UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 4, 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 0-19655
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 August 6, 1999, the total number of outstanding shares of the Registrant's
common stock was 38,138,176.
TETRA TECH, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Risk Factors 23
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 35
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PART I. FINANCIAL INFORMATION
ITEM 1.
Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
In thousands, except share data July 4, October 4,
1999 1998
---------- ----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 9,293 $ 4,889
Accounts receivable - net .................................................. 80,041 68,834
Unbilled receivables - net ................................................. 69,622 59,888
Prepaid and other current assets ........................................... 9,227 4,955
Deferred income taxes ...................................................... 3,766 3,766
---------- ----------
Total Current Assets .................................................... 171,949 142,332
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PROPERTY AND EQUIPMENT:
Leasehold improvements ..................................................... 2,121 1,348
Equipment, furniture and fixtures .......................................... 34,760 25,616
---------- ----------
Total ................................................................... 36,881 26,964
Accumulated depreciation and amortization .................................. (18,578) (13,219)
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PROPERTY AND EQUIPMENT - NET ................................................... 18,303 13,745
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INTANGIBLE ASSETS - NET ........................................................ 147,762 108,638
LOAN TO UNCONSOLIDATED AFFILIATE ............................................... 3,000 --
OTHER ASSETS ................................................................... 4,014 1,895
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TOTAL ASSETS ................................................................... $ 345,028 $ 266,610
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---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................... $ 25,195 $ 24,027
Accrued compensation ....................................................... 19,597 15,614
Other current liabilities .................................................. 16,226 8,283
Current portion of long-term obligations ................................... 21,000 14,065
Income taxes payable ....................................................... 5,953 3,294
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Total Current Liabilities ............................................... 87,971 65,283
---------- ----------
LONG-TERM OBLIGATIONS .......................................................... 35,336 33,546
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - authorized, 2,000,000 shares of $.01 par value;
issued and outstanding 0 shares .......................................... -- --
Exchangeable stock of a subsidiary ......................................... 13,570 15,411
Common stock - authorized, 50,000,000 shares of $.01 par value; issued and
outstanding 38,132,018 and 28,630,600 shares at
July 4, 1999 and October 4, 1998, respectively ........................... 381 287
Additional paid-in capital ................................................. 123,444 87,565
Cumulative translation loss ................................................ (584) --
Retained earnings .......................................................... 84,910 64,518
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TOTAL STOCKHOLDERS' EQUITY ..................................................... 221,721 167,781
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 345,028 $ 266,610
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---------- ----------
See accompanying Notes to 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 Nine Months Ended
---------------------- ----------------------
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
--------- --------- --------- ---------
Gross Revenue .................................................... $ 157,091 $ 98,231 $ 399,147 $ 257,396
Subcontractor costs ........................................ 36,352 23,082 92,208 56,777
--------- --------- --------- ---------
Net Revenue ...................................................... 120,739 75,149 306,939 200,619
Cost of Net Revenue .............................................. 88,189 54,405 232,778 149,530
--------- --------- --------- ---------
Gross Profit ..................................................... 32,550 20,744 74,161 51,089
Selling, General and Administrative Expenses ..................... 15,598 8,636 33,120 21,605
Amortization of Intangibles ...................................... 1,353 697 3,386 2,022
--------- --------- --------- ---------
Income from Operations ........................................... 15,599 11,411 37,655 27,462
Interest Expense ................................................. 649 624 2,143 1,433
Interest Income .................................................. (99) (114) (362) (254)
--------- --------- --------- ---------
Income Before Minority Interest and Income Tax
Expense ....................................................... 15,049 10,901 35,874 26,283
Income to Minority Interest ...................................... -- 1,194 -- 1,397
--------- --------- --------- ---------
Income Before Income Tax Expense ................................. 15,049 9,707 35,874 24,886
Income Tax Expense ............................................... 6,546 4,214 15,482 10,822
--------- --------- --------- ---------
Net Income ....................................................... $ 8,503 $ 5,493 $ 20,392 $ 14,064
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic Earnings Per Share ......................................... $ 0.22 $ 0.16 $ 0.55 $ 0.41
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted Earnings Per Share ....................................... $ 0.21 $ 0.15 $ 0.52 $ 0.39
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted Average Common Shares Outstanding:
Basic ...................................................... 37,801 35,184 36,805 34,695
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted .................................................... 40,145 36,502 39,266 36,245
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying Notes to Condensed Consolidated Financial Statements.
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Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands Nine Months Ended
-------------------------------
July 4, June 28,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 20,392 $ 14,064
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 8,745 5,102
Undistributed earnings to minority interest........................... -- 1,397
Provision for losses on receivables................................... (1,105) (631)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable................................................... 2,220 (16,655)
Unbilled receivables.................................................. (3,446) 1,074
Prepaid and other assets.............................................. (3,906) (4,981)
Accounts payable...................................................... (5,494) 4,937
Accrued compensation.................................................. 26 (304)
Other current liabilities............................................. 170 (4,511)
Income taxes payable.................................................. (824) (1,346)
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Net Cash Provided By (Used In) Operating Activities............... 16,778 (1,854)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (4,005) (2,374)
Payments for business acquisitions, net of cash acquired.................... (33,963) (25,948)
Payments on loans to unconsolidated affiliate............................... (3,000) --
------------ ------------
Net Cash Used In Investing Activities............................. (40,968) (28,322)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt.................................................. (45,000) (27,519)
Proceeds from issuance of long-term debt.................................... 48,359 49,000
Net proceeds from issuance of common stock.................................. 25,819 3,305
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Net Cash Provided By Financing Activities......................... 29,178 24,786
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EFFECT OF RATE CHANGES ON CASH.............................................. (584) --
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 4,404 (5,390)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................ 4,889 12,262
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CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................. $ 9,293 $ 6,872
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SUPPLIMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................................. $ 1,804 $ 1,197
Income taxes.......................................................... $ 4,739 $ 12,168
(Continued)
-5-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands Nine Months Ended
-----------------------
July 4, June 28,
1999 1998
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SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In February 1999, the Company purchased all of the capital stock of McCulley,
Frick & Gilman, Inc. In conjunction with this acquisition, liabilities were
assumed as follows:
Fair value of assets acquired ............................................... $ 10,086
Cash paid ................................................................... (4,250)
Issuance of common stock .................................................... (3,613)
Other acquisition costs ..................................................... (70)
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Liabilities assumed ...................................................... $ 2,153
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----------
In May 1999, the Company purchased all of the capital stock of Collins/Pina
Consulting Engineers, Inc. In conjunction with this acquisition,
liabilities were assumed as follows:
Fair value of assets acquired ............................................... $ 4,919
Cash paid ................................................................... (2,501)
Issuance of common stock .................................................... (102)
Other acquisition costs ..................................................... (70)
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Liabilities assumed ...................................................... $ 2,246
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----------
In May 1999, the Company purchased all of the capital stock of
D.E.A. Construction Company. In conjunction with this acquisition,
liabilities were assumed as follows:
Fair value of assets acquired ............................................... $ 19,532
Cash paid ................................................................... (14,000)
Covenant not to compete ..................................................... (250)
Purchase price payable ...................................................... (185)
Other acquisition costs ..................................................... (80)
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Liabilities assumed ...................................................... $ 5,017
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----------
In May 1999, the Company purchased all of the capital stock of BAHA
Communications, Inc. In conjunction with this acquisition, liabilities were
assumed as follows:
Fair value of assets acquired ............................................... $ 3,355
Issuance of common stock .................................................... (2,133)
Common stock held in escrow ................................................. (425)
Other acquisition costs ..................................................... (70)
----------
Liabilities assumed ...................................................... $ 727
----------
----------
(Continued)
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Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands Nine Months Ended
--------------------------
July 4, June 28,
1999 1998
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SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In June 1999, the Company purchased all of the capital stock of Utilities &
C.C., Inc. In conjunction with this acquisition, liabilities were assumed
as follows:
Fair value of assets acquired ........................................... $ 2,568
Issuance of common stock ................................................ (2,040)
Other acquisition costs ................................................. (70)
----------
Liabilities assumed .................................................. $ 458
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----------
In June 1999, the Company purchased all of the capital stock of ASL
Consultants, Inc. In conjunction with this acquisition, liabilities were
assumed as follows:
Fair value of assets acquired ........................................... $ 16,433
Cash paid ............................................................... (10,000)
Other acquisition costs ................................................. (90)
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Liabilities assumed .................................................. $ 6,343
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In June 1999, the Company purchased all of the capital stock of L.M.W.
