FINANCIAL HIGHLIGHTS
Fiscal Year Ended
---------------------------------------------------------------------
Oct. 3, Oct. 4, Sept. 28, Sept. 29, Oct. 1,
1999 1998 1997 1996 1995
------- ------- --------- -------- -------
(in thousands, except per share data)
Gross revenue.......................... $ 566,490 $ 382,934 $ 246,767 $ 220,099 $ 120,034
Net revenue............................ 432,080 297,597 190,791 161,037 87,874
Income from operations................. 55,424 39,813 24,599 17,735 11,756
Net income............................. 29,115 20,586 14,256 10,105 7,553
Basic earnings per share (1)........... 0.78 0.59 0.49 0.37 0.29
Diluted earnings per share (1) ........ 0.74 0.56 0.46 0.36 0.29
Weighted average common shares
outstanding: (1)
Basic............................. 37,159 34,962 29,214 27,314 25,731
Diluted........................... 39,550 36,488 30,820 28,226 26,432
Net cash flow from operating
activities (2)...................... 30,258 (6,620) 1,144 21,124 13,578
Working capital........................ 86,313 77,049 42,539 32,739 39,872
Total assets........................... 380,478 266,610 159,513 88,463 92,930
Long-term obligations, excluding
current portion..................... 37,289 33,546 -- -- 19,045
Stockholders' equity................... 234,432 167,781 107,641 63,269 41,496
(1) REFLECTS THE EFFECT, ON A RETROACTIVE BASIS, OF A 5-FOR-4 STOCK SPLIT,
EFFECTED IN THE FORM OF A 25% STOCK DIVIDEND, IN JUNE 1999.
(2) NET CASH FROM OPERATING ACTIVITIES WAS REDUCED BY $9.3 MILLION, $10.3
MILLION AND $15.6 MILLION FOR THE YEARS ENDED OCTOBER 3, 1999, OCTOBER 4,
1998 AND SEPTEMBER 28, 1997, RESPECTIVELY, AS A RESULT OF OUR ASSIGNMENT OF
ACCOUNTS RECEIVABLE TO THE FORMER OWNERS OF CERTAIN ACQUIRED COMPANIES.
1
SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended
--------------------------------------------------------------------
Oct. 3,(2) Oct. 4,(3) Sept. 28,(4) Sept. 29,(5) Oct. 1,(6)
1999 1998 1997 1996 1995
---------- ------- --------- --------- -------
(in thousands, except per share data)
STATEMENTS OF INCOME DATA
Gross revenue.......................... $ 566,490 $ 382,934 $ 246,767 $ 220,099 $ 120,034
Subcontractor costs.................... 134,410 85,337 55,976 59,062 32,160
---------- ---------- ---------- ---------- ---------
Net revenue............................ 432,080 297,597 190,791 161,037 87,874
Cost of net revenue.................... 327,336 223,871 141,019 122,084 65,484
---------- ---------- ---------- ---------- ---------
Gross profit........................... 104,744 73,726 49,772 38,953 22,390
Selling, general and administrative
expenses............................ 49,320 33,913 25,173 21,218 10,634
---------- ---------- ---------- ---------- ---------
Income from operations................. 55,424 39,813 24,599 17,735 11,756
Net interest (expense) income.......... (3,135) (1,910) (20) (776) 833
----------- ---------- ---------- --------- ---------
Income before minority interest and
income tax expense.................. 52,289 37,903 24,579 16,959 12,589
Minority interest...................... -- 1,397 -- -- --
---------- ---------- ---------- ---------- ---------
Income before income tax expense....... 52,289 36,506 24,579 16,959 12,589
Income tax expense..................... 23,174 15,920 10,323 6,854 5,036
---------- ---------- ---------- ---------- ---------
Net income............................. $ 29,115 $ 20,586 $ 14,256 $ 10,105 $ 7,553
========== ========== ========== ========== =========
Basic earnings per share (1)........... $ 0.78 $ 0.59 $ 0.49 $ 0.37 $ 0.29
========== ========== ========== ========== =========
Diluted earnings per share (1)......... $ 0.74 $ 0.56 $ 0.46 $ 0.36 $ 0.29
========== ========== ========== ========== =========
Weighted average common shares
outstanding: (1)
Basic............................. 37,159 34,962 29,214 27,314 25,731
========== ========== ========== ========== =========
Diluted........................... 39,550 36,488 30,820 28,226 26,432
========== ========== ========== ========== =========
Oct. 3, Oct. 4, Sept. 28, Sept. 29, Oct. 1,
1999 1998 1997 1996 1995
------- ------- --------- --------- -------
(in thousands)
BALANCE SHEET DATA
Working capital........................ $ 86,313 $ 77,049 $ 42,539 $ 32,739 $ 39,872
Total assets........................... 380,478 266,610 159,513 88,463 92,930
Long-term obligations, excluding
current portion..................... 37,289 33,546 -- -- 19,045
Stockholders' equity................... 234,432 167,781 107,641 63,269 41,496
(Continued)
2
(1) REFLECTS THE EFFECT, ON A RETROACTIVE BASIS, OF A 5-FOR-4 STOCK SPLIT,
EFFECTED IN THE FORM OF A 25% STOCK DIVIDEND, IN JUNE 1999.
(2) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF MFG,
INC. (FORMERLY MCCULLEY, FRICK & GILMAN, INC., ACQUIRED FEBRUARY 26, 1999),
COLLINS/PINA CONSULTING ENGINEERS, INC. (ACQUIRED MAY 7, 1999), D.E.A.
CONSTRUCTION COMPANY (ACQUIRED MAY 19, 1999), BAHA COMMUNICATIONS, INC.
(ACQUIRED MAY 21, 1999), UTILITIES & C.C., INC. (ACQUIRED JUNE 18, 1999),
ASL CONSULTANTS, INC. (ACQUIRED JUNE 25, 1999), COSENTINI ASSOCIATES, INC.
(FORMERLY PARTNERSHIP INTERESTS AND CERTAIN COMPANIES AFFILIATED WITH
COSENTINI ASSOCIATES LLP, ACQUIRED JUNE 30, 1999), PDR ENGINEERS, INC.
(ACQUIRED SEPTEMBER 3, 1999), AND EVERGREEN UTILITY CONTRACTORS, INC.,
CONTINENTAL UTILITY CONTRACTORS, INC. AND GIG HARBOR CONSTRUCTION, INC.
(COLLECTIVELY ACQUIRED OCTOBER 2, 1999) FROM THE EFFECTIVE ACQUISITION
DATES.
(3) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF TETRA
TECH NUS, INC. (ACQUIRED DECEMBER 31, 1997), WHALEN/SENTREX LLC (FORMED
MARCH 2, 1998), C.D.C. ENGINEERING, INC. (ACQUIRED MARCH 26, 1998 AND
SUBSEQUENTLY MERGED INTO TETRA TECH, INC. ON JULY 29, 1999), MCNAMEE,
PORTER & SEELEY, INC. (ACQUIRED JULY 8, 1998) AND THE SENTREX GROUP OF
COMPANIES (ACQUIRED SEPTEMBER 22, 1998) FROM THE EFFECTIVE ACQUISITION
DATES.
(4) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF IWA
ENGINEERS (ACQUIRED DECEMBER 11, 1996 AND SUBSEQUENTLY MERGED INTO TETRA
TECH, INC. ON JULY 29, 1999), FLO ENGINEERING, INC. (ACQUIRED DECEMBER 20,
1996 AND SUBSEQUENTLY MERGED INTO TETRA TECH, INC. ON JULY 29, 1999), SCM
CONSULTANTS, INC. (ACQUIRED MARCH 19, 1997), WHALEN & COMPANY, INC.
(ACQUIRED JUNE 11, 1997) AND COMMSITE DEVELOPMENT CORPORATION (ACQUIRED
JULY 11, 1997 AND SUBSEQUENTLY MERGED INTO WHALEN & COMPANY, INC. ON
JANUARY 4, 1999) FROM THE EFFECTIVE ACQUISITION DATES.
(5) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITION OF KCM,
INC. (ACQUIRED NOVEMBER 7, 1995) FROM THE EFFECTIVE ACQUISITION DATE.
(6) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITION OF TETRA
TECH EM INC. (FORMERLY KNOWN AS PRC ENVIRONMENTAL MANAGEMENT, INC. AND
ACQUIRED SEPTEMBER 15, 1995) FROM THE EFFECTIVE ACQUISITION DATE.
(Concluded)
3
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 CONSOLIDATED FINANCIAL STATEMENTS.
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 increased the
size and scope of our business and have expanded our service offerings
through a series of strategic acquisitions and internal growth. From fiscal
1991 through fiscal 1999, we generated a net revenue compounded annual growth
rate of approximately 34.9% and achieved a net income compounded annual
growth rate of approximately 37.0%.
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 our clients and, in
accordance with industry practice, are included in our 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 the executive offices,
corporate accounting, information technology, marketing, and bid and proposal
costs. These costs are generally unrelated to specific client projects. In
addition, we include amortization of certain intangible assets resulting from
acquisitions in SG&A expenses.
4
We provide services to a diverse base of Federal, state and local
government agencies, and private and international clients. The following
table presents, for the periods indicated, the approximate percentage of our
net revenue attributable to these client sectors:
Percentage of Net Revenue
----------------------------------------
Client Fiscal 1999 Fiscal 1998 Fiscal 1997
------ ----------- ----------- -----------
Federal government............................... 39.1% 48.7% 52.3%
State and local government....................... 16.3 12.7 14.8
Private.......................................... 41.3 35.4 29.2
International.................................... 3.3 3.2 3.7
----------- ----------- -----------
Total............................................ 100.0% 100.0% 100.0%
=========== =========== ===========
Our revenue and operating results fluctuate from quarter to quarter as
a result of a number of factors, such as:
- the seasonality of the spending cycle of our 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 and size of the return on investment capital; and
- general economic and political conditions.
Variations in any of these factors can cause significant variations in operating
results from quarter to quarter and could result in losses.
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 fiscal 1999, we purchased 11 companies in the
following nine transactions:
- MCCULLEY, FRICK & GILMAN, INC.- In February 1999, we acquired
McCulley, Frick & Gilman, Inc. (MFG). The purchase was valued at approximately
$8.1 million. MFG, a Colorado-based firm, provides professional environmental
science and consulting services to private-sector clients throughout the United
States.
