UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-19655
TETRA TECH, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4148514
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
670 N. ROSEMEAD BOULEVARD, PASADENA, CALIFORNIA 91107
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(Address of principal executive offices)
(626) 351-4664
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of January 26, 1998, the total number of outstanding shares of the
Registrant's common stock was 22,301,912.
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TETRA TECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Risk Factors 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 20
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PART I. FINANCIAL INFORMATION
ITEM 1.
Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
In thousands, except share data
December 28, September 28,
1997 1997
------------ -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $ 5,411 $ 12,262
Accounts receivable - net. . . . . . . . . . . . . . . . . . . . . . 39,759 30,089
Unbilled receivables - net. . . . . . . . . . . . . . . . . . . . . 33,239 35,145
Prepaid and other current assets . . . . . . . . . . . . . . . . . . 4,066 2,522
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . 867 867
--------- ---------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . 83,342 80,885
PROPERTY AND EQUIPMENT:
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . 1,154 1,177
Equipment, furniture and fixtures. . . . . . . . . . . . . . . . . . 17,544 16,838
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,698 18,015
Accumulated depreciation and amortization. . . . . . . . . . . . . . (10,323) (9,592)
--------- ---------
PROPERTY AND EQUIPMENT - NET . . . . . . . . . . . . . . . . . . . . . 8,375 8,423
INTANGIBLE ASSETS - NET. . . . . . . . . . . . . . . . . . . . . . . . 68,797 69,439
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,386 766
--------- ---------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161,900 $ 159,513
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,458 $ 11,621
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . 8,366 10,981
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . 2,976 6,386
Current portion of long-term obligations . . . . . . . . . . . . . . 10,000 8,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 1,751 1,358
--------- ---------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . 36,551 38,346
REDEEMABLE PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . -- 13,526
STOCKHOLDERS' EQUITY:
Preferred stock - authorized, 2,000,000 shares of $.01 par value;
issued and outstanding 0 and 1,231,840 shares at December 28,
1997 and September 28, 1997, respectively . . . . . . . . . . . . -- --
Common stock - authorized, 30,000,000 shares of $.01 par value;
issued and outstanding 22,272,741 and 20,714,254 shares at
December 28, 1997 and September 28, 1997, respectively . . . . . . 223 207
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 77,143 63,502
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . 47,983 43,932
--------- ---------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . 125,349 107,641
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . $ 161,900 $ 159,513
--------- ---------
--------- ---------
See accompanying notes to the condensed consolidated financial statements.
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Tetra Tech, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
In thousands, except per share data
Three Months Ended
-------------------------------
December 28, December 29,
1997 1996
------------ -------------
Gross Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,438 $ 54,938
Subcontractor costs . . . . . . . . . . . . . . . . . . . . . . . . 12,774 14,515
--------- ---------
Net Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,664 40,423
Cost of Net Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . 40,339 31,051
--------- ---------
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,325 9,372
Selling, General and Administrative Expenses . . . . . . . . . . . . . 6,146 4,979
--------- ---------
Income From Operations . . . . . . . . . . . . . . . . . . . . . . . . 7,179 4,393
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 15
Interest Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 64
--------- ---------
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . 7,107 4,442
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 3,056 1,846
--------- ---------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,051 $ 2,596
--------- ---------
--------- ---------
Basic Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . $ 0.19 $ 0.15
--------- ---------
--------- ---------
Diluted Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . $ 0.18 $ 0.14
--------- ---------
--------- ---------
Weighted Average Common Shares Outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,774 17,688
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,073 18,361
See accompanying notes to the condensed consolidated financial statements.
