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 JULY 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.
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(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
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(Address of principal executive offices)
(626) 351-4664
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of August 7, 2000, the total number of outstanding shares of the
Registrant's common stock was 39,688,925.
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 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market 23
Risks
Risk Factors 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 34
-2-
PART I. FINANCIAL INFORMATION
ITEM 1.
Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
In thousands, except share data JULY 2, 2000 OCTOBER 3, 1999
----------------- --------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 9,868 $ 8,189
Accounts receivable - net.......................................... 126,785 91,376
Unbilled receivables - net......................................... 107,900 85,072
Prepaid and other current assets................................... 14,108 7,174
Deferred income taxes.............................................. 3,259 3,259
------------ ------------
Total Current Assets............................................ 261,920 195,070
------------ ------------
PROPERTY AND EQUIPMENT:
Leasehold improvements............................................. 3,111 3,343
Equipment, furniture and fixtures.................................. 57,298 39,488
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Total........................................................... 60,409 42,831
Accumulated depreciation and amortization.......................... (27,880) (21,085)
------------ --------------
PROPERTY AND EQUIPMENT - NET........................................... 32,529 21,746
------------ ------------
INTANGIBLE ASSETS - NET................................................ 191,566 160,686
OTHER ASSETS........................................................... 3,698 2,976
------------ ------------
TOTAL ASSETS........................................................... $ 489,713 $ 380,478
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 33,696 $ 32,570
Accrued compensation............................................... 26,106 21,900
Billings in excess of costs on uncompleted contracts............... 7,198 5,872
Other current liabilities.......................................... 16,417 14,606
Current portion of long-term obligations........................... 26,000 24,000
Income taxes payable............................................... 7,418 9,809
------------ ------------
Total Current Liabilities....................................... 116,835 108,757
------------ ------------
LONG-TERM OBLIGATIONS.................................................. 93,792 37,289
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - authorized, 2,000,000 shares of $.01 par
value; issued and outstanding 0 shares at July 2, 2000
and October 3, 1999.............................................. -- --
Exchangeable stock of a subsidiary................................. 13,887 13,239
Common stock - authorized, 50,000,000 shares of $.01 par value;
issued and outstanding 39,602,709 and 38,433,621 shares at
July 2, 2000 and October 3, 1999, respectively................... 396 384
Additional paid-in capital......................................... 145,715 127,978
Accumulated other comprehensive income (loss)...................... (153) (802)
Retained earnings.................................................. 119,241 93,633
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................................. 279,086 234,432
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 489,713 $ 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 NINE MONTHS ENDED
----------------------------- ----------------------------
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Gross Revenue...................................... $ 203,795 $ 157,091 $ 551,617 $ 399,147
Subcontractor costs.......................... 47,327 36,352 127,132 92,208
----------- ----------- ----------- -----------
Net Revenue........................................ 156,468 120,739 424,485 306,939
Cost of Net Revenue................................ 116,266 88,189 326,245 232,778
----------- ----------- ----------- -----------
Gross Profit....................................... 40,202 32,550 98,240 74,161
Selling, General and Administrative Expenses....... 18,810 15,598 43,361 33,120
Amortization of Intangibles........................ 1,719 1,353 4,492 3,386
----------- ----------- ----------- -----------
Income from Operations............................. 19,673 15,599 50,387 37,655
Interest Expense................................... 2,077 649 4,868 2,143
Interest Income.................................... (119) (99) (209) (362)
----------- ----------- ----------- -----------
Income Before Income Tax Expense................... 17,715 15,049 45,728 35,874
Income Tax Expense................................. 7,795 6,546 20,120 15,482
----------- ----------- ----------- -----------
Net Income......................................... $ 9,920 $ 8,503 $ 25,608 $ 20,392
=========== =========== =========== ===========
Basic Earnings Per Share........................... $ 0.25 $ 0.22 $ 0.66 $ 0.55
=========== =========== =========== ===========
Diluted Earnings Per Share......................... $ 0.24 $ 0.21 $ 0.62 $ 0.52
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding:
Basic........................................ 39,287 37,801 38,768 36,805
=========== =========== =========== ===========
Diluted...................................... 42,104 40,145 41,221 39,266
=========== =========== =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
-4-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands NINE MONTHS ENDED
--------------------------------------