Associates, Inc., Cosentini Associates, Inc. and Cobin, Inc. and all of the
limited liability partnership interests of Cosentini Associates IL LLP,
Cosentini Associates MA LLP, Cosentini Associates DC LLP and Cosentini
Associates FL LLP (collectively, CAA). In conjunction with these acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired ........................................... $ 15,577
Cash paid ............................................................... (5,069)
Other acquisition costs ................................................. (250)
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Liabilities assumed .................................................. $ 10,258
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----------
In December 1997, the Company, through its wholly-owned subsidiary Tetra Tech
NUS, Inc., purchased the assets of certain environmental services
businesses of Brown & Root, Inc. and Halliburton NUS Corporation, both of
which were subsidiaries of Halliburton Company. In conjunction with this
acquisition, liabilities were assumed as follows:
Fair value of assets acquired ........................................... $ 27,794
Cash paid ............................................................... (24,872)
Other acquisition costs ................................................. (325)
----------
Liabilities assumed .................................................. $ 2,597
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----------
(Continued)
-7-
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands Nine Months Ended
------------------------------
July 4, June 28,
1999 1998
----------- -----------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In March 1998, the Company, through its wholly-owned subsidiary Whalen
Service Corps Inc., purchased certain assets of TANCO LLC, dba Integration
Technologies from ANTEC Corporation. This purchase was related to a limited
liability company agreement between Whalen Service Corps Inc. and Sentrex
Cen-Comm. In conjunction with this acquisition, liabilities were assumed as
follows:
Fair value of assets acquired....................................... $ 1,572
Cash paid........................................................... (623)
-----------
Liabilities assumed.............................................. $ 949
-----------
-----------
In March 1998, the Company purchased all of the capital stock of
C.D.C. Engineering, Inc. In conjunction with this acquisition,
liabilities were assumed as follows:
Fair value of assets acquired....................................... $ 2,299
Cash paid........................................................... (323)
Issuance of common stock............................................ (1,294)
Other acquisition costs............................................. (70)
-----------
Liabilities assumed.............................................. $ 612
-----------
-----------
See accompanying Notes to Condensed Consolidated Financial Statements.
(Concluded)
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TETRA TECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of July 4,
1999, the condensed consolidated statements of income for the three-month and
nine-month periods ended July 4, 1999 and June 28, 1998 and the condensed
consolidated statements of cash flows for the nine-month periods ended July 4,
1999 and June 28, 1998 are unaudited, and in the opinion of management include
all adjustments, consisting of only normal and recurring adjustments, necessary
for a fair presentation of the financial position and the results of operations
for the periods presented.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
October 4, 1998.
The results of operations for the three and nine months ended July 4,
1999 are not necessarily indicative of the results to be expected for the fiscal
year ending October 3, 1999.
All share and per share amounts reflect, on a retroactive basis, the
5-for-4 stock splits effected in the form of 25.0% stock dividends, wherein one
additional share of stock was issued on June 15, 1999 and September 15, 1998 for
each four shares outstanding as of the record dates of May 14, 1999 and July 27,
1998, respectively.
2. EARNINGS PER SHARE
Due to the Company's complex capital structure, the Company presents
both basic and diluted Earnings Per Share (EPS). Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed by dividing net income by the weighted average number of common shares
outstanding and dilutive potential common shares. The Company includes as
potential common shares the weighted average number shares of exchangeable stock
of a subsidiary and the weighted average dilutive effects of outstanding stock
options. The exchangeable stock of a subsidiary is non-voting and is
exchangeable, on a basis of 1.25 shares of exchangeable stock for 1 share of
Company common stock.
3. CURRENT ASSETS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents totaled $9.3 million and $4.9 million at July 4, 1999 and October 4,
1998, respectively.
-9-
4. MERGERS AND ACQUISITIONS
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 $0.6 million. WSC
initially held a 51.0% majority interest in Whalen/Sentrex LLC, a California
limited liability company, while LAL Corp. held the remaining 49.0% minority
interest.
On March 26, 1998, the Company acquired 100.0% 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 has been valued at approximately $1.6 million,
consisting of cash and 88,829 shares of Company common stock.
On July 8, 1998, the Company acquired 100.0% 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 $15.3 million, consisting of cash and
343,610 shares of Company common stock. Simultaneously with the acquisition, MPS
distributed to its former shareholders accounts receivable having a net value of
$8.0 million.
On September 22, 1998, the Company acquired, through its subsidiary
Tetra Tech Canada Ltd. (TtC), 100.0% of the capital stock of 1056584 Ontario
Limited, 1056585 Ontario Limited, Venture Cable Limited, Cen-Comm
Communications, Inc., Sentrex Electronics Inc. and LAL Corp. (collectively,
the Sentrex Group of Companies (SGOC)), providers of engineering and
technical services to the cable television, telephony and data networking
industries. The purchase has been valued at approximately $19.2 million,
consisting of cash and 1,150,442 shares of TtC exchangeable stock. The TtC
exchangeable stock is exchangeable, on a basis of 1.25 shares of exchangeable
stock for 1 share of Company common stock as described in the related
purchase agreement. Upon completion of the SGOC acquisition, the Company
beneficially owns 100.0% of Whalen/Sentrex LLC.
