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 APRIL 2, 2000
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 May 8, 2000, the total number of outstanding shares of the Registrant's
common stock was 39,142,491.
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 Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Risk Factors 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 28
-2-
PART I. FINANCIAL INFORMATION
ITEM 1.
Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
In thousands, except share data APRIL 2, 2000 OCTOBER 3, 1999
----------------- --------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 20,643 $ 8,189
Accounts receivable - net.......................................... 103,337 91,376
Unbilled receivables - net......................................... 92,424 85,072
Prepaid and other current assets................................... 11,859 7,174
Deferred income taxes.............................................. 3,259 3,259
------------ ------------
Total Current Assets............................................ 231,522 195,070
------------ ------------
PROPERTY AND EQUIPMENT:
Leasehold improvements............................................. 3,024 3,343
Equipment, furniture and fixtures.................................. 46,942 39,488
------------ ------------
Total........................................................... 49,966 42,831
Accumulated depreciation and amortization.......................... (25,689) (21,085)
------------ --------------
PROPERTY AND EQUIPMENT - NET........................................... 24,277 21,746
------------ ------------
INTANGIBLE ASSETS - NET................................................ 159,266 160,686
OTHER ASSETS........................................................... 2,851 2,976
------------ ------------
TOTAL ASSETS........................................................... $ 417,916 $ 380,478
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 25,987 $ 32,570
Accrued compensation............................................... 21,471 21,900
Billings in excess of costs on uncompleted contracts............... 5,691 5,872
Other current liabilities.......................................... 13,353 14,606
Current portion of long-term obligations........................... 26,000 24,000
Income taxes payable............................................... 2,416 9,809
------------ ------------
Total Current Liabilities....................................... 94,918 108,757
------------ ------------
LONG-TERM OBLIGATIONS.................................................. 70,093 37,289
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - authorized, 2,000,000 shares of $.01 par value;
issued and outstanding 0 shares at April 2, 2000
and October 3, 1999.............................................. -- --
Exchangeable stock of a subsidiary................................. 13,239 13,239
Common stock - authorized, 50,000,000 shares of $.01 par value;
issued and outstanding 38,663,370 and 38,433,621 shares at
April 2, 2000 and October 3, 1999, respectively.................. 387 384
Additional paid-in capital......................................... 129,835 127,978
Accumulated other comprehensive income (loss)...................... 124 (802)
Retained earnings.................................................. 109,320 93,633
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................................. 252,906 234,432
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 417,916 $ 380,478
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
-3-
Tetra Tech, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
In thousands, except per share data Three Months Ended Six Months Ended
----------------------------- ----------------------------
April 2, April 4, April 2, April 4,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Gross Revenue...................................... $ 177,581 $ 128,083 $ 347,822 $ 242,056
Subcontractor costs.......................... 38,735 31,128 79,805 55,856
----------- ----------- ----------- -----------
Net Revenue........................................ 138,846 96,955 268,017 186,200
Cost of Net Revenue................................ 109,562 74,402 209,979 144,589
----------- ----------- ----------- -----------
Gross Profit....................................... 29,284 22,553 58,038 41,611
Selling, General and Administrative Expenses....... 11,999 9,646 24,551 17,522
Amortization of Intangibles........................ 1,305 1,038 2,773 2,033
----------- ----------- ----------- -----------
Income from Operations............................. 15,980 11,869 30,714 22,056
Interest Expense................................... 1,507 656 2,791 1,494
Interest Income.................................... 34 124 89 263
----------- ----------- ----------- -----------
Income Before Income Tax Expense................... 14,507 11,337 28,012 20,825
Income Tax Expense................................. 6,383 4,875 12,325 8,936
----------- ----------- ----------- -----------
Net Income......................................... $ 8,124 $ 6,462 $ 15,687 $ 11,889
=========== =========== =========== ===========
Basic Earnings Per Share........................... $ 0.21 $ 0.18 $ 0.41 $ 0.33
=========== =========== =========== ===========
Diluted Earnings Per Share......................... $ 0.20 $ 0.16 $ 0.38 $ 0.31
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding:
Basic........................................ 38,550 36,794 38,501 36,306
=========== =========== =========== ===========
Diluted...................................... 41,140 39,264 40,779 38,826
=========== =========== =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
-4-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands Six Months Ended
--------------------------------------
April 2, April 4,
2000 1999
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 15,687 $ 11,889
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization......................................... 7,377 4,456
Provision for losses on receivables................................... (959) (542)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable................................................... (11,158) 18,071
Unbilled receivables.................................................. (6,489) (7,148)
Prepaid and other assets.............................................. (4,555) (672)
Accounts payable...................................................... (7,573) (5,305)
Accrued compensation.................................................. 496 (2,473)
Other current liabilities............................................. (1,277) 927
Income taxes payable.................................................. (7,392) (2,638)
----------- -----------
Net Cash (Used In) Provided By Operating Activities............... (15,843) 16,565
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (7,015) (2,355)
Payments for business acquisitions, net of cash acquired.................... (2,089) (4,033)
Loans to unconsolidated affiliate........................................... -- (3,000)
----------- ------------
Net Cash Used In Investing Activities............................. (9,104) (9,388)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations........................................... (28,196) (29,219)
Proceeds from issuance of long-term obligations............................. 63,000 7,000
Net proceeds from issuance of common stock.................................. 1,671 23,003
----------- -----------
Net Cash Provided By Financing Activities......................... 36,475 784
----------- -----------
EFFECT OF RATE CHANGES ON CASH.............................................. 926 (778)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................... 12,454 7,183
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................ 8,189 4,889
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................. $ 20,643 $ 12,072
=========== ===========
SUPPLIMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................................. $ 2,527 $ 1,347
Income taxes.......................................................... $ 19,718 $ 10,321
(Continued)
-5-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands SIX MONTHS ENDED
--------------------------------------
April 2, April 4,
2000 1999
------------------ ------------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In March 2000, concurrent with Tetra Tech Engineers, P.C.'s acquisition
of certain assets of Edward A. Sears Associates, the Company's
subsidiary, Cosentini Associates, Inc. acquired certain non-licensed
assets of Edward A. Sears Associates from Tetra Tech Engineers, P.C.