- COLLINS/PINA CONSULTING ENGINEERS, INC.- In May 1999, we acquired
Collins/Pina Consulting Engineers, Inc. (CPC). The purchase was valued at
approximately $2.7 million. CPC, an Arizona-based firm, provides consulting
engineering and related services primarily in the state of Arizona.
- D.E.A. CONSTRUCTION COMPANY - In May 1999, we acquired D.E.A.
Construction Company (DCC). The purchase was valued at approximately $15.5
million. DCC, a Colorado-based construction and field services firm, provides
design, construction and maintenance of communications and
5
information transport systems to the communications industry primarily in
Colorado and surrounding states.
- BAHA COMMUNICATIONS, INC.- In May 1999, we acquired BAHA
Communications, Inc. (BCI). The purchase was valued at approximately $2.6
million, excluding the value of the accounts receivable which were assigned
to the former owners at the time of acquisition. BCI, a Nevada-based
construction and field services firm, provides infrastructure installation
and maintenance services to the wireless personal communications industry
primarily in Nevada and the Southwestern United States.
- UTILITIES & C.C., INC. - In June 1999, we acquired Utilities &
C.C., Inc. (UCC). The purchase was valued at approximately $2.2 million. UCC,
a Northern California-based construction and field services firm, provides
infrastructure installation and maintenance services to the wireless personal
communications industry primarily in California.
- ASL CONSULTANTS, INC. - In June 1999, we acquired ASL Consultants,
Inc. (ASL). The purchase was valued at approximately $10.1 million. ASL, a
Southern California-based consulting engineering firm, provides water and
wastewater treatment, transportation, and other engineering services
primarily in California and Arizona.
- COSENTINI ASSOCIATES - In June 1999, we acquired the outstanding
shares and partnership interests of certain companies affiliated with
Cosentini Associates LLP (collectively, CAA). The purchase was valued at
approximately $5.3 million, excluding the value of the accounts receivable
which were assigned to the former owners at the time of acquisition. CAA, a
New York-based engineering firm, provides engineering services for major
buildings primarily in the Northeastern United States.
- PDR ENGINEERS, INC. - In September 1999, we acquired PDR
Engineers, Inc. (PDR). The purchase was valued at approximately $6.6 million.
PDR, a Kentucky-based consulting engineering firm, provides water and
wastewater treatment, transportation, and other engineering services
primarily in the Southeastern United States.
- EVERGREEN UTILITY CONTRACTORS, INC. - In October 1999, we acquired
Evergreen Utility Contractors, Inc., Continental Utility Contractors, Inc.
and Gig Harbor Construction, Inc. (collectively, EUC). The purchase was
valued at approximately $11.8 million. EUC, a Washington-based engineering
firm, provides engineering and network services for cable TV and fiber optic
telephone networks in the Pacific Northwestern United States.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating information as a percentage of net revenue:
Percentage of Net Revenue
----------------------------------------
Fiscal Year Ended
----------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
--------- -------- ---------
Net revenue............................. 100.0% 100.0% 100.0%
Cost of net revenue..................... 75.8 75.2 73.9
--------- --------- --------
Gross profit............................ 24.2 24.8 26.1
Selling, general and administrative
expenses............................. 11.4 11.4 13.2
--------- --------- --------
Income from operations.................. 12.8 13.4 12.9
Net interest (expense) income .......... (0.7) (0.7) --
--------- --------- --------
Income before minority interest and
income tax expense................... 12.1 12.7 12.9
6
Minority interest....................... -- (0.5) --
--------- --------- --------
Income before income tax expense........ 12.1 12.2 12.9
Income tax expense...................... 5.4 5.3 5.4
--------- --------- --------
Net income.............................. 6.7% 6.9% 7.5%
========= ========= =======
FISCAL 1999 COMPARED TO FISCAL 1998
NET REVENUE. Net revenue increased $134.5 million, or 45.2%, to
$432.1 million in fiscal 1999 from $297.6 million in fiscal 1998. All four
client sectors continued to show net revenue increases in actual dollars.
These increases were primarily attributable to the expansion of our
infrastructure services throughout the United States, the continued expansion
of new lines of service in our communications business and companies acquired
in fiscal 1999. As a percentage of net revenue, increases were realized in
the state and local sector, the private sector and the international sector.
Net revenue from the companies acquired in fiscal 1999 totaled $61.5 million.
Excluding the net revenue from these companies, we realized 24.5% growth in
our net revenue. Gross revenue increased $183.6 million, or 47.9%, to $566.5
million in fiscal 1999 from $382.9 million in fiscal 1998. In fiscal 1999,
subcontractor costs comprised 23.7% of gross revenue compared to 22.3% for
fiscal 1998.
COST OF NET REVENUE. Cost of net revenue increased $103.5 million,
or 46.2%, to $327.3 million in fiscal 1999 from $223.9 million in fiscal
1998. As a percentage of net revenue, cost of net revenue increased from
75.2% in fiscal 1998 to 75.8% in fiscal 1999. This increase was primarily
attributable to higher costs incurred from the acquired companies.
Professional compensation, the largest component of our cost of net revenue,
rose as the number of our employees increased by 1,781, or 48.6%, to 5,443 in
fiscal 1999 from 3,662 in fiscal 1998. Excluding the employees provided from
acquired companies, our number of employees increased by 74, or 2.0%. Gross
profit increased $31.0 million, or 42.1%, to $104.7 million in fiscal 1999
from $73.7 million in fiscal 1998. In addition, included in our net revenue
and gross profit was $1.75 million relating to the reversal of an over
accrual of an allowance for disallowed costs (See Note 3. in Notes to
Consolidated Financial Statements). However, as a percentage of net revenue,
gross profit decreased from 24.8% in fiscal 1998 to 24.2% in fiscal 1999,
primarily due to lower margins of acquired companies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses
increased $15.4 million, or 45.4%, to $49.3 million in fiscal 1999 from $33.9
million in fiscal 1998. This increase was primarily attributable to
additional headquarters' costs associated with centralizing corporate
functions, other corporate initiatives, costs associated with year 2000
compliance, as well as additional amortization expense relating to acquired
companies. As a percentage of net revenue, SG&A expenses remained at 11.4%.
The amortization expense related to acquisitions increased $1.8 million, or
63.1%, to $4.8 million in fiscal 1999 from $3.0 million in fiscal 1998.
NET INTEREST EXPENSE. Net interest expense increased $1.2 million,
or 64.1%, from $1.9 million to $3.1 million from fiscal 1998 to fiscal 1999.
This increase was primarily attributable to the financing and working capital
needs of certain acquisitions.
INCOME TAX EXPENSE. Income tax expense increased $7.3 million, or
45.6%, to $23.2 million in fiscal 1999 from $15.9 million in fiscal 1998.
This increase was due to higher income before income taxes and an increase in
our effective tax rate from 43.6% in fiscal 1998 to 44.3% in fiscal 1999.
This increase was primarily attributable to increased amounts of
non-deductible goodwill resulting from our business acquisitions.
7
FISCAL 1998 COMPARED TO FISCAL 1997
NET REVENUE. Net revenue increased $106.8 million, or 56.0%, to
$297.6 million in fiscal 1998 from $190.8 million in fiscal 1997. All four
client sectors continued to show net revenue increases in actual dollars.
These increases were attributable to increases in our existing Federal
government contracts, the introduction of new lines of service in our
communications business and to companies acquired in fiscal 1998. As a
percentage of net revenue, increases were realized in the private sector. Net
revenue from the companies acquired in fiscal 1998 totaled $72.0 million.
Excluding the net revenue from these companies, we realized 18.2% growth in
our net revenue. Gross revenue increased $136.2 million, or 55.2%, to $382.9
million in fiscal 1998 from $246.8 million in fiscal 1997. In fiscal 1998,
subcontractor costs comprised 22.3% of gross revenue compared to 22.7% for
fiscal 1997.
COST OF NET REVENUE. Cost of net revenue increased $82.9 million, or
58.8%, to $223.9 million in fiscal 1998 from $141.0 million in fiscal 1997.
As a percentage of net revenue, cost of net revenue increased from 73.9% in
fiscal 1997 to 75.2% in fiscal 1998. This increase was primarily attributable
to higher costs of Federal government contracts, as well as costs incurred in
connection with the additional net revenue from the acquired companies.
Professional compensation, the largest component of our cost of net revenue,
rose as the number of our employees increased by 1,400, or 61.9%, to 3,662 in
fiscal 1998 from 2,262 in fiscal 1997. Excluding the employees provided from
acquired companies, our number of employees increased by 265, or 11.7%. Gross
profit increased $24.0 million, or 48.1%, to $73.7 million in fiscal 1998
from $49.8 million in fiscal 1997. However, as a percentage of net revenue,
gross profit decreased from 26.1% in fiscal 1997 to 24.8% in fiscal 1998,
primarily due to a change in the relative mix of our Federal government
contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses
increased $8.7 million, or 34.7%, to $33.9 million in fiscal 1998 from $25.2
million in fiscal 1997. This increase was primarily attributable to
additional headquarters' costs associated with centralizing corporate
functions as well as additional amortization expense relating to acquired
companies. As a percentage of net revenue, SG&A expenses decreased from 13.2%
in fiscal 1997 to 11.4% in fiscal 1998 due to operating efficiencies. The
amortization expense related to acquisitions increased $1.4 million, or
89.1%, to $3.0 million in fiscal 1998 from $1.6 million in fiscal 1997.
NET INTEREST EXPENSE. Net interest expense increased from less than
$0.1 million to $1.9 million from fiscal 1997 to fiscal 1998. This increase
was primarily attributable to the financing and working capital needs of
certain acquisitions.
INCOME TAX EXPENSE. Income tax expense increased $5.6 million, or
54.2%, to $15.9 million in fiscal 1998 from $10.3 million in fiscal 1997.
This increase was due to higher income before income taxes and an increase in
our effective tax rate from 42.0% in fiscal 1997 to 43.6% in fiscal 1998.
This increase was primarily attributable to amortization amounts which were
not tax deductible.
UNAUDITED QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited quarterly operating
results for each of our last three fiscal years ended October 3, 1999,
October 4, 1998 and September 28, 1997. This data is also expressed as a
percentage of net revenue for the respective quarters. The information has
been derived from unaudited consolidated financial statements that, in our
opinion, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such quarterly information.