On February 26, 1999, the Company acquired 100.0% 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 $7.9 million, consisting of cash and
231,490 shares of Company common stock, and is subject to a purchase
-10-
price and purchase allocation adjustment based on the final determination of
MFG's net asset value as of February 26, 1999.
On May 7, 1999, the Company acquired 100.0% 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
6,172 shares of Company common stock.
On May 19, 1999, the Company acquired 100.0% 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
$14.3 million and consisted of cash and is subject to a purchase price and
purchase allocation adjustment based on the final determination of DCC's net
asset value as of May 19, 1999. Additionally, the Company paid $0.3 million to
the President and Chief Executive Officer of DCC as consideration for a
non-competition agreement.
On May 21, 1999, the Company acquired 100.0% 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 and 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 distributed to its former shareholders
accounts receivable having a net value of $1.0 million.
On June 18, 1999, the Company acquired 100.0% 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 $2.1 million and consisted of 137,930
shares of Company common stock and is subject to a purchase price and purchase
allocation adjustment based upon the final determination of UCC's net asset
value as of May 30, 1999.
On June 25, 1999, the Company acquired 100.0% 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 and consisted 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 100.0% of the capital stock
of L.M.W. Associates, Inc., Cosentini Associates, Inc. and Cobin, Inc., and
100.0% of the limited liability partnership interests of Cosentini Associates
IL LLP, Cosentini Associates MA LLP, Cosentini Associates DC LLP and
Cosentini Associates FL LLP (collectively, CAA). The purchase was valued at
approximately $5.3 million and consisted of cash and is subject to a purchase
price and
-11-
purchase allocation adjustment based upon the final determination of CAA's net
asset value as of June 30, 1999. Simultaneously with the acquisition, CAA
distributed to its former shareholders and partners accounts receivable having a
gross value of $18.4 million.
All of the acquisitions above have been accounted for as purchases
and, accordingly, the purchase prices of the businesses acquired have been
allocated to the assets and liabilities acquired based upon their fair
values. The excess of the purchase cost of the acquisitions over the fair
value of the net assets acquired was recorded as goodwill and is included in
Intangible Assets - Net in the accompanying 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%. The
results of operations of each of the companies acquired have been included in
the Company's financial statements as set forth in the related purchase
agreements.
The effect of unaudited pro forma operating results of the UCC, BCI,
DCC, CPC, MFG, SGOC and CDE transactions, had they been acquired on September
29, 1997, is not material.
Pro forma operating results assuming the Company had acquired CAA, ASL,
MPS and NUS on September 29, 1997 is presented in Note 6. UNAUDITED PRO FORMA
OPERATING RESULTS.
5. ACCOUNTS RECEIVABLE
Accounts receivable are presented net of a valuation allowance to
provide for doubtful accounts and for the potential disallowance of billed and
unbilled costs. The allowance for doubtful accounts as of July 4, 1999 and
October 4, 1998 was $3.6 million and $2.9 million, respectively. The allowance
for disallowed costs as of July 4, 1999 and October 4, 1998 was $3.7 million and
$9.8 million, respectively. Disallowance of billed and unbilled costs is
primarily associated with contracts with the Federal government which contain
clauses that subject contractors to several levels of audit. The Company
establishes reserves on those contract receivables, especially those acquired in
acquisitions, where there is substantial uncertainty as to their collection. In
September 1995, the Company purchased the stock of PRC Environmental Management,
Inc. (EMI). EMI contracts with the Federal government and at the time of
acquisition, had outstanding audits for the years 1987 through 1995. Reserves
for cost disallowances resulting from those audits were established at the time
of acquisition. During the three months ended July 4, 1999, it was determined
that approximately $4.4 million of the $10.7 million outstanding receivables
relating to these years would ultimately be uncollectible due to cost
disallowances. Accordingly, this amount was applied against the allowance for
disallowed costs. It was further determined that the total reserve against these
receivables exceeded the ultimate risk exposure by approximately $1.75 million.
Accordingly, this amount was taken into income during the three months ended
July 4, 1999. At July 4, 1999, approximately $2.1 million of these receivables
remained uncollected and fully reserved. Should these amounts be collected in
future periods, they will likewise be taken into income. However, as of July 4,
1999, collectibility was not assured and therefore these amounts remain fully
reserved. Management believes that resolution of these matters will not have a
material adverse impact on the Company's financial position or results of
operations.
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6. UNAUDITED PRO FORMA OPERATING RESULTS
The table below presents summarized unaudited pro forma operating
results assuming that the Company had acquired CAA, ASL, MPS and NUS on
September 29, 1997. These amounts are based on historical results and
assumptions and estimates which the Company believes to be reasonable. The pro
forma results do not reflect anticipated cost savings and do not necessarily
represent results which would have occurred if the CAA, ASL, MPS and NUS
acquisitions had actually taken place on September 29, 1997.
Pro Forma Nine Months Ended
-------------------------------------
July 4, 1999 June 28, 1998
------------- -------------
Gross revenue $429,420 $344,030
Income from operations 39,139 29,774
Net income 36,709 14,055
Basic earnings per share 0.57 0.40
Diluted earnings per share 0.53 0.39
Weighted average shares outstanding:
Basic 36,805 34,954
Diluted 39,265 36,507
7. COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from non
owner sources. These sources include net income and other revenues, expenses,
gains and losses incurred. The Company includes as other comprehensive income
translation gains and losses from subsidiaries with functional currencies
different than that of the Company. For the three and nine months ended July 4,
1999, comprehensive income was approximately $8.7 million and $19.8 million,
respectively. For the three and nine months ended July 4, 1999, the Company
incurred net translation gains of $0.2 million and net translation losses of
$0.6 million, respectively. The Company incurred no translation gains or losses
for the three and nine months ended June 28, 1998.
8. LOAN TO UNCONSOLIDATED AFFILIATE
During the nine months ended July 4, 1999, the Company had loans of
$3.0 million outstanding to TANCO LLC, a 50% owned affiliate, for working
capital needs.
9. SECONDARY OFFERING OF COMMON STOCK
In February 1998, the Company, along with certain selling
stockholders, offered 3,968,750 shares of its common stock through a public
offering. The Company offered 1,250,000 shares and received approximately
$22.0 million in net proceeds from the offering of these shares. These
proceeds were used for the partial repayment of outstanding indebtedness
under the Company's revolving credit facility.
-13-
10. SUBSEQUENT EVENTS
Effective August 2, 1999, the Company amended its revolving credit
facility to increase its line of credit from $65.0 million to $80.0 million in
order to provide for additional working capital and potential acquisition needs.
This facility will be reduced to $65.0 million in February 2000.