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Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
In thousands
Three Months Ended
---------------------------
December 28, December 29,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,051 $ 2,596
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 1,374 902
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (380) 20
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,600) 93
Unbilled receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,161 (485)
Prepaid and other assets . . . . . . . . . . . . . . . . . . . . . . . . . (2,164) (879)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,837 (1,515)
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,615) (1,582)
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . (3,410) 999
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 1,561
--------- ---------
Net Cash (Used In) Provided By Operating Activities . . . . . . . . . . (8,353) 1,710
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (684) (356)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . -- 16
Proceeds from business acquisitions, net of cash acquired. . . . . . . . . . . . . . -- 34
--------- ---------
Net Cash Used In Investing Activities . . . . . . . . . . . . . . . . . (684) (306)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (73)
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . 2,000 --
Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . 186 141
--------- ---------
Net Cash Provided By Financing Activities . . . . . . . . . . . . . . . 2,186 68
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . (6,851) 1,472
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 12,262 6,129
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $ 5,411 $ 7,601
--------- ---------
--------- ---------
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Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
In thousands
Three Months Ended
---------------------------
December 28, December 29,
1997 1996
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130 $ 6
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,663 $ 314
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In December 1996, the Company purchased all of the capital
stock of IWA Engineers. In conjunction with this acquisition,
liabilities were assumed as follows:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . $ 2,513
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (132)
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,026)
Other acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . (70)
---------
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,285
---------
---------
In December 1996, the Company purchased all of the capital stock of
FLO Engineering, Inc. In conjunction with this acquisition,
liabilities were assumed as follows:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . $ 837
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (88)
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . (459)
Other acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . (70)
---------
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 220
---------
---------
See accompanying notes to the condensed consolidated financial statements.
-6-
TETRA TECH, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheets as of December
28, 1997, the condensed consolidated statements of income and the condensed
statements of cash flows for the three month periods ended December 28, 1997
and December 29, 1996 are unaudited, and in the opinion of management include
all adjustments, consisting of only normal and recurring adjustments,
necessary for a fair presentation of the financial position and the results
of operations for the periods presented.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1997.
The results of operations for the three month period ended December 28,
1997 are not necessarily indicative of the results to be expected for the
fiscal year ending October 4, 1998.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER
SHARE, which the Company has adopted in the accompanying financial
statements. The Statement replaces the presentation of primary Earnings Per
Share (EPS) with a presentation of basic EPS, which excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. The Statement
also requires the dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Diluted EPS is computed similarly to fully diluted EPS pursuant to Accounting
Principles Board Opinion No. 15. Earnings per share for 1997 have been
restated to reflect the requirement of SFAS 128. Basic and diluted earnings
per share 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 December 1, 1997 for each four shares outstanding as of the record
date of November 14, 1997.
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3. CURRENT ASSETS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents totaled $5,411,000 and $12,262,000 at December 28, 1997 and
September 28, 1997, respectively.
4. MERGERS AND ACQUISITIONS
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 318,079 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 June 11, 1997, the Company acquired 100% of the capital stock of
Whalen & Company, Inc. and Whalen Service Corps Inc. (collectively, WAC).
WAC, a telecommunications firm, provides a full range of services including
telecommunications site development services for PCS, cellular, ESMR,
air-to-ground, microwave, paging, fiber optic and switching centers
technology. In addition, WAC provides consulting, engineering, design
services and construction management with respect to the cable television
industry. The purchase has been valued at approximately $41,738,000
consisting of cash and 3,639,800 shares of Company common stock. The common
stock was issued in a private placement and had a value of $31,972,000. The
Company's stock was valued based upon the extended restriction period and
economic factors specific to the Company's circumstances which resulted in a
fair valuation approximately 28% below the then prevailing market price. 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 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 customers. The purchase was valued at approximately
$2,431,000, consisting of cash and 197,572 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 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 40,138 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.
-8-
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
customers. The purchase was valued at approximately $1,632,000, consisting
of cash and 95,675 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.
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 market
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 balance sheets. The final
determination of such excess amount for WAC and CDC is subject to a final
determination of the value of the consideration paid and the net assets
acquired as various studies and valuations are not yet complete. The results
of operations of each of the companies acquired have been included in the
Company's financial statements from their respective acquisition effective
dates as set forth in the related purchase agreements.
The effect of unaudited pro forma operating results of the SCM, FLO and
IWA transactions, had they been acquired on September 30, 1996, is not
material.