In conjunction with this acquisition, liabilities were assumed as
follows:
Fair value of assets acquired....................................... $ 505
Cash paid........................................................... (350)
Other acquisition costs............................................. (80)
-----------
Liabilities assumed.............................................. $ 75
===========
In October 1999, the Company purchased all of the capital stock of LC of
Illinois, Inc. and HFC Technologies, Inc. In conjunction with this
acquisition, liabilities were assumed as follows:
Fair value of assets acquired....................................... $ 2,606
Cash paid........................................................... (1,513)
Other acquisition costs............................................. (80)
-----------
Liabilities assumed.............................................. $ 1,013
===========
In February 1999, the Company purchased all of the capital stock of McCulley,
Frick & Gilman, Inc. In conjunction with this acquisition, liabilities were
assumed as follows:
Fair value of assets acquired....................................... $ 9,907
Cash paid........................................................... (4,358)
Issuance of common stock............................................ (3,705)
Other acquisition costs............................................. (70)
-----------
Liabilities assumed.............................................. $ 1,774
===========
See accompanying Notes to Condensed Consolidated Financial Statements.
(Concluded)
-6-
TETRA TECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of April 2,
2000, the condensed consolidated statements of income for the three-month and
six-month periods ended April 2, 2000 and April 4, 1999 and the condensed
consolidated statements of cash flows for the six months ended April 2, 2000 and
April 4, 1999 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
October 3, 1999.
The results of operations for the three and six months ended April 2,
2000 are not necessarily indicative of the results to be expected for the fiscal
year ending October 1, 2000.
2. EARNINGS PER SHARE
Due to the Company's complex capital structure, the Company presents
both basic and diluted Earnings Per Share (EPS). Basic EPS excludes dilution and
is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
is computed by dividing net income by the weighted average number of common
shares outstanding and dilutive potential common shares. The Company includes as
potential common shares the weighted average number shares of exchangeable stock
of a subsidiary and the weighted average dilutive effects of outstanding stock
options. The exchangeable stock of a subsidiary is non-voting and is
exchangeable on a 1.25 to one basis for the Company's common stock. Basic and
diluted EPS reflect, on a retroactive basis, a 5-for-4 stock split effected in
the form of a 25.0% stock dividend, wherein one additional share of stock was
issued on June 15, 1999 for each four shares outstanding as of the record date
of May 14, 1999.
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 $20.6 million and $8.2 million at April 2, 2000 and October
3, 1999, respectively.
4. MERGERS AND ACQUISITIONS
On February 26, 1999, the Company acquired 100% of the capital stock of
McCulley, Frick & Gilman, Inc. (MFG), a provider of professional environmental
science and consulting services to
-7-
private-sector clients. The purchase was valued at approximately $8.1
million, as adjusted, consisting of cash and 237,413 shares of Company common
stock, of which 5,923 shares were issued in October 1999 pursuant to the
purchase price adjustment clause in the related purchase agreement.
On May 7, 1999, the Company acquired 100% of the capital stock of
Collins/Pina Consulting Engineers, Inc. (CPC), a provider of consulting
engineering and related services primarily in the state of Arizona. The purchase
was valued at approximately $2.7 million, as adjusted, consisting of cash and
4,938 shares of Company common stock.
On May 19, 1999, the Company acquired 100% of the capital stock of
D.E.A. Construction Company (DCC), a provider of engineering and network
infrastructure services for cable television and fiber optic telephone networks
including design, construction and maintenance capabilities of communications
and information transport systems. The purchase was valued at approximately
$15.5 million, as adjusted, consisting of cash.
On May 21, 1999, the Company acquired 100% of the capital stock of BAHA
Communications, Inc. (BCI), a supplier of infrastructure installation and
maintenance services to the wireless personal communications industry. The
purchase was valued at approximately $2.6 million, consisting of 176,168 shares
of Company common stock, and is subject to a purchase price and purchase
allocation adjustment based on the final determination of BCI's net asset value
as of June 30, 1999. Of the 176,168 shares of Company common stock, 29,272
shares are being held in escrow as contingent consideration until July 31, 2000
and will be released dependent upon BCI's operational performance, as specified
in the related escrow agreement, during the previous 12-month period.
Simultaneously with the acquisition, BCI assigned to its former owners accounts
receivable having a net value of $1.0 million.
On June 18, 1999, the Company acquired 100% of the capital stock of
Utilities & C.C., Inc. (UCC), a supplier of infrastructure installation and
maintenance services to the wireless personal communications industry. The
purchase was valued at approximately $2.2 million, as adjusted, consisting of
144,482 shares of Company common stock, of which 6,552 shares were issued in
October 1999 pursuant to the purchase price adjustment clause in the related
purchase agreement.
On June 25, 1999, the Company acquired 100% of the capital stock of ASL
Consultants, Inc. (ASL), a provider of water and wastewater treatment,
transportation, and other engineering services. The purchase was valued at
approximately $10.1 million, consisting of cash, and is subject to a purchase
price and purchase allocation adjustment based upon the final determination of
ASL's net asset value as of July 2, 1999.
On June 30, 1999, the Company acquired 100% of the capital stock of
L.M.W. Associates, Inc., Cosentini Associates, Inc. and Cobin, Inc., and 100% of
the limited liability partnership interests of Cosentini Associates IL LLP,
Cosentini Associates MA LLP, Cosentini Associates DC LLP and Cosentini
Associates FL LLP (collectively, CAA). The purchase was valued at approximately
$5.3 million, consisting of cash, and is subject to a purchase price and
purchase allocation adjustment based upon the final determination of CAA's net
asset value as of
-8-
June 30, 1999. Simultaneously with the acquisition, CAA assigned to its
former owners accounts receivable having a gross value of $18.4 million.
On August 3, 1999, the Company merged its wholly owned subsidiaries,
Simons Li & Associates, Inc., IWA Engineers, FLO Engineering, Inc. and C.D.C.
Engineering, Inc. into a single operating division of the Company. The Company
believes this combination provides synergy and cohesiveness for the combined
group.
On August 4, 1999, the Company merged its wholly owned subsidiary
Integration Technologies, Inc. (IT) into its newly acquired wholly owned
subsidiary, DCC. IT and DCC provide substantially similar services to the same
client in similar markets. The Company believes this combination provides a
stronger market position.
On September 3, 1999, the Company acquired 100% of the capital stock of
PDR Engineers, Inc. (PDR), a provider of engineering consulting services to
Federal, state and local government and private-sector clients. The purchase was
valued at approximately $6.6 million, consisting of cash and 236,525 shares of
Company common stock, and is subject to a purchase price and purchase allocation
adjustment based upon the final determination of PDR's net asset value as of
September 3, 1999.
