1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 27, 1996 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 1-11075 DAMES & MOORE, INC. (Exact name of registrant as specified in its charter) Delaware 95-4316617 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 911 Wilshire Blvd., Suite 700, Los Angeles, California 90017 (Address, including zip code, of principal executive offices) (213) 683-1560 (Registrant's telephone number, including area code) 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 period 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 November 1, 1996, 21,800,448 shares of the registrant's common stock, $0.01 par value, were issued and outstanding. 2 Part I. Financial Information Item 1. Financial Statements DAMES & MOORE Condensed Consolidated Statements of Financial Position (In thousands, except share and per share amounts) (unaudited) Assets Sept. 27, March 29, 1996 1996 Current: Cash and cash equivalents $ 17,715 $ 55,351 Marketable securities and short-term investments 6,268 14,936 Accounts receivable, clients: Billed, net of allowance for doubtful accounts of: $2,588 and $1,886 113,806 84,616 Billed contract retentions 8,304 7,295 Unbilled 49,213 43,813 171,323 135,724 Prepaid expenses and other assets 14,120 10,180 Total current assets 209,426 216,191 Property and equipment, net 19,418 14,871 Intangibles of acquired businesses 109,443 84,294 Equity investments and other assets 8,014 1,923 $346,301 $317,279 Liabilities and Shareholders' Equity Current: Notes payable $ 8,328 $ - Accounts payable, trade 24,388 20,162 Accrued payroll and employee benefits 26,565 26,733 Current income taxes payable 2,841 2,800 Accrued expenses and other liabilities 27,141 20,682 Total current liabilities 89,263 70,377 Commitments and contingencies Long-term debt 75,000 75,000 Other long-term liabilities 4,544 3,955 Shareholders' equity: Preferred stock, $0.01 par value, shares authorized: 1,000,000 shares issued: none - - Common stock and capital in excess of $0.01 par value, shares authorized: 27,000,000 shares issued: 22,724,000 and 22,686,000 107,224 106,804 Retained earnings 81,522 75,295 Treasury stock, 923,360 and 1,150,000 (10,844) (13,859) Other shareholders' equity (408) (293) Total shareholders' equity 177,494 167,947 $346,301 $317,279 See accompanying notes to condensed consolidated financial statements. 3 DAMES & MOORE Condensed Consolidated Statements of Earnings (In thousands, except per share amounts) (unaudited) Three Months Ended Six Months Ended Sept. 27, Sept. 29, Sept. 27, Sept. 29, 1996 1995 1996 1995 Gross revenues $163,110 $141,786 $317,948 $283,642 Direct costs of outside services 47,737 41,294 94,460 82,496 Net revenues 115,373 100,492 223,488 201,146 Operating expenses: Salaries and related costs 80,400 70,662 155,929 140,672 General expenses 20,184 17,856 40,719 36,739 Depreciation 2,253 1,553 4,062 2,907 Amortization of goodwill 955 853 1,853 1,652 103,792 90,924 202,563 181,970 Earnings from operations 11,581 9,568 20,925 19,176 Investment and other income 288 1,140 966 2,005 Interest expense (1,434) (709) (2,894) (1,461) Earnings before income taxes 10,435 9,999 18,997 19,720 Income taxes 4,413 4,196 7,995 8,190 Net earnings $ 6,022 $ 5,803 $ 11,002 $ 11,530 Earnings per share $ 0.28 $ 0.26 $ 0.51 $ 0.51 Cash dividends declared per share $ 0.03 $ 0.03 $ 0.06 $ 0.06 Weighted average number of shares 21,823 22,662 21,717 22,662 See accompanying notes to condensed consolidated financial statements. 4 DAMES & MOORE Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Six Months Ended Sept. 27, Sept. 29, 1996 1995 Cash Flow from operating activities: Net earnings $ 11,002 $ 11,530 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,023 4,678 Unrealized gain on marketable securities (16) (1,392) Earnings of equity investments (188) (92) Deferred income taxes 237 183 Change in assets and liabilities, net of effects of purchases of businesses: Marketable securities and short-term investments 8,684 1,418 Accounts receivable (20,213) (14,516) Prepaid expenses and other assets (2,845) (4,362) Income tax refunds 640 - Accounts payable and accrued expenses (4,706) 5,298 Net cash (used in) provided by operating activities (1,382) 2,745 Cash flows from investing activities: Purchases of businesses, net of cash acquired (24,324) (38,072) Purchases of property and equipment (4,585) (3,078) Equity investments and other assets, net (5,727) (22) Net cash (used in) investing activities (34,636) (41,172) Cash flows from financing activities: Net change in short-term debt 5,777 13,114 Proceeds from issuance of debt - 25,780 Issuance of common stock 280 720 Restricted stock repurchased - (76) Treasury stock issued 60 - Treasury stock purchased (6,449) - Dividends paid (1,286) (1,362) Net cash (used in) provided by financing activities (1,618) 38,176 Net (decrease) in cash and cash equivalents (37,636) (251) Cash and cash equivalents, beginning of period 55,351 13,300 Cash and cash equivalents, end of period $ 17,715 $ 13,049 Supplemental disclosures of cash flow information: Interest paid $ 260 $ 1,212 Income tax paid 7,207 8,322 Non cash investing activities - business acquisitions 7,381 886 See accompanying notes to condensed consolidated financial statements. 