The effect of unaudited pro forma operating results assuming that the
Company had acquired CDC and WAC on September 30, 1996 is presented in Note
7. UNAUDITED PRO FORMA OPERATING RESULTS.
5. ACCOUNTS RECEIVABLE
Accounts receivable are presented net of a valuation allowance to
provide for doubtful accounts and for the potential disallowance of billed
and unbilled costs. The allowance for doubtful accounts as of December 28,
1997 and December 29, 1996 was $1,275,000 and $1,159,000, respectively. The
allowance for disallowed costs as of December 28, 1997 and December 29, 1996
was $9,553,000 and $10,081,000, respectively. Disallowance of billed and
unbilled costs is primarily associated with contracts with the U.S.
government which contain clauses that subject contractors to several levels
of audit. Management believes that resolution of these matters will not have
a material adverse impact on the Company's financial position or results of
operations.
6. SUBSEQUENT EVENT
On December 31, 1997, the Company acquired the assets of certain
environmental services businesses of Brown & Root, Inc. and Halliburton NUS
Corporation, both of which are subsidiaries of Halliburton Company and
collectively referred to as "NUS." NUS provides consulting, engineering and
design services for the environmental remediation of contaminated air, water
and soil conditions. The purchase price of approximately $32,000,000
consisted of cash and is subject to a purchase price adjustment as described
in the related
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purchase agreement. The acquisition will be accounted for as a purchase.
The effect of unaudited pro forma operating results, had NUS been acquired on
September 30, 1996, is presented in Note 7. UNAUDITED PRO FORMA OPERATING
RESULTS.
7. UNAUDITED PRO FORMA OPERATING RESULTS
The following table presents summarized unaudited pro forma operating
results assuming that the Company had acquired WAC, CDC and NUS on September
30, 1996:
Pro Forma Three Months Ended
--------------------------------------
December 28, 1997 December 29, 1996
----------------- -----------------
(In thousands, except per share data)
Gross revenue $87,768 $94,568
Income from operations 7,515 6,783
Net income 4,168 3,462
Basic earnings per share 0.19 0.16
Diluted earnings per share 0.18 0.16
Weighted average shares outstanding:
Basic 21,774 21,646
Diluted 23,073 22,319
-10-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents the percentage relationship of selected
items in the Company's condensed consolidated Statements of Income to net
revenue, and the percentage increase or (decrease) in the dollar amount of
such items:
PERCENTAGE RELATIONSHIP TO REVENUE
-------------------------------------
QUARTER ENDED
------------------------------------- PERIOD TO PERIOD
DECEMBER 28, 1997 DECEMBER 29, 1996 CHANGE
----------------- ----------------- ----------------
Net revenue 100.0% 100.0% 32.8%
Cost of net revenue 75.2 76.8 29.9
------- ------- -------
Gross profit 24.8 23.2 42.2
Selling, general and
administrative expenses 11.5 12.3 23.4
------- ------- -------
Income from operations 13.3 10.9 63.4
Net interest (expense) income (0.1) 0.1 (246.9)
------- ------- -------
Income before income taxes 13.2 11.0 60.0
Income tax expense 5.7 4.6 65.5
------- ------- -------
Net income 7.5% 6.4% 56.0%
------- ------- -------
------- ------- -------
Gross revenue increased by 20.9% to $66,438,000 for the three months
ended December 28, 1997 compared to $54,938,000 for the comparable prior year
period. Net revenue increased by 32.8% to $53,664,000 for the quarter ended
December 28, 1997 compared to $40,423,000 for the comparable quarter in the
prior year. For both gross and net revenue, growth in actual dollars was
experienced in three client sectors - federal government, commercial and
international. The increase in the commercial and international sectors was
primarily attributable to the WAC acquisition. The following table presents
the percentage of net revenue for each client sector:
PERCENTAGE OF NET REVENUE
-----------------------------------------
QUARTER ENDED
-----------------------------------------
CLIENT SECTOR DECEMBER 28, 1997 DECEMBER 29, 1996
------------- ----------------- -----------------
Federal government 45 60
State & local government 13 17
Commercial 40 21
International 2 2
Cost of net revenue increased 29.9% to $40,339,000 for the three months
ended December 28, 1997 compared to $31,051,000 for the comparable prior year
period. As a percentage of net revenue, cost of net revenue decreased to
75.2% for the quarter ended December 28, 1997 from
-11-
76.8% from the comparable prior year quarter primarily as a result of
higher margins realized from the WAC acquisition.