July 2, July 4,
2000 1999
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 25,608 $ 20,392
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 11,287 8,745
Provision for losses on receivables................................... (1,074) (1,105)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable................................................... (25,728) 2,220
Unbilled receivables.................................................. (16,874) (3,446)
Prepaid and other assets.............................................. (6,370) (3,906)
Accounts payable...................................................... (3,607) (5,494)
Accrued compensation.................................................. 3,501 26
Other current liabilities............................................. (900) 170
Income taxes payable.................................................. (3,142) (824)
--------- ----------
Net Cash (Used In) Provided By Operating Activities............... (17,299) 16,778
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (12,025) (4,005)
Payments for business acquisitions, net of cash acquired.................... (28,387) (33,963)
Payments on loans to unconsolidated affiliate............................... -- (3,000)
--------- ----------
Net Cash Used In Investing Activities............................. (40,412) (40,968)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations........................................... (44,616) (45,000)
Proceeds from issuance of long-term obligations............................. 97,000 48,359
Net proceeds from issuance of common stock.................................. 6,357 25,819
--------- ----------
Net Cash Provided By Financing Activities......................... 58,741 29,178
--------- ----------
EFFECT OF RATE CHANGES ON CASH.............................................. 649 (584)
--------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................... 1,679 4,404
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................ 8,189 4,889
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................. $ 9,868 $ 9,293
=========== ===========
SUPPLIMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................................. $ 4,810 $ 1,804
Income taxes.......................................................... $ 23,262 $ 12,452
(Continued)
-5-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands NINE MONTHS ENDED
-------------------------------------
July 2, July 4,
2000 1999
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SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In June 2000, the Company purchased all of the capital stock of Drake
Contractors, Inc. In conjunction with this acquisition, liabilities were
assumed as follows:
Fair value of assets acquired....................................... $ 9,466
Cash paid........................................................... (4,923)
Contingent consideration............................................ (1,000)
Other acquisition costs............................................. (100)
---------
Liabilities assumed.............................................. $ 3,443
=========
In May 2000, the Company purchased all of the capital stock of Rizzo
Associates, Inc. In conjunction with this acquisition, liabilities were
assumed as follows:
Fair value of assets acquired....................................... $ 17,588
Issuance of common stock............................................ (1,785)
Cash paid........................................................... (8,400)
Other acquisition costs............................................. (120)
---------
Liabilities assumed.............................................. $ 7,283
=========
In May 2000, the Company purchased all of the capital stock of FHC, Inc. In
conjunction with this acquisition, liabilities were assumed as follows:
Fair value of assets acquired....................................... $ 6,357
Issuance of common stock............................................ (833)
Cash paid........................................................... (3,920)
Other acquisition costs............................................. (100)
---------
Liabilities assumed.............................................. $ 1,504
=========
In May 2000, the Company purchased, through its majority-owned subsidiary,
Tetra Tech Canada Ltd., all of the capital stock of 1261248 Ontario, Inc.,
which does business as Engineered Communications. In conjunction with this
acquisition, liabilities were assumed as follows:
Fair value of assets acquired....................................... $ 1,521
Issuance of exchangeable stock...................................... (647)
Cash paid........................................................... (762)
Other acquisition costs............................................. (100)
---------
Liabilities assumed.............................................. $ 12
=========
(Continued)
-6-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands NINE MONTHS ENDED
--------------------------------------
July 2, July 4,
2000 1999
------------------ ------------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In April 2000, the Company purchased all of the capital stock of eXpert
Wireless Solutions, Inc. In conjunction with this acquisition, liabilities
were assumed as follows:
Fair value of assets acquired....................................... $ 21,381
Issuance of common stock............................................ (8,585)
Cash paid........................................................... (10,090)
Other acquisition costs............................................. (100)
---------
Liabilities assumed.............................................. $ 2,606
=========
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 these
acquisitions, 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 June 1999, the Company purchased all of the capital stock of
L.M.W. Associates, Inc., Cosentini Associates, Inc. and Cobin, Inc.
