SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1996 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 No.)
incorporation or organization)
670 NORTH ROSEMEAD BOULEVARD, PASADENA, CALIFORNIA 91107
---------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (818) 449-6400
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
--- ---
Number of shares of Common Stock outstanding
as of April 26, 1996: 11,273,081
TETRA TECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
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 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
-2-
PART I. FINANCIAL INFORMATION
Item 1.
- - -------
Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
$ in thousands, except share data March 31, October 1,
1996 1995
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 5,734 $13,130
Accounts receivable - net........................... 24,756 26,975
Unbilled receivables - net......................... 24,985 25,529
Prepaid and other current assets.................... 3,019 1,869
Deferred income tax benefit......................... 1,680 4,758
------- -------
Total Current Assets............................. 60,174 72,261
PROPERTY AND EQUIPMENT:
Leasehold improvements.............................. 679 433
Equipment, furniture and fixtures................... 12,365 10,959
------- -------
Total............................................ 13,044 11,392
Accumulated depreciation............................ (6,193) (5,001)
------- -------
PROPERTY AND EQUIPMENT - NET.......................... 6,851 6,391
INTANGIBLE ASSETS - NET............................... 21,663 14,044
OTHER ASSETS.......................................... 2,250 234
------- -------
TOTAL ASSETS.......................................... $90,938 $92,930
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $11,421 $14,820
Accrued compensation................................ 6,788 8,287
Other current liabilities........................... 3,173 2,954
Purchase price payable.............................. 0 5,000
Current portion of long-term obligations............ 45 1,000
Income taxes payable................................ 0 328
------- -------
Total Current Liabilities........................ 21,427 32,389
Long-term obligations................................. 13,000 19,045
STOCKHOLDERS' EQUITY:
Preferred stock - authorized,
2,000,000 shares; none issued and
outstanding........................................
Common stock - authorized, 15,000,000 shares
of $0.1 par value; issued and outstanding
11,264,858 and 10,588,247 shares at
March 31, 1996 and October 1, 1995, respectively... 113 106
Additional paid-in capital.......................... 32,501 21,819
Retained earnings................................... 23,897 19,571
------- -------
TOTAL STOCKHOLDERS' EQUITY............................ 56,511 41,496
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $90,938 $92,930
======= =======
See accompanying notes to the condensed consolidated financial statements.
-3-
Tetra Tech, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
$ in thousands, except share data Three Months Ended Six Months Ended
---------------------- ----------------------
March 31, April 2, March 31, April 2,
1996 1995 1996 1995
---------- -------- --------- --------
Gross Revenue........................... $53,929 $27,852 $108,091 $55,498
Subcontractor costs................... 13,853 6,701 29,992 14,400
------- ------- -------- -------
Net Revenue............................. 40,076 21,151 78,099 41,098
Cost of Net Revenue..................... 30,676 15,907 60,159 30,957
------- ------- -------- -------
Gross Profit............................ 9,400 5,244 17,940 10,141
Selling, General and Administrative
Expenses.............................. 4,963 2,524 9,484 4,907
Goodwill Amortization................... 318 107 607 218
------- ------- -------- -------
Income From Operations.................. 4,119 2,613 7,849 5,016
Interest Expense........................ 361 4 820 11
Interest Income......................... (70) (205) (181) (394)
------- ------- -------- -------
Income Before Income Taxes.............. 3,828 2,814 7,210 5,399
Income Tax Expense...................... 1,531 1,126 2,884 2,160
------- ------- -------- -------
Net Income.............................. $ 2,297 $ 1,688 $ 4,326 $ 3,239
======= ======= ======== =======
Net Income Per Common Share............. $ 0.20 $ 0.16 $ 0.38 $0.30
======= ======= ======== =======
Shares Used in Per Share Calculations... 11,603 10,759 11,462 10,755
======= ======= ======== =======
See accompanying notes to the condensed consolidated financial statements.