Selling, general and administrative (SG&A) expenses, inclusive of
amortization, increased 23.4% to $6,146,000 for the three months ended
December 28, 1997 compared to $4,979,000 for the comparable prior year
period. The increase was primarily due to the amortization of the goodwill
associated with the acquisitions in fiscal 1997. As a percentage of net
revenue, SG&A expenses decreased to 11.5% for the quarter ended December 28,
1997 from 12.3% in the first quarter last year.
Net interest expense of $72,000 was incurred in the quarter ended
December 28, 1997 compared to net interest income of $49,000 for the
comparable prior year period primarily due to the reduction in cash provided
by operating activities.
Income tax expense increased to $3,056,000 for the three months ended
December 28, 1997 from $1,846,000 for the comparable prior year period due to
higher income before income taxes and higher income from operations. The
increase in the Company's effective tax rate is primarily due to amortization
of goodwill resulting from acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
As of December 28, 1997, the Company's cash and cash equivalents totaled
$5,411,000. In addition, the Company has a credit agreement (the "Credit
Agreement") with a bank which, as of January 30, 1998, provides for a
revolving credit facility of $55,000,000. Under the Credit Agreement, the
Company may also request standby letters of credit up to the aggregate sum of
$10,000,000 outstanding at any one time. As of December 28, 1997, borrowings
outstanding totaled $10,000,000 and standby letters of credit totaled
$1,776,000.
In the three months ended December 28, 1997, cash used in operating
activities was $8,353,000 compared to cash provided by operating activities
of $1,710,000 for the comparable prior year period. The decrease is primarily
attributable to increases in billed accounts receivable of $9,600,000. The
Company has targeted, as an immediate and ongoing practice, to increase its
efficiency in the timing of invoicing and to accelerate the collecting of
receivables. For the three months ended December 28, 1997, cash used in
investing activities was $684,000 compared to $306,000 for the comparable
prior year period. The increase of $378,000 was due to the increase in the
capital expenditures. For the three months ended December 28, 1997, cash
provided by financing activities was $2,186,000 and resulted primarily from
the proceeds of the issuance of long-term debt.
The Company continuously evaluates the marketplace for strategic
acquisition opportunities. Once an opportunity is identified, the Company
examines the effect an acquisition may have on the business environment, as
well as on the Company's results of operations. The Company proceeds with an
acquisition only if it determines that the acquisition is anticipated to have
an accretive effect on future operations. The Company's strategy is to
position itself to address existing and emerging markets. The Company views
acquisitions as a key
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component of its growth strategy, and intends to use both cash and its
securities, as it deems appropriate, to fund such acquisitions.
The Company expects that existing cash balances, internally generated
funds, and its credit facility will be sufficient to meet the Company's
capital requirements through the end of fiscal 1998.
The Company is currently converting its computer systems and business
processes to ensure that its computer systems will be capable of processing
periods for the year 2000 and beyond as well as ensure that its business
processes will be able to support current and anticipated growth projections.
The Company does not presently anticipate the costs associated with ensuring
these capabilities will have a material adverse effect on the Company.
RISK FACTORS
STATEMENTS REGARDING THE COMPANY'S PERFORMANCE PROSPECTS COULD CONTAIN
FORWARD-LOOKING INFORMATION THAT INVOLVES RISK AND UNCERTAINTIES SUCH AS THE
LEVEL OF DEMAND FOR THE COMPANY'S SERVICES, FUNDING DELAYS FOR PROJECTS, LACK
OF REGULATORY CLARITY AFFECTING THE MARKETPLACE AND INDUSTRY-WIDE COMPETITIVE
FACTORS. THE FOLLOWING RISK FACTORS SHOULD BE REVIEWED IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q.