and all 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). In conjunction with these acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired....................................... $ 15,577
Cash paid........................................................... (5,069)
Other acquisition costs............................................. (250)
----------
Liabilities assumed.............................................. $ 10,258
==========
(Continued)
-7-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands NINE MONTHS ENDED
--------------------------------------
July 2, July 4,
2000 1999
------------------ ------------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In June 1999, the Company purchased all of the capital stock of ASL
Consultants, Inc. In conjunction with this acquisition, liabilities were
assumed as follows:
Fair value of assets acquired....................................... $ 16,433
Cash paid........................................................... (10,000)
Other acquisition costs............................................. (90)
----------
Liabilities assumed.............................................. $ 6,343
==========
In June 1999, the Company purchased all of the capital stock of Utilities &
C.C., Inc. In conjunction with this acquisition, liabilities were assumed
as follows:
Fair value of assets acquired....................................... $ 2,568
Issuance of common stock............................................ (2,040)
Other acquisition costs............................................. (70)
----------
Liabilities assumed.............................................. $ 458
==========
In May 1999, the Company purchased all of the capital stock of BAHA
Communications, Inc. In conjunction with this acquisition, liabilities were
assumed as follows:
Fair value of assets acquired....................................... $ 3,355
Issuance of common stock............................................ (2,133)
Common stock held in escrow......................................... (425)
Other acquisition costs............................................. (70)
----------
Liabilities assumed.............................................. $ 727
==========
In May 1999, the Company purchased all of the capital stock of
D.E.A. Construction Company. In conjunction with this acquisition,
liabilities were assumed as follows:
Fair value of assets acquired....................................... $ 19,532
Cash paid........................................................... (14,000)
Covenant not to compete............................................. (250)
Purchase price payable.............................................. (185)
Other acquisition costs............................................. (80)
----------
Liabilities assumed.............................................. $ 5,017
==========
(Continued)
-8-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands NINE MONTHS ENDED
--------------------------------------
July 2, July 4,
2000 1999
------------------ ------------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In May 1999, the Company purchased all of the capital stock of Collins/Pina
Consulting Engineers, Inc. In conjunction with this acquisition,
liabilities were assumed as follows:
Fair value of assets acquired....................................... $ 4,919
Cash paid........................................................... (2,501)
Issuance of common stock............................................ (102)
Other acquisition costs............................................. (70)
----------
Liabilities assumed.............................................. $ 2,246
==========
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)
-9-
TETRA TECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of July 2,
2000, the condensed consolidated statements of income for the three-month and
nine-month periods ended July 2, 2000 and July 4, 1999 and the condensed
consolidated statements of cash flows for the nine months ended July 2, 2000 and
July 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 nine months ended July 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 one to one basis, as adjusted for stock splits and stock
dividends subsequent to the original issuance, for the Company's common stock.
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 $9.9 million and $8.2 million at July 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 commercial clients. The purchase was
valued at approximately $8.1 million, as adjusted, consisting
-10-
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. 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 twelve-month period. Additionally, concurrent with the acquisition,
BCI assigned (without recourse) to its former shareholders accounts
receivable valued at approximately $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 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 adjustment based upon the final determination of CAA's net asset value
as of June 30, 1999. Additionally, concurrent with the acquisition, CAA
assigned (without recourse) to its former owners accounts receivable valued
at approximately $18.4 million.
-11-
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 clients 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 commercial 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.
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.
On April 3, 2000, the Company acquired 100% of the capital stock of
eXpert Wireless Solutions, Inc. (EWS), a provider of radio-frequency engineering
and consulting services to the wireless communications industry. The purchase
was valued at approximately $18.8 million, consisting of cash and 407,877 shares
of Company common stock. Additionally, concurrently with the acquisition, EWS
distributed to its former shareholders accounts receivable valued at
approximately $1.8 million.
-12-
On May 3, 2000, the Company, through its majority-owned subsidiary,
Tetra Tech Canada Ltd., acquired 100% of the capital stock of 1261248
Ontario, Inc., which does business as Engineered Communications (ENG), a
provider of engineering and network services for the wired communications
industry in Ontario, Canada. The purchase was valued at approximately $1.5
million, consisting of cash and 33,606 shares of exchangeable stock of the
Company's majority-owned subsidiary and is subject to a purchase price and
purchase allocation adjustment based upon the final determination of ENG's
net asset value as of May 1, 2000.