The operating results for any quarter are not necessarily indicative of the
results to be expected for any future period.
8
Fiscal 1999 Quarter Ended Fiscal 1998 Quarter Ended
---------------------------------- ------------------------------------
Jan. 3, Apr. 4, Jul. 4, Oct. 3, Dec. 28, Mar. 29, Jun. 28, Oct. 4,
1999 1999 1999 1999 1997 1998 1998 1998
------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
Net revenue $89,245 $96,955 $120,739 $125,141 $53,664 $71,806 $75,149 $96,978
Cost of net revenue 70,187 74,402 88,189 94,558 40,339 54,786 54,405 74,341
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 19,058 22,553 32,550 30,583 13,325 17,020 20,744 22,637
Selling, general and
administrative expenses 8,871 10,684 16,951 12,814 6,146 8,148 9,333 10,286
------- ------- ------- ------- ------- ------- ------- -------
Income from operations 10,187 11,869 15,599 17,769 7,179 8,872 11,411 12,351
Net interest (expense) income (699) (532) (550) (1,354) (73) (596) (510) (731)
-------- ------- -------- ------- ------- ------ ------- ------
Income before minority
interest and income tax expense 9,488 11,337 15,049 16,415 7,106 8,276 10,901 11,620
Minority interest - - - - - 203 1,194 -
------- ------- ------- ------- -------- ------- ------- -------
Income before income
tax expense 9,488 11,337 15,049 16,415 7,106 8,073 9,707 11,620
Income tax expense 4,061 4,875 6,546 7,692 3,055 3,552 4,214 5,099
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 5,427 $ 6,462 $ 8,503 $ 8,723 $ 4,051 $ 4,521 $ 5,493 $ 6,521
======= ======= ======= ======= ======= ======= ======= =======
Fiscal 1997 Quarter Ended
------------------------------------
Dec. 29, Mar. 30, Jun. 29, Sep. 28,
1996 1997 1997 1997
------- ------- ------- ------
(in thousands)
Net revenue $40,423 $43,914 $48,621 $57,833
Cost of net revenue 31,051 33,367 35,660 40,941
------- ------- ------- -------
Gross profit 9,372 10,547 12,961 16,892
Selling, general and
administrative expenses 4,979 5,655 6,754 7,785
------- ------- ------- -------
Income from operations 4,393 4,892 6,207 9,107
Net interest (expense) income 49 31 4 (104)
------- ------- ------- ------
Income before minority
interest and income tax expense 4,442 4,923 6,211 9,003
Minority interest - - - -
------- ------- ------- -------
Income before income
tax expense 4,442 4,923 6,211 9,003
Income tax expense 1,846 2,051 2,567 3,859
------- ------- ------- -------
Net income $ 2,596 $ 2,872 $ 3,644 $ 5,144
======= ======= ======= =======
Fiscal 1999 Quarter Ended Fiscal 1998 Quarter Ended
----------------------------------- -----------------------------------
Jan. 3, Apr. 4, Jul. 4, Oct. 3, Dec. 28, Mar. 29, Jun. 28, Oct. 4,
1999 1999 1999 1999 1997 1998 1998 1998
------- ------- ------- ------- ------- ------- ------- -------
Net revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenue 78.6 76.7 73.0 75.6 75.2 76.3 72.4 76.7
------- -------- ------- ------- -------- ------- ------- --------
Gross profit 21.4 23.3 27.0 24.4 24.8 23.7 27.6 23.3
Selling, general and
administrative expenses 10.0 11.1 14.1 10.2 11.5 11.3 12.4 10.6
------- -------- ------- ------- -------- ------- ------- --------
Income from operations 11.4 12.2 12.9 14.2 13.3 12.4 15.2 12.7
Net interest (expense) income (0.8) (0.5) (0.4) (1.1) (0.1) (0.9) (0.7) (0.7)
------- -------- ------- ------- -------- ------- ------- --------
Income before minority
interest and income tax 10.6 11.7 12.5 13.1 13.2 11.5 14.5 12.0
expense
Minority interest - - - - - 0.3 1.6 -
------- -------- ------- ------- -------- ------- ------- --------
Income before income
tax expense 10.6 11.7 12.5 13.1 13.2 11.2 12.9 12.0
Income tax expense 4.5 5.0 5.5 6.1 5.7 4.9 5.6 5.3
------- -------- ------- ------- -------- ------- ------- --------
Net income 6.1% 6.7% 7.0% 7.0% 7.5% 6.3% 7.3% 6.7%
======= ======== ======= ======= ======== ======= ======= ========
Fiscal 1997 Quarter Ended
------------------------------------
Dec. 29, Mar. 30, Jun. 29, Sep. 28,
1996 1997 1997 1997
------- ------- ------- ------
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of net revenue 76.8 76.0 73.3 70.8
------- ------- -------- -------
Gross profit 23.2 24.0 26.7 29.2
Selling, general and
administrative expenses 12.3 12.9 13.9 13.5
------- ------- -------- -------
Income from operations 10.9 11.1 12.8 15.7
Net interest (expense) income 0.1 0.1 - (0.1)
- ------- ------- ------- --------
Income before minority
interest and income tax expense 11.0 11.2 12.8 15.6
Minority interest - - - -
------- ------- -------- ------
Income before income
tax expense 11.0 11.2 12.8 15.6
Income tax expense 4.6 4.7 5.3 6.7
------- ------- -------- -------
Net income 6.4% 6.5% 7.5% 8.9%
======= ======= ======== =======
LIQUIDITY AND CAPITAL RESOURCES
We are currently in the process of refinancing our existing
revolving credit facility, which must be reduced to $60.0 million on February
1, 2000, with a new senior secured credit facility in the amount of $150.0
million. In connection with this refinancing, we have signed a syndication
mandate letter under which Banc of America LLC has agreed to form a syndicate
of financial institutions, led by Bank of America, N.A., to provide the new
facility. We expect that internally generated funds, our existing cash
balances and availability under the new facility will be sufficient to meet
our capital requirements through the end of fiscal 2000. However, no
assurance can be given that we will successfully complete the refinancing. If
we are unable to refinance our indebtedness, we will need to obtain alternate
financing to reduce our existing facility and meet our fiscal 2000 capital
needs.
As of October 3, 1999, our working capital was $86.3 million, an
increase of $9.3 million from $77.0 million on October 4, 1998, of which cash
and cash equivalents totaled $8.2 million. In fiscal 1999, we augmented cash
provided by operations with borrowings under our credit facility and proceeds
from our secondary offering. In fiscal 1999, $30.3 million was provided by
operating activities and $57.7 million was used in investing activities, of
which $50.7 million was related to business acquisitions. In fiscal 1998, we
used $6.6 million in operating activities and $41.3 million in investing
activities, of which $37.8 million was related to business acquisitions. In both
fiscal years 1999 and 1998, cash provided by/used in operating activities was
effected by the structure of certain transactions. One of our acquisition
structures is to assign accounts receivable to the former owners at the time of
the transaction in lieu of cash consideration. This structure allows us to
reduce our cash used in investing activities. However, cash must be invested in
future periods to finance the working capital needs of the acquired
9
company. In fiscal 1999, in the BCI and CAA acquisitions, accounts receivable
in the aggregate amount of $19.4 million were assigned to the former owners.
Collections on these receivables during fiscal 1999 totaled $9.3 million. If
we had not assigned these receivables at the time of acquisition, cash
provided by operating activities in fiscal 1999 could have been $39.6
million. In fiscal years 1997 and 1998, we acquired WAC and MPS utilizing
this same structure. In fiscal 1997, we assigned $18.5 million in receivables
to the former owners of WAC and in fiscal 1998, we assigned $8.0 million in
receivables to the former owners of MPS. In fiscal 1998, cash collected on
these assigned receivables totaled $10.3 million. If we had not assigned
these receivables at the time of acquisition, cash provided by operating
activities in fiscal 1998 could have been $3.7 million. Our capital
expenditures during fiscal years 1999 and 1998 were approximately $7.0
million and $3.5 million, respectively. The expenditures were primarily for
computer equipment and office expansion.
We have a credit agreement with a bank (the "Credit Agreement")
which, as of October 3, 1999, provided us with a revolving credit facility
(the "Facility") of $85.0 million. On December 24, 1999, we amended the
Credit Agreement to provide for a facility of $93.0 million. The Facility
must be reduced to $60.0 million on February 1, 2000 and it matures on
December 15, 2000 or earlier at our discretion upon payment in full of loans
and other obligations. Throughout fiscal 1999, maximum borrowings under the
Facility were $65.0 million. At October 3, 1999, borrowings and standby
letters of credit totaled $57.5 million and $1.5 million, respectively.
We continuously evaluate the marketplace for strategic acquisition
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
or could expand our service offerings. 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, we do not expect to be materially adversely affected by inflation or
changing prices.
RECENTLY ISSUED FINANCIAL STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME, which we adopted in fiscal 1999. The Statement
establishes standards for the reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Statement requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement and is displayed
with the same prominence as other financial statements.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which we adopted in fiscal
year 1999. The Statement establishes standards for the way that public
business enterprises report information about operating segments as well as
related disclosures about products and services, geographic areas, and major
clients. The Statement also requires that a public business report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the
10
measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVES AND HEDGING ACTIVITIES. The Statement, as amended, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Statement requires companies to recognize all derivative instruments on their
balance sheet as either assets or liabilities measured at fair value. The
Statement also specifies a new method of accounting for hedging transactions,
prescribes the types of items and transactions that may be hedged, and
specifies detailed criteria to be met to qualify for hedge accounting. We
will adopt this Statement in fiscal year 2001.
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 debt. 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 into either a borrowing at
the base rate or a borrowing at a eurodollar rate with similar terms, not to
exceed the maturity date of the Facility. The Facility matures on December 15,
2000 or earlier at our discretion upon payment in full of loans and other
obligations. Accordingly, we classify total outstanding debt between current
liabilities and long-term debt based on anticipated payments within and beyond
one year's period of time. We presently anticipate repaying $24.0 million of our
long-term debt in fiscal 2000. As our facility matures in December 2000, we
anticipate repaying the outstanding debt of $37.3 million by seeking an
alternate financing arrangement. Assuming we pay our long-term debt in the
amounts of $24.0 million, $24.0 million and $13.3 million for the next three
years ratably throughout each year, we obtain financing arrangements with
similar interest provisions, and our average interest rate on our long-term debt
increases or decreases by one percentage point, our interest expense could
increase or decrease by $0.5 million, $0.3 million and $0.1 million in fiscal
2000, 2001 and 2002, respectively. However there can be no assurance that we
will, or will be able to, repay our debt in the prescribed manner or obtain
alternate financing. We could incur additional debt under this credit facility
or our operating results could be worse than we expect.