POTENTIAL LIABILITY AND INSURANCE. Because of the type of projects in
which the Company is or may be involved, the Company's current and
anticipated future services may involve risks of potential liability under
Superfund, common law or contractual indemnification agreements. It is
difficult to assess accurately the magnitude of potential risk to the Company.
The Company maintains two comprehensive general liability policies, both
in the amount of $1,000,000. These amounts, together with two $9,000,000
umbrella policies, provide total general liability coverage of $10,000,000
for the Environmental business and Architecture & Engineering business
segments and coverage of $10,000,000 for the Telecommunications business
segment. The Company's professional liability insurance (E&O) policy, which
included pollution coverage, for 1997 provided $10,000,000 in coverage for
Environmental and Architecture & Engineering, with $100,000 self-insured
retention. The same E&O policy covered the Telecommunications segment with a
sublimit of $1,000,000 each claim/$1,000,000 aggregate. For 1998, the
Company expects to maintain similar coverages as to 1997 for professional
services including pollution-related services rendered by the Company. The
Company procures insurance coverage through a broker who is experienced in
the engineering field. The broker, together with the Company's Risk Manager,
reviews the Company's risk/insurance programs with those of the Company's
competitors and clients. This review, combined with historical experience,
claims history and contractual requirements, allows the Company to determine
the adequate amount of insurance. However, because there are various
exclusions and retentions under the Company's insurance policies, there can
be no assurance that all liabilities that may be incurred by the Company are
subject to insurance coverage. In addition, the E&O policy is a "claims
made" policy which only covers claims made during the term of the policy. If
a policy terminates and retroactive coverage is not obtained, a claim
subsequently made, even a claim based on events or acts which occurred during
the term of the policy, would not be covered by the policy. In the event the
Company expands its services into new markets, no assurance can be given that
the Company will be able to obtain insurance coverage for such activities or,
if insurance is obtained, that the dollar amount of any liabilities incurred
in connection with the performance of such services will not exceed policy
limits. The
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premiums paid by the Company for its professional liability policies during
fiscal 1997 were approximately $726,000 for E&O. The projected amounts to be
paid for fiscal 1998 will be approximately $722,000.
The Company evaluates and determines the risk associated with an
uninsured claim. In the event the Company determines that an uninsured claim
has potential liability, the Company establishes an appropriate reserve. The
Company does not establish a reserve if it determines that the claim has no
merit. The Company's historical levels of insurance coverage and reserves
have been shown to be adequate. However, a partially or completely uninsured
claim, if successful and of significant magnitude, could have a material
adverse effect on the Company.
SIGNIFICANT COMPETITION. The market for the Company's services is
highly competitive. The Company competes with many other firms, ranging from
small local firms to large national firms having greater financial and
marketing resources than the Company. The Company performs engineering and
consulting services across a broad spectrum of business areas, primarily in
the resource management, infrastructure, and the telecommunication service
business areas. Services within these business areas are provided to a client
base including Federal (Departments of Defense, Interior and Energy; U.S
Environmental Protection Agency; and the U.S. Post Office), state and local
agencies, as well as the commercial sector. The range of competitors for any
one procurement can vary from 10 to 100 firms, depending upon the relative
value of the project, the financial terms and risks associated with the work,
and any restrictions placed upon competition by the customer. Historically,
competition has been based primarily on the quality and timeliness of
service. However, the Company believes that price has become an increasingly
important competitive factor. The Company believes that its principal
competitors include Dames & Moore, Inc., E A Engineering Science &
Technology, ICF Kaiser International, Inc., International Technology Corp.,
TRC Companies, Inc., URS Consultants, Inc., Roy F. Weston, Inc., Castle Tower
Corporation and OSP Consultants, Inc.