-4-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
$ in thousands
Six Months Ended
----------------------
March 31, April 2,
1996 1995
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 4,326 $ 3,239
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation.................................. 1,276 703
Amortization.................................. 607 218
Other......................................... 2 (76)
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable........................... 10,961 780
Unbilled receivables.......................... (485) 3,514
Prepaid and other assets...................... (294) (937)
Accounts payable.............................. (6,077) (4,045)
Accrued compensation.......................... (1,954) (414)
Other current liabilities..................... 41 (10)
Income taxes payable.......................... (1,400) (1,051)
-------- -------
Net Cash Provided By Operating
Activities................................ 7,003 1,921
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for short-term investment.................. --- (3,003)
Capital expenditures............................... (1,062) (707)
Proceeds from sale of property and
equipment......................................... 41 8
Payments for business acquisitions, net
of cash acquired.................................. (6,748) ---
-------- -------
Net Cash Used In Investing
Activities................................ (7,769) (3,702)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt......................... (12,003) ---
Proceeds from issuance of long-term debt........... 5,003 ---
Payments on obligations under capital
leases............................................ (6) ---
Net proceeds from issuance of common
stock............................................. 376 93
Payments to acquire treasury stock................. --- (82)
-------- -------
Net Cash (Used In) Provided By
Financing Activities...................... (6,630) 11
-------- -------
NET DECREASE IN CASH AND CASH
EQUIVALENTS....................................... (7,396) (1,770)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD......................................... 13,130 15,890
-------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................................ $ 5,734 $14,120
======== =======
-5-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
$ in thousands
Six Months Ended
----------------------
March 31, April 2,
1996 1995
---------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest...................................... $ 796 $ 9
Income taxes.................................. $ 4,285 $2,719
SUPPLEMENTAL NON-CASH INVESTING AND
FINANCING ACTIVITIES:
In November 1995, the Company
purchased all of the capital stock of
KCM, Inc. In conjunction with this
acquisition, liabilities were
assumed as follows:
Fair value of assets acquired................. $ 20,393
Cash paid................................... (2,645)
Issuance of common stock.................... (10,313)
Other acquisition costs..................... (415)
--------
Liabilities assumed...................... $ 7,020
========
See accompanying notes to the condensed consolidated financial statements.
-6-
TETRA TECH, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying condensed consolidated balance sheet as of March 31, 1996,
the condensed consolidated statements of income and the condensed statements of
cash flows for the three-month and six-month periods ended March 31, 1996 and
April 2, 1995 are unaudited, and in the opinion of management include all
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 for the fiscal year ended October 1,
1995.
The results of operations for the three and six months ended March 31, 1996
are not necessarily indicative of the results to be expected for the fiscal year
ending September 29, 1996.
The computation of net income per common share is based upon the weighted
average number of shares outstanding, including the effects of common stock
equivalents (common stock options), and, 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 June 23, 1995 for each four shares outstanding as
of the record date of June 9, 1995.
2. CURRENT ASSETS
--------------
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents
totalled $5,038,000 at March 31, 1996.
3. ACQUISITIONS
------------
In September 1995, the Company acquired 100% of the capital stock of PRC
Environmental Management, Inc. ("EMI"), a scientific and information technology
firm, from PRC Inc. The acquisition was accounted for as a purchase. The
purchase price, estimated at $40,000,000 is subject to adjustment based upon the
Net Asset Value of the Business on September 14, 1995 as described in the
related purchase agreement. From the effective acquisition date, the results of
EMI operations have been included in the Company's condensed consolidated
financial statements.
-7-
In November 1995, the Company acquired 100% of the capital stock of KCM,
Inc. ("KCM"), an engineering services firm specializing in areas of water
quality, water and wastewater systems, surface water management, fisheries and
facilities. The acquisition was accounted for as a purchase. The purchase price
of $12,958,000 consists of cash and Company stock which was issued under
Regulation D under the Securities Act of 1933, as amended, and had a value of
$10,313,000. From the effective acquisition date, the results of KCM operations
have been included in the Company's condensed consolidated financial statements.
The purchase price of the acquisitions in excess of the fair value of the
net assets acquired is being amortized over a period of 20 years and is included
under the caption "Intangible Assets-Net" in the accompanying consolidated
balance sheets. The final determination of such excess is subject to a financial
determination of the value of the net assets acquired and the purchase price.