On May 17, 2000, the Company acquired 100% of the capital stock of FHC,
Inc. (FHC), a provider of engineering consulting services primarily to state and
local governments in Oklahoma. The purchase was valued at approximately $4.9
million, consisting of cash and 53,007 shares of Company common stock and is
subject to a purchase price and purchase allocation adjustment based upon the
final determination of FHC's net asset value as of May 17, 2000.
On May 24, 2000, the Company acquired 100% of the capital stock of
Rizzo Associates, Inc. (RAI), a provider of engineering consulting services to
state and local governments and commercial clients in the upper Northeast region
of the U.S. This purchase was valued at approximately $10.3 million, consisting
of cash and 112,436 shares of Company common stock and is subject to a purchase
price and purchase allocation adjustment based upon the final determination of
RAI's net asset value as of May 24, 2000.
On June 16, 2000, the Company acquired 100% of the capital stock of
Drake Contractors, Inc. (DCI), a provider of infrastructure installation and
maintenance services primarily in Colorado. The purchase was valued at
approximately $6.0 million, consisting of cash (of which $1.0 million is
contingent on operational performance) and is subject to a purchase price and
purchase allocation adjustment based upon the final determination of DCI's
net asset value as of June 1, 2000. Additionally, concurrent with the
acquisition, DCI distributed to its former shareholders accounts receivable
valued at approximately $2.1 million.
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 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, high volatility
in the trading price of the Company's common stock and other economic factors
specific to the Company's circumstances. During fiscal 1999 and fiscal 2000,
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.
-13-
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 July 2, 2000
and October 3, 1999 was $4.5 million and $4.1 million, respectively. The
allowance for disallowed costs as of July 2, 2000 and October 3, 1999 was
$2.9 million and $4.4 million, respectively. During the three and nine months
ended July 4, 1999, the Company reversed $1.75 million of these reserves into
income due to the collection of previously reserved accounts receivable.
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, EUC, EWS, FHC and RAI on October 5, 1998. The effect of unaudited pro
forma results of LCI, ENG, ESA, and DCI 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.
In thousands, except per share data PRO FORMA NINE MONTHS ENDED
-----------------------------------
JULY 2, 2000 JULY 4, 1999
-------------- --------------
Gross revenue $ 577,563 $ 506,456
Income from operations 51,566 46,013
Net income 25,510 21,620
Basic earnings per share 0.65 0.58
Diluted earnings per share 0.61 0.54
Weighted average shares outstanding:
Basic 39,068 37,575
Diluted 41,521 40,036
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
-14-
private organizations. The Communications operating segment provides a
comprehensive set of services including engineering, consulting and
operational services to communications 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 July 2, 2000 MANAGEMENT INFRASTRUCTURE COMMUNICATIONS TOTAL
-------------- --------------- -------------- -------------
Gross Revenue........................ $ 91,000 $ 63,647 $ 54,824 $ 209,471
Net Revenue.......................... 62,227 50,955 41,469 154,651
Income from Operations............... 7,930 5,789 7,878 21,597
Depreciation Expense................. 517 839 776 2,132
RESOURCE
Nine months ended July 2, 2000 MANAGEMENT INFRASTRUCTURE COMMUNICATIONS TOTAL
-------------- --------------- -------------- -------------
Gross Revenue........................ $ 264,906 $ 170,196 $ 130,204 $ 565,306
Net Revenue.......................... 178,805 136,961 102,591 418,357
Income from Operations............... 21,888 15,223 18,129 55,240
Depreciation Expense................. 1,715 2,779 2,123 6,617
RESOURCE
Three months ended July 4, 1999 MANAGEMENT INFRASTRUCTURE COMMUNICATIONS TOTAL
-------------- -------------- -------------- -------------
Gross Revenue........................ $ 87,983 $ 43,919 $ 27,722 $ 159,624
Net Revenue.......................... 59,360 37,610 22,612 119,582