CONTRACTS. The Company's contracts with the Federal and state
governments and some of its other client contacts are subject to termination
at the discretion of the client. Some contracts made with the Federal
government are subject to annual approval of funding and audits of the
Company's rates. Limitations imposed on spending by Federal government
agencies may limit the continued funding of the Company's existing contracts
with the Federal government and may limit the Company's ability to obtain
additional contracts. These limitations, if significant, could have a
material adverse effect on the Company. All of the Company's contracts with
the Federal government are subject to audit by the government, primarily by
the 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,
however, there can be no assurance that DCAA audits will not result in
material cost disallowances in the future.
In September 1995, the Company acquired Tetra Tech EM Inc. (formerly
known as PRC Environmental Management, Inc., EMI). EMI likewise contracts
with the Federal government
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and such contracts are subject to the same auditing standards as those of the
Company. Audits and negotiations for the years 1987 through 1992 have
recently been completed and cost disallowances as a result of audit totaled
approximately $672,000. Negotiations for the 1993 audit are currently
underway. Audits for the years 1994 and 1995 have yet to be completed.
The Company enters into various contracts with its clients, which include
fixed-price contracts. In fiscal 1997, 32.2% of the Company's net revenue
was derived from fixed-price contracts. Under a fixed-price contract, the
customer agrees to pay a specified price for the Company's performance of the
entire contract. Fixed-price contracts carry inherent risks, including risks
of losses from underestimating costs, problems with new technologies and
economic and other changes that may occur over the contract period. Losses
under fixed-price contracts, should they occur, could have a material adverse
effect on the Company.
The Company contracts with both domestic and international customers.
Certain contracts with international customers are denominated in a currency
other than the U.S. dollar. Contracts denominated in any currency other than
the U.S. dollar contain certain inherent risks, including risks on foreign
currency translation and risks in expatriating funds from foreign countries.
In fiscal 1997, 3.7% of the Company's net revenue was derived from the
international marketplace compared to 1.6% for fiscal 1996. As the Company's
net revenue derived from the international marketplace increases, so
increases risks associated in realizing the full contract value of those
contracts denominated in foreign currencies. The Company is currently
evaluating options to hedge future potential losses from foreign currency
transactions.
CONFLICTS OF INTEREST. Many of the Company's clients are concerned
about potential or actual conflicts of interest in retaining environmental
consultants and engineers. For example, Federal government agencies have
formal policies against continuing or awarding contracts that would create
actual or potential conflicts of interest with other activities of a
contractor. These policies, among other things, may prevent the Company in
certain cases from bidding for or performing contracts resulting from or
relating to certain work the Company has performed for the government. In
addition, services performed for a private client may create a conflict of
interest which precludes or limits the Company's ability to obtain work from
another private entity. The Company has, on occasion, declined to bid on a
project because of an actual or potential conflict of interest. However, the
Company has not experienced disqualification during a bidding or award
negotiation process by any government or private client as a result of a
conflict of interest.
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the Company's
common stock may be significantly affected by factors such as
quarter-to-quarter variations in the Company's results of operations, changes
in environmental legislation and changes in investors' perception of the
business risks and conditions in the environmental services business. In
addition, market fluctuations, as well as general economic or political
conditions, may adversely affect the market price of the Company's common
stock, regardless of the Company's actual performance.
QUALIFIED PROFESSIONALS. The Company's ability to attract and retain
qualified scientists and engineers is an important factor in determining the
Company's future growth and success.
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The market for environmental professionals is competitive and there can be no
assurance that the Company will continue to be successful in its efforts to
attract and retain such professionals.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) EXHIBITS
3.1 Restated Certificate of Incorporation of the Company, as
amended to date (incorporated herein by reference to Exhibit
3.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended October 1, 1995).
3.2 Bylaws of the Company, as amended to date (incorporated herein
by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1, No. 33-43723).
3.3 Certificate of Amendment of Certificate of Incorporation of
the Company (incorporated herein by reference to Exhibit 3.3 to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1997).
