SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 31, 1999 or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
Commission file number 0-16169
HARDING LAWSON ASSOCIATES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0132062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
707 17th Street, Suite 2400
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 293-6100
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
At September 30, 1999 the registrant had issued and outstanding an aggregate of
4,997,828 shares of its common stock.
INDEX
HARDING LAWSON ASSOCIATES GROUP, INC.
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
August 31, 1999 (Unaudited) and
May 31, 1999....................................................3
Condensed Consolidated Statements of Income -
Three Months Ended August 31, 1999 and
August 31, 1998 (Unaudited).....................................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended August 31, 1999 and
August 31, 1998 (Unaudited)....................................5
Notes to Condensed Consolidated Financial Statements
August 31, 1999 (Unaudited).....................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................12
SIGNATURES ...............................................................13
EXHIBIT INDEX ...............................................................14
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARDING LAWSON ASSOCIATES GROUP, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
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August 31, 1999 May 31, 1999
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,319 $ 17,108
Investments - rabbi trust 2,676 3,629
Accounts receivable 36,077 30,443
Unbilled work in progress 12,754 15,685
Less allowances for receivables and
unbilled work (2,705) (2,464)
Prepaid expenses 1,804 1,282
Deferred income taxes 4,513 5,017
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Total current assets 64,438 70,700
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Equipment 28,387 27,947
Less accumulated depreciation (22,680) (22,056)
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Net equipment 5,707 5,891
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Deposits and other assets 10,382 10,550
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Total assets $ 80,527 $ 87,141
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,914 $ 9,290
Accrued expenses 7,411 10,558
Accrued compensation 5,883 7,967
Deferred compensation - rabbi trust 3,241 4,236
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,926 4,558
Income taxes payable 1,307 1,394
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Total current liabilities 29,682 38,003
Other liabilities 1,553 1,635
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Total liabilities 31,235 39,638
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Commitments and Contingencies
Minority interest in subsidiaries 56 48
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Shareholders' equity:
Preferred stock $0.01 par value; authorized shares
1,000,000; issued and outstanding none
Common stock $0.01 par value; authorized shares
10,000,000; issued 5,061,842 and 4,963,336 at
August 31,1999 and May 31, 1999, respectively 51 50
Additional paid-in capital 18,716 18,066
Stockholder note receivable (243) (243)
Rabbi trust shares - 68,014 and 70,354 at August 31,
1999 and May 31, 1999, respectively (564) (607)
Retained earnings 31,276 30,189
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Total shareholders' equity 49,236 47,455
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Total liabilities and shareholders' equity $ 80,527 $ 87,141
========================================================================================
The accompanying notes are an integral part of these financial statements.
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HARDING LAWSON ASSOCIATES GROUP, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
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Three Months Ended August 31,
1999 1998
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Gross revenue $41,695 $39,443
Less: Cost of outside services 13,755 11,762
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Net revenue 27,940 27,681
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Costs and expenses:
Payroll and benefits 19,411 18,933
General expenses 6,675 7,102
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Total costs and expenses 26,086 26,035
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Operating income 1,854 1,646
Interest income, net 111 113
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Income before provision for income taxes
and minority interest 1,965 1,759
Provision for income taxes 807 740
Minority interest 7 6
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Net income $ 1,151 $ 1,013
======================================================================================
Basic net income per share $ 0.23 $ 0.21
======================================================================================
Shares used in computing basic net income per share 4,951 4,896
======================================================================================
Diluted net income per share $ 0.22 $ 0.20
======================================================================================
Shares used in computing dilute net income per share 5,142 4,999
======================================================================================
The accompanying notes are an integral part of these financial statements.