-14-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED BELOW, THE MATTERS
DISCUSSED IN THIS SECTION ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER
OF RISKS AND UNCERTAINTIES. OUR ACTUAL LIQUIDITY NEEDS, CAPITAL RESOURCES AND
OPERATING RESULTS MAY DIFFER MATERIALLY FROM THE DISCUSSION SET FORTH BELOW IN
THESE FORWARD-LOOKING STATEMENTS. FOR ADDITIONAL INFORMATION, REFER TO THE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
FILING.
OVERVIEW
Tetra Tech, Inc. is a leading provider of specialized management
consulting and technical services in three principal business areas: resource
management, infrastructure and communications. As a specialized management
consultant, we assist our clients in defining problems and developing innovative
and cost-effective solutions. Our management consulting services are
complemented by our technical services. These technical services, which
implement solutions, include research and development, applied science,
engineering and architectural design, construction management, and operations
and maintenance. Our clients include a diverse base of public and private
organizations located in the United States and internationally.
Since our initial public offering in December 1991, we have increased
the size and scope of our business and have expanded our service offerings
through a series of strategic acquisitions and internal growth.
We derive our gross revenues from fees from professional services. Our
services are billed under various types of contracts with our clients,
including:
- Fixed-price;
- Fixed-rate time and materials;
- Cost-reimbursement plus fixed fee; and
- Cost-reimbursement plus fixed and award fee.
In the course of providing our services, we routinely subcontract
services. These subcontractor costs are passed through to clients and, in
accordance with industry practice, are included in gross revenue. Because
subcontractor services can change significantly from project to project, we
believe net revenue, which is gross revenue less the cost of subcontractor
services, is a more appropriate measure of our performance.
Our cost of net revenue includes professional compensation and certain
direct and indirect overhead costs such as rents, utilities and travel.
Professional compensation represents the majority of these costs. Our selling,
general and administrative (SG&A) expenses are comprised primarily of our
corporate headquarters' costs related to the executive offices, corporate
finance and accounting, information technology, marketing, and bid and proposal
costs. These costs are generally unrelated to specific client projects and can
vary as expenses are
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incurred supporting corporate activities and initiatives. In addition, we
include amortization of certain intangible assets resulting from acquisitions in
SG&A expenses.
We provide our services to a diverse base of Federal, state and local
government agencies, and commercial and international clients. The following
table presents, for the periods indicated, the approximate percentage of net
revenue attributable to these client sectors:
Percentage of Net Revenue
-----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
Client Sector July 4, 1999 June 28, 1998 July 4, 1999 June 28, 1998
- ------------- ------------------- ------------------- ------------------- ------------------
Federal government 36.1% 51.5% 39.6% 49.8%
State & local government 17.4 11.4 15.6 12.1
Commercial 44.1 34.8 41.0 35.8
International 2.4 2.3 3.8 2.3
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 made the following acquisitions:
MCCULLEY, FRICK & GILMAN, INC. -- In February 1999, we acquired
McCulley, Frick & Gilman, Inc. (MFG). The purchase was valued at approximately
$7.9 million. Following the transaction we changed the name to MFG, Inc. MFG, a
Colorado-based consulting and engineering 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 consulting engineering firm,
provides engineering and related services primarily to state and local
governments in Arizona.
D.E.A. CONSTRUCTION COMPANY -- In May 1999, we acquired D.E.A.
Construction Company (DCC). The purchase was valued at approximately $14.3
million. DCC, a Colorado-based construction and field services firm, provides
design and construction and maintenance of communications and information
transport systems to the communications industry primarily in Colorado, Idaho
and surrounding states.
BAHA COMMUNICATIONS, INC. -- In May 1999, we acquired BAHA
Communications, Inc. (BCI). The purchase was valued at approximately $2.6
million. 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 $2.1 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.
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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 throughout
California and Arizona to Federal, state, and local government and commercial
clients.
COSENTINI ASSOCIATES -- In June 1999, we acquired outstanding shares
and partnership interests of certain companies affiliated with Cosentini
Associates LLP (collectively, CAA). The purchase was valued at approximately
$5.3 million. CAA, a New York-based engineering firm, provides engineering
services for major buildings primarily in the Northeastern United States.
RESULTS OF OPERATIONS
The following table presents the percentage relationship of selected
items to net revenue in our condensed consolidated statements of income:
% Relationship to Net Revenue % Relationship to Net Revenue
----------------------------- -----------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
July 4, 1999 June 28, 1998 July 4, 1999 June 28, 1998
------------ ------------- ------------ -------------
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of net revenue 73.0 72.4 75.8 74.5
--------- ---------- ---------- ----------
Gross profit 27.0 27.6 24.2 25.5
Selling, general and
administrative expenses 12.9 11.5 10.8 10.8
Acquisition amortization 1.2 0.9 1.1 1.0
--------- ---------- ---------- ----------
Income from operations 12.9 15.2 12.3 13.7
Net interest (expense) income (0.4) (0.7) (0.6) (0.6)
--------- ---------- ---------- ----------
Income before minority interest
and income tax expense 12.5 14.5 11.7 13.1
Income to minority interest -- (1.6) -- (0.7)
--------- ---------- ---------- ----------
Income before income tax expense 12.5 12.9 11.7 12.4
Income tax expense 5.5 5.6 5.0 5.4
--------- ---------- ---------- ----------
Net income 7.0% 7.3% 6.6% 7.0%
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
NET REVENUE. Net revenue increased $45.6 million, or 60.7%, to
$120.7 million for the three months ended July 4, 1999 from $75.1 million for
the comparable period last year. For the nine months ended July 4, 1999, net
revenue increased $106.3 million, or 53.0%, to $306.9 million from $200.6
million for the comparable period last year. Included in net revenue for the
three months and nine months ended July 4, 1999 was $1.75 million relating to
the over accrual of an allowance for disallowed costs (See Note 5. in Notes
to Condensed Consolidated Financial Statements). This allowance relates to
amounts previously not recognized as revenue as they were deemed to be
unallowable. These amounts were subsequently collected and therefore included
as revenue. Excluding this adjustment, net revenue increased 58.3% and 52.1%
for the three and nine months ended July 4, 1999, respectively. All client
sectors continued to show net revenue increases in actual dollars. As a
percentage of net revenue, decreases were realized in the Federal government
sector due to growth in revenue from commercial clients and revenue
contributed by acquired companies. These acquisitions provided increases in
our revenue from both state and local governments and commercial clients. For
the three months ended July 4, 1999, net revenue provided by companies
acquired in the past 12 months totaled $40.9 million. Excluding this net
revenue, we recognized 6.2% growth in our net revenue. For the nine months
ended July 4, 1999, net revenue
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provided by companies acquired in the past 12 months totaled $66.7 million.
Excluding this net revenue, we recognized 19.7% growth in our net revenue. Gross
revenue increased $58.9 million, or 59.9%, to $157.1 million for the three
months ended July 4, 1999 from $98.2 million for the comparable period last
year. For the nine months ended July 4, 1999, gross revenue increased $141.8
million, or 55.1%, to $399.1 million from $257.4 million for the comparable
period last year.