Income from Operations............... 8,603 4,814 3,724 17,141
Depreciation Expense................. 644 1,283 987 2,914
RESOURCE
Nine months ended July 4, 1999 MANAGEMENT INFRASTRUCTURE COMMUNICATIONS TOTAL
-------------- -------------- -------------- -------------
Gross Revenue........................ $ 242,167 $ 89,852 $ 74,843 $ 406,862
Net Revenue.......................... 166,120 74,507 64,194 304,821
Income from Operations............... 19,940 9,967 11,492 41,399
Depreciation Expense................. 2,007 1,920 1,285 5,212
-15-
RECONCILIATIONS:
THREE MONTHS ENDED
----------------------------------
JULY 2, 2000 JULY 4, 1999
------------ ------------
GROSS REVENUE
Gross revenue from reportable segments............................... $ 209,471 $ 159,624
Elimination of inter-segment revenue................................. (7,493) (3,418)
Other revenue........................................................ 1,817 885
------------ ------------
Total consolidated gross revenue................................. $ 203,795 $ 157,091
============ ============
NET REVENUE
Net revenue from reportable segments................................. $ 154,651 $ 119,582
Other revenue........................................................ 1,817 1,156
------------ ------------
Total consolidated net revenue................................... $ 156,468 $ 120,738
============ ============
INCOME FROM OPERATIONS
Income from operations of reportable segments........................ $ 21,597 $ 17,141
Elimination of inter-segment income.................................. (536) (227)
Other income......................................................... 331 38
Amortization of intangibles.......................................... (1,719) (1,353)
------------ ------------
Total consolidated income from operations........................ $ 19,673 $ 15,599
============ ============
NINE MONTHS ENDED
----------------------------------
JULY 2, 2000 JULY 4, 1999
------------ ------------
GROSS REVENUE
Gross revenue from reportable segments............................... $ 565,306 $ 406,862
Elimination of inter-segment revenue................................. (19,817) (10,142)
Other revenue........................................................ 6,128 2,427
------------ ------------
Total consolidated gross revenue................................. $ 551,617 $ 399,147
============ ============
NET REVENUE
Net revenue from reportable segments................................. $ 418,357 $ 304,821
Other revenue........................................................ 6,128 2,118
------------ ------------
Total consolidated net revenue................................... $ 424,485 $ 306,939
============ ============
INCOME FROM OPERATIONS
Income from operations of reportable segments........................ $ 55,240 $ 41,399
Elimination of inter-segment income.................................. (1,337) (617)
Other income......................................................... 976 259
Amortization of intangibles.......................................... (4,492) (3,386)
------------ ------------
Total consolidated income from operations........................ $ 50,387 $ 37,655
============ ============
MAJOR CLIENTS
The Company's net revenue attributable to the U.S. Federal
government was approximately $41.8 million and $43.6 million for the three
months ended July 2, 2000 and July 4, 1999, respectively. Net revenue
attributable to the U.S. Federal government was approximately $122.9 million
and $121.2 million for the nine months ended July 2, 2000 and July 4, 1999,
respectively. Both the Resource Management and Infrastructure operating
segments realize net revenue from the U.S. government.
-16-
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 $9.6
million and $8.7 million for the three months ended July 2, 2000 and July 4,
1999, respectively. For the nine months ended July 2, 2000 and July 4, 1999,
comprehensive income was $26.3 million and $19.8 million, respectively. For the
three months ended July 2, 2000, the Company incurred net translation losses of
$0.3 million. For the nine months ended July 2, 2000, the Company realized net
translation gains of $0.6 million. For the three months ended July 4, 1999, the
Company realized net translation gains of $0.2 million. For the nine months
ended July 4, 1999, the Company incurred net translation losses of $0.6 million.