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HARDING LAWSON ASSOCIATES GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Three Months Ended August 31,
1999 1998
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OPERATING ACTIVITIES
Net income $ 1,151 $ 1,013
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 875 829
Net increase in current assets (1,527) (4,719)
Net decrease in current liabilities (8,279) (267)
Other (18) 157
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Net cash used in operating activities (7,798) (2,987)
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INVESTING ACTIVITIES
Purchase of equipment, net (541) (528)
Investment in acquisition (63)
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Net cash used in investing activities (541) (591)
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FINANCING ACTIVITIES
Proceeds from issuance of common stock 614 201
Repurchase of common stock (2,371)
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Net cash provided by (used in) financing activities 614 (2,170)
Effect of foreign currency translation (64) (120)
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Net decrease in cash and cash equivalents (7,789) (5,868)
Cash and cash equivalents at beginning of period 17,108 15,118
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Cash and cash equivalents at end of period $ 9,319 $ 9,250
=============================================================================================
The accompanying notes are an integral part of these financial statements.
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HARDING LAWSON ASSOCIATES GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
August 31, 1999
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
without audit by Harding Lawson Associates Group, Inc., (the "Company") in
accordance with generally accepted accounting principles for interim financial
statements and pursuant to the rules of the Securities and Exchange Commission
for Form 10-Q. Certain information and footnotes required by generally accepted
accounting principles for complete financial statements have been omitted. It is
the opinion of management that all adjustments considered necessary for a fair
presentation have been included, and that all such adjustments are of a normal
and recurring nature. For further information, refer to the audited financial
statements and footnotes included in the Company's Annual Report on Form 10-K
dated May 31, 1999. Reclassification of certain balances for the fiscal year
ended May 31, 1999 have been made to conform to the August, 1999 presentation.
NOTE 2: COMMITMENTS AND CONTINGENCIES
The Company is currently subject to certain claims and lawsuits arising in the
ordinary course of its business. In the opinion of management, adequate
provision has been made for all known liabilities that are currently expected to
result from these claims and lawsuits, and in the aggregate such claims are not
expected to have a material effect on the financial position of the Company. The
estimates used in establishing these provisions could differ from actual
results. Should these provisions change significantly, the effect on operations
for any quarterly or annual reporting period could be material.
NOTE 3: COMPREHENSIVE INCOME
Comprehensive income (in thousands) for the three months ended August 31 is as
follows:
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Three Months Ended
August 31,
1999 1998
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Net income $ 1,151 $ 1,013
Foreign currency translation adjustment (64) (120)
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Comprehensive income $ 1,087 $ 893
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HARDING LAWSON ASSOCIATES GROUP, INC.
NOTE 4: RESTRUCTURING CHARGES
During May, 1999, the Company recorded charges of $4,383,000 for i) anticipated
losses associated with the planned disposal of its investments in its Australian
and Mexican operations; such investments were written down to their anticipated
net realizable value, ii) severance and other costs associated with the
corporate reorganization and corporate office relocation, and iii) the writedown
of goodwill associated with the Company's acquisition of EEC Environmental, Inc.
in 1993. As of August 31, 1999 and May 31, 1999 the accompanying consolidated
financial statements reflect $2,015,000 and $2,768,000 in accrued expenses,
respectively, in connection with the restructuring charges. The remaining
charges were recorded as a reduction to the related assets.
NOTE 5: SEGMENT INFORMATION
The Company has determined that the services provided by the Company represent
one reportable segment. At the end of the fiscal year 1999, the Company formally
merged its primary domestic operating divisions into a single operating Company.
The table below presents information (in thousands) about net revenue from
external customers attributable to the Company's country of domicile and
attributable to all foreign countries. The method for attributing net revenues
from particular countries is based on the location where the service is actually
being provided. Individual countries are not shown because they are not
material. The Company's foreign operations are mainly in Australia (Australia
and Mexico during the quarter ended August 31, 1998).
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Three Months Ended
August 31,
1999 1998
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United States $26,622 $26,530
Australia/Mexico 1,318 1,151
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Company Total $27,940 $27,681
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The table below presents information about total assets attributable to the
Company's country of domicile and attributable to all foreign countries (in
thousands):
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August 31, May 31,
1999 1999
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United States $80,077 $86,691
Australia 450 450
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Company Total $80,527 $87,141
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The amounts included for net revenue and total assets are based on the financial
information used to produce these financial statements.