COST OF NET REVENUE. Cost of net revenue increased $33.8 million, or
62.1%, to $88.2 million for the three months ended July 4, 1999 from $54.4
million for the comparable period last year. As a percentage of net revenue,
cost of net revenue for the three months ended July 4, 1999 was 73.0% compared
to 72.4% for the comparable period last year. For the nine months ended July 4,
1999, cost of net revenue increased $83.2 million, or 55.7%, to $232.8 million
from $149.5 million for the comparable period last year. As a percentage of net
revenue, cost of net revenue for the nine months ended July 4, 1999 was 75.8%
compared to 74.5% for the comparable period last year. These increases were
primarily due to the volume increases in our resource management business area,
as well as the higher cost of net revenue for the acquired companies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses,
including amortization of intangibles, increased $7.6 million, or 81.6%, to
$17.0 million for the three months ended July 4, 1999 from $9.3 million for
the comparable period last year. As a percent of net revenue, SG&A expenses,
including amortization of intangibles, increased to 14.1% for the three
months ended July 4, 1999 from 12.4% for the comparable period last year. For
the nine months ended July 4, 1999, SG&A expenses, including amortization of
intangibles, increased $12.9 million, or 54.5%, to $36.5 million from $23.6
million for the comparable period last year. As a percentage of net revenue,
SG&A expenses, including amortization of intangibles, increased 11.9% for the
nine months ended July 4, 1999 from 11.8% for the comparable period last
year. Amortization expense relating to acquisitions increased to 1.2% of net
revenue for both the three months and nine months ended July 4, 1999 from
0.9% and 1.0% for the comparable periods last year. As a percentage of net
revenue, the increase in SG&A expenses, including amortization of
intangibles, for the three months ended July 4, 1999 was primarily related to
the timing of expenses associated with upgrading and converting certain
systems to be year 2000 compliant as well as the timing of expenses relating
to further development of our corporate systems and processes. For the nine
months ended July 4, 1999, our SG&A costs, excluding amortization of
intangibles, remained flat at 10.8% of our net revenue.
NET INTEREST EXPENSE. Net interest expense remained less than $1.0
million for the three months ended July 4, 1999. For the nine months ended July
4, 1999, net interest expense increased $0.6 million, or 51.1%, to $1.8 million
from $1.2 million for the comparable period last year. This increase was
primarily attributable to borrowings on our line of credit to facilitate
acquisitions.
INCOME TAX EXPENSE. Income tax expense increased $2.3 million, or
55.3%, to $6.5 million for the three months ended July 4, 1999 from $4.2 million
for the comparable period last
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year. For the nine months ended July 4, 1999, income tax expense increased
$4.7 million, or 43.0%, to $15.5 million from $10.8 million for the
comparable period last year. Certain expenses create permanent differences
that impact our effective tax rate. Our current effective tax rate is 43.2%
compared to 43.5% in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of July 4, 1999, our working capital was $84.0 million, an increase
of $6.9 million from October 4, 1998, of which cash and cash equivalents totaled
$9.3 million. In addition, we have a credit agreement (the "Credit Agreement")
with a bank which provided for a revolving credit facility (the "Facility") of
$65.0 million. Under our Credit Agreement, we may also request standby letters
of credit up to the aggregate sum of $20.0 million outstanding at any given
time. Our Credit Agreement provided for a mandatory reduction of $5.0 million on
December 15, 1999. Our Facility matures on December 15, 2000 or earlier at our
discretion upon payment in full of loans and other obligations. Effective August
2, 1999, we amended the Credit Agreement to provide for a Facility of $80.0
million until February 2000, at which time the Facility will be reduced to $65
million. As of July 4, 1999, borrowings and standby letters of credit totaled
$55.0 million and $1.4 million, respectively.
In the nine months ended July 4, 1999, we generated $16.8 million
from operating activities compared to our usage of $1.9 million for the
comparable period last year. This increase was primarily attributable to our
efforts to increase our efficiency in the timing of our billings and the
collection of our receivables. Excluding cash used in non-recurring operating
activities of acquired companies of $0.9 million, cash generated from
operating activities would have been $17.5 million. In the nine months ended
July 4, 1999, cash used in investing activities was $41.0 million compared to
$28.3 million for the comparable period last year. This increase primarily
was the result of business acquisitions. In the nine months ended July 4,
1999, cash used in financing activities was $29.2 million compared to cash
generation of $24.8 million for the comparable period last year. During the
nine months ended July 4, 1999, cash generated from operating activities and
the proceeds of our secondary offering allowed us to reduce the outstanding
borrowings on our Facility.
We expect that internally generated funds, our existing cash balances
and availability under the Credit Agreement, as amended, will be sufficient to
meet our capital requirements through the end of fiscal 1999. However, we may
seek to expand our borrowing capabilities to accommodate acquisition
opportunities.
We continuously evaluate the marketplace for strategic opportunities.
Once an opportunity is identified, we examine the effect an acquisition may have
on the business environment, as well as on our results of operations. We proceed
with an acquisition if we determine that the acquisition is anticipated to have
an accretive effect on future operations. However, as successful integration and
implementation are essential to achieve favorable results, no assurances can be
given that all acquisitions will provide accretive results. Our strategy is to
position ourselves to address existing and emerging markets. We view
acquisitions as a key component of our growth strategy, and we intend to use
both cash and our securities, as we deem appropriate, to fund such acquisitions.
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We believe our operations have not been and, in the foreseeable future,
do not expect to be materially adversely affected by inflation or changing
prices.
MARKET RISKS
We currently utilize no material derivative financial instruments which
expose us to significant market risk. We are exposed to cash flow risk due to
interest rate fluctuations with respect to our long-term 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 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 currently anticipate repaying
$21.0 of our outstanding indebtedness under the Facility in the next 12 months.
However there can be no assurance that we will, or will be able to, repay our
long-term debt in the manner described. We could incur additional debt under the
Facility or our operating results could be worse than currently anticipated.
YEAR 2000
We are working 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 Y2K
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 upon which we rely.
We have established both a Y2K review committee and a Y2K action team.
The purpose of the review committee is to develop and communicate our Y2K plan
to achieve our Y2K compliance mission. The purpose of the action team is to
identify, remediate and implement plans to resolve Y2K related issues. Through
the review committee and the action team, we are in the process of completing
our full assessment of all issues relating to the Y2K. We have developed
questionnaires regarding Y2K readiness to be used internally and externally. We
have completed our internal assessment and are assessing the Y2K issues of our
clients and vendors. We rely on certain software vendors who are the makers of
Y2K compliance statements as they apply to our specific software. Our references
to the Y2K compliance status of these systems are republications of their
statements. Based on the information collected to date, we do not believe that
the cost of addressing our Y2K issues will have a material adverse impact on our
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financial position. We plan to devote all resources required to resolve any
significant Y2K issues 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. Currently, only one operating unit which accounts for
approximately 4.8% of our gross revenue is not Y2K compliant. We plan to either
convert this unit or upgrade it to a Y2K compliant version of its existing
applications in September 1999. In all cases, we believe that our financial and
accounting systems will be Y2K compliant in a timely manner and will not be
materially impacted by Y2K.
