UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 DECEMBER 29, 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 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)
(818) 351-4664
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(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 January 26, 1997, the total number of outstanding shares of the
Registrant's common stock was 14,259,386.
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 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
Item 1.
- -------
Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
$ in thousands, except share data December 29, September 29,
1996 1996
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 7,601 $ 6,129
Accounts receivable - net.............. 24,272 22,306
Unbilled receivables - net............ 25,381 25,201
Prepaid and other current assets....... 3,291 1,939
Deferred income tax benefit............ 2,358 2,358
------- -------
Total Current Assets................. 62,903 57,933
PROPERTY AND EQUIPMENT:
Leasehold improvements................. 901 733
Equipment, furniture and fixtures...... 13,673 13,072
------- -------
Total................................ 14,574 13,805
Accumulated depreciation............... (7,383) (6,790)
------- -------
PROPERTY AND EQUIPMENT - NET............ 7,191 7,015
INTANGIBLE ASSETS - NET................. 22,498 22,047
OTHER ASSETS............................ 1,127 1,468
------- -------
TOTAL ASSETS............................ $93,719 $88,463
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................... $12,401 $13,423
Accrued compensation................... 6,067 7,311
Other current liabilities.............. 4,661 3,356
Current portion of long-term
obligations........................... 341 0
Income taxes payable................... 2,759 1,104
------- -------
Total Current Liabilities............ 26,229 25,194
STOCKHOLDERS' EQUITY:
Preferred stock - authorized,
2,000,000 shares; none issued and
outstanding..........................
Common stock - authorized, 15,000,000
shares of $.01 par value; issued
and outstanding 14,244,210 and
14,127,002 shares at December 29,
1996 and September 29, 1996,
respectively.......................... 142 141
Additional paid-in capital............. 35,076 33,452
Retained earnings...................... 32,272 29,676
------- -------
TOTAL STOCKHOLDERS' EQUITY.............. 67,490 63,269
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' $93,719 $88,463
EQUITY................................. ======= =======
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
---------------------------
December 29, December 31,
1996 1995
------------ ------------
Gross Revenue..................................................... $54,938 $54,162
Subcontractor costs........................................... 14,515 16,139
------- -------
Net Revenue....................................................... 40,423 38,023
Cost of Net Revenue............................................... 31,051 29,483
------- -------
Gross Profit...................................................... 9,372 8,540
Selling, General and Administrative Expenses...................... 4,979 4,810
------- -------
Income From Operations............................................ 4,393 3,730
Interest Expense.................................................. 15 459
Interest Income................................................... 64 111
------- -------
Income Before Income Taxes........................................ 4,442 3,382
Income Tax Expense................................................ 1,846 1,353
------- -------
Net Income........................................................ $ 2,596 $ 2,029
======= =======
Net Income Per Common Share....................................... $ 0.18 $ 0.14
======= =======
Shares Used in Per Share Calculations............................. 14,689 14,152
======= =======
See accompanying notes to the condensed consolidated financial statements.