On October 2, 1999, the Company acquired 100% of the capital stock of
Evergreen Utility Contractors, Inc., Continental Utility Contractors, Inc. and
Gig Harbor Construction, Inc. (collectively, EUC), a provider of engineering and
network services for cable TV and fiber optic networks in the Pacific Northwest
Region of the U.S. The purchase was valued at approximately $11.8 million,
consisting of cash, and is subject to a purchase price and purchase allocation
adjustment based upon the final determination of EUC's net asset value as of
October 2, 1999.
On October 25, 1999, the Company acquired 100% of the capital stock of
LC of Illinois, Inc. and HFC Technologies, Inc. (collectively, LCI), a provider
of engineering and network infrastructure services for cable television and
fiber optic telephone networks including design, construction and maintenance
capabilities for communications and information transport systems. The purchase
was valued at approximately $1.6 million, consisting of cash, and is subject to
a purchase price and purchase allocation adjustment based upon the final
determination of LCI's net asset value as of October 25, 1999.
On March 30, 2000, Tetra Tech Engineers P.C. acquired certain assets
of Edward A. Sears Associates (ESA), a provider of engineering services to
hospitals in New York. Concurrent with this transaction, the Company's
subsidiary Cosentini Associates, Inc. acquired certain non-licensed assets
of ESA from Tetra Tech Engineers, P.C. The purchase was valued at
approximately $0.4 million, consisting of cash, and is subject to a purchase
price and purchase allocation adjustment based upon the final determination
of ESA's net asset value as of March 30, 2000.
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
values. The excess of the purchase cost of the acquisitions over
-9-
the fair value of the net assets acquired was recorded as goodwill and is
included in Intangible Assets - Net in the accompanying condensed
consolidated balance sheets. The Company values stock exchanged in
acquisitions based on extended restriction periods and economic factors
specific to the Company's circumstances. During fiscal 1999, stock exchanged
in acquisitions was discounted by 15%. The results of operations of each of
the companies acquired have been included in the Company's financial
statements from the effective acquisition dates.
The effect of unaudited pro forma operating results of the LCI and ESA
transactions, had they been acquired on October 5, 1998, is not material.
Pro forma operating results assuming the Company had acquired MFG, CPC,
DCC, BCI, UCC, ASL, CAA, PDR and EUC on October 5, 1998 is presented in Note 6.
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 April 2, 2000 and
October 3, 1999 was $3.9 million and $4.1 million, respectively. The allowance
for disallowed costs as of both April 2, 2000 and October 3, 1999 was $3.6
million and $4.4 million, respectively. Disallowance of billed and unbilled
costs is primarily associated with contracts with the Federal government which
contain clauses that subject contractors to several levels of audit. The Company
establishes reserves on those contract receivables, especially those acquired in
acquisitions, where collectibility is not assured. Management believes that
resolution of these matters will not have a material adverse impact on the
Company's financial position or results of operations.
6. UNAUDITED PRO FORMA OPERATING RESULTS
The table below presents summarized unaudited pro forma operating
results assuming that the Company had acquired MFG, CPC, DCC, BCI, UCC, ASL,
CAA, PDR and EUC on October 5, 1998. The effect of unaudited pro forma
results of LCI and ESA, had they been acquired on October 5, 1998 is not
material. These amounts are based on historical results and assumptions and
estimates which the Company believes to be reasonable. The pro forma results
do not reflect anticipated cost savings and do not necessarily represent
results which would have occurred if these acquisitions had actually taken
place on October 5, 1998.
PRO FORMA SIX MONTHS ENDED
--------------------------
APRIL 4, 1999
-------------
Gross revenue $ 316,267,000
Income from operations 28,345,000
Net income 13,756,000
Basic earnings per share 0.38
Diluted earnings per share 0.35
-10-
PRO FORMA SIX MONTHS ENDED
--------------------------
APRIL 4, 1999
-------------
Weighted average shares outstanding:
Basic 36,646,000
Diluted 39,166,000
7. OPERATING SEGMENTS
The Company's management has organized its operations into three
operating segments: Resource Management, Infrastructure, and Communications. The
Resource Management operating segment provides specialized environmental
engineering and consulting services primarily relating to water quality and
water availability to both public and private organizations. The Infrastructure
operating segment provides engineering services to provide additional
development, as well as upgrading and replacement of existing infrastructure to
both public and private organizations. The Communications operating segment
provides a comprehensive set of services including engineering, consulting and
field services to telecommunications companies, wireless service providers and
cable operators. Management has established these operating segments based upon
the services provided, the different marketing strategies, and the specialized
needs of the clients. The Company accounts for inter-segment sales and transfers
as if the sales and transfers were to third parties; that is, by applying a
negotiated fee onto the cost of the services performed. Management evaluates the
performance of these operating segments based upon their respective income from
operations before the effect of any acquisition related amortization and any fee
from inter-segment sales and transfers.