-17-
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 costeffective 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
-18-
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 commercial 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 NINE MONTHS ENDED
--------------------------------- ---------------------------------
CLIENT SECTOR JULY 2, 2000 JULY 4, 1999 JULY 2, 2000 JULY 4, 1999
- ------------- ------------ ------------ ------------ ------------
Federal government 26.7% 36.1% 28.9% 39.6%
State & local government 18.5 17.4 17.5 15.6
Commercial sector 51.7 44.1 50.8 41.0
International 3.1 2.4 2.8 3.8
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 NINE MONTHS ENDED
--------------------------------- ---------------------------------
OPERATING SEGMENT JULY 2, 2000 JULY 4, 1999 JULY 2, 2000 JULY 4, 1999
- ----------------- ------------ ------------ ------------ ------------
Resource Management 39.8% 49.2% 42.1% 54.1%
Infrastructure 32.5 31.1 32.3 24.3
Communications 26.5 18.7 24.2 20.9
Other revenue 1.2 1.0 1.4 0.7
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 third quarter of fiscal 2000, we made the
following acquisitions:
EXPERT WIRELESS SOLUTIONS, INC. -- In April 2000, the Company acquired
100% of the capital stock of eXpert Wireless Solutions, Inc. (EWS), a provider
of radio-frequency engineering and consulting services to the wireless
communications industry. The purchase was valued at approximately $18.8 million,
consisting of cash and 407,877 shares of Company common stock. Additionally,
concurrent with the acquisition, EWS distributed to its former shareholders
accounts receivable valued at approximately $1.8 million.
ENGINEERED COMMUNICATIONS -- In May 2000, the Company, through its
majority-owned subsidiary, Tetra Tech Canada Ltd., acquired 100% of the capital
stock of 1261248 Ontario, Inc., which does business as Engineered Communications
(ENG), a provider of engineering and network services for the wired
communications industry in Ontario, Canada. The purchase was valued at
approximately $1.5 million, consisting of cash and 33,606 shares of exchangeable
stock of Tetra Tech Canada Ltd., and is subject to a purchase
price and allocation adjustment based upon the final determination of ENG's net
asset value as of May 1, 2000.
-19-
FHC, INC. -- In May 2000, the Company acquired 100% of the capital
stock of FHC, Inc. (FHC), a provider of engineering consulting services
primarily to state and local governments in Oklahoma. The purchase was valued
at approximately $4.9 million, consisting of cash and 53,007 shares of
Company common stock, and is subject to a purchase price and purchase
allocation adjustment based upon the final determination of FHC's net asset
value as of May 17, 2000.
RIZZO ASSOCIATES, INC. -- In May 2000, the Company acquired 100% of the
capital stock of Rizzo Associates, Inc. (RAI). The purchase was valued at
approximately $10.3 million, consisting of cash and 112,436 shares of Company
common stock, and is subject to a purchase price and purchase allocation
adjustment based upon the final determination of RAI's net asset value as of May
24, 2000.
DRAKE CONTRACTORS, INC. -- In June 2000, the Company acquired 100%
of the capital stock of Drake Contractors, Inc. (DCI). The purchase was
valued at approximately $6.0 million, consisting of cash (of which $1.0
million is contingent on operational performance) and is subject to a
purchase price and purchase allocation adjustment based upon the final
determination of DCI's net asset value as of June 1, 2000. Additionally,
concurrent with the acquisition, DCI distributed to its former shareholders
accounts receivable valued at approximately $2.1 million.