-4-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
$ in thousands Three Months Ended
------------------------------
December 29, December 31,
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 2,596 $ 2,029
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.................................................. 902 1,010
Other.......................................................................... 20 ---
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable............................................................ 93 10,629
Unbilled receivables........................................................... (485) (6,590)
Prepaid and other assets....................................................... (879) (151)
Accounts payable............................................................... (1,515) (3,333)
Accrued compensation........................................................... (1,582) (1,812)
Other current liabilities...................................................... 999 (108)
Income taxes payable........................................................... 1,561 434
------- -------
Net Cash Provided By Operating Activities.................................... 1,710 2,108
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................................................. (356) (682)
Proceeds from sale of property and equipment...................................... 16 17
Proceeds (Payments) for business acquisitions, net of cash acquired............... 34 (6,226)
------- -------
Net Cash Used In Investing Activities........................................ (306) (6,891)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt........................................................ (73) (1,000)
Proceeds from issuance of long-term debt.......................................... --- 3
Payments on obligations under capital leases...................................... --- (6)
Net proceeds from issuance of common stock........................................ 141 65
------- -------
Net Cash Provided By (Used In) Financing Activities.......................... 68 (938)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. 1,472 (5,721)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................. 6,129 13,130
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 7,601 $ 7,409
======= =======
-5-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
$ in thousands
Three Months Ended
--------------------------------
December 29, December 31,
1996 1995
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................................... $ 6 $416
Income taxes............................................................... $ 314 $995
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
In December 1996, the Company purchased all of the capital
stock of IWA Engineers. In conjunction with this acquisition,
liabilities were assumed as follows:
Fair value of assets acquired.............................................. $ 2,513
Cash paid.................................................................. (132)
Issuance of common stock................................................... (1,026)
Other acquisition costs.................................................... (70)
-------
Liabilities assumed...................................................... $ 1,285
=======
In December 1996, the Company purchased all of the capital stock of
FLO Engineering, Inc. In conjunction with this acquisition,
liabilities were assumed as follows:
Fair value of assets acquired.............................................. $ 837
Cash paid.................................................................. (88)
Issuance of common stock................................................... (459)
Other acquisition costs.................................................... (70)
-------
Liabilities assumed...................................................... $ 220
=======
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 sheets as of December 29,
1996, the condensed consolidated statements of income and the condensed
statements of cash flows for the three month periods ended December 29, 1996 and
December 31, 1995 are unaudited, and in the opinion of management include all
adjustments, which are of a normal recurring nature, 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 September 29,
1996.
The results of operations for the three month period ended December 29, 1996
are not necessarily indicative of the results to be expected for the fiscal year
ending September 28, 1997.
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 21, 1996 for each four shares outstanding as
of the record date of June 7, 1996.
2. 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 totalled $7,601,000 at December 29, 1996.
3. ACQUISITIONS
------------
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, local and private customers. The
acquisition was accounted for as a purchase. The purchase price of
approximately $1,500,000 consists of cash and Company common stock which is
subject to adjustment based upon the Net Asset Value of the Business on December
29, 1996 as described in the related purchase agreement.
-7-
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 acquisition was accounted for as a purchase. The purchase
price of approximately $700,000 consists of cash and Company common stock which
is subject to adjustment based upon the Net Asset Value of the Business on
December 29, 1996 as described in the related purchase agreement.
The purchase price of the acquisitions in excess of the fair value of the
net assets acquired is being amortized over a period of 30 years and is included
under the caption "Intangible Assets - Net" in the accompanying consolidated
balance sheets.
The effect of unaudited pro forma operating results of both transactions,
had they been acquired as of September 30, 1996, is not material.
In November 1995, the Company acquired 100% of the capital stock of KCM,
Inc. ("KCM"). The following table presents summarized unaudited pro forma
operating results assuming that the Company had acquired KCM on October 2, 1995:
Pro Forma Three Months Ended
----------------------------
Dec. 31, 1995
-------------
($ in thousands, except per share data)
Gross revenue $56,213
Income before income taxes 3,542
Net income 2,126
Net income per share 0.14
Weighted average shares outstanding 14,152
4. ACCOUNTS RECEIVABLE
-------------------
The Accounts Receivable valuation allowance includes amounts to provide for
doubtful accounts and for the potential disallowance of billed and unbilled
costs. Disallowance of billed and unbilled costs is primarily associated with
contracts with the U.S. government which contain clauses that subject
contractors to many 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.
-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:
Percentage Relationship to Revenue
--------------------------------------
Quarter Ended
-------------------------------------- Period to Period
December 29, 1996 December 31, 1995 Change
----------------- ----------------- -----------------
Net revenue 100.0% 100.0% 6.3%
Cost of net revenue 76.8 77.5 5.3
------- ------- -----
Gross profit 23.2 22.5 9.7
Selling, general and
administrative expenses 12.3 12.7 3.5
------- ------- -----
Income from operations 10.9 9.8 17.8
Net interest (expense) income 0.1 (0.9) 114.1
------- ------- -----
Income before income taxes 11.0 8.9 31.3
Income tax expense 4.6 3.6 36.4
------- ------- -----
Net income 6.4% 5.3% 27.9%
======= ======= =====
Gross revenue increased by 1.4% to $54,938,000 for the three months ended
December 29, 1996 compared to $54,162,000 for the comparable prior year period.