5 DAMES & MOORE Notes to Condensed Consolidated Financial Statements Note 1 - Basis of Presentation: The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and disclosures included in the Company's 1996 annual report to shareholders. The condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) which management considers necessary to present fairly the financial position of the Company as of September 27, 1996 and March 29, 1996 and the results of operations for the six month periods ended September 27, 1996 and September 29, 1995. Certain items in the prior year's financial statements have been reclassified to be consistent with the 1997 fiscal year presentation. The results of operations for the interim periods are not necessarily indicative of operating results to be expected for the full year. Fiscal Year: The Company uses a 52-53 week fiscal year ending the last Friday in March. The six-month periods ended September 27, 1996 and September 29, 1995 were each comprised of 26 weeks. Note 2 - Long-term Debt The Company amended its existing revolving lines of credit with a number of banks. The Company has available $70,300,000 for borrowing in U.S. dollars, offshore foreign currencies or foreign domestic currencies and for the issuance of letters of credit and purchase of foreign currency exchange contracts. The lines of credit mature as follows: $14,500,000 in November 1996, $5,800,000 in February 1998, and $50,000,000 in January 1999. Interest rates are charged under several pricing options, including the bank's reference rates or alternative variable rates, at the Company's option. These lines involve no compensating balance requirements or material commitment fee arrangements. The agreements contain limitations on additional indebtedness, sales of assets, acquisitions and capital expenditures, as well as covenants as to minimum ratios and balances as to net worth, fixed charge coverage, leverage ratio, asset coverage and net funded debt to earnings, as defined; such requirements were satisfied as of September 27, 1996. As of September 27, 1996, under these lines, the Company had borrowings of $6,862,000, standby letters of credit totaling $17,170,000, principally for project performance, advance payment guarantees and the Company's domestic insurance program; and $527,000 for guarantees of officer loans. On September 30, 1996 the Company borrowed the remaining $25,000,000 available from the Senior Notes, see the Company's annual report for the year ended March 29, 1996. 6 DAMES & MOORE Notes to Condensed Consolidated Financial Statements Note 3 - Shareholders' Equity: The Company declared quarterly cash dividends of $0.03 per share of common stock, totaling $1,285,700, during the first two quarters of fiscal 1997, and issued 37,700 shares of Restricted Stock under its amended and restated 1991 Long-Term Incentive Plan. The Board of Directors has authorized the Company to repurchase up to 2,500,000 shares of its common stock. The Company has repurchased 1,728,700 shares through September 27, 1996 and reissued 805,340 shares. Note 4 - Foreign Currency Translation: The Company's foreign subsidiaries and branches have been using the U.S. dollar as their functional currency. The Company has determined, that due to growth and expansion in these countries, the majority of these entities have become self-contained and integrated within the countries' economic environment. Accordingly, effective August 3, 1996 the functional currencies for these entities will be their respective local currency. The monetary assets and liabilities are translated into U.S. dollars using exchange rates in effect at period end. Revenue and expenses are translated at the average rates of exchange prevailing during the period. The resulting translation adjustments are reported as a separate component of shareholders' equity. Note 5 - Stock Repurchase Agreement: On November 5, 1996, the Company reached agreement in principle with Hochtief Aktiengesellschaft vorm. Gebr. Helfmann (Hochtief AG) to repurchase all of the 3,700,000 shares of Dames & Moore common stock held by the German civil engineering and construction company. The agreement is subject to certain approvals and the satisfaction of certain contingencies. The Company intends to use the acquired shares to facilitate acquisitions or may remarket them if market conditions permit. 