RESULTS OF OPERATIONS
The following table presents the percentage relationship of selected
items to net revenue in our condensed consolidated statements of income:
% RELATIONSHIP TO NET REVENUE % RELATIONSHIP TO NET REVENUE
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
JULY 2, 2000 JULY 4, 1999 JULY 2, 2000 JULY 4, 1999
------------ -------------- ------------ --------------
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of net revenue 74.3 73.0 76.9 75.8
------- ------- ------- -------
Gross profit 25.7 27.0 23.1 24.2
Selling, general and
administrative expenses 12.0 12.9 10.2 10.8
Acquisition amortization 1.1 1.2 1.1 1.1
------- ------- ------- -------
Income from operations 12.6 12.9 11.9 12.3
Net interest expense (1.3) (0.4) (1.1) (0.6)
------- ------- ------- -------
Income before income tax expense 11.3 12.5 10.8 11.7
Income tax expense 5.0 5.5 4.7 5.0
------- ------- ------- -------
Net income 6.3% 7.0% 6.0% 6.6%
======= ======= ======= =======
NET REVENUE. Net revenue increased $35.7 million, or 29.6%, to $156.5
million for the three months ended July 2, 2000 from $120.7 million for the
comparable period last year. For the nine months ended July 2, 2000, net revenue
increased $117.5 million, or 38.3%, to $424.5 million from $306.9 million for
the comparable period last year. Included in net revenue for the three months
and nine months ended July 4, 1999 was $1.75 million relating to the over
accrual of an allowance for disallowed costs (See Note 5. of Notes to Condensed
Consolidated Financial Statements). This allowance relates to amounts previously
not recognized as revenue as they
-20-
were deemed to be unallowable. These amounts were subsequently collected and
therefore included as revenue (the "Adjustment"). Excluding the Adjustment,
net revenue increased 31.5% and 39.1% for the three and nine months ended
July 2, 2000, respectively. The commercial, state and local and international
sectors continued to show net revenue increases in actual dollars and as a
percentage of net revenue. As a percentage of net revenue, reductions were
realized in the Federal government client sector. These reductions were due
to growth in revenue from commercial clients and revenue contributed by
acquired companies. Acquisitions provided increases in our revenue from both
commercial clients and state and local governments. For the three months
ended July 2, 2000, net revenue provided by companies acquired in the past
twelve months totaled $21.5 million. Excluding this net revenue, we
recognized 11.8% growth in our net revenue. For the nine months ended July 2,
2000, net revenue provided by companies acquired in the past twelve months
totaled $94.2 million. Excluding this net revenue, we recognized 7.6% growth
in our net revenue. Gross revenue increased $46.7 million, or 29.7%, to
$203.8 million for the three months ended July 2, 2000 from $157.1 million
for the comparable period last year. For the nine months ended July 2, 2000,
gross revenue increased $152.5 million, or 38.2%, to $551.6 million from
$399.1 million for the comparable period last year. Excluding the Adjustment
in the three months ended July 4, 1999, gross revenue increased 31.2% and
38.8% for the three and nine months ended July 2, 2000, respectively.
COST OF NET REVENUE. Cost of net revenue increased $28.1 million, or
31.8%, to $116.3 million for the three months ended July 2, 2000 from $88.2
million for the comparable period last year. As a percentage of net revenue,
cost of net revenue for the three months ended July 2, 2000 was 74.3%
compared to 73.0% (74.1% pre Adjustment) for the comparable period last year.
For the nine months ended July 2, 2000, cost of net revenue increased $93.5
million, or 40.2%, to $326.2 million from $232.8 million for the comparable
period last year. As a percentage of net revenue, cost of net revenue for the
nine months ended July 2, 2000 was 76.9% compared to 75.8% (76.2% pre
Adjustment) for the comparable period last year. These increases were
primarily due to the reversal of reserves in the three and nine months ended
July 4, 1999, as well as the higher cost of net revenue for the acquired
companies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses,
excluding amortization of intangibles, increased $3.2 million, or 20.6%, to
$18.8 million for the three months ended July 2, 2000 from $15.6 million for
the comparable period last year. As a percent of net revenue, SG&A expenses,
excluding amortization of intangibles, decreased to 12.0% for the three
months ended July 2, 2000 from 12.9% (13.1% pre Adjustment) for the
comparable period last year. For the nine months ended July 2, 2000, SG&A
expenses, excluding amortization of intangibles, increased $10.2 million, or
30.9%, to $43.4 million from $33.1 million for the comparable period last
year. As a percentage of net revenue, SG&A expenses, excluding amortization
of intangibles, decreased to 10.2% for the nine months ended July 2, 2000
from 10.8% (10.9% pre Adjustment) for the comparable period last year.
Amortization expense relating to acquisitions remained at 1.1% of net revenue
for both the three months and nine months ended July 2, 2000 and for the
comparable periods last year. As a percentage of net revenue, the decrease in
SG&A expenses, including amortization of intangibles, for the three months
ended July 2, 2000 was primarily related to timing of expenses relating to
the automation of our corporate business systems and processes and business
development activities.