YEAR 2000
Since fiscal 1995, we have worked to resolve the potential impact of
the year 2000 (Y2K) on our business operations and the ability of our
computerized information systems to accurately process information that may be
date-sensitive. Any of our programs that recognize a date using "00" as the year
1900 rather than the year 2000 could result in errors or system failures.
We utilize a number of computer programs across our entire operation.
The primary information technology (IT) systems we utilize are (1) the
accounting and financial systems which include general ledger, accounts payable,
accounts receivable, billing and collection, fixed assets, job cost accounting
and payroll, and (2) human resource information management systems. We do not
believe we have a material amount of non-IT systems on which we rely.
We established both a Y2K review committee and a Y2K action team. The
purpose of the review committee was to develop and communicate our Y2K plan to
achieve our Y2K compliance mission. The
11
purpose of the action team was to identify, remediate and implement plans to
resolve our Y2K related issues. Through the review committee and the action
team, we assessed all issues we believe to have that relate to Y2K. We
developed questionnaires regarding Y2K readiness used both internally and
externally. We completed both our internal assessment and assessed the Y2K
issues of our clients and vendors. Based on the information collected to date,
we do not believe that our Y2K issues will have a material adverse impact on
our financial position. We plan to continue to devote all resources required to
resolve any significant Y2K issues that may arise in a timely manner.
STATE OF READINESS
We began our risk assessment in 1995. Since that time we have procured
and implemented certain accounting and financial reporting systems as well as
contract administration and billing systems that have been certified as Y2K
compliant by our vendors. At the end of fiscal 1998, approximately 72% of our
gross revenue was recognized on these Y2K compliant systems. During fiscal 1999
we converted the remaining operating units to Y2K compliant systems. For the
companies we acquired in fiscal 1999, we obtained warranties from the former
owners regarding the companies' Y2K compliance. In all cases, we believe that
our financial and accounting systems are Y2K compliant and we will not be
materially impacted by the year 2000.
We installed a Y2K compliant human resource information management
system. We believe that our human resource management information systems are
Y2K compliant and we will not be materially impacted by the year 2000.
We have expended approximately $2.6 million on the procurement of these
systems, the conversion of data from legacy systems to these systems, and on the
implementation and testing of these systems.
RISKS
We have extensive business with the Federal government. Should the
Federal government, specifically the Department of Defense, experience
significant business interruptions relating to Y2K compliance, we could be
materially impacted. To the extent that other third parties upon which we rely,
such as banking institutions, clients and vendors, are unable to address their
Y2K issues in a timely manner, we could be materially impacted. We believe that
the worst case scenario relating to Y2K would be an extensive period of time
in which the Federal government and other third parties could not process
payments promptly.
We believe the risks associated with non-Y2K compliance include: (1)
our inability to invoice and process payments, (2) our inability to produce
accurate and timely financials, (3) the impact on our cash flow and working
capital needs, (4) the impact on our profitability, and (5) our liability to
third parties for not meeting contracted deliverables.
CONTINGENCY PLANS
We currently do not have formal contingency plans for the failure of
our financial and accounting systems or our human resource information
management system.
We maintain, as a matter of policy and practice, mitigation plans in
the event of systems failure which includes regular backup of certain historical
information on both electronic and paper mediums.
12
INDEPENDENT AUDITORS' REPORT
Tetra Tech, Inc.:
We have audited the accompanying consolidated balance sheets of Tetra
Tech, Inc. and its subsidiaries as of October 3, 1999 and October 4, 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended October 3, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Tetra Tech, Inc. and its
subsidiaries as of October 3, 1999 and October 4, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
October 3, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
November 16, 1999 (except for Note 5, as to which the date is December 24, 1999)
13
TETRA TECH, INC.
CONSOLIDATED BALANCE SHEETS
Oct. 3, Oct. 4,
1999 1998
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 8,189,000 $ 4,889,000
Accounts receivable - net.................................. 91,376,000 68,834,000
Unbilled receivables - net................................. 85,072,000 59,888,000
Prepaid expenses and other current assets.................. 7,174,000 4,955,000
Deferred income taxes...................................... 3,259,000 3,766,000
-------------- --------------
Total Current Assets.................................... 195,070,000 142,332,000
-------------- --------------
Property and Equipment:
Equipment, furniture and fixtures.......................... 39,488,000 25,616,000
Leasehold improvements..................................... 3,343,000 1,348,000
-------------- --------------
Total................................................... 42,831,000 26,964,000
Accumulated depreciation and amortization.................. (21,085,000) (13,219,000)
-------------- --------------
Property and Equipment - Net................................... 21,746,000 13,745,000
-------------- --------------
Intangible Assets - Net........................................ 160,686,000 108,638,000
Other Assets................................................... 2,976,000 1,895,000
-------------- --------------
Total Assets................................................... $ 380,478,000 $ 266,610,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................... $ 32,570,000 $ 24,027,000
Accrued compensation....................................... 21,900,000 15,614,000
Billings in excess of costs on uncompleted contracts....... 5,872,000 694,000
Other current liabilities.................................. 14,606,000 7,589,000
Income taxes payable....................................... 9,809,000 3,294,000
Current portion of long-term obligations................... 24,000,000 14,065,000
-------------- --------------
Total Current Liabilities............................... 108,757,000 65,283,000
-------------- --------------
Long-term Obligations.......................................... 37,289,000 33,546,000
-------------- --------------
Commitments and Contingencies (Notes 8 and 10)
Stockholders' Equity:
Preferred stock - authorized, 2,000,000 shares of $.01 par
value; issued and outstanding 0 at October 3, 1999 and
October 4, 1998.......................................... -- --
Exchangeable stock of a subsidiary......................... 13,239,000 15,411,000
Common stock - authorized, 50,000,000 shares of $.01 par
value; issued and outstanding 38,433,621 shares at
October 3, 1999 and 35,788,250 shares at October 4, 1998. 384,000 357,000
Additional paid-in capital................................. 127,978,000 87,495,000
Accumulated other comprehensive income..................... (802,000) --
Retained earnings.......................................... 93,633,000 64,518,000
-------------- --------------
Total Stockholders' Equity..................................... 234,432,000 167,781,000
-------------- --------------
Total Liabilities and Stockholders' Equity..................... $ 380,478,000 $ 266,610,000
============== ==============
See accompanying Notes to Consolidated Financial Statements.
14
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
--------------------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
--------------- -------------- --------------
Revenue:
Gross revenue.............................. $ 566,490,000 $ 382,934,000 $ 246,767,000
Subcontractor costs........................ 134,410,000 85,337,000 55,976,000
-------------- -------------- --------------
Net Revenue..................................... 432,080,000 297,597,000 190,791,000
Cost of Net Revenue............................. 327,336,000 223,871,000 141,019,000
-------------- -------------- --------------
Gross Profit.................................... 104,744,000 73,726,000 49,772,000
Selling, General and Administrative Expenses.... 49,320,000 33,913,000 25,173,000
-------------- -------------- --------------
Income From Operations.......................... 55,424,000 39,813,000 24,599,000
Interest Expense................................ 3,561,000 2,329,000 320,000
Interest Income................................. 426,000 419,000 300,000
-------------- -------------- --------------
Income Before Minority Interest and Income
Tax Expense.................................. 52,289,000 37,903,000 24,579,000
Minority Interest............................... -- 1,397,000 --
-------------- -------------- --------------
Income Before Income Tax Expense................ 52,289,000 36,506,000 24,579,000
Income Tax Expense.............................. 23,174,000 15,920,000 10,323,000
-------------- -------------- --------------
Net Income...................................... $ 29,115,000 $ 20,586,000 $ 14,256,000
============== ============== ==============
Basic Earnings Per Share........................ $ 0.78 $ 0.59 $ 0.49
============== ============== ==============
Diluted Earnings Per Share...................... $ 0.74 $ 0.56 $ 0.46
============== ============== ==============
Weighted Average Common Shares Outstanding:
Basic..................................... 37,159,000 34,962,000 29,214,000
============== ============== ==============
Diluted................................... 39,550,000 36,488,000 30,820,000
============== ============== ==============
See accompanying Notes to Consolidated Financial Statements.
15
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED OCTOBER 3, 1999, OCTOBER 4, 1998 AND SEPTEMBER 28, 1997
ACCUMULATED
EXCHANGEABLE STOCK COMMON STOCK ADDITIONAL OTHER
---------------------- -------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME/(LOSS) TOTAL
---------- ---------- ---------- -------- ------------ ----------- ------------ -----------
BALANCE, SEPTEMBER 29, 1996
as previously reported....... -- $ -- 22,073,440 $221,000 $ 33,372,000 $29,676,000 $ -- $63,269,000
Five-for-four common stock
split (see Note 6)....... 5,518,360 55,000 (55,000) --
--------- ---------- ---------- ------- ------------ ----------- ---------- ------------
BALANCE, SEPTEMBER 29, 1996.... -- -- 27,591,800 276,000 33,317,000 29,676,000 -- 63,269,000
Net income and
comprehensive income..... 14,256,000 14,256,000
Shares issued in
acquisitions............. 4,299,163 43,000 27,007,000 27,050,000
Stock options exercised.... 282,436 3,000 1,307,000 1,310,000
Shares issued in Employee
Stock Purchase Plan...... 192,624 2,000 1,280,000 1,282,000
Tax benefit for
disqualifying
dispositions of stock
options.................. 474,000 474,000
--------- ----------- ---------- ------- ------------ ----------- --------- ------------
BALANCE, SEPTEMBER 28, 1997.... -- -- 32,366,023 324,000 63,385,000 43,932,000 -- 107,641,000
Net income and
comprehensive income.... 20,586,000 20,586,000
Shares issued in
acquisitions............ 920,354 15,411,000 432,435 4,000 5,520,000 20,935,000
Stock options exercised... 440,331 4,000 2,613,000 2,617,000
Shares issued in Employee
Stock Purchase Plan .... 144,431 1,000 1,505,000 1,506,000
Preferred shares converted
to common............... 2,405,938 24,000 13,502,000 13,526,000
Tax benefit for
disqualifying
dispositions of stock
options ................ 977,000 977,000
Payment for fractional
shares.................. (908) (7,000) (7,000)
--------- ----------- ---------- -------- ------------ ----------- --------- -------------
BALANCE, OCTOBER 4, 1998 ...... 920,354 15,411,000 35,788,250 357,000 87,495,000 64,518,000 -- 167,781,000
Comprehensive income:
Net income ............. 29,115,000 29,115,000
Foreign currency
translation adjustment. (802,000) (802,000)
-------------
Comprehensive income... 28,313,000
-------------
Shares issued in secondary
offering............... 1,250,000 12,000 22,159,000 22,171,000
Shares issued in
acquisitions............ 787,051 8,000 11,563,000 11,571,000
Stock options exercised... 289,972 3,000 1,920,000 1,923,000
Shares issued in Employee
Stock Purchase Plan..... 156,361 2,000 2,220,000 2,222,000
Exchangeable shares of a
subsidiary exchanged
for common shares....... (129,712) (2,172,000) 162,140 2,000 2,170,000 --
Tax benefit for
disqualifying
dispositions of stock
options................. 473,000 473,000
Payment for fractional
shares.................. (153) (22,000) (22,000)
--------- ----------- ---------- -------- ------------ ----------- --------- -------------
BALANCE, OCTOBER 3, 1999....... 790,642 $13,239,000 38,433,621 $384,000 $127,978,000 $93,633,000 $(802,000) $234,432,000
========= =========== ========== ======== ============ =========== ========= ============
See accompanying Notes to Consolidated Financial Statements.