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HARDING LAWSON ASSOCIATES GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward Looking Statements
The statements in this report that are forward-looking are based on current
expectations, and actual results may differ materially. The forward-looking
statements include those regarding the level of future purchases of fixed
assets, the possible impact of current and future claims against the Company
based upon negligence and other theories of liability, and the possibility of
the Company making acquisitions during the next 12 to 18 months. Forward-looking
statements involve numerous risks and uncertainties that could cause actual
results to differ materially, including, but not limited to, the possibilities
that the demand for the Company's services may decline as a result of possible
changes in general and industry specific economic conditions and the effects of
competitive services and pricing; one or more current or future claims made
against the Company may result in substantial liabilities; and such other risks
and uncertainties as are described in reports and other documents filed by the
Company from time to time with the Securities and Exchange Commission.
Results of Operations
(In thousands, except share data)
The following table sets forth, for the periods indicated, (i) the percentage
that certain items in the condensed consolidated income statements of the
Company bear to net revenues, and (ii) the percentage increase (decrease) in
dollar amount of such items from year to year.
Percentage of Net Revenue Percentage Increase (Decrease)
Three Months Ended Three Months Ended
August 31, August 31,
1999 1998 1999 vs 1998
---- ---- ------------
Net revenue 100.0% 100.0% .9%
Costs and expenses
Payroll and benefits 69.5 68.4 2.5
General expenses 23.9 25.6 (6.0)
Operating income/margin 6.6 6.0 12.6
Interest income, net and
interest in loss of uncon-
solidated subsidiaries .4 .4 (1.8)
Income before income taxes
and minority interest 7.0 6.4 11.7
Provision for income taxes
and minority interest 2.9 2.7 9.1
Net income 4.1 3.7 13.6
First Quarter Comparison for Fiscal Years 2000 and 1999
Net revenue for the fiscal quarter ended August 31, 1999 totaled $27,940, an
increase of .9% from net revenue of $27,681 for the first quarter of the prior
fiscal year. The increase in net revenue represents a 57% increase in revenue
from state and local government contracts and a 15% increase in revenue from
international operations, offset by a 24% decrease in revenue from federal
contracts and a 2% decrease in revenue from domestic industrial clients. Net
revenue from domestic industrial clients accounted for 48% of total net revenue
for the current fiscal year compared to 50% for the prior fiscal year. Net
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HARDING LAWSON ASSOCIATES GROUP, INC.
revenue from public sector contracts accounted for 47% of total net revenue for
the current fiscal year compared to 46% in the prior fiscal year. Net revenue
from international operations was 5% of total net revenue for the current fiscal
year compared to 4% in the prior fiscal year. During the first quarter of fiscal
2000, the Company experienced higher demand for the Company's services,
partially offset by lower prices compared to the same period in the prior year.
A significant portion of the services provided by the Company to its public
sector clients are performed under a relatively small number of larger contracts
compared to private sector clients. Similar to situations that have occurred in
the past few years, some of these public sector contracts will be substantially
completed during the current fiscal year. The Company has been awarded certain
contracts that potentially could offset revenue that will be lost under nearly
completed contracts. However, if the Company is unsuccessful in realizing the
full potential of these contracts or winning new contracts, or if funding delays
are experienced on previously awarded federal contracts, a material decline in
revenue could result.
Operating income was $1,854 in the first quarter of fiscal 2000, an increase of
12.6% from $1,646 for the same period in fiscal 1999. Operating margin increased
to 6.6% of net revenue in the current fiscal quarter compared to 6.0% in the
first quarter of fiscal 1999. The increase in operating income and margin was
primarily due to the favorable impact of the Company's restructuring, partially
offset by higher payroll expenses due to salary increases at the beginning of
the current fiscal year.