The following tables set forth (in thousands) summarized financial
information on the Company's reportable segments:
REPORTABLE SEGMENTS:
Resource
Three months ended April 2, 2000 Management Infrastructure Communications Total
---------- -------------- -------------- -----------
Gross Revenue........................ $ 89,521 $ 54,152 $ 38,074 $ 181,747
Net Revenue.......................... 60,456 44,418 31,364 136,238
Income from Operations............... 6,896 4,514 5,720 17,130
Depreciation Expense................. 631 1,015 744 2,390
Resource
Six months ended April 2, 2000 Management Infrastructure Communications Total
---------- -------------- -------------- -----------
Gross Revenue........................ $ 173,906 $ 106,549 $ 75,380 $ 355,835
Net Revenue.......................... 116,578 86,005 61,121 263,704
Income from Operations............... 13,958 9,434 10,251 33,643
Depreciation Expense................. 1,198 1,940 1,348 4,486
Resource
Three months ended April 4, 1999 Management Infrastructure Communications Total
---------- -------------- -------------- -----------
Gross Revenue........................ $ 83,598 $ 23,726 $ 23,452 $ 129,776
Net Revenue.......................... 57,563 18,603 20,236 96,402
Income from Operations............... 6,359 1,366 4,017 11,742
Depreciation Expense................. 851 313 216 1,380
-11-
Resource
Six months ended April 4, 1999 Management Infrastructure Communications Total
---------- -------------- -------------- -----------
Gross Revenue........................ $ 154,185 $ 45,932 $ 47,120 $ 247,237
Net Revenue.......................... 106,761 36,896 41,582 185,239
Income from Operations............... 11,336 3,783 7,767 22,886
Depreciation Expense................. 1,362 666 298 2,326
RECONCILIATIONS:
Three Months Ended
-----------------------------------
April 2, 2000 April 4, 1999
------------- -------------
GROSS REVENUE
Gross revenue from reportable segments............................... $181,747 $129,776
Elimination of inter-segment revenue................................. (6,774) (3,506)
Other revenue........................................................ 2,608 1,813
-------- --------
Total consolidated gross revenue................................. $177,581 $128,083
======== ========
NET REVENUE
Net revenue from reportable segments................................. $136,238 $ 96,402
Other revenue........................................................ 2,608 553
-------- --------
Total consolidated net revenue................................... $138,846 $ 96,955
======== ========
INCOME FROM OPERATIONS
Income from operations of reportable segments........................ $ 17,130 $ 11,742
Elimination of inter-segment income.................................. (463) (308)
Other income......................................................... 618 1,473
Amortization of intangibles.......................................... (1,305) (1,038)
-------- --------
Total consolidated income from operations........................ $ 15,980 $ 11,869
======== ========
Six Months Ended
-----------------------------------
April 2, 2000 April 4, 1999
------------- -------------
GROSS REVENUE
Gross revenue from reportable segments............................... $355,835 $247,237
Elimination of inter-segment revenue................................. (12,325) (6,724)
Other revenue........................................................ 4,312 1,543
-------- --------
Total consolidated gross revenue................................. $347,822 $242,056
======== ========
NET REVENUE
Net revenue from reportable segments................................. $263,704 $185,239
Other revenue........................................................ 4,313 961
-------- --------
Total consolidated net revenue................................... $268,017 $186,200
======== ========
INCOME FROM OPERATIONS
Income from operations of reportable segments........................ $ 33,643 $ 22,886
Elimination of inter-segment income.................................. (802) (390)
Other income......................................................... 646 1,593
Amortization of intangibles.......................................... (2,773) (2,033)
-------- --------
Total consolidated income from operations......................... $ 30,714 $ 22,056
======== ========
-12-
MAJOR CLIENTS
The Company's net revenue attributable to the U.S. Federal
government was approximately $41.9 million and $40.6 million for the three
months ended April 2, 2000 and April 4, 1999, respectively. Net Revenue
attributable to the U.S. Federal government was approximately $81.0 million
and $77.7 million for the six months ended April 2, 2000 and April 4, 1999,
respectively. Both the Resource Management and Infrastructure operating
segments report revenue from the U.S. government.
8. COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from non
owner sources. These sources include net income and other revenues, expenses,
gains and losses incurred. The Company includes as other comprehensive income
translation gains and losses from subsidiaries with functional currencies
different than that of the Company. Comprehensive income was approximately $8.6
million and $5.7 million for the three months ended April 2, 2000 and April 4,
1999, respectively. For the six months ended April 2, 2000 and April 4, 1999,
comprehensive income was $16.6 million and $11.1 million, respectively. For the
three and six months ended April 2, 2000, the Company realized net translation
gains of $0.5 million and $0.9 million, respectively. For the three and six
months ended April 4, 1999, the Company incurred net translation losses of $0.8
million.
9. SUBSEQUENT EVENT
On April 3, 2000, the Company acquired 100% of the capital stock of
eXpert Wireless Solutions, Inc. (EWS), a provider of radio-frequency
engineering services throughout the United States and abroad. The purchase
was valued at approximately $18.8 million consisting of cash and 407,877
shares of Company common stock and is subject to a purchase price and
purchase allocation adjustment. This acquisition further expands the
Company's capabilities in the wireless communications market.
-13-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED BELOW, THE MATTERS
DISCUSSED IN THIS SECTION ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER
OF RISKS AND UNCERTAINTIES. OUR ACTUAL LIQUIDITY NEEDS, CAPITAL RESOURCES AND
OPERATING RESULTS MAY DIFFER MATERIALLY FROM THE DISCUSSION SET FORTH BELOW IN
THESE FORWARD-LOOKING STATEMENTS. FOR ADDITIONAL INFORMATION, REFER TO THE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
FILING.
OVERVIEW
Tetra Tech, Inc. is a leading provider of specialized management
consulting and technical services in three principal business areas: resource
management, infrastructure and communications. As a specialized management
consultant, we assist our clients in defining problems and developing innovative
and cost-effective solutions. Our management consulting services are
complemented by our technical services. These technical services, which
implement solutions, include research and development, applied science,
engineering and architectural design, construction management, and operations
and maintenance. Our clients include a diverse base of public and private
organizations located in the United States and internationally.
Since our initial public offering in December 1991, we have increased
the size and scope of our business and have expanded our service offerings
through a series of strategic acquisitions and internal growth.
We derive our revenue from fees from professional services. Our
services are billed under various types of contracts with our clients,
including:
- Fixed-price;
- Fixed-rate time and materials;
- Cost-reimbursement plus fixed fee; and
- Cost-reimbursement plus fixed and award fee.
In the course of providing our services, we routinely subcontract
services. These subcontractor costs are passed through to clients and, in
accordance with industry practice, are included in gross revenue. Because
subcontractor services can change significantly from project to project, we
believe net revenue, which is gross revenue less the cost of subcontractor
services, is a more appropriate measure of our performance.
Our cost of net revenue includes professional compensation and certain
direct and indirect overhead costs such as rents, utilities and travel.
Professional compensation represents the majority of these costs. Our selling,
general and administrative (SG&A) expenses are comprised primarily of our
corporate headquarters' costs related to our executive offices, corporate
finance and accounting, information technology, marketing, and bid and proposal
costs. These costs are generally unrelated to specific client projects and can
vary as expenses are
14
incurred supporting corporate activities and initiatives. In addition, we
include amortization of certain intangible assets resulting from acquisitions
in SG&A expenses.