The following table presents summarized unaudited pro forma operating
results assuming that the Company had acquired EMI and KCM on October 3, 1994:
Pro Forma Six Months Ended
--------------------------
March 31, 1996 April 2, 1995
-------------- -------------
($ in thousands, except per share data)
Gross revenue $110,142 $115,967
Income before income taxes 7,370 5,873
Net income 4,423 3,523
Net income per share 0.38 0.31
Weighted average shares outstanding 11,613 11,387
-8-
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 to Net Revenue % Relationship to Net Revenue
----------------------------- -----------------------------
Quarter Ended Period to Six Months Ended Period to
------------- Period ---------------- Period
Mar. 31, 1996 Apr. 2, 1995 Change Mar. 31, 1996 Apr. 2, 1995 Change
------------- ------------ --------- ------------- ------------ ---------
Net revenue 100.0% 100.0% 89.5% 100.0% 100.0% 90.0%
Cost of net revenue 76.5 75.2 92.8 77.0 75.3 94.3
----- ----- ------ ----- ----- ------
Gross profit 23.5 24.8 79.3 23.0 24.7 76.9
Selling, general and
administrative expenses 13.2 12.4 100.7 12.9 12.4 96.9
----- ----- ------ ----- ----- ------
Income from operations 10.3 12.4 57.6 10.1 12.3 56.5
Net interest (expense) income (0.8) 0.9 (144.8) (0.8) 0.9 (166.8)
----- ----- ------ ----- ----- ------
Income before income taxes 9.5 13.3 36.0 9.3 13.2 33.5
Income tax expense 3.8 5.3 36.0 3.7 5.3 33.5
----- ----- ------ ----- ----- ------
Net income 5.7% 8.0% 36.1% 5.6% 7.9% 33.6%
===== ===== ====== ===== ===== ======
Gross revenue increased by 93.6% to $53,929,000 for the three months ended March
31, 1996 compared to $27,852,000 for the comparable prior year period. For the
six months ended March 31, 1996, gross revenue increased by 94.8% to
$108,091,000 from $55,498,000 in the prior year. Net revenue increased by 89.5%
to $40,076,000 for the quarter from $21,151,000 a year ago. For the six months
ended March 31, 1996, net revenue increased by 90.0% to $78,099,000 from
$41,098,000 last year. For both gross and net revenue, growth in actual dollars
was experienced in all client sectors. The percentage of the Company's net
revenue attributable to the Federal government, state and local government,
commercial clients, and international clients was affected by the acquisitions
of PRC Environmental Management, Inc. ("EMI") and KCM, Inc. (the
"Acquisitions"). The following table presents the percentage of net revenue for
each client sector:
Percentage of Net Revenue
---------------------------------------------------------------
Quarter Ended Six Months Ended
------------------------------ ------------------------------
Client Sector March 31, 1996 April 2, 1995 March 31, 1996 April 2, 1995
- - --------------------------- -------------- ------------- -------------- -------------
Federal government 61 55 63 52
State & local government 18 11 16 12
Commercial 19 34 19 36
International 2 -- 2 --
For the quarter ended March 31, 1996, the Acquisitions contributed $19,729,000
in net revenue growth, of which $13,908,000 was in the Federal government
sector, and $4,499,000 was in the
-9-
state and local government sector. For the six months ended, the Acquisitions
contributed $37,775,000 in net revenue growth of which $27,983,000 was in the
Federal government sector, and $7,238,000 was in the state and local government
sector.
Cost of net revenue increased 92.8% to $30,676,000 for the three months ended
March 31, 1996 compared to $15,907,000 for the comparable prior year period.
For the six months ended March 31, 1996, cost of net revenue increased 94.3% to
$60,159,000 from $30,957,000 in the prior year. As a percentage of net revenue,
cost of net revenue increased in the quarter and six months from 75.2% and 75.3%
last year to 76.5% and 77.0% this year, respectively. This increase was due
substantially to the higher cost of net revenue associated with the EMI
acquisition. Although this percentage increased, the Company continues to
emphasize strong project management techniques.
Selling, general and administrative ("SG&A") expenses, inclusive of
amortization, increased 100.7% to $5,281,000 for the three months ended March
31, 1996 compared to $2,631,000 for the comparable prior year period. For the
quarter ended March 31, 1996, this increase was due to the amortization of the
goodwill associated with the Acquisitions ($220,000), and the addition of SG&A
expenses of the Acquisitions ($2,550,000). For the six months ended March 31,
1996, SG&A increased 96.9% to $10,091,000 from $5,125,000 in the prior year and
the amortization of the goodwill associated with the Acquisitions was $410,000,
and the SG&A expenses of the Acquisitions was $4,658,000. As a percentage of
net revenue, SG&A expenses increased to 13.2% for the quarter ended March 31,
1996 from 12.4% for the comparable period last year, and for the six months
ended March 31, 1996, SG&A expenses increased to 12.9% from 12.4% last year.