10.1 Credit Agreement dated as of September 15, 1995 between the
Company and Bank of America Illinois, as amended by the First
Amendment to Credit Agreement dated as of November 27, 1995
(incorporated herein by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 1, 1995).
10.2 Second Amendment dated as of June 20, 1997 to the Credit
Agreement dated as of September 15, 1995 between the Company
and Bank of America Illinois (incorporated herein by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 29, 1997).
10.3 Third Amendment dated as of December 15, 1997 to the Credit
Agreement dated as of September 15, 1995 between the Company
and Bank of America National Trust and Savings Association
(incorporated herein by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 1997).
10.4 Fourth Amendment dated as of January 30, 1997 to the Credit
Agreement dated as of September 15, 1995 between the Company
and Bank of America National Trust and Savings Association.
10.5 Security Agreement dated as of September 15, 1995 among the
Company, GeoTrans, Inc., Simons Li & Associates, Inc., Hydro-
Search, Inc., PRC Environmental Management, Inc. and Bank of
America Illinois (incorporated herein by reference to Exhibit
10.2
17
to the Company's Annual Report on Form 10-K for the fiscal
year ended October 1, 1995).
10.6 Pledge Agreement dated as of September 15, 1995 between
the Company and Bank of America Illinois (incorporated
herein by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended
October 1, 1995).
10.7 Guaranty dated as of September 15, 1995, executed by the
Company in favor of Bank of America Illinois (incorporated
herein by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended
October 1, 1995).
10.8 1989 Stock Option Plan dated as of February 1, 1989
(incorporated herein by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, No. 33-43723).
10.9 Form of Incentive Stock Option Agreement executed by the
Company and certain individuals in connection with the
Company's 1989 Stock Option Plan (incorporated herein by
reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1, No. 33-43723).
10.10 Executive Medical Reimbursement Plan (incorporated herein
by reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1, No. 33-43723).
10.11 1992 Incentive Stock Plan (incorporated herein by reference
to Exhibit 10.18 to the Company's Annual Report on Form
10-K for the fiscal year ended October 3, 1993).
10.12 Form of Incentive Stock Option Agreement used by the
Company in connection with the Company's 1992 Incentive
Stock Plan (incorporated herein by reference to Exhibit
10.19 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 3, 1993).
10.13 1992 Stock Option Plan for Nonemployee Directors
(incorporated herein by reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 3, 1993).
10.14 Form of Nonqualified Stock Option Agreement used by the
Company in connection with the Company's 1992 Stock Option
Plan for Nonemployee Directors (incorporated herein by
reference to Exhibit 10.21 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 3, 1993).
10.15 1994 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 10.22 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 2, 1994).
18
10.16 Form of Stock Purchase Agreement used by the Company in
connection with the Company's 1994 Employee Stock Purchase
Plan (incorporated herein by reference to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the fiscal
year ended October 2, 1994).
10.17 Employment Agreement dated as of June 11, 1997 between the
Company and Daniel A. Whalen (incorporated herein by
reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
June 29, 1997).
10.18 Registration Rights Agreement dated as of June 11, 1997
among the Company and the parties listed on Schedule A
attached thereto (incorporated herein by reference to
Exhibit 10.17 to the Company's Quarterly Report on Form 10-
Q for the fiscal quarter ended June 29, 1997).
10.19 Registration Rights Agreement dated as of July 11, 1997
among the Company and the parties listed on Schedule A
attached thereto (incorporated by reference to Exhibit
10.18 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 28, 1997).
11 Computation of Net Income Per Common Share.
27 Financial Data Schedule.
(b) REPORT ON FORM 8-K
Current Report on Form 8-K for the event of December 31, 1997, filed
with the Securities and Exchange Commission on January 15, 1998,
which relates to the Company's acquisition of the environmental
services business (NUS) from Brown & Root, Inc. and Halliburton NUS
Corporation.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 10, 1998 TETRA TECH, INC.
By: /s/ LI-SAN HWANG
------------------------------------
Li-San Hwang
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ JAMES M. JASKA
-------------------------------------
James M. Jaska
Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
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