We provide our services to a diverse base of Federal, state and local
government agencies, and private sector and international clients. The following
table presents, for the periods indicated, the approximate percentage of net
revenue attributable to these client sectors:
Percentage of Net Revenue
-----------------------------------------------------------------------------------
Three Months Ended Six Months Ended
---------------------------------------- ---------------------------------------
CLIENT SECTOR April 2, 2000 April 4, 1999 April 2, 2000 April 4, 1999
- ------------- ------------------- ------------------- ------------------- ------------------
Federal government 30.2% 41.9% 30.3% 41.7%
State & local government 16.8 14.3 16.8 14.5
Private sector 50.5 39.4 50.3 39.0
International 2.5 4.4 2.6 4.8
We manage our business in three operating segments, Resource
Management, Infrastructure and Communications. The following table presents,
for the periods indicated, the approximate percentage of net revenue
attributable to the operating segments:
Percentage of Net Revenue
-----------------------------------------------------------------------------------
Three Months Ended Six Months Ended
---------------------------------------- ---------------------------------------
Operating Segment April 2, 2000 April 4, 1999 April 2, 2000 April 4, 1999
- ------------- ------------------- ------------------- ------------------- ------------------
Resource Management 43.5% 59.3% 43.5% 57.4%
Infrastructure 32.0 19.2 32.1 19.8
Communications 22.6 20.9 22.8 22.3
Other revenue 1.9 0.6 1.6 0.5
RECENT ACQUISITIONS
As a part of our growth strategy, we expect to pursue complementary
acquisitions to expand our geographical reach and the breadth and depth of our
service offerings. During the second quarter of fiscal 2000, we made the
following acquisition:
EDWARD A. SEARS ASSOCIATES -- In March 2000, Tetra Tech Engineers,
P.C. acquired certain assets of Edward A. Sears Associates (ESA). Concurrent
with this acquisition, our subsidiary, Cosentini Associates, Inc. acquired
certain non-licensed assets of ESA from Tetra Tech Engineers, P.C. The
purchase was valued at approximately $0.4 million and consisted of cash. ESA,
a New York-based civil engineering firm, provides professional engineering
and consulting services to hospitals throughout New York.
RESULTS OF OPERATIONS
The following table presents the percentage relationship of selected
items to net revenue in our condensed consolidated statements of income:
-15-
% Relationship to Net Revenue % Relationship to Net Revenue
------------------------------ ------------------------------
Three Months Ended Six Months Ended
------------------ ----------------
Apr. 2, 2000 Apr. 4, 1999 Apr. 2, 2000 Apr. 4, 1999
------------ ------------ ------------ ------------
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of net revenue 78.9 76.7 78.3 77.7
--------- ---------- ---------- ----------
Gross profit 21.1 23.3 21.7 22.3
Selling, general and
administrative expenses 9.6 11.1 10.2 10.5
--------- ---------- ---------- ----------
Income from operations 11.5 12.2 11.5 11.8
Net interest (expense) income (1.1) (0.5) (1.0) (0.6)
--------- ---------- ---------- ----------
Income before income tax expense 10.4 11.7 10.5 11.2
Income tax expense 4.6 5.0 4.6 4.8
--------- ---------- ---------- ----------
Net income 5.9% 6.7% 5.9% 6.4%
========= ========== ========== ==========
NET REVENUE. Net revenue increased $41.9 million, or 43.2%, to
$138.9 million for the three months ended April 2, 2000 from $97.0 million
for the comparable period last year. For the six months ended April 2, 2000,
net revenue increased $81.8 million, or 43.9%, to $268.0 million from $186.2
million for the comparable period last year. With the exception of our
international sector, all sectors continued to show net revenue increases in
actual dollars. As a percentage of net revenue, decreases were realized in
the Federal government sector due to substantial growth in revenue from
private sector clients and revenue contributed by the fiscal 1999
acquisitions. These acquisitions provided increases in our revenue from
commercial clients and state and local governments. For the three months
ended April 2, 2000, net revenue provided by companies acquired in the past
year totaled $35.8 million. Excluding this net revenue, we realized 6.3%
organic growth in our net revenue. For the six months ended April 2, 2000,
net revenue provided by companies acquired in the past year totaled $72.7
million. Excluding this net revenue, we realized 4.9% organic growth in our
net revenue. Gross revenue increased $49.5 million, or 38.6%, to $177.6
million for the three months ended April 2, 2000 from $128.1 million for the
comparable period last year. For the six months ended April 2, 2000, gross
revenue increased $105.8 million, or 43.7%, to $347.8 million from $242.1
million for the comparable period last year.
COST OF NET REVENUE. Cost of net revenue increased $35.2 million, or
47.3%, to $109.6 million for the three months ended April 2, 2000 from $74.4
million for the comparable period last year. As a percentage of net revenue,
cost of net revenue for the three months ended April 2, 2000 was 78.9% compared
to 76.7% for the comparable period last year. For the six months ended April 2,
2000, cost of net revenue increased $65.4 million, or 45.2%, to $210.0 million
from $144.6 million for the comparable period last year. As a percentage of net
revenue, cost of net revenue for the six months ended April 2, 2000 was 78.3%
compared to 77.7% for the comparable period last year. These increases were
primarily due to higher indirect costs of acquired companies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses
increased $2.6 million, or 24.5%, to $13.3 million for the three months ended
April 2, 2000 from $10.7 million for the comparable period last year. As a
percentage of net revenue, SG&A expenses decreased to 9.6% for the three
months ended April 2, 2000 from 11.1% for the comparable period last year.
For the six months ended April 2, 2000, SG&A expenses increased $7.8 million,
or 39.7%, to $27.3 million from $19.6 million for the comparable period last
year. As a
-16-
percentage of net revenue, SG&A expenses decreased to 10.2% for
the six months ended April 2, 2000 from 10.5% for the comparable period last
year. Amortization expense relating to acquisitions decreased to 0.9% and
1.0% of net revenue for the three months and six months ended April 2, 2000
compared to 1.1% for both the three months and six months ended April 4,
1999. Cost reductions have been realized by the centralization of certain
corporate functions. As a result, headquarters' costs have decreased as a
percentage of net revenue. Additionally, amortization of intangible assets
has increased at a slower rate than the increase in our net revenue.
NET INTEREST EXPENSE. Net interest expense increased $0.9 million, or
176.9% to $1.5 million for the three months ended April 2, 2000. For the six
months ended April 2, 2000, net interest expense increased $1.5 million, or
119.5%, to $2.7 million from $1.2 million for the comparable period last year.
These increases were primarily attributable to borrowings on our line of credit
to facilitate acquisitions.