We have installed a Y2K compliant human resource information management
system. We are currently in the process of converting our non-Y2K compliant
units to this system. The remaining units are deemed to be Y2K compliant by
their vendors, however, they will ultimately be converted to this new system. In
all cases, we believe that our human resource management information systems are
Y2K compliant and will not be materially impacted by Y2K.
We have expended or obligated 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.
We have extensive business with the Federal government. Should the
Federal government, specifically the Department of Defense, experience
significant business interruptions relating to non-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 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.
RISKS
We believe the risks associated with non-Y2K compliance include:
- our inability to invoice and process payments;
- our inability to produce accurate and timely financials;
- the impact on our cash flow and working capital needs;
- the impact on our profitability; and
- our potential 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. We have substantial experience in the
conversion process from multiple
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legacy systems to our vendor certified Y2K systems. We have an experienced and
dedicated staff to perform the functions identified and are reasonably confident
that the projected conversions will be accomplished as projected.
We currently do not have formal contingency plans for the failure of
our human resource information management system. Our implementation strategy
was to install the system as simply as possible, with little customization. We
have successfully installed the system and are in the process of loading data
into the system and converting data from legacy systems where possible. We
believe there is sufficient time to complete our conversions in order to meet
the Y2K deadline.
We maintain, as a matter of policy and practice, mitigation plans in
the event of systems failure, which include regular backup of historical
information. In conjunction with acquisitions, we obtain representations and
warranties from the selling shareholders relating to the Y2K compliance of the
company acquired. For the acquisitions made during the three months ended July
4, 1999, such representations and warranties were obtained.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Please refer to the information we have included under the heading
"Market Risks" in ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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RISK FACTORS
SOME OF THE INFORMATION IN THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU
CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL,"
"EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "CONTINUE" OR SIMILAR WORDS.
YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY: (1)
DISCUSS OUR FUTURE EXPECTATIONS; (2) CONTAIN PROJECTIONS OF OUR FUTURE OPERATING
RESULTS OR OF OUR FUTURE FINANCIAL CONDITION; OR (3) STATE OTHER
"FORWARD-LOOKING" INFORMATION. WE BELIEVE IT IS IMPORTANT TO COMMUNICATE OUR
EXPECTATIONS TO OUR INVESTORS. THERE MAY BE EVENTS IN THE FUTURE, HOWEVER, THAT
WE ARE NOT ACCURATELY ABLE TO PREDICT OR OVER WHICH WE HAVE NO CONTROL. THE RISK
FACTORS LISTED IN THIS SECTION, AS WELL AS ANY CAUTIONARY LANGUAGE IN THIS
QUARTERLY REPORT ON FORM 10-Q, PROVIDE EXAMPLES OF RISKS, UNCERTAINTIES AND
EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTATIONS
DESCRIBED IN FORWARD-LOOKING STATEMENTS. THE OCCURRENCE OF ANY OF THE EVENTS
DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM
10-Q COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION
AND OPERATING RESULTS. UPON THE OCCURRENCE OF ANY OF THESE EVENTS, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY THAT COULD ADVERSELY
IMPACT OUR BUSINESS AND OPERATING RESULTS
A significant part of our growth strategy is to acquire other companies
that complement our lines of business or that broaden our geographic presence.
During fiscal 1998, we purchased ten companies in five separate transactions.
During the nine months ended July 4, 1999, we purchased seven companies. We
expect to continue to acquire companies as an element of our growth strategy.
Acquisitions involve certain risks that could cause our actual growth or
operating results to differ from our expectations or the expectations of
security analysts. For example:
- We may not be able to identify suitable acquisition candidates or
to acquire additional companies on favorable terms;
- We compete with others to acquire companies. Competition may
increase and may result in decreased availability or increased
price for suitable acquisition candidates;
- We may not be able to obtain the necessary financing, on
favorable terms or at all, to finance any potential acquisitions;
- We may ultimately fail to consummate an acquisition even if
announced that we plan to acquire a company;
- We may fail to successfully integrate or manage these acquired
companies due to differences in business backgrounds or corporate
cultures;
- These acquired companies may not perform as we expect;
- We may find it difficult to provide a consistent quality of
service across our geographically diverse operations; and
- If we fail to successfully integrate any acquired company, our
reputation could be damaged. This could make it more difficult to
market our services or to acquire additional companies in the
future.
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In addition, our acquisition strategy may divert management's attention away
from our primary service offerings, result in the loss of key clients or
personnel and expose us to unanticipated liabilities.
Finally, acquired companies that derive a significant portion of their
revenues from the Federal government and that do not follow the same cost
accounting policies and billing procedures as we do may be subject to larger
cost disallowances for greater periods than we typically encounter. If we fail
to determine the existence of unallowable costs and establish appropriate
reserves in advance of an acquisition we may be exposed to material
unanticipated liabilities, which could have a material adverse effect on our
business.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD HAVE A
NEGATIVE EFFECT ON THE PRICE OF OUR COMMON STOCK
Our quarterly revenues, expenses and operating results may fluctuate
significantly because of a number of factors, including:
- The seasonality of the spending cycle of public sector clients,
notably the Federal government;
- Employee hiring and utilization rates;
- The number and significance of client engagements commenced and
completed during a quarter;
- Delays incurred in connection with an engagement;
- The ability of clients to terminate engagements without
penalties;
- The size and scope of engagements;
- The timing of expenses incurred for corporate initiatives;
- The timing and size of the return on investment capital; and
- General economic and political conditions.
Variations in any of these factors could cause significant fluctuations in our
operating results from quarter to quarter and could result in net losses.
THE VALUE OF OUR COMMON STOCK COULD CONTINUE TO BE VOLATILE
The trading price of our common stock has fluctuated widely. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. The overall market and the price of our common stock may
continue to fluctuate greatly. The trading price of our common stock may be
significantly affected by various factors, including:
- Quarter to quarter variations in our operating results;
- Changes in environmental legislation;
- Changes in investors' and analysts' perception of the business
risks and conditions of our business;
- Broader market fluctuations; and
- General economic or political conditions.
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IF WE ARE NOT ABLE TO SUCCESSFULLY MANAGE OUR GROWTH STRATEGY, OUR BUSINESS AND
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED
We are growing rapidly. Our growth presents numerous managerial,
administrative, operational and other challenges. Our ability to manage the
growth of our operations will require us to continue to improve our operational,
financial and human resource management information systems and our other
internal systems and controls. In addition, our growth will increase our need to
attract, develop, motivate and retain both our management and professional
employees. The inability of our management to manage our growth effectively or
the inability of our employees to achieve anticipated performance or utilization
levels, could have a material adverse effect on our business.