7 Part I. Financial Information Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company, from time to time, may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the following among other factors: the ability to attract and retain professional personnel; potential liability for consulting services relating to toxic and hazardous materials and the availability to insure such risks; dependence on environmental regulation; and the competitive markets in the Company's service areas. Acquisitions During the first quarter of fiscal 1997, the Company acquired two companies. DecisionQuest, Inc., a company specializing in litigation support for corporate clients, provides services in trial strategy consulting, development of case themes, juror analysis and selection, preparation of demonstrative trial graphics, and witness preparation. BRW Group, Inc. provides project planning, design and construction phase services for transportation and infrastructure projects. The Company completed several smaller acquisitions during the second quarter of fiscal 1997. The Company acquired an engineering and consulting firm specializing in the design of facilities related to water reclamation and reuse, treatment and supply. In addition, the Company purchased the remaining interest in an international agricultural consulting firm, in which it previously held a non-controlling minority interest. Lastly, the Company acquired a 40% interest in a high-tech engineering firm in Britain with expertise in finding practical applications using state of the art research and technological advances. Their expertise is in designing and modeling the effects of impacts and deformations on critical structures. All acquisitions are accounted for as purchases; accordingly, the purchase prices in excess of net assets acquired were recognized and are being amortized over periods up to 40 years. The operating results of the acquisitions have been included in the Company's consolidated financial statements from the date of each acquisition. Results of Operations Second Quarter 1997 Compared with Second Quarter 1996 The Company uses a 52-53 week fiscal year ending the last Friday in March. The second quarter for both fiscal year 1997 and 1996 were comprised of 13 weeks. 1997 Increase 1996 Net Revenues $115,373,000 14.81% $100,492,000 The 14.81% increase in net revenues in the second quarter of 1997 as compared to the second quarter of 1996 was primarily a result of the Company's new acquisitions, which contributed $13,739,000 for the quarter, representing a 13.67% increase from the prior year's second quarter. The remaining increase of $1,141,000, or 1.14%, represents growth in the Company's ongoing businesses. 8 1997 Increase 1996 Salaries and Related Costs $80,400,000 13.78% $70,662,000 Of the 13.78% increase in salaries and related costs in the second quarter of 1997, the acquisitions accounted for $8,867,000, or 12.55%, with the remaining increase attributable to annual salary raises granted at the beginning of the Company's 1997 fiscal year. Salaries and related costs represent 69.7% and 70.3% of net revenues for the second quarter of 1997 and 1996, respectively. 1997 Increase 1996 General Expenses $20,184,000 13.04% $17,856,000 General expenses increased by $3,103,000, or 17.38%, due to the new acquisitions. This increase was reduced by savings realized in insurance costs. As a percentage of net revenues, general expenses represent 17.5% and 17.8% of net revenues for the second quarter of 1997 and 1996, respectively. 1997 Increase 1996 Depreciation $2,253,000 45.11% $1,553,000 New acquisitions were responsible for $415,000, or 26.7%, of the increase in depreciation and the balance of the increase in depreciation was attributable to new purchases of property and equipment for previously acquired companies and the core business. Depreciation represents 2% and 1.6% of net revenues for the second quarter of 1997 and 1996, respectively. 1997 Increase 1996 Amortization of Goodwill $955,000 11.87% $853,000 Amortization of goodwill increased due to the Company's acquisitions. Future acquisitions will continue this trend. 1997 Increase 1996 Earnings from Operations $11,581,000 21.04% $9,568,000 The Company's operating margin as a percentage of net revenues was 10% and 9.5% for the second quarter of 1997 and 1996, respectively. 1997 Decrease 1996 Investment and Other Income $288,000 (74.7%) $1,140,000 The decline in investment and other income is a result of the Company's liquidation of the captive insurance subsidiary's equity portfolio and the subsequent reinvestment in less volatile but lower yielding instruments. 