INCOME TAX EXPENSE. Income tax expense increased $1.5 million, or
30.9%, to $6.4 million for the three months ended April 2, 2000 from $4.9
million for the comparable period last year. For the six months ended April
2, 2000, income tax expense increased $3.4 million, or 37.9%, to $12.3
million from $8.9 million for the comparable period last year. Our effective
tax rate varies as we acquire companies. Certain amortization expenses
relating to acquisitions are not tax deductible. Our current effective tax
rate is 44.0% compared to 44.3% in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of April 2, 2000, our working capital was $136.6 million, an
increase of $50.3 million from October 3, 1999, of which cash and cash
equivalents totaled $20.6 million. The increase in cash and cash equivalents
was primarily related to $11.0 million in borrowings in order to fund an
acquisition on April 3, 2000. In addition, we have a credit agreement (the
"Credit Agreement") with a bank which provides for a revolving credit
facility (the "Facility") of $150.0 million. Under our Credit Agreement, we
may also request standby letters of credit up to the aggregate sum of $25.0
million outstanding at any given time. Our Facility matures on March 17, 2005
or earlier at our discretion upon payment in full of loans and other
obligations. As of April 2, 2000, borrowings and standby letters of credit
totaled $95.0 million and $1.1 million, respectively.
In the six months ended April 2, 2000, we used $15.8 million from
operating activities compared to $16.6 million provided in the comparable
period last year. This decrease was in part attributable to our cash payments
of $5.4 million to former shareholders of acquired companies for accounts
receivable not acquired in the purchase transactions. In the six months ended
April 2, 2000, cash used in investing activities was $9.1 million compared to
$9.4 million for the comparable period last year. This increase primarily was
the result of replaced equipment in our wired communications business. In the
six months ended April 4, 1999, cash provided by financing activities was
$36.5 million compared to $0.8 million for the comparable period last year.
This change was attributable to funding the working capital needs of acquired
entities and securing funds to support an acquisition which took place on
-17-
April 3, 2000. The three and six months ended April 4, 1999 were also
favorably impacted by the proceeds from our secondary offering.
We expect that internally generated funds, our existing cash balances
and availability under the Credit Agreement will be sufficient to meet our
capital requirements through the end of fiscal 2000.
We continuously evaluate the marketplace for strategic opportunities.
Once an opportunity is identified, we examine the effect an acquisition may have
on the business environment, as well as on our results of operations. We proceed
with an acquisition if we determine that the acquisition is anticipated to have
an accretive effect on future operations. However, as successful integration and
implementation are essential to achieve favorable results, no assurances can be
given that all acquisitions will provide accretive results. Our strategy is to
position ourselves to address existing and emerging markets. We view
acquisitions as a key component of our growth strategy, and we intend to use
both cash and our securities, as we deem appropriate, to fund such acquisitions.
We believe our operations have not been and, in the foreseeable future,
do not expect to be materially adversely affected by inflation or changing
prices.
MARKET RISKS
We currently utilize no material derivative financial instruments which
expose us to significant market risk. We are exposed to cash flow risk due to
interest rate fluctuations with respect to our long-term obligations. At our
option, we borrow on our Facility (a) at a base rate (the greater of the federal
funds rate plus 0.50% or the bank's reference rate) or (b) at a eurodollar rate
plus a margin which ranges from 0.75% to 1.25%. Borrowings at the base rate have
no designated term and may be repaid without penalty anytime prior to the
Facility's maturity date. Borrowings at a eurodollar rate have a term no less
than 30 days and no greater than 90 days. Typically, at the end of such term,
such borrowings may be rolled over at our discretion upon payment in full of
loans and other obligations. Accordingly, we classify total outstanding
obligations between current liabilities and long-term obligations based on
anticipated payments within and beyond one year's period of time. We currently
anticipate repaying $26.0 million of our outstanding indebtedness in the next 12
months. However, there can be no assurance that we will, or will be able to
repay our long-term obligations in the manner described. We could incur
additional debt under the Facility or our operating results could be worse than
currently anticipated.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Please refer to the information we have included under the heading
"Market Risks" in ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-18-
RISK FACTORS
SOME OF THE INFORMATION IN THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU
CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL,"
"EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "CONTINUE" OR SIMILAR WORDS.
YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY: (1)
DISCUSS OUR FUTURE EXPECTATIONS; (2) CONTAIN PROJECTIONS OF OUR FUTURE OPERATING
RESULTS OR OF OUR FUTURE FINANCIAL CONDITION; OR (3) STATE OTHER
"FORWARD-LOOKING" INFORMATION. WE BELIEVE IT IS IMPORTANT TO COMMUNICATE OUR
EXPECTATIONS TO OUR INVESTORS. THERE MAY BE EVENTS IN THE FUTURE, HOWEVER, THAT
WE ARE NOT ACCURATELY ABLE TO PREDICT OR OVER WHICH WE HAVE NO CONTROL. THE RISK
FACTORS LISTED IN THIS SECTION, AS WELL AS ANY CAUTIONARY LANGUAGE IN THIS
QUARTERLY REPORT ON FORM 10-Q, PROVIDE EXAMPLES OF RISKS, UNCERTAINTIES AND
EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTATIONS
DESCRIBED IN FORWARD-LOOKING STATEMENTS. THE OCCURRENCE OF ANY OF THE EVENTS
DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM
10-Q COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION
AND OPERATING RESULTS. UPON THE OCCURRENCE OF ANY OF THESE EVENTS, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY THAT COULD ADVERSELY
IMPACT OUR BUSINESS AND OPERATING RESULTS
A significant part of our growth strategy is to acquire other companies
that complement our lines of business or that broaden our geographic presence.
During fiscal 1999, we purchased 11 companies in nine separate transactions.
During the six months ended April 2, 2000, we purchased three companies in two
transactions. We expect to continue to acquire companies as an element of our
growth strategy. Acquisitions involve certain risks that could cause our actual
growth or operating results to differ from our expectations or the expectations
of security analysts. For example:
- We may not be able to identify suitable acquisition candidates or
to acquire additional companies on favorable terms;
- We compete with others to acquire companies. Competition may
increase and may result in decreased availability or increased
price for suitable acquisition candidates;
- We may not be able to obtain the necessary financing, on favorable
terms or at all, to finance any potential acquisitions;
- We may ultimately fail to consummate an acquisition even if
announced that we plan to acquire a company;
- We may fail to successfully integrate or manage these acquired
companies due to differences in business backgrounds or corporate
cultures;
- These acquired companies may not perform as we expect;
- We may find it difficult to provide a consistent quality of
service across our geographically diverse operations; and
- If we fail to successfully integrate any acquired company, our
reputation could be damaged. This could make it more difficult to
market our services or to acquire additional companies in the
future.