-21-
NET INTEREST EXPENSE. Net interest expense increased $1.4 million or
256.0% to $2.0 million for the three months ended July 2, 2000 from less than
$1.0 million for the comparable period last year. For the nine months ended
July 2, 2000, net interest expense increased $2.9 million, or 161.6%, to $4.7
million from $1.8 million for the comparable period last year. This increase
was primarily attributable to borrowings on our line of credit to facilitate
acquisitions and working capital needs. Our average indebtedness for the
three and nine months ended July 2, 2000 was $105.4 million and $88.7
million, respectively, as compared to $33.7 million and $8.6 million for the
comparable periods last year. In addition, fiscal 1999 was favorably impacted
by proceeds from our secondary offering.
INCOME TAX EXPENSE. Income tax expense increased $1.2 million, or
19.1%, to $7.8 million for the three months ended July 2, 2000 from $6.5
million for the comparable period last year. For the nine months ended July
2, 2000, income tax expense increased $4.6 million, or 30.0%, to $20.1
million from $15.5 million for the comparable period last year. Certain
expenses, primarily amortization of non-deductible goodwill, create permanent
differences that impact our effective tax rate. Our current effective tax
rate is 44.0% compared to 43.5% in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of July 2, 2000, our working capital was $145.1 million, an
increase of $58.8 million from October 3, 1999, of which cash and cash
equivalents totaled $9.9 million. 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 July 2, 2000, borrowings and standby letters of credit on
the Facility totaled $118.0 million and $1.1 million, respectively.
In the nine months ended July 2, 2000, we used $17.3 million from
operating activities compared to $16.8 million provided in the comparable
period last year. This increase was in part attributable to our cash payments
of $8.1 million to former shareholders of acquired companies for accounts
receivable not acquired in the purchase transactions. In the nine months
ended July 2, 2000, cash used in investing activities was $40.4 million
compared to $41.0 million for the comparable period last year. This increase
primarily was the result of replaced equipment in our wired communications
business and other capital expenditures. In the nine months ended July 2,
2000, cash provided by financing activities was $58.7 million compared to
$29.2 million for the comparable period last year. This change was
attributable to the working capital needs of acquired entities and funds
needed to support acquisitions. The nine months ended July 4, 1999 was 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.
-22-
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 twelve months. Assuming we repay $26.0 million
ratably during the next twelve months, and our average interest rate
increases or decreases by one percentage point, our interest expense could
increase or decrease by approximately $1.1 million during the next twelve
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.
-23-
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 FORWARDLOOKING 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 eleven companies in
nine separate transactions. During the nine months ended July 2, 2000, we
purchased eight companies in seven 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.
-24-
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.
-25-
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 noncompete agreements from certain principals and stockholders of
companies we have acquired, we generally do not have noncompete or employment
agreements with key employees who were not once equity shareholders of these
companies. We do not maintain keyman 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 nine months ended July 2, 2000, approximately 28.9% of our
net revenue was derived from Federal agencies, of which 15.3% was derived from
the Department of Defense (DOD), 9.4% from the Environmental Protection Agency
(EPA), 2.2% from the Department of Energy (DOE), and 2.0% 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
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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 CONTRACTS 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 fixedprice contracts.
Fixedprice 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 fixedprice
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. (currently known as AT&T Broadband) 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.
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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 nine months ended July 2, 2000,
subcontractor costs comprised 23.0% 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
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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 nine months ended July 2, 2000, approximately 2.8% 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.
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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
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended April 2, 2000).
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
(incorporated herein by reference to Exhibit 10.19 to the
Company's
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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
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Quarterly Report on Form 10-Q for the fiscal quarter
ended June 28, 1998).
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).
10.22 Registration Rights Agreement dated as of March 31, 2000
among the Company and the parties listed on Schedule A
attached thereto.
10.23 Registration Rights Agreement dated as of May 3, 2000 among
the Company and the parties listed on Schedule A attached
thereto.
10.24 Registration Rights Agreement dated as of May 17, 2000 among
the Company and the parties listed on Schedule A attached
thereto.
10.25 Registration Rights Agreement dated as of May 24, 2000 among
the Company and the parties listed on Schedule A attached
thereto.
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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: August 16, 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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