1997 Increase 1996 Interest Expense $1,434,000 102.36% $709,000 Funding of acquisitions and related business ventures has been financed with long-term debt. Consequently, interest expense has and will continue to increase. See "Liquidity and Capital Resources." 1997 Increase 1996 Income Taxes $4,413,000 5.18% $4,196,000 Income taxes as a percentage of earnings before income taxes was 42.3% and 42% for the second quarter of 1997 and 1996, respectively. 1997 Increase 1996 Net Earnings $6,022,000 3.77% $5,803,000 Net earnings as a percentage of net revenues were 5.2% and 5.8% for the second quarter of 1997 and 1996, respectively. The decrease as a percentage of net revenues is a result of interest costs and reduced income from our captive insurance subsidiary investment portfolio, offset partially by savings realized in insurance costs. 9 First Two Quarters 1997 Compared with First Two Quarters 1996 The Company uses a 52-53 week fiscal year ending the last Friday in March. The first two quarters for both fiscal year 1997 and 1996 were comprised of 26 weeks. 1997 Increase 1996 Net Revenues $223,488,000 11.11% $201,146,000 The 11.11% increase in net revenues in the first two quarters of 1997 as compared to the first two quarters of 1996 was primarily a result of the Company's new acquisitions, which contributed $20,412,000, representing a 10.15% increase from the prior year's first two quarters. The remaining increase of $1,930,000, or .96%, represents growth in the Company's ongoing businesses. 1997 Increase 1996 Salaries and Related Costs $155,929,000 10.85% $140,672,000 Of the 10.85% increase in salaries and related costs in the first two quarters of 1997, the acquisitions accounted for $12,744,000, or 9.06%, with the remaining increase attributable to annual salary raises granted at the beginning of the Company's 1997 fiscal year. Salaries and related costs represent 69.8% and 69.9% of net revenues for the first two quarters of 1997 and 1996, respectively. 1997 Increase 1996 General Expenses $40,719,000 10.83% $36,739,000 General expenses increased by $4,580,000, or 12.47%, due to the new acquisitions. Savings realized in insurance costs were further offset by one-time costs for an image program and consultant fees. As a percentage of net revenues, general expenses represent 18.2% and 18.3% of net revenues for the first two quarters of 1997 and 1996, respectively. 1997 Increase 1996 Depreciation $4,062,000 39.76% $2,907,000 New acquisitions were responsible for $577,000, or 19.8%, of the increase in depreciation, and the balance of the increase in depreciation was attributable to new purchases of property and equipment for previously acquired companies and the core business. Depreciation represents 1.8% and 1.4% of net revenues for the first two quarters of 1997 and 1996, respectively. 1997 Increase 1996 Amortization of Goodwill $1,853,000 12.17% $1,652,000 Amortization of goodwill increased due to the Company's acquisitions. Future acquisitions will continue this trend. 1997 Increase 1996 Earnings from Operations $20,925,000 9.12% $19,176,000 The Company's operating margin as a percentage of net revenues was 9.4% and 9.5% for the first two quarters of 1997 and 1996, respectively. Higher margins from the new acquisitions were offset by several administrative charges related to acquisition closings, relocation costs for senior management personnel, consultant expenses and costs associated with the Company's new image program. 1997 Decrease 1996 Investment and Other Income $966,000 (51.82%) $2,005,000 The decline in investment and other income is a result of the Company's liquidation of the captive insurance subsidiary's equity portfolio in April and May and the subsequent reinvestment in less volatile but lower yielding instruments. 10 1997 Increase 1996 Interest Expense $2,894,000 98.14% $1,461,000 Funding of acquisitions and related business ventures has been financed with long-term debt. Consequently, interest expense has and will continue to increase. See "Liquidity and Capital Resources." 1997 Decrease 1996 Income Taxes $7,995,000 (2.38%) $8,190,000 Income taxes as a percentage of earnings before income taxes was 42.1% and 41.5% for the first two quarters of 1997 and 1996, respectively. 