Net revenue increased by 6.3% to $40,423,000 for the quarter ended December 29,
1996 compared to $38,023,000 for the comparable quarter in the prior year. For
both gross and net revenue, growth in actual dollars was experienced in three
client sectors - state and local government, commercial and international. The
following table presents the percentage of net revenue for each client sector:
Percentage of Net Revenue
-------------------------------------
Quarter Ended
-------------------------------------
Client Sector December 29, 1996 December 31, 1995
- ------------- ----------------- -----------------
Federal government 60 65
State & local government 17 14
Commercial 21 19
International 2 2
Cost of net revenue increased 5.3% to $31,051,000 for the three months ended
December 29, 1996 compared to $29,483,000 for the comparable prior year period.
As a percentage of net revenue, cost of net revenue decreased to 76.8% for the
quarter ended December 29, 1996 from 77.5% from the comparable prior year
quarter. This decrease was due substantially to improvements in operating
margins and efficiencies in business operations.
-9-
Selling, general and administrative ("SG&A") expenses, inclusive of
amortization, increased 3.5% to $4,979,000 for the three months ended December
29, 1996 compared to $4,810,000 for the comparable prior year period. The
increase was due to the amortization of the goodwill associated with the
acquisitions of IWA and FLO ($3,000), and the addition of SG&A expenses of IWA
and FLO ($151,000). As a percentage of net revenue, SG&A expenses decreased to
12.3% for the quarter ended December 29, 1996 from 12.7% in the first quarter
last year.
Net interest income of $49,000 was realized in the quarter ended December 29,
1996 compared to net interest expense of $348,000 for the comparable prior year
period.
Income tax expense increased to $1,846,000 for the three months ended December
29, 1996 from $1,353,000 for the comparable prior year period due to higher
income before income taxes. The Company estimates that its fiscal 1997 effective
tax rate will be approximately 41%, an increase of 1% primarily due to
amortization of goodwill resulting from acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
As of December 29, 1996, the Company's cash and cash equivalents totalled
$7,601,000. In addition, the Company has a credit agreement (the "Credit
Agreement") with a bank which provides for a revolving credit facility of
$15,000,000. 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 December 29, 1996, there were no borrowings outstanding;however,
standby letters of credit totalled $1,995,000.
The increase in cash from operating activities for the three months ended
December 29, 1996 resulted primarily from net income. The decrease in accounts
payable and accrued compensation resulted primarily from the timing and
management 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 1997.
RISK FACTORS
Statements regarding the Company's performance prospects could contain
forward-looking information that involves risk and uncertainties such as the
level of demand for the Company's services, funding delays for projects, 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 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.
-10-
The Company maintains comprehensive general liability insurance in the
amount of $1,000,000. This amount, together with $9,000,000 coverage under
umbrella policies, provide total general liability coverage of $10,000,000. The
Company's professional liability insurance ("E&O") policy, which includes
pollution coverage, in 1996 provided $10,000,000 in coverage, with a $100,000
self-insured retention. For 1997, the Company expects to maintain similar
coverages 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 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 environmental 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 and audits of the Company's business
systems and 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. 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,
-11-
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 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.
-12-
PART II. OTHER INFORMATION
Item 2. Changes in Securities
- ------- ----------------------
On December 11, 1996, the Company acquired 100% of the capital stock of
IWA Engineers, a California corporation ("IWA"), through the merger of the
Company's wholly-owned subsidiary with and into IWA (the "IWA Merger"). In
connection with the IWA Merger, the Company issued an aggregate of 70,217 shares
of its Common Stock, $.01 par value ("Common Stock"), to the former shareholders
of IWA. For purposes of the IWA Merger, the shares of Common Stock were valued
at $19.475 per share. 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 December 18, 1996, the Company acquired 100% of the capital stock of
FLO Engineering, Inc., a Colorado corporation ("FLO"), through the merger of the
Company's wholly-owned subsidiary with and into FLO (the "FLO Merger"). In
connection with the FLO Merger, the Company issued an aggregate of 32,110 shares
of Common Stock to the former shareholders of FLO. For purposes of the FLO
Merger, the shares of Common Stock were valued at $19.075 per share. 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
--------
(i) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
-13-
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: February 12, 1997 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)
-14-