For the quarter ended March 31, 1996, net interest expense of $291,000 was
incurred compared to net interest income of $201,000 in the quarter ended April
2, 1995, primarily due to borrowings on the Company's revolving credit facility
($13,000,000 at March 31, 1996) to partially fund the EMI acquisition on
September 15, 1995. For the six months ended March 31, 1996, net interest
expense increased to $639,000, compared to net interest income of $380,000 in
the prior year.
Income tax expense increased to $1,531,000 and $2,884,000 for the quarter and
six months ended March 31, 1996, respectively, from $1,126,000 and $2,160,000
for the comparable prior year period due to higher income before income taxes.
The Company estimates that its fiscal 1996 effective tax rate will be
approximately 40%, the same as experienced in fiscal 1995.
Severe weather conditions and the Federal government slowdown had some affect on
the Company's normal operations; however, the financial impact was minimized by:
- staff adjustments to temporary status, and
- workload shifts to private and other public sector contracts.
-10-
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company's cash and cash equivalents totalled
$5,734,000. In addition, the Company has a credit agreement (the "Credit
Agreement") with a bank which provides for a revolving credit facility of
$30,000,000, which was voluntarily reduced to $25,000,000 in March, 1996. The
Company anticipates further voluntary reductions in availability under the
revolving credit facility during the balance of fiscal 1996. Under the Credit
Agreement, the Company may also request standby letters of credit up to the
aggregate sum of $5,000,000 outstanding at any one time. As of March 31, 1996,
outstanding borrowings totalled $13,000,000 and outstanding letters of credit
totalled $37,000.
The increase in cash from operating activities for the six months ended March
31, 1996 resulted primarily from the management of receivables and increase in
net income. The decrease in accounts payable and accrued compensation resulted
primarily from the timing of these liabilities.
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 1996.
RISK FACTORS
The following risk factors should be reviewed in addition to the other
information contained in this Quarterly Form 10-Q.
POTENTIAL LIABILITY AND INSURANCE. Because of the type of environmental
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 both the areas and magnitude of potential risk to the
Company.
The Company maintains comprehensive general liability insurance in the
amount of $1,000,000. This amount, together with $9,000,000 umbrella policies,
provide total general liability coverage of $10,000,000. The Company's
professional liability insurance ("E&O") policy, which includes pollution
coverage, for 1996 provided $10,000,000 in coverage, with $100,000 self-insured
retention. For 1997, the Company expects to maintain similar coverages as to
1996 for current services including pollution-related services rendered by the
Company. 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
-11-
dollar amount of any liabilities incurred in connection with the performance of
such services will not exceed policy limits. The premiums paid by the Company
for its professional liability policies during 1996 were approximately $726,000
for E&O. The amounts to be paid for 1997 will be determined by March 14, 1997.
The Company does not maintain funded reserves to provide for payment of
partially or completely uninsured claims and, accordingly, a partially or
completely uninsured claim, if successful and of significant magnitude, could
have a material adverse effect on the Company.
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. Competition in the environment services industry is
likely to increase as the industry matures, as more companies enter the market
and expand the range of services which they offer and as the Company and its
competitors move into new geographic markets. Historically, competition has been
based primarily on the quality and timeliness of service. However, as the
industry continues to mature, the Company believes that price will become an
increasingly important competitive factor.
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. 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. The
Company's government contracts are subject to renegotiation of profits in the
event of a change in the contractual scope of work to be performed.
CONFLICTS OF INTEREST. Many of the Company's clients are concerned about
potential or actual conflicts of interest in retaining environmental 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 another private entity. The Company has, on
occasion, declined to bid on a project because of an actual or potential
conflict of interest. However, the Company has not experienced disqualification
during a bidding or award negotiation process by any government or private
client as a result of a 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
-12-
of the business risks and conditions in the environmental 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 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.
-13-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- - ------ --------------------------------
(a) Exhibits
--------
EXHIBIT 27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
(i) Report on Form 8-K/A dated November 7, 1995 and filed with the
Securities and Exchange Commission on January 15, 1996 which
relates to the Company's acquisition of KCM, Inc. and includes the
audited financial statements and independent auditors' report for
the business previously acquired and the unaudited pro forma
consolidated financial statements which were omitted from the Form
8-K.
-14-
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: May 8, 1996 TETRA TECH, INC.
By: /s/ Li-San Hwang
-----------------------------------
Li-San Hwang
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ James M. Jaska
-----------------------------------
James M. Jaska
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
-15-