THE LOSS OF KEY PERSONNEL OR OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL COULD SIGNIFICANTLY DISRUPT OUR BUSINESS
We depend upon the efforts and skills of our executive officers, senior
managers and consultants. With limited exceptions, we do not have employment
agreements with any of these individuals. The loss of the services of any of
these key personnel could adversely affect our business. Although we have
obtained non-compete agreements from certain principals and stockholders of
companies we have acquired, we generally do not have non-compete or employment
agreements with key employees who were not once equity shareholders of these
companies. We do not maintain key-man life insurance policies on any of our
executive officers or senior managers.
Our future growth and success depends on our ability to attract and
retain qualified scientists and engineers. The market for these professionals is
competitive and we may not be able to attract and retain such professionals.
CHANGES IN EXISTING LAWS AND REGULATIONS COULD REDUCE THE DEMAND FOR OUR
SERVICES
A significant amount of our resource management business is generated
either directly or indirectly as a result of existing Federal and state
governmental laws, regulations and programs. Any changes in these laws or
regulations that reduce funding or affect the sponsorship of these programs
could reduce the demand for our services and could have a material adverse
effect on our business.
OUR REVENUES FROM AGENCIES OF THE FEDERAL GOVERNMENT ARE CONCENTRATED, AND A
REDUCTION IN SPENDING BY THESE AGENCIES COULD ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS
Agencies of the Federal government are among our most significant
clients. During the nine months ended July 4, 1999, approximately 39.6% of our
net revenue was derived from Federal agencies, of which 22.2% was derived from
the Department of Defense (DOD), 12.5% from the Environmental Protection Agency
(EPA), 2.9% from the Department of Energy (DOE), and 2.0% from various other
Federal government agencies. Some contracts with Federal government agencies
require annual funding approval and may be terminated at their discretion. A
reduction in spending by Federal government agencies could limit the continued
funding of
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existing contracts with them and could limit our ability to obtain additional
contracts. These limitations, if significant, could have a material adverse
effect on our business.
Additionally, the failure of clients to pay significant amounts due us
for our services could adversely affect our business. For example, we recently
received notification from a Federal government agency that we are entitled to
payments in excess of our billings. However, the agency involved must obtain
specific funding approval for amounts owed to us and there can be no assurance
this funding approval will be obtained.
OUR CONTRACTS WITH GOVERNMENTAL AGENCIES ARE SUBJECT TO AUDIT, WHICH COULD
RESULT IN THE DISALLOWANCE OF CERTAIN COSTS
Contracts with the Federal government and other governmental agencies
are subject to audit. Most of these audits are conducted by the Defense Contract
Audit Agency (DCAA), which reviews our overhead rates, operating systems and
cost proposals. The DCAA may disallow costs if it determines that we accounted
for these costs incorrectly or in a manner inconsistent with Cost Accounting
Standards. A disallowance of costs by the DCAA, or other governmental auditors,
could have a material adverse effect on our business.
In September 1995, we acquired PRC Environmental Management, Inc.
(EMI). EMI also contracts with Federal government agencies and such contracts
are also subject to the same governmental audits. At the time of acquisition,
audits had not yet been completed or finalized. Accordingly, reserves were
established for potential disallowances. Since then, the DCAA has completed
audits of EMI's contracts for the fiscal years 1987 through 1995. As a result of
these audits and negotiations with the DCAA, the DCAA disallowed approximately
$4.4 million in costs which have been applied against the established reserves.
OUR BUSINESS AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY LOSSES UNDER
FIXED-PRICE CONTRACTS OR TERMINATION OF CONTRACT AT THE CLIENT'S DISCRETION
We contract with Federal and state governments as well as with the
commercial sector. These contracts are often subject to termination at the
discretion of the client with or without cause. Additionally, we enter into
various types of contracts with our clients, including fixed-price contracts.
Fixed-price contracts protect clients and expose us to a number of risks.
These risks include underestimation of costs, problems with new technologies,
unforeseen costs or difficulties, delays beyond our control and economic and
other changes that may occur during the contract period. Losses under
fixed-price contracts or termination of contracts at the discretion of the
client could have a material adverse effect on our business.
In fiscal 1999, we had a contract change with Tele-Communications,
Inc. involving three turnkey contracts. This change was due in part to
Tele-Communications, Inc.'s change in strategy from the use of turnkey
contracts to the use of direct service contracts in the upgrading of its
network systems.
OUR INABILITY TO FIND QUALIFIED SUBCONTRACTORS COULD ADVERSELY AFFECT THE
QUALITY OF OUR SERVICE AND OUR ABILITY TO PERFORM UNDER CERTAIN CONTRACTS
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Under some of our contracts, we depend on the efforts and skills of
subcontractors for the performance of certain tasks. Reliance on subcontractors
varies from project to project. In the nine months ended July 4, 1999,
subcontractor costs comprised 23.1% of our gross revenue. The absence of
qualified subcontractors with whom we have a satisfactory relationship could
adversely affect the quality of our service and our ability to perform under
some of our contracts.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY
We provide specialized management consulting and technical services to
a broad range of public and private sector clients. The market for our services
is highly competitive and we compete with many other firms. These firms range
from small regional firms to large national firms which may have greater
financial and marketing resources than ours.
We focus primarily on the resource management, infrastructure and
communications business areas. We provide services to our clients which include
Federal, state and local agencies, and organizations in the private sector.
We compete for projects and engagements with a number of competitors
which can vary from 10 to 100 firms. Historically, clients have chosen among
competing firms based on the quality and timeliness of the firm's service. We
believe, however, that price has become an increasingly important factor.
We believe that our principal competitors include, in alphabetical
order, Black & Veatch LLP; Brown & Caldwell; Castle Tower Corporation; Camp,
Dresser & McKee; CH2M Hill Companies Ltd.; Dames & Moore Group; EA Engineering,
Science & Technology, Inc.; Earth Tech, Inc.; ICF Kaiser International, Inc.; IT
Group Inc.; Mastec, Inc.; Montgomery Watson; OSP Consultants, Inc.; Roy F.
Weston, Inc.; and URS Greiner Corporation.
OUR SERVICES EXPOSE US TO SIGNIFICANT RISKS OF LIABILITY AND OUR INSURANCE
POLICIES MAY NOT PROVIDE ADEQUATE COVERAGE
Our services involve significant risks of professional and other
liabilities which may substantially exceed the fees we derive from our services.
Our business activities could expose us to potential liability under various
environmental laws such as the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA). In addition, we sometimes
contractually assume liability under indemnification agreements. We cannot
predict the magnitude of such potential liabilities.
