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 April 1, 2007

OR

o

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.

(Exact name of registrant as specified in its charter)

 

Delaware

95-4148514

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

 

3475 East Foothill Boulevard, Pasadena, California  91107

(Address of principal executive office and zip code )

 

(626) 351-4664

(Registrant’s telephone number, including area code)

 


 

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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x      Accelerated filer o      Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                                                                                                                                                                          Yes o   No x

 

As of April 30, 2007, 58,095,692 shares of the registrant’s common stock were outstanding.

 

 




TETRA TECH, INC.

INDEX

 

PART I.   FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

 

 

Condensed Consolidated Balance Sheets

 

 

 

Condensed Consolidated Statements of Income

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

Item 4.

Controls and Procedures

 

 

PART II.   OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

Item 6.

Exhibits

 

 

SIGNATURES

 

 

 

2




PART I.              FINANCIAL INFORMATION

Item 1. Financial Statements

Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value)

 

 

April 1,
2007

 

October 1,
2006

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$ 22,564

 

$

65,353

 

Accounts receivable — net

 

348,496

 

346,543

 

Prepaid expenses and other current assets

 

23,622

 

21,757

 

Income taxes receivable

 

10,260

 

5,063

 

Current assets of discontinued operations

 

593

 

865

 

Total current assets

 

405,535

 

439,581

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

Equipment, furniture and fixtures

 

83,609

 

79,225

 

Leasehold improvements

 

9,097

 

8,798

 

Total

 

92,706

 

88,023

 

Accumulated depreciation and amortization

 

(59,273

)

(56,033

)

PROPERTY AND EQUIPMENT — NET

 

33,433

 

31,990

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

10,129

 

12,909

 

 

 

 

 

 

 

INCOME TAXES RECEIVABLE

 

33,800

 

33,800

 

 

 

 

 

 

 

GOODWILL

 

158,976

 

158,581

 

 

 

 

 

 

 

INTANGIBLE ASSETS — NET

 

6,522

 

4,507

 

 

 

 

 

 

 

OTHER ASSETS

 

15,688

 

17,893

 

 

 

 

 

 

 

NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS

 

2,418

 

2,418

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

666,501

 

$

701,679

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

98,620

 

$

104,626

 

Accrued compensation

 

58,800

 

67,592

 

Billings in excess of costs on uncompleted contracts

 

43,924

 

41,345

 

Deferred income taxes

 

17,689

 

15,386

 

Current portion of long-term obligations

 

627

 

17,760

 

Other current liabilities

 

33,189

 

42,200

 

Current liabilities of discontinued operations

 

370

 

359

 

Total current liabilities

 

253,219

 

289,268

 

 

 

 

 

 

 

LONG-TERM OBLIGATIONS

 

33,583

 

57,608

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock — authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding as of April 1, 2007 and October 1, 2006

 

 

 

Common stock — authorized, 85,000 shares of $0.01 par value; issued and outstanding, 57,883 and 57,676 shares as of April 1, 2007 and October 1, 2006, respectively

 

580

 

577

 

Additional paid-in capital

 

270,507

 

265,444

 

Accumulated other comprehensive income (loss)

 

(4

)

1

 

Retained earnings

 

108,616

 

88,781

 

TOTAL STOCKHOLDERS’ EQUITY

 

379,699

 

354,803

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

666,501

 

$

701,679

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3




Tetra Tech, Inc.
Condensed Consolidated Statements of Income
(unaudited — in thousands, except per share data)

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

346,019

 

$

318,892

 

$

715,172

 

$

660,084

 

Subcontractor costs

 

109,760

 

81,176

 

234,042

 

192,609

 

Revenue, net of subcontractor costs

 

236,259

 

237,716

 

481,130

 

467,475

 

 

 

 

 

 

 

 

 

 

 

Other contract costs

 

191,112

 

191,155

 

391,564

 

376,527

 

Gross profit

 

45,147

 

46,561

 

89,566

 

90,948

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

26,769

 

30,337

 

49,823

 

57,601

 

Income from operations

 

18,378

 

16,224

 

39,743

 

33,347

 

 

 

 

 

 

 

 

 

 

 

Interest expense — net

 

495

 

1,873

 

1,244

 

4,105

 

Loss on retirement of debt

 

 

 

4,226

 

 

Income from continuing operations before income tax expense

 

17,883

 

14,351

 

34,273

 

29,242

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

7,500

 

6,246

 

14,464

 

12,649

 

Income from continuing operations

 

10,383

 

8,105

 

19,809

 

16,593

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

26

 

859

 

26

 

394

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,409

 

$

8,964

 

$

19,835

 

$

16,987

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.18

 

$

0.14

 

$

0.34

 

$

0.29

 

Income from discontinued operations, net of tax

 

 

0.02

 

 

0.01

 

Net income

 

$

0.18

 

$

0.16

 

$

0.34

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.18

 

$

0.14

 

$

0.34

 

$

0.29

 

Income from discontinued operations, net of tax

 

 

0.02

 

 

 

Net income

 

$

0.18

 

$

0.16

 

$

0.34

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

57,838

 

57,262

 

57,773

 

57,182

 

Diluted

 

58,323

 