-19-
In addition, our acquisition strategy may divert management's attention away
from our primary service offerings, result in the loss of key clients or
personnel and expose us to unanticipated liabilities.
Finally, acquired companies that derive a significant portion of their
revenues from the Federal government and that do not follow the same cost
accounting policies and billing procedures as we do may be subject to larger
cost disallowances for greater periods than we typically encounter. If we fail
to determine the existence of unallowable costs and establish appropriate
reserves in advance of an acquisition we may be exposed to material
unanticipated liabilities, which could have a material adverse effect on our
business.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD HAVE A
NEGATIVE EFFECT ON THE PRICE OF OUR COMMON STOCK
Our quarterly revenues, expenses and operating results may fluctuate
significantly because of a number of factors, including:
- The seasonality of the spending cycle of public sector clients,
notably the Federal government;
- Employee hiring and utilization rates;
- The number and significance of client engagements commenced and
completed during a quarter;
- Delays incurred in connection with an engagement;
- The ability of clients to terminate engagements without penalties;
- The size and scope of engagements;
- The timing of expenses incurred for corporate initiatives;
- The timing and size of the return on investment capital; and
- General economic and political conditions.
Variations in any of these factors could cause significant fluctuations in our
operating results from quarter to quarter and could result in net losses.
THE VALUE OF OUR COMMON STOCK COULD CONTINUE TO BE VOLATILE
The trading price of our common stock has fluctuated widely. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. The overall market and the price of our common stock may
continue to fluctuate greatly. The trading price of our common stock may be
significantly affected by various factors, including:
- Quarter to quarter variations in our operating results;
- Changes in environmental legislation;
- Changes in investors' and analysts' perception of the business
risks and conditions of our business;
- Broader market fluctuations; and
- General economic or political conditions.
-20-
IF WE ARE NOT ABLE TO SUCCESSFULLY MANAGE OUR GROWTH STRATEGY, OUR BUSINESS AND
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED
We are growing rapidly. Our growth presents numerous managerial,
administrative, operational and other challenges. Our ability to manage the
growth of our operations will require us to continue to improve our operational,
financial and human resource management information systems and our other
internal systems and controls. In addition, our growth will increase our need to
attract, develop, motivate and retain both our management and professional
employees. The inability of our management to manage our growth effectively or
the inability of our employees to achieve anticipated performance or utilization
levels, could have a material adverse effect on our business.
THE LOSS OF KEY PERSONNEL OR OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL COULD SIGNIFICANTLY DISRUPT OUR BUSINESS
We depend upon the efforts and skills of our executive officers, senior
managers and consultants. With limited exceptions, we do not have employment
agreements with any of these individuals. The loss of the services of any of
these key personnel could adversely affect our business. Although we have
obtained non-compete agreements from certain principals and stockholders of
companies we have acquired, we generally do not have non-compete or employment
agreements with key employees who were not once equity shareholders of these
companies. We do not maintain key-man life insurance policies on any of our
executive officers or senior managers.
Our future growth and success depends on our ability to attract and
retain qualified scientists and engineers. The market for these professionals is
competitive and we may not be able to attract and retain such professionals.
CHANGES IN EXISTING LAWS AND REGULATIONS COULD REDUCE THE DEMAND FOR OUR
SERVICES
A significant amount of our resource management business is generated
either directly or indirectly as a result of existing Federal and state
governmental laws, regulations and programs. Any changes in these laws or
regulations that reduce funding or affect the sponsorship of these programs
could reduce the demand for our services and could have a material adverse
effect on our business.
OUR REVENUES FROM AGENCIES OF THE FEDERAL GOVERNMENT ARE CONCENTRATED, AND A
REDUCTION IN SPENDING BY THESE AGENCIES COULD ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS
Agencies of the Federal government are among our most significant
clients. During the six months ended April 2, 2000, approximately 30.3% of our
net revenue was derived from Federal agencies, of which 16.4% was derived from
the Department of Defense (DOD), 9.5% from the Environmental Protection Agency
(EPA), 2.2% from the Department of Energy (DOE), and 2.2% from various other
Federal government agencies. Some contracts with Federal government agencies
require annual funding approval and may be terminated at their discretion. A
reduction in spending by Federal government agencies could limit the continued
funding of
-21-
existing contracts with them and could limit our ability to obtain
additional contracts. These limitations, if significant, could have a material
adverse effect on our business.
Additionally, the failure of clients to pay significant amounts due us
for our services could adversely affect our business. For example, we recently
received notification from a Federal government agency that we are entitled to
payments in excess of our billings. However, the agency involved must obtain
specific funding approval for amounts owed to us and there can be no assurance
this funding approval will be obtained.
OUR CONTRACTS WITH GOVERNMENTAL AGENCIES ARE SUBJECT TO AUDIT, WHICH COULD
RESULT IN THE DISALLOWANCE OF CERTAIN COSTS
Contracts with the Federal government and other governmental agencies
are subject to audit. Most of these audits are conducted by the Defense Contract
Audit Agency (DCAA), which reviews our overhead rates, operating systems and
cost proposals. The DCAA may disallow costs if it determines that we accounted
for these costs incorrectly or in a manner inconsistent with Cost Accounting
Standards. A disallowance of costs by the DCAA, or other governmental auditors,
could have a material adverse effect on our business.
In September 1995, we acquired PRC Environmental Management, Inc.
(EMI). EMI also contracts with Federal government agencies and such contracts
are also subject to the same governmental audits. At the time of acquisition,
audits had not yet been completed or finalized. Accordingly, reserves were
established for potential disallowances. Since then, the DCAA has completed
audits of EMI's contracts for the fiscal years 1987 through 1995. As a result of
these audits and negotiations with the DCAA, the DCAA has disallowed to date
approximately $4.4 million in costs which have been applied against the
established reserves.
OUR BUSINESS AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY LOSSES UNDER
FIXED-PRICE CONTRACTS OR TERMINATION OF CONTRACT AT THE CLIENT'S DISCRETION
We contract with Federal and state governments as well as with the
private sector. These contracts are often subject to termination at the
discretion of the client with or without cause. Additionally, we enter into
various types of contracts with our clients, including fixed-price contracts.