We currently maintain comprehensive general liability, umbrella and
professional liability insurance policies. We believe that our insurance
policies are adequate for our business operations. Professional liability
policies are "claims made" policies; thus, only claims made during the term of
the policy are covered. Should we terminate our professional liability policy
and not obtain retroactive coverage, we would be uninsured for claims made after
termination even if these claims are based on events or acts that occurred
during the term of the policy. Additionally, our insurance policies may not
protect us against potential liability due to various exclusions and retentions.
Should we expand into new markets, we may not be able to obtain
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insurance coverage for such activities or, if insurance is obtained, the dollar
amount of any liabilities incurred could exceed our insurance coverage.
Partially or completely uninsured claims, if successful and of significant
magnitude, could have a material adverse affect on our business.
WE MAY BE PRECLUDED FROM PROVIDING CERTAIN SERVICES DUE TO CONFLICT OF INTEREST
ISSUES
Many of our clients are concerned about potential or actual conflicts
of interest in retaining management consultants. Federal government agencies
have formal policies against continuing or awarding contracts that would create
actual or potential conflicts of interest with other activities of a contractor.
These policies, among other things, may prevent us from bidding for or
performing contracts resulting from or relating to certain work we have
performed for the government. In addition, services performed for a private
client may create a conflict of interest that precludes or limits our ability to
obtain work from other public or private organizations. We have, on occasion,
declined to bid on projects because of these conflicts of interest issues.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO RISKS SUCH AS FOREIGN CURRENCY
FLUCTUATIONS
In the nine months ended July 4, 1999, approximately 3.8% of our net
revenue was derived from the international marketplace. Some contracts with our
international clients are denominated in foreign currencies. As such, these
contracts contain inherent risks including foreign currency exchange risk and
the risk associated with expatriating funds from foreign countries. If our
international revenue increases, our exposure to foreign currency fluctuations
will also increase. We have entered into forward exchange contracts to address
foreign currency fluctuations.
WE COULD EXPERIENCE BUSINESS INTERRUPTIONS RELATING TO THE YEAR 2000
We are working to resolve the potential impact of the year 2000 (Y2K)
on its business operations and the ability of its computerized information
systems to accurately process information that may be date-sensitive. Any of its
programs that recognize a date using "00" as the year 1900 rather than the Y2K
could result in errors or system failures.
We utilize a number of computer programs across our entire operation.
The primary information technology systems we utilize are the accounting and
financial and human resource information management systems. 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.
Currently, only one of our operating units which accounts for approximately 4.8%
of our gross revenue is not Y2K compliant. We plan to either convert this unit
or upgrade it to a Y2K compliant version of its existing applications in
September 1999. In all cases, we believe that our financial and accounting
systems will be Y2K compliant in a timely manner and will not be materially
impacted by Y2K.
We have extensive business with the Federal government. Should the
Federal government, especially the Department of Defense, experience significant
business interruptions
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relating to non-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, in
addition to the Company's financial institutions not being able to supply the
Company with its working capital needs.
Additional risks associated with non-Y2K compliance include:
- our inability to invoice and process payments;
- our inability to produce accurate and timely financials;
- the impact on our cash flow and working capital needs;
- the impact on our profitability; and
- our potential liability to third parties for not meeting
contracted deliverables.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On May 7, 1999, we acquired 100.0% of the capital stock of
Collins/Pina Consulting Engineers, Inc., an Arizona corporation (CPC), through
stock purchases from the former shareholders of CPC (the "Stock Purchase"). In
connection with the Stock Purchase, we issued an aggregate of 6,172 shares of
our Common Stock, $.01 par value ("Common Stock"), to one of the former
shareholders of CPC. For purposes of the Stock Purchase, each share of Common
Stock was valued at $19.44. The issuance of Common Stock was made by private
placement in reliance on the exemption from the registration provisions of the
Securities Act of 1933, as amended (the "Act"), provided for in Section 4(2) of
the Act.
On May 21, 1999, we acquired 100.0% of the capital stock of BAHA
Communications, Inc., a Nevada corporation (BCI), through a merger of a
wholly-owned subsidiary with and into BCI (the "BCI Merger"). In connection with
the BCI Merger, we issued an aggregate of 176,168 shares of our Common Stock to
the former shareholders of BCI. For purposes of the BCI Merger, each share of
Common Stock was valued at $17.08. The issuances of Common Stock were made by
private placement in reliance on the exemption from the registration provisions
of the Act, provided for in Section 4(2) of the Act.
On June 18, 1999, we acquired 100.0% of the capital stock of
Utilities & C.C., Inc., a California corporation (UCC), through a merger of a
wholly-owned subsidiary with and into UCC (the "UCC Merger"). In connection
with the UCC Merger, we issued an aggregate of 137,930 shares of our Common
Stock to the former shareholders of UCC. For purposes of the UCC Merger, each
share of Common Stock was valued at $17.40. The issuance of Common Stock was
made by private placement in reliance on the exemption from the registration
provisions of the Act, provided for in Section 4(2) of the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
3.1 Restated Certificate of Incorporation of the
Company (incorporated herein by reference to
Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 1,
1995).
3.2 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 3.4 to the
Company's Annual Report on Form 10-K for the
fiscal year ended October 4, 1998).
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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
(incorporated herein by reference to Exhibit
10.4 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended December 28,
1997).
10.5 Fifth Amendment dated as of July 6, 1998 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
10.4 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended).
10.6 Sixth Amendment dated as of July 21, 1999 to
the Credit Agreement dated as of September 15,
1995 between the Company and Bank of America
National Trust and Savings Association.
10.7 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 to the Company's
Annual Report on Form 10-K for the fiscal year
ended October 1, 1995).
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10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
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10.17 1994 Employee Stock Purchase Plan (incorporated
herein by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the
fiscal year ended October 2, 1994).
10.18 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).
10.19 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).
10.20 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).
10.21 Registration Rights Agreement dated as of July
11, 1997 among the Company and the parties
listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.18 to the Company's Annual Report on Form
10-K for the fiscal year ended September 28,
1997).
10.22 Registration Rights Agreement dated as of March
26, 1998 among the Company and the parties
listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.20 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 29,
1998).
10.23 Registration Rights Agreement dated as of July
9, 1998 among the Company and the parties
listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.22 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 28,
1998).
10.24 Registration Rights Agreement dated as of
September 22, 1998 among the Company and the
parties listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.23 to the Company's Annual Report on Form
10-K for the fiscal year ended October 4,
1998).
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10.25 Registration Rights Agreement dated as of
February 26, 1999 among the Company and the
parties listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit
10.24 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended April 4,
1999).
10.26 Registration Rights Agreement dated as of May
7, 1999 among the Company and the parties
listed on Schedule A attached thereto.
10.27 Registration Rights Agreement dated as of May
21, 1999 among the Company and the parties
listed on Schedule A attached thereto.
10.28 Registration Rights Agreement dated as of June
18, 1999 among the Company and the parties
listed on Schedule A attached thereto.
11 Computation of Net Income Per Common Share.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 18, 1999 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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