1997 Decrease 1996 Net Earnings $11,002,000 (4.58%) $11,530,000 Net earnings as a percentage of net revenues were 4.9% and 5.7% for the first two quarters of 1997 and 1996, respectively. The decrease is a result of the administrative charges previously mentioned, interest costs and reduced income from our captive insurance subsidiary investment portfolio, offset partially by savings realized in insurance costs. Liquidity and Capital Resources The Company's working capital of $120,163,000 at September 27, 1996 has declined from $145,814,000 at March 29, 1996. Cash and cash equivalents total $17,715,000 at September 27, 1996, compared to $55,351,000 at March 29, 1996. The primary source of cash in the first two quarters of 1997 consisted of borrowings of $5,777,000. The primary uses of cash in the first two quarters of 1997 consisted of funding acquisitions, approximately $24,324,000; equity investments in new ventures, approximately $6,000,000; and repurchase of common stock, approximately $6,449,000. Accounts receivable increased 26% since March 29, 1996. Companies acquired in the first two quarters accounted for 61% of the increase, and the balance related to a higher level of business activity. Property and equipment increased 30% since March 29, 1996 primarily as a result of the acquisitions in the first two quarters and purchases of new equipment. On March 29, 1996, the Company completed its $100,000,000 Senior Notes credit facility, providing long-term financing to the Company. On closing, $75,000,000 of the total was funded. The remaining $25,000,000 was funded on September 30, 1996. The Company has available separate multi-year lines of credit totaling $70,300,000. Outstanding at September 27, 1996 are: borrowings of $6,862,000; standby letters of credit totaling $17,170,000, principally for project performance, advance payment guarantees, and the Company's domestic insurance program; and $527,000 for guarantees of officer loans. The Board of Directors has authorized the Company to repurchase up to 2,500,000 shares of its common stock. The Company has repurchased 1,728,700 shares through September 27, 1996, 86,200 of which were purchased in its second quarter. The Company may continue to purchase shares on the open market from time to time. The Company anticipates continuing capital requirements to support its growth, diversification of services, and funding of acquisitions. The Company believes that cash generated from operations, coupled with funding from the Senior Notes and its available lines of credit will be sufficient to meet its requirements for the foreseeable future. 11 Part II. Other Information Item 1. Legal Proceedings In 1994, a developer and townhome association filed an action against the Company and two other co-defendants alleging settlement problems with the foundation of the townhomes and later a claim for sewer repairs due to insufficient slope. A settlement in principle has been reached in this matter that would require the Company to pay $2.5 million contingent on the signing of a definitive agreement and on the Court's finding that the settlement was in good faith, so that all cross-claims by other defendants for implied indemnity would be dismissed. The Special Master appointed by the Court has stated that he would recommend that the Court issue such a finding as to the amount of the settlement. The parties are drafting the appropriate documents and expect to finalize the matter by January 31, 1997. The Company has adequately reserved the amount of this settlement. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders was held on August 12, 1996. Eleven directors were elected to hold office for the coming year. The following table lists the number of votes cast for or withheld from each: For Withheld Norman A. Barkeley 17,857,948 385,779 Arthur C. Darrow 17,568,346 675,381 George D. Leal 17,704,668 539,059 Robert J. Lynch, Jr. 17,855,968 387,759 Michael R. Peevey 17,771,112 472,615 Harald Peipers 17,813,015 430,712 Robert M. Perry 17,860,816 382,911 James E. Seitz* 17,857,448 386,279 John P. Trudinger 17,759,051 484,676 Richard C. Tucker 17,788,151 455,576 Anthony R. Moore 17,858,251 385,476 There were no abstentions or broker non-votes with respect to the election of the Company's directors. * Mr. Seitz has resigned as a director effective October 31, 1996. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27.1 Financial Data Schedule (included only in the electronic filing). (b) There have been no reports on Form 8-K filed during the quarter for which this report on Form 10-Q is being filed. 12 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. DAMES & MOORE, INC. Date: November 6, 1996 ARTHUR C. DARROW Arthur C. Darrow President and Chief Executive Officer (Principal Executive Officer) Date: November 6, 1996 MARK A. SNELL Mark A. Snell Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 6, 1996 LESLIE S. PUGET Leslie S. Puget Corporate Controller (Principal Accounting Officer) 13 Exhibit Index Exhibit Number Description 27 Financial Data Schedule, which is included only in the electronic submission to the Securities and Exchange Commission.