16
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
---------------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 29,115,000 $20,586,000 $14,256,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 12,708,000 6,595,000 4,411,000
Deferred income taxes.................................... (211,000) (2,899,000) 1,490,000
Provision for losses on receivables...................... (667,000) (334,000) (56,000)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable...................................... 4,713,000 (23,262,000) (3,617,000)
Unbilled receivables..................................... (13,727,000) (11,502,000) (8,037,000)
Prepaid expenses and other current assets................ 998,000 (1,375,000) 1,823,000
Accounts payable......................................... (8,306,000) 10,203,000 (3,551,000)
Accrued compensation..................................... (935,000) (32,000) (3,909,000)
Other current liabilities................................ 3,973,000 (6,548,000) (1,412,000)
Income taxes payable..................................... 2,597,000 1,948,000 (254,000)
------------ ----------- ------------
Net Cash Provided By (Used In) Operating Activities.. 30,258,000 (6,620,000) 1,144,000
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... (7,040,000) (3,511,000) (2,640,000)
Proceeds from sale of property and equipment.................. -- -- 44,000
Payments for business acquisitions, net of cash acquired...... (50,655,000) (37,778,000) (1,237,000)
------------- ------------ ------------
Net Cash Used In Investing Activities................ (57,695,000) (41,289,000) (3,833,000)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations............................. (67,605,000) (39,580,000) (6,797,000)
Proceeds from issuance of long-term obligations............... 72,841,000 76,000,000 13,000,000
Proceeds from issuance of common stock........................ 26,576,000 4,116,000 2,619,000
------------ ----------- -----------
Net Cash Provided By Financing Activities............ 31,812,000 40,536,000 8,822,000
------------ ----------- -----------
Effect of Rate Changes on Cash................................... (1,075,000) -- --
------------ ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents............. 3,300,000 (7,373,000) 6,133,000
Cash and Cash Equivalents at Beginning of Year................... 4,889,000 12,262,000 6,129,000
------------ ----------- -----------
Cash and Cash Equivalents at End of Year......................... $ 8,189,000 $ 4,889,000 $12,262,000
============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................... $ 3,524,000 $ 2,129,000 $ 309,000
============ =========== ===========
Income taxes............................................... $ 20,067,000 $17,195,000 $ 9,407,000
============ =========== ===========
(Continued)
17
Fiscal Year Ended
---------------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
------------ ----------- -----------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
In fiscal 1999, the Company purchased all of the capital
stock of McCulley, Frick & Gilman, Inc., Collins/Pina
Consulting Engineers, Inc., D.E.A. Construction Company,
BAHA Communications, Inc., Utilities & C.C., Inc., ASL
Consultants, Inc., Cosentini Associates, Evergreen Utility
Contractors, Inc., Continental Utility Contractors, Inc.,
Gig Harbor Construction, Inc. and PDR Engineers, Inc.
In conjunction with these acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired.......................... $110,616,000
Cash paid.............................................. (52,275,000)
Issuance of common stock............................... (11,571,000)
Purchase price payable (282,000)
Other acquisition costs................................ (965,000)
-------------
Liabilities assumed................................ $ 45,523,000
============
In fiscal 1998, the Company purchased all of the capital stock of
C.D.C. Engineering, Inc., McNamee, Porter & Seeley, Inc. and
the Sentrex Group of Companies. The Company also purchased
certain assets of Brown & Root, Inc. and Halliburton
Corporation. In conjunction with these acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired.......................... $ 80,209,000
Cash paid.............................................. (38,348,000)
Issuance of common and exchangeable stock.............. (20,935,000)
Other acquisition costs................................ (985,000)
-------------
Liabilities assumed................................ $ 19,941,000
============
In fiscal 1997, the Company purchased all of the capital stock of
IWA Engineers, FLO Engineering, Inc., SCM Consultants, Inc.,
Whalen & Company, Inc., Whalen Service Corps Inc. and
CommSite Development Corporation. In conjunction with these
acquisitions, liabilities were assumed as follows:
Fair value of assets acquired.......................... $ 66,386,000
Cash paid.............................................. (8,811,000)
Purchase price payable................................. (729,000)
Issuance of common and preferred stock................. (40,577,000)
Other acquisition costs................................ (2,111,000)
-------------
Liabilities assumed................................ $ 14,158,000
============
(Concluded)
See accompanying Notes to Consolidated Financial Statements.
18
TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED OCTOBER 3, 1999,
OCTOBER 4, 1998 AND SEPTEMBER 28, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Tetra Tech, Inc. (the "Company") provides specialized
management consulting and technical services in three principal business areas:
resource management, infrastructure and communications. The Company's management
consulting services are complemented by its technical services. These technical
services, which implement solutions, include research and development, applied
science, engineering and architectural design, construction management, and
operations and maintenance.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries and its
majority-owned subsidiary Tetra Tech Canada Ltd. All significant intercompany
balances and transactions have been eliminated in consolidation.
FISCAL YEAR - The Company reports results of operations based on 52- or
53-week periods ending near September 30. Fiscal years 1999 and 1997 contained
52 weeks. Fiscal year 1998 contained 53 weeks.
CONTRACT REVENUE AND COSTS - In the course of providing its services,
the Company routinely subcontracts for services. These costs are passed through
to clients and, in accordance with industry practice, are included in the
Company's gross revenue. Because subcontractor services can change significantly
from project to project, changes in gross revenue may not be indicative of
business trends. Accordingly, the Company also reports net revenue, which is
gross revenue less the cost of subcontractor services. Contract revenue and
contract costs on both cost-type and fixed-price-type contracts are recorded
using the percentage-of-completion (cost-to-cost) method. Under this method,
contract revenue on long-term contracts is recognized in the ratio that contract
costs incurred bear to total estimated costs. Costs and income on long-term
contracts are subject to revision throughout the lives of the contracts and any
required adjustments are made in the period in which the revisions become known.
Losses on contracts are recorded in full as they are identified.
Selling, general and administrative costs are expensed in the period
incurred.
Net revenue under Federal government contracts and subcontracts
accounted for approximately 39.1%, 48.7% and 52.3%, of net revenue for the years
ended October 3, 1999, October 4, 1998 and September 28, 1997, respectively.
CASH AND CASH EQUIVALENTS - Cash equivalents include all investments
with initial maturities of 90 days or less.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost
and are depreciated over their estimated useful lives using the straight-line
method. Expenditures for maintenance and repairs are expensed as incurred.
Generally, estimated useful lives range from three to ten years for
equipment, furniture and fixtures. Leasehold improvements are amortized on a
straight-line basis over the shorter of their estimated useful lives or the
remaining terms of the leases.
19
LONG-LIVED ASSETS - The Company reviews the recoverability of
long-lived assets to determine if there has been any impairment. This assessment
is performed based on the estimated undiscounted cash flows compared with the
carrying value of the assets. If the future cash flows (undiscounted and without
interest charges) are less than the carrying value, a writedown would be
recorded to reduce the related asset to its estimated fair value.
Intangible assets as of October 3, 1999 and October 4, 1998 consist
principally of goodwill resulting from business acquisitions which is being
amortized over periods ranging from 15 to 30 years. The accumulated amortization
of intangible assets as of October 3, 1999 and October 4, 1998 was $11.0 million
and $6.5 million, respectively.
INCOME TAXES - The Company files a consolidated federal income tax
return and combined California franchise tax reports, as well as other returns
which are required in the states in which the Company does business, which
include the Company and its subsidiaries. Income taxes are recognized for (a)
the amount of taxes payable or refundable for the current period, and (b)
deferred income tax assets and liabilities for the future tax consequences of
events that have been recognized in the Company's financial statements or income
tax returns. The effects of income taxes are measured based on enacted tax laws
and rates.
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 the income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed by dividing income
available to common stockholders 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 of shares of
exchangeable stock of a subsidiary, the weighted average number of shares of
redeemable preferred stock and the weighted average dilutive effects of
outstanding stock options. The exchangeable stock of a subsidiary is
non-voting and is exchangeable share for share for the Company's common stock
on a 1.25 to one basis. The redeemable preferred stock had voting and
dividend rights substantially similar to those of common. The redeemable
preferred stock outstanding at September 28, 1997 was converted to common
stock during the fiscal year ended October 4, 1998. Basic and diluted EPS
reflect, on a retroactive basis, a 5-for-4 stock split effected in the form
of a 25% stock dividend, wherein one additional share of stock was issued on
June 15, 1999 for each four shares outstanding as of the record date of May
14, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
cash equivalents, accounts receivable, unbilled receivables and accounts payable
approximate fair value because of the short maturities of these instruments. The
carrying amount of the revolving credit facility and other long-term debt
approximates fair value because the interest rates are based upon variable
reference rates.
CONCENTRATION OF CREDIT RISK - Financial instruments which subject the
Company to credit risk consist primarily of cash and cash equivalents, accounts
receivable and unbilled receivables. The Company places its temporary cash
investments with high credit quality financial institutions and, by policy,
limits the amount of investment exposure to any one financial institution. As of
October 3, 1999, approximately 25.5% of accounts receivable was due from various
agencies of the Federal government. The remaining accounts receivable are
generally diversified due to the large number of organizations comprising the
Company's client base and their geographic dispersion. The Company performs
ongoing credit evaluations of its clients and maintains an allowance for
potential credit losses.
20
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 130, REPORTING COMPREHENSIVE INCOME which the Company adopted in fiscal year
1999. The Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION which the Company adopted in fiscal
year 1999. The Statement establishes standards for the way that public business
enterprises report information about operating segments as well as related
disclosures about products and services, geographic areas, and major clients.
The Statement also requires that a public business report descriptive
information about the way that the operating segments were determined,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES
AND HEDGING ACTIVITIES. The Statement, as amended, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Statement
requires companies to recognize all derivative instruments on their balance
sheet as either assets or liabilities measured at fair value. The Statement also
specifies a new method of accounting for hedging transactions, prescribes the
types of items and transactions that may be hedged, and specifies detailed
criteria to be met to qualify for hedge accounting. The Company has not yet
completed its analysis of the effect of SFAS No. 133 on its financial
statements. The Company will adopt this Statement in fiscal year 2001.
2. MERGERS AND ACQUISITIONS
On December 11, 1996, the Company acquired 100% of the capital stock of
IWA Engineers (IWA), an architecture and engineering firm providing a wide range
of planning, engineering, and design capabilities in water, wastewater, and
facility design, and serving state and local government and private clients. The
purchase was valued at approximately $1,632,000, consisting of cash and 149,491
shares of Company common stock, as adjusted based upon IWA's net asset value on
December 29, 1996 as described in the related purchase agreement.
On December 18, 1996, the Company acquired 100% of the capital stock of
FLO Engineering, Inc. (FLO), a consulting and engineering firm specializing in
water resource engineering involving hydraulic engineering and hydrographic data
collection. The purchase was valued at approximately $724,000, consisting of
cash and 62,715 shares of Company common stock, as adjusted based upon FLO's net
asset value on December 29, 1996 as described in the related purchase agreement.
On March 20, 1997, the Company acquired 100% of the capital stock of
SCM Consultants, Inc. (SCM), a consulting and engineering firm providing design
of irrigation, water and wastewater systems, as well as facility and
infrastructure engineering services, to state and local government, private and
industrial
21
clients. The purchase was valued at approximately $2,431,000, consisting of
cash and 308,706 shares of Company common stock, as adjusted based upon SCM's
net asset value on March 30, 1997 as described in the related purchase
agreement.
On June 11, 1997, the Company acquired 100% of the capital stock of
Whalen & Company, Inc. and Whalen Service Corps Inc. (collectively, WAC). WAC, a
wireless telecommunications firm, provides a full range of wireless
telecommunications site development services for PCS, cellular, ESMR,
air-to-ground, microwave, paging, fiber optic and switching centers technology.
The purchase has been valued at approximately $41,738,000 consisting of cash and
5,687,187 shares of Company common stock. Initially, the Company issued
1,231,840 shares of redeemable preferred stock. The shares of redeemable
preferred stock were subsequently converted into common stock. The common and
preferred stock were issued in a private placement and had a combined value of
$31,972,000. On the business day prior to the merger, WAC distributed to its
stockholders (i) cash in the amount of $4,138,000 and (ii) accounts receivable
having a net value of $18,456,000.
On July 11, 1997, the Company acquired 100% of the capital stock of
CommSite Development Corporation (CDC), a wireless telecommunications site
development service firm. The purchase has been valued at approximately
$5,702,000 consisting of cash and 496,997 shares of Company common stock, as
adjusted based on CDC's net asset value on July 11, 1997 as described in the
related purchase agreement.
On December 31, 1997, the Company acquired, through its wholly-owned
subsidiary Tetra Tech NUS, Inc., the assets of certain environmental services
businesses of Brown & Root, Inc. and Halliburton Corporation, both of which are
subsidiaries of Halliburton Company (collectively, NUS). NUS provides
consulting, engineering and design services for the environmental remediation of
contaminated air, water and soil conditions. The purchase price was valued at
approximately $25.2 million, as adjusted, and consisted of cash.
On March 2, 1998, Whalen Service Corps Inc. (WSC) agreed to participate
in a partnership with Sentrex Cen-Comm and ANTEC Corporation to provide design,
engineering, information management and construction services to support
advanced communication system upgrades to the broadband information transport
industries. The agreement required the purchase of certain assets of TANCO LLC
from ANTEC Corporation for a price in cash of approximately $0.3 million. WSC
initially held a 51% majority interest in Whalen/Sentrex LLC, a California
limited liability company while LAL Corp. held the remaining 49% minority
interest.
On March 26, 1998, the Company acquired 100% of the capital stock of
C.D.C. Engineering, Inc. (CDE), a consulting and engineering firm specializing
in civil engineering, transportation engineering, structural engineering and
land surveying. The purchase was valued at approximately $1.5 million,
consisting of cash and 88,825 shares of Company common stock.
On July 8, 1998, the Company acquired 100% of the capital stock of
McNamee, Porter & Seeley, Inc. (MPS), a provider of engineering services with
expertise in the areas of water, industrial wastewater and process controls. The
purchase was valued at approximately $14.9 million, consisting of cash and
343,610 shares of Company common stock. Simultaneously with the acquisition, MPS
assigned to its former owners accounts receivable having a net value of $8.0
million.
On September 22, 1998, the Company acquired, through its majority-owned
subsidiary Tetra Tech Canada Ltd. (TtC), 100% of the capital stock of 1056584
Ontario Limited, 1056585 Ontario Limited, Ventrure Cable Limited, Cen-Comm
Communication, Inc., Sentrex Electronics, Inc. and LAL Corp., (collectively,
the Sentrex Group of Companies (SGOC)), providers of engineering and technical
22
services to the cable television, telephony and data networking industries. The
purchase was valued at approximately $19.2 million, consisting of cash and
920,354 shares of TtC exchangeable stock. The TtC exchangeable stock is
exchangeable, share for share, subject to adjustment, for Company common stock
as described in the related purchase agreement. Upon completion of the SGOC
acquisition, the Company beneficially owns 100% of Whalen/Sentrex LLC.
On January 4, 1999, the Company merged CDC into WAC. The Company
believes this combination strengthens its geographic presence in Northern
California.
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 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 and 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, consisted 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
23
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 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. (SLA), IWA, FLO, and CDE 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
stonger 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.
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 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 1998 and 1999, stock
exchanged in acquisitions was discounted by 15.0%. During fiscal 1997, the
discount on stock exchanged in acquisitions ranged from 16% to 28%. 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 SGOC and CDE
acquisitions, had they been acquired on September 29, 1997, is not material.
The following table presents summarized unaudited pro forma
operating results assuming that the Company had acquired EUC, PDR, CAA, ASL,
UCC, BCI, DCC, CPC, MFG, MPS and NUS on September 29, 1997:
24
Fiscal Year Ended
-------------------------------------------------------
Oct. 3, 1999 Oct. 4, 1998
-------------------------- ---------------------------
Gross revenue $ 660,815,000 $ 558,727,000
Income before income tax expense 58,996,000 48,269,000
Net income 32,861,000 22,275,000
Basic earnings per share $ 0.88 $ 0.62
Diluted earnings per share 0.82 0.59
Weighted average common shares outstanding:
Basic 37,559,000 36,019,000
Diluted 39,950,000 37,545,000
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at October 3, 1999 and
October 4, 1998:
Oct. 3, 1999 Oct. 4, 1998
--------------- ---------------
Billed accounts receivable.................................... $ 95,465,000 $ 71,745,000
--------------- ---------------
Unbilled accounts receivable:
Billable amounts not invoiced, amounts billable at
stipulated stages of completion of contract work,
and unbilled amounts pending negotiation or
receipt of contract modifications..................... 84,230,000 58,384,000
Costs and fee retention billable upon audit of total
contract costs ....................................... 5,282,000 11,278,000
--------------- ---------------
Total unbilled accounts receivable ........................... 89,512,000 69,662,000
--------------- ---------------
Allowance for uncollectible accounts:
Allowance for doubtful accounts.......................... (4,089,000) (2,911,000)
Allowance for disallowed costs .......................... (4,440,000) (9,774,000)
--------------- ---------------
Total allowance for uncollectible accounts................... (8,529,000) (12,685,000)
--------------- ---------------
Total ........................................................ $ 176,448,000 $ 128,722,000
=============== ===============
The accounts receivable valuation allowance includes amounts to provide
for doubtful accounts and for the potential disallowance of billed and unbilled
costs. The Company's contracts with the Federal government are subject to audit
by the government, primarily the Defense Contract Audit Agency (DCAA), which
reviews the Company's overhead rates, operating systems and cost proposals.
During the course of its audit, the DCAA may disallow costs if it determines
that the Company improperly accounted for such costs in a manner inconsistent
with Cost Accounting Standards. Historically, the Company has not had any
material cost disallowances by the DCAA as a result of audit, except for
disallowances of acquired receivables as further described. There can be no
assurance that DCAA audits will not result in material cost disallowances in the
future.
On September 15, 1995, the Company acquired Tetra Tech EM Inc. (EMI).
EMI likewise contracts with the Federal government. At the time of acquisition,
audits had not been performed for years beyond 1986 and reserves for
disallowances relating to those unaudited years were adjusted to reflect the
estimated ultimate disallowances relating to those receivables. As of September
1999, audits and negotiations relating to the EMI contracts for years 1987
through 1995 were complete, and cost disallowances as a result of these audits
totaled approximately $4.4 milllion. Beyond the $4.4 million in
25
cost disallowances, there remains uncollected receivables of approximately
$2.1 million. Although it has been determined that the Company is entitled to
these payments, collectibility of such amounts cannot be assured as each
Federal agency must obtain separate funding approval. The reserves
established for these receivables exceeded the disallowances and the
uncollected amounts by $1.75 million. Accordingly, this excess was taken into
income during fiscal 1999.
Allowances to provide for doubtful accounts have been determined
through reviews of specific amounts determined to be uncollectible, plus a
general allowance for other amounts for which some potential loss is determined
to be probable based on current events and circumstances. Given the above,
management believes that the resolution of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
As of October 3, 1999, the Company has approximately $5.3 million under
retainage provisions of contracts and approximately $1.7 million of accounts
receivable which may not be realized within one year.
4. INCOME TAXES
Income tax expense for the years ended October 3, 1999, October 4, 1998
and September 28, 1997 consisted of the following:
Fiscal Year Ended
-------------------------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
-------------- -------------- --------------
Current:
Federal............................ $ 18,763,000 $ 15,284,000 $ 9,220,000
State.............................. 4,661,000 3,535,000 2,291,000
Deferred ............................. (250,000) (2,899,000) (1,188,000)
-------------- -------------- --------------
Total income tax expense.............. $ 23,174,000 $ 15,920,000 $ 10,323,000
============== ============== ==============
Temporary differences comprising the net deferred income tax asset
shown on the consolidated balance sheets were as follows:
Oct. 3, Oct. 4,
1999 1998
-------------- --------------
Allowance for doubtful accounts............................. $ 1,787,000 $ 3,662,000
Cash to accrual............................................. (1,119,000) (1,250,000)
Accrued vacation............................................ 2,189,000 1,247,000
State taxes................................................. 1,477,000 1,038,000
Prepaid expense............................................. (307,000) (632,000)
Depreciation................................................ (1,047,000) (299,000)
Other....................................................... 279,000 --
------------- -------------
Net deferred income tax asset............................... $ 3,259,000 $ 3,766,000
============= =============
26
Total income tax expense was different than the amount computed by
applying the federal statutory rate as follows:
Fiscal Year Ended
------------------------------------------------------------------------
Oct. 3, 1999 Oct. 4, 1998 Sept. 28, 1997
------------------------ ------------------------- ---------------------
Amount % Amount % Amount %
------------- -------- ------------- -------- ------------ --------
Tax at federal statutory rate.......... $ 18,301,000 35.0% $ 12,777,000 35.0% $ 8,603,000 35.0%
State taxes, net of federal benefit.... 2,719,000 5.2 1,898,000 5.2 1,348,000 5.5
Goodwill............................... 1,434,000 2.7 990,000 2.7 528,000 2.1
Other.................................. 720,000 1.4 255,000 0.7 (156,000) (0.6)
------------- -------- ------------- -------- ------------ --------
Total income tax expense............... $ 23,174,000 44.3% $ 15,920,000 43.6% $ 10,323,000 42.0%
============= ======== ============= ======== ============ ========
5. LONG-TERM OBLIGATIONS
The Company has a credit agreement (as amended, the "Credit
Agreement") with a bank to support its working capital and acquisition needs.
At October 3, 1999, the Credit Agreement provided a revolving credit facility
of $85.0 million. On December 24, 1999, the Company amended the Credit
Agreement to provide a revolving credit facility of $93.0 million. The
facility must be reduced to $60.0 million on February 1, 2000 and matures on
December 15, 2000 or earlier at the discretion of the Company upon payment in
full of loans and other obligations.
Interest on borrowings under the Credit Agreement is payable at the
Company's option (a) at a base rate (the greater of the federal funds rate plus
0.50% or the bank's reference rate) as defined in the Credit Agreement or (b) at
a eurodollar rate plus a margin which ranges from 0.75% to 1.25%. The weighted
average interest rate on outstanding borrowings under the Credit Agreement at
October 3, 1999 was 6.58%.
Borrowings under the Credit Agreement are secured by the Company's
accounts receivable and the stock of 12 of the Company's subsidiaries.
The Credit Agreement contains various covenants including, but not
limited to, restrictions related to tangible net worth, net income, additional
indebtedness, asset sales, mergers and acquisitions, capital expenditures,
creation of liens, and dividends on capital stock (other than stock dividends).
For the fiscal year ended October 3, 1999, the Company exceeded its capital
expenditure limitation by $0.04 million. The bank provided a waiver for this
covenant.
As of October 3, 1999, outstanding borrowings totaled $57.5 million and
standby letters of credit totaled $1.5 million.
At October 3, 1999, approximately $3.8 million of additional debt
existed from acquired companies. Of this amount, $2.5 million was paid on
October 6, 1999. The weighted average interest rate on these outstanding
borrowings at October 3, 1999 was 8.88%. It is the Company's intention to pay
the remainder of this debt in fiscal 2000 and terminate all such agreements.
6. STOCKHOLDERS' EQUITY
On June 15, 1999, the Company paid a five-for-four split of the
Company's common stock, effected in the form of a 25% stock dividend, to the
stockholders of record on May 14, 1999. All agreements concerning stock options
and other commitments payable in shares of the Company's common stock are
affected by the five-for-four split. All references to number of shares (except
shares
27
authorized), stock options, share prices and per share information in the
consolidated financial statements have been adjusted to reflect the stock split
on a retroactive basis.
In February 1999, the Company, along with certain selling stockholders,
offered a total of 3,968,750 shares of its common stock through a public
offering. The Company offered 1,250,000 shares and received approximately $22.2
million in net proceeds which were used for the partial repayment of outstanding
indebtedness under the Company's revolving credit facility.
In connection with the SGOC acquisition, the Company issued 920,354
shares of exchangeable stock of its subsidiary, Tetra Tech Canada Ltd. (the
"Exchangeable Shares"), a corporation existing under the laws of the Province
of Ontario, Canada. The Exchangeable Shares are non-voting but carry exchange
rights under which a holder of Exchangeable Shares is entitled, at any time
after five months from the date of issue of the Exchangeable Shares, to
require the Company to redeem all or any part of the Exchangeable Shares for
an amount per share equal to (a) the current market price of a share of the
Company's common stock, which shall be satisfied in full by the Company
causing to be delivered to such holder one share of the Company's common
stock for each Exchangeable Share presented and surrendered, plus (b) a
dividend amount or dividend shares, if any. The Exchangeable Shares cannot be
put back to the Company for cash.
Pursuant to the Company's 1989 Stock Option Plan, key employees may be
granted options to purchase an aggregate of 1,192,090 shares of the Company's
common stock at prices ranging from 85% to 100% of the market value on the date
of grant. All options granted to date by the Company have been at 100% of the
market value as determined by the Board of Directors at the date of grant. These
options become exercisable beginning one year from date of grant, become fully
vested in four years and terminate ten years from the date of grant.
The Company also has a 1992 Incentive Stock Plan under which key
employees may be granted options to purchase an aggregate of 5,761,718 shares of
the Company's common stock at prices not less than the market value on the date
of grant. From such date of grant, these options become exercisable after one
year, are fully vested no later than five years after grant and terminate no
later than ten years after grant.
Pursuant to the Company's 1992 Non-employee Director Plan, non-employee
directors may be granted options to purchase an aggregate of 143,047 shares of
the Company's common stock at prices not less than the market value on the date
of grant. These options vest and become exercisable when, and only if, the
optionee continues to serve as a director until the Annual Meeting following the
year in which the options were granted.
The Company also has an Employee Stock Purchase Plan (the "Purchase
Plan") which provides for the granting of Purchase Rights to purchase common
stock to regular full and part-time employees or officers of the Company and its
subsidiaries. Under the Purchase Plan, shares of common stock will be issued
upon exercise of the Purchase Rights. Under the Purchase Plan, an aggregate of
1,098,632 shares may be issued pursuant to the exercise of Purchase Rights. The
maximum amount that an employee can contribute during a Purchase Right Period is
$4,000, and the minimum contribution per payroll period is $25.
Under the Purchase Plan, the exercise price of a Purchase Right will be
the lesser of 100% of the fair market value of such shares on the first day of
the Purchase Right Period or 85% of the fair market value on the last day of the
Purchase Right Period. For this purpose, the fair market value of the stock is
its closing price as reported on the Nasdaq Stock Market on the day in question.
28
During the three years in the period ended October 3, 1999, option
activity was as follows:
Number Weighted Average
of Options Exercise Price
------------ ----------------
Balance, September 29, 1996..................... 2,461,556 $ 6.16
Granted.................................... 953,365 10.05
Exercised.................................. (282,435) 4.64
Cancelled.................................. (209,518) 7.70
------------
Balance, September 28, 1997..................... 2,922,968 7.46
Granted.................................... 711,957 13.51
Exercised.................................. (440,331) 5.94
Cancelled.................................. (234,007) 10.09
------------
Balance, October 4, 1998........................ 2,960,587 8.94
Granted.................................... 899,284 16.51
Exercised.................................. (289,972) 6.63
Cancelled.................................. (189,386) 11.02
------------
Outstanding at October 3, 1999.................. 3,380,513 $ 11.27
------------
------------
Exercisable at October 3, 1999.................. 1,676,411 $ 7.78
------------
------------
The following table summarizes information concerning currently
outstanding and exercisable options:
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
------------------ ----------- --------------- ------------ ----------- --------
$0.55 - $0.75 10,531 1.03 $ 0.70 10,531 $ 0.70
$0.94 - $0.94 24,554 1.75 0.94 24,554 0.94
$2.56 - $3.82 108,606 3.14 3.47 108,606 3.47
$4.27 - $6.31 600,932 4.77 5.24 600,932 5.24
$7.10 - $10.43 1,142,851 6.87 9.44 728,124 9.29
$11.01 - $16.50 874,488 8.58 13.88 203,664 13.38
$16.56 - $20.63 618,551 9.40 18.78 -- --
------------ ----------- ---------- ----------- ----------
3,380,513 7.23 $ 11.27 1,676,411 $ 7.78
============ =========== ========== ===========
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations in accounting for its employee stock
option plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Pro forma net income and earnings per share had
the Company accounted for stock options issued to employees in accordance with
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, are as follows:
29
Fiscal Year Ended
-----------------------------------------------------------------
Oct. 3, 1999 Oct. 4, 1998 Sept. 28, 1997
------------------- ------------------- ------------------
Net income-as reported.............................. $ 29,115,000 $ 20,586,000 $ 14,256,000
Net income-pro forma................................ 27,004,000 18,945,000 13,091,000
Basic earnings per share-as reported................ $ 0.78 $ 0.59 $ 0.49
Diluted earnings per share-as reported.............. 0.74 0.56 0.46
Basic earnings per share-pro forma.................. 0.73 0.54 0.45
Diluted earnings per share-pro forma................ 0.68 0.52 0.42
The fair value of the Company's stock options used to compute pro forma
net income and pro forma earnings per share disclosures is the estimated value
using the Black-Scholes option-pricing model. The weighted average fair values
per share of options granted in fiscal 1999, 1998 and 1997 are $6.59, $4.90 and
$3.30, respectively. The following assumptions were used in completing the
model:
Fiscal Year Ended
-----------------------------------------------------------------
Oct. 3, 1999 Oct. 4, 1998 Sept. 28, 1997
------------------- ------------------- ------------------
Dividend yield...................................... 0.0% 0.0% 0.0%
Expected volatility................................. 42.2% 42.5% 40.5%
Risk-free rate of return, annual.................... 6.4% 6.4% 6.4%
Expected life....................................... 3.26 yrs. 3.11 yrs. 2.76 yrs.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Fiscal Year Ended
-----------------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
--------------- --------------- ------------
Numerator--
Net income............................................... $ 29,115,000 $ 20,586,000 $ 14,256,000
--------------- --------------- ---------------
Denominator--
Denominator for basic earnings per share--
weighted average shares............................. 37,159,000 34,962,000 29,214,000
Effect of dilutive securities:
Stock options....................................... 1,320,000 1,300,000 886,000
Redeemable preferred stock.......................... -- 189,000 720,000
Exchangeable stock of a subsidiary.................. 1,071,000 37,000 --
-------------- -------------- --------------
Dilutive potential common shares......................... 2,391,000 1,526,000 1,606,000
Denominator for diluted earnings per share--
adjusted weighted average shares and
assumed conversions............................... 39,550,000 36,488,000 30,820,000
=============== =============== ===============
Basic earnings per share.................................... $ 0.78 $ 0.59 $ 0.49
=============== =============== ===============
Diluted earnings per share.................................. $ 0.74 $ 0.56 $ 0.46
=============== =============== ===============
30
8. LEASES
The Company leases land, buildings and equipment under various
operating leases. Rent expense under all operating leases was approximately
$20.6 million, $13.4 million and $10.2 million for the fiscal years ended
October 3, 1999, October 4, 1998 and September 28, 1997, respectively. Amounts
payable under noncancelable operating lease commitments are as follows during
the fiscal years ending in:
2000....................................................................... $ 21,979,000
2001....................................................................... 17,652,000
2002....................................................................... 12,366,000
2003....................................................................... 8,752,000
2004....................................................................... 6,080,000
Thereafter................................................................. 9,467,000
--------------
Total...................................................................... $ 76,296,000
==============
9. RETIREMENT PLANS
The Company and its subsidiaries have established defined contribution
plans and 401(k) plans. Generally, employees are eligible to participate in the
defined contribution plans upon completion of one year of service and in the
401(k) plans upon commencement of employment. For the fiscal years ended October
3, 1999, October 4, 1998 and September 28, 1997 employer contributions relating
to the plans were approximately $6.4 million, $4.0 million and $3.5 million,
respectively.
10. CONTINGENCIES
The Company is subject to certain claims and lawsuits typically filed
against the engineering and consulting professions, primarily alleging
professional errors or omissions. The Company carries professional liability
insurance, subject to certain deductibles and policy limits against such claims.
Management is of the opinion that the resolution of these claims will not have a
material adverse effect on the Company's financial position and results of
operations.
11. 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.
31
The following table sets forth (in thousands) summarized financial
information on the Company's reportable segments.
Reportable Segments:
Resource
Fiscal year ended October 3, 1999 Management Infrastructure Communications Total
---------- -------------- -------------- ---------
Gross Revenue......................... $340,955 $135,589 $102,378 $578,922
Net Revenue........................... 231,518 111,776 88,765 432,059
Income from Operations................ 30,147 15,703 14,905 60,755
Depreciation Expense.................. 1,446 4,430 1,565 7,441
Segment Assets........................ 154,375 48,633 44,444 247,452
Resource
Fiscal year ended October 4, 1998 Management Infrastructure Communications Total
---------- -------------- -------------- ---------
Gross Revenue......................... $279,582 $ 56,464 $ 54,739 $390,785
Net Revenue........................... 198,701 47,174 51,084 296,959
Income from Operations................ 24,572 8,337 9,967 42,876
Depreciation Expense.................. 1,851 1,101 530 3,482
Segment Assets........................ 124,951 20,329 24,931 170,211
Resource
Fiscal year ended September 28, 1997 Management Infrastructure Communications Total
---------- -------------- -------------- ---------
Gross Revenue......................... $196,466 38,401 $ 15,488 $250,355
Net Revenue........................... 144,964 30,397 15,419 190,780
Income from Operations................ 16,668 4,733 4,998 26,399
Depreciation Expense.................. 1,981 524 210 2,715
Segment Assets........................ 79,039 17,329 8,324 104,692
Reconciliations:
Fiscal Year Ended
----------------------------------------------------
Oct. 3, 1999 Oct. 4, 1998 Sept. 28, 1997
-------------- ------------- --------------
GROSS REVENUE
Gross revenue from reportable segments.................. $ 578,922 $ 390,785 $ 250,355
Elimination of inter-segment revenue.................... (15,850) (11,237) (4,614)
Other revenue........................................... 3,418 3,386 1,026
----------- ----------- -----------
Total consolidated gross revenue.................... $ 566,490 $ 382,934 $ 246,767
=========== =========== ===========
NET REVENUE
Net revenue from reportable segments.................... $ 432,059 $ 296,959 $ 190,780
Other revenue........................................... 21 638 11
----------- ----------- -----------
Total consolidated net revenue...................... $ 432,080 $ 297,597 $ 190,791
=========== =========== ===========
INCOME FROM OPERATIONS
Income from operations of reportable segments........... $ 60,755 $ 42,876 $ 26,399
Elimination of inter-segment income..................... (730) (1,286) (404)
Other income/(expense).................................. 240 1,191 174
Amortization of intangibles............................. (4,841) (2,968) (1,570)
----------- ----------- -----------
Total consolidated income from operations........... $ 55,424 $ 39,813 $ 24,599
=========== =========== ===========
TOTAL ASSETS
Total assets from reportable segments................... $ 247,452 $ 170,211 $ 104,692
Goodwill not allocated to segments...................... 160,686 108,638 69,439
Elimination of inter-segment assets..................... (27,660) (12,239) (14,618)
----------- ----------- -----------
Total consolidated total assets..................... $ 380,478 $ 266,610 $ 159,513
=========== =========== ===========
32
GEOGRAPHIC INFORMATION
Fiscal Year Ended
----------------------------------------------------------------------------------------------
(in thousands) Oct. 3, 1999 Oct. 4, 1998 Sept. 28, 1997
-------------------------------- -------------------------------- --------------------------
Net Long-Lived Net Long-Lived Net Long-Lived
Revenue (a) Assets (b) Revenue (a) Assets (b) Revenue (a) Assets (b)
------------ ----------- ------------ ----------- ------------ ----------
United States............. $ 417,983 $ 185,408 $ 288,020 $ 124,278 $ 183,820 $ 78,628
Foreign countries......... 14,097 -- 9,576 -- 7,151 --
(a) Net revenue is attributed to countries based on the location of clients
(b) Long-lived assets include non-current assets of the Company.
MAJOR CLIENTS
The Company's net revenue attributable to the U.S. Federal
government was approximately $169.3 million, $144.4 million and $99.7 million
for fiscal years ended October 3, 1999, October 4, 1998 and September 28,
1997, respectively. Both the Resource Management and Infrastructure operating
segments report revenue from the U.S. government.
12. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
In the opinion of management, the following unaudited quarterly data
for the years ended October 3, 1999 and October 4, 1998 reflect all adjustments
necessary for a fair statement of the results of operations. All such
adjustments are of a normal recurring nature. (In thousands, except per share
data)
First Second Third Fourth
Fiscal Year 1999 Quarter Quarter Quarter Quarter
- ---------------- ------- ------- ------- -------
Gross revenue................................ $ 113,973 $ 128,083 $ 157,091 $ 167,343
Net revenue.................................. 89,245 96,955 120,739 125,141
Gross profit................................. 19,058 22,553 32,550 30,583
Income from operations....................... 10,187 11,869 15,599 17,769
Net income................................... 5,427 6,462 8,503 8,723
Basic earnings per share..................... $ 0.15 $ 0.18 $ 0.22 $ 0.23
Diluted earnings per share .................. 0.14 0.16 0.21 0.22
Weighted average common shares
outstanding:
Basic................................... 35,820 36,793 37,801 38,223
Diluted................................. 38,387 39,263 40,145 40,404
33
First Second Third Fourth
Fiscal Year 1998 Quarter Quarter Quarter Quarter
- ---------------- ------- ------- ------- -------
Gross revenue................................ $ 66,438 $ 92,727 $ 98,231 $ 125,538
Net revenue.................................. 53,664 71,806 75,149 96,978
Gross profit................................. 13,325 17,020 20,744 22,637
Income from operations....................... 7,179 8,872 11,411 12,351
Net income................................... 4,051 4,521 5,493 6,521
Basic earnings per share..................... $ 0.12 $ 0.13 $ 0.16 $ 0.18
Diluted earnings per share .................. 0.11 0.12 0.15 0.18
Weighted average common shares
outstanding:
Basic................................... 34,021 34,881 35,184 35,708
Diluted................................. 36,042 36,195 36,501 37,149
34
SECURITIES INFORMATION
Tetra Tech's common stock is traded on the Nasdaq Stock Market under
the symbol WATR. There were 1,390 stockholders of record as of December 10,
1999. Tetra Tech has not paid any cash dividends since its inception and does
not intend to pay any cash dividends on its common stock in the foreseeable
future. The high and low sales prices for the common stock for the last two
fiscal years, as reported by the National Association of Securities Dealers,
Inc., are set forth in the following tables. The prices have been adjusted to
reflect the effect, on a retroactive basis, of a five-for-four stock split,
effected in the form of a 25% stock dividend, in June 1999.
FISCAL YEAR 1999 HIGH LOW
---------------- ---- ---
First Quarter $ 22.40 $ 12.50
Second Quarter 21.50 13.70
Third Quarter 20.70 15.20
Fourth Quarter 20.00 13.50
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
First Quarter $ 14.21 $ 11.92
Second Quarter 15.36 12.16
Third Quarter 16.16 12.48
Fourth Quarter 18.40 12.32
35