Fixed-price contracts protect clients and expose us to a number of risks. These
risks include underestimation of costs, problems with new technologies,
unforeseen costs or difficulties, delays beyond our control and economic and
other changes that may occur during the contract period. Losses under
fixed-price contracts or termination of contracts at the discretion of the
client could have a material adverse effect on our business.
In fiscal 1999, we had a contract change with Tele-Communications, Inc.
involving three turnkey contracts. This change was due in part to
Tele-Communications, Inc.'s change in strategy from the use of turnkey contracts
to the use of direct service contracts in the upgrading of its network systems.
-22-
OUR INABILITY TO FIND QUALIFIED SUBCONTRACTORS COULD ADVERSELY AFFECT THE
QUALITY OF OUR SERVICE AND OUR ABILITY TO PERFORM UNDER CERTAIN CONTRACTS
Under some of our contracts, we depend on the efforts and skills of
subcontractors for the performance of certain tasks. Reliance on subcontractors
varies from project to project. In the six months ended April 2, 2000,
subcontractor costs comprised 22.9% of our gross revenue. The absence of
qualified subcontractors with whom we have a satisfactory relationship could
adversely affect the quality of our service and our ability to perform under
some of our contracts.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY
We provide specialized management consulting and technical services to
a broad range of public and private sector clients. The market for our services
is highly competitive and we compete with many other firms. These firms range
from small regional firms to large national firms which may have greater
financial and marketing resources than ours.
We focus primarily on the resource management, infrastructure and
communications business areas. We provide services to our clients which include
Federal, state and local agencies, and organizations in the private sector.
We compete for projects and engagements with a number of competitors
which can vary from 10 to 100 firms. Historically, clients have chosen among
competing firms based on the quality and timeliness of the firm's service. We
believe, however, that price has become an increasingly important factor.
We believe that our principal competitors include, in alphabetical
order, Black & Veatch LLP; Brown & Caldwell; Castle Tower Corporation; Camp,
Dresser & McKee; CH2M Hill Companies Ltd.; EA Engineering, Science & Technology,
Inc.; Earth Tech, Inc.; ICF Kaiser International, Inc.; IT Group Inc.; Mastec,
Inc.; Montgomery Watson; Quanta Service, Inc.; Roy F. Weston, Inc.; URS Greiner
Corporation; and Wireless Facilities, Inc.
OUR SERVICES EXPOSE US TO SIGNIFICANT RISKS OF LIABILITY AND OUR INSURANCE
POLICIES MAY NOT PROVIDE ADEQUATE COVERAGE
Our services involve significant risks of professional and other
liabilities which may substantially exceed the fees we derive from our services.
Our business activities could expose us to potential liability under various
environmental laws such as the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA). In addition, we sometimes
contractually assume liability under indemnification agreements. We cannot
predict the magnitude of such potential liabilities.
We currently maintain comprehensive general liability, umbrella and
professional liability insurance policies. We believe that our insurance
policies are adequate for our business operations. Professional liability
policies are "claims made" policies; thus, only claims made during the term of
the policy are covered. Should we terminate our professional liability policy
and not obtain retroactive coverage, we would be uninsured for claims made after
termination
-23-
even if these claims are based on events or acts that occurred during the
term of the policy. Additionally, our insurance policies may not protect us
against potential liability due to various exclusions and retentions. Should
we expand into new markets, we may not be able to obtain insurance coverage
for such activities or, if insurance is obtained, the dollar amount of any
liabilities incurred could exceed our insurance coverage. Partially or
completely uninsured claims, if successful and of significant magnitude,
could have a material adverse affect on our business.
WE MAY BE PRECLUDED FROM PROVIDING CERTAIN SERVICES DUE TO CONFLICT OF INTEREST
ISSUES
Many of our clients are concerned about potential or actual conflicts
of interest in retaining management consultants. 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 us from bidding for or
performing contracts resulting from or relating to certain work we have
performed for the government. In addition, services performed for a private
client may create a conflict of interest that precludes or limits our ability to
obtain work from other public or private organizations. We have, on occasion,
declined to bid on projects because of these conflicts of interest issues.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO RISKS SUCH AS FOREIGN CURRENCY
FLUCTUATIONS
In the six months ended April 2, 2000, approximately 2.6% of our net
revenue was derived from the international marketplace. Some contracts with
our international clients are denominated in foreign currencies. As such,
these contracts contain inherent risks including foreign currency exchange
risk and the risk associated with expatriating funds from foreign countries.
If our international revenue increases, our exposure to foreign currency
fluctuations will also increase. We periodically enter into forward exchange
contracts to address foreign currency fluctuations.
-24-
PART II. OTHER INFORMATION
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 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).
3.3 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).
3.4 Certificate of Amendment of Certificate of
Incorporation of the Company (incorporated
herein by reference to Exhibit 3.4 to the
Company's Annual Report on Form 10-K for the
fiscal year ended October 4, 1998).
10.1 Credit Agreement dated as of March 17, 2000
among the Company and the financial
institutions named therein.
10.2 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).
10.3 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).
10.4 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).
10.5 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).
10.6 Form of Incentive Stock Option Agreement used
by the Company in connection with the Company's
1992 Incentive Stock Plan
-25-
(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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 Registration Rights Agreement dated as of July
9, 1998 among the Company and the parties
listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.22 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 28,
1998).
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10.16 Registration Rights Agreement dated as of
September 22, 1998 among the Company and the
parties listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.23 to the Company's Annual Report on Form
10-K for the fiscal year ended October 4,
1998).
10.17 Registration Rights Agreement dated as of
February 26, 1999 among the Company and the
parties listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.24 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended April 4,
1999).
10.18 Registration Rights Agreement dated as of May
7, 1999 among the Company and the parties
listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.26 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended July 4,
1999).
10.19 Registration Rights Agreement dated as of May
21, 1999 among the Company and the parties
listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.27 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended July 4,
1999).
10.20 Registration Rights Agreement dated as of June
18, 1999 among the Company and the parties
listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.28 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended July 4,
1999).
10.21 Registration Rights Agreement dated as of
September 3, 1999 among the Company and the
parties listed on Schedule A attached thereto.
(incorporated herein by reference to Exhibit
10.30 to the Company's Annual Report on Form
10-K for the fiscal year ended October 3,
1999).
11 Computation of Net Income Per Common Share.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
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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 17, 2000 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)
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