Net interest income for the fiscal quarter ended August 31, 1999 was $111
compared to $113 in the first quarter of the prior year.
The effective tax rate was 41% for the first quarter of fiscal year 2000
compared to 42% in the first quarter of the prior fiscal year.
Net income for the quarter was $1,151 compared with $1,013 in the first quarter
of fiscal 1999, an increase of 13.6%. For the quarter ended August 31, 1999,
basic and diluted earnings per share were $0.23 and $0.22 on 4,951,000 and
5,142,000 weighted average shares outstanding, respectively. For the quarter
ended August 31, 1998, basic and diluted earnings per share were $0.21 and $0.20
on 4,896,000 and 4,999,000 weighted average shares outstanding, respectively.
Liquidity and Capital Resources
For the three months ended August 31, 1999, net cash used in operations was
$7,798 compared to $2,987 for the first three months of the prior year. The
increase in cash used in operations during the current year's fiscal quarter was
primarily due to increased payments of the Company's payables and accrued
liabilities, partially offset by improved collections of the Company's
receivables compared to the prior year.
The Company made net capital expenditures of $541 in the first three months of
fiscal 1999 compared to net capital expenditures of $528 in the first three
months of the prior fiscal year. The Company anticipates that its capital
expenditures, excluding acquisitions, for the current fiscal year will be
slightly higher than those incurred in the prior fiscal year.
On March 7, 1996 the Board of Directors of the Company approved a Common Stock
Repurchase Program ("1996 Program") that authorized the Company to purchase up
to a maximum of 500,000 shares of stock on the open market for purposes of
funding the Company's various employee stock programs. The Company repurchased
260,000 shares during the first three months of fiscal 1999 at an average price
per share of $9.12. No shares were repurchased during the first quarter of
fiscal 2000. There are 4,500 shares which remain available to be repurchased
under the 1996 Program. On
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HARDING LAWSON ASSOCIATES GROUP, INC.
September 25, 1998, the Board authorized management to repurchase up to 500,000
shares over four years.
The Company is a consulting engineering services firm engaged in providing
environmental, infrastructure, geotechnical and construction related services
and encounters potential liability including claims for errors and omissions,
resulting from construction defects, construction cost overruns, environmental
or other damage in the normal course of business. The Company is party to
lawsuits and is aware of potential exposure related to certain claims. In the
opinion of management, adequate provision has been made for all known
liabilities that are currently expected to result from these matters, and in the
aggregate, such claims are not expected to have a material impact on the
financial position and liquidity of the Company. The Company is provided a $15
million per occurrence, $25 million aggregate contractor's operations and
professional services insurance policy through an unrelated rated carrier. The
Company also maintains a general liability insurance policy with an unrelated,
rated carrier.
At August 31, 1999 the Company had cash on hand and cash equivalents of $9,319.
The Company has a $20 million revolving credit line agreement that expires in
November 2000. At August 31, 1999 and May 31, 1999, the Company had no
borrowings outstanding under its line of credit leaving $20 million available to
the Company. Borrowings were available to the Company at an interest rate of
6.75% at August 31, 1999 and 6.4% at May 31, 1999. The Company is in compliance
with all covenants pertaining to the credit line agreement.
The Company believes that its available cash and cash equivalents, as well as
cash generated from operations and its available credit line, will be sufficient
to meet the Company's cash requirements for the balance of the fiscal year.
During the remainder of fiscal year 2000 the Company intends to actively
continue its search for acquisitions to expand its geographical representation
and enhance its technical capabilities. The Company expects to utilize a portion
of its liquidity over the next 12 to 18 months for capital expenditures,
including acquisitions. There can be no assurances that the Company will be able
to identify suitable acquisition candidates, and if such are identified, that
the Company will be able to successfully negotiate and consummate a transaction.
