase Agreement used by the Company in
connection with the Company's 1994 Employee Stock Purchase
Plan (incorporated herein by reference to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the fiscal year
ended October 2, 1994).
10.18 Employment Agreement dated as of June 11, 1997 between the
Company and Daniel A. Whalen (incorporated herein by
reference to Exhibit 10.16 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 29, 1997).
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10.19 Registration Rights Agreement dated as of June 11, 1997
among the Company and the parties listed on Schedule A
attached thereto (incorporated herein by reference to
Exhibit 10.17 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 29, 1997).
10.20 Registration Rights Agreement dated as of July 11, 1997
among the Company and the parties listed on Schedule A
attached thereto (incorporated herein by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 28, 1997).
10.21 Registration Rights Agreement dated as of March 26, 1998
among the Company and the parties listed on Schedule A
attached thereto (incorporated herein by reference to
Exhibit 10.20 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 29, 1998).
10.22 Registration Rights Agreement dated as of July 9, 1998 among
the Company and the parties listed on Schedule A attached
thereto.
11 Computation of Net Income Per Common Share.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
-20-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 11, 1998 TETRA TECH, INC.
By:
---------------------------------------------
Li-San Hwang
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
By:
---------------------------------------------
James M. Jaska
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
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