YEAR 2000 COMPLIANCE
Overview
Computer systems and software have historically been coded to accept only two
digit entries for the year. If computers cannot properly distinguish between the
years 1900 and 2000, computers may shut down or perform incorrect calculations.
Scope & Status
In late 1997, the Company established a Year 2000 Project Team ("Project Team").
The Project Team was established to address the following key components related
to the Year 2000 issue:
o Information applications, including the Company's project management and
accounting systems
o Computer hardware, software, operating systems and network infrastructure
including telecommunications systems
o Facility and administrative systems
o Digital systems and devices with embedded processors installed on client
projects
o Major suppliers and customers' systems
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HARDING LAWSON ASSOCIATES GROUP, INC.
During the second quarter of fiscal 1999, the Company completed the upgrade of
its major information technology system (a project management and accounting
system). This version of the third party business application is warranted as
Year 2000 compliant. The Company is performing specific Year 2000 compliance
testing.
The Company has completed the inventory and assessment of its hardware and
software for Year 2000 compliance. Other network and infrastructure upgrades of
equipment and software are scheduled as part of normal business operations.
Facility and administrative systems that support the Company (such as telephone,
security systems, etc.) were also assessed for Year 2000 compliance and priority
upgrades to such hardware and software are in progress. The remediation of the
Company's facility and administrative systems is scheduled to be completed prior
to December 31, 1999. The Company considers risks in these areas to be minimal.
Contingency plans will be developed if the Company determines that compliance is
not likely to occur.
The Company has undertaken an analysis of its vendors and suppliers to determine
potential areas of risk with regard to their failure to achieve Year 2000
compliance. Written requests have been sent to appropriate vendors and suppliers
to determine their Year 2000 readiness. Evaluation of the responses to those
requests will determine future verification procedures. The Company is currently
inventorying and contacting vendors of software and equipment that such vendors
have supplied under contracts of relationships with the Company's clients.
Contingency plans will also be developed as appropriate to address any potential
problems that may be identified.
Costs
The costs associated with Year 2000 compliance have not been material and
generally fall within normally anticipated operating and capital spending. The
Company currently estimates the costs of becoming Year 2000 compliant will not
be material to the financial position of the Company. Although the Company does
not currently anticipate the costs of Year 2000 compliance to be material, it
cannot ensure Year 2000 compliance by third parties.
Risks
The upgrade of the Company's project management and accounting systems to a Year
2000 compliant version mitigates the risk that the Company would be unable to
maintain accurate client records and billings. Technical deliverables provided
by the Company for client sites could cause potential interruption in services
provided by those clients. The Company's efforts to evaluate and remediate
software and equipment supplied to its clients are expected to mitigate such
potential service interruptions. There can be no assurance nonetheless that such
mitigation will be effective to avoid such service interruptions.
The Company cannot predict with accuracy the extent to which its vendors and
clients will become compliant. The Company's financial position could be
adversely affected if major vendors or clients do not adequately complete Year
2000 requirements. The Company believes that the most significant risk it faces
with regard to Year 2000 compliance issues would be if disruptions occurred to a
significant portion of the Company's client base that could cause delayed
contracting for and/or payment of the Company's services.
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HARDING LAWSON ASSOCIATES GROUP, INC.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits are furnished along with this Form 10-Q
Quarterly Report for the period ended August 31, 1999:
Exhibit No. 11 Computation of Net Income Per Share
Exhibit No. 27 Financial Data Schedule
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARDING LAWSON ASSOCIATES GROUP, INC.
Date: October 5, 1999 By: /s/ Robert L. Costello, Jr.
-------------------------------------------
Robert L. Costello, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 5, 1999 By: /s/ Gregory A. Thornton
-------------------------------------------
Gregory A. Thornton
Vice President and Chief Financial Officer
(Principal Accounting Officer)
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HARDING LAWSON ASSOCIATES GROUP, INC.
EXHIBIT INDEX
Exhibit No.
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11 Computation of Per Share Earnings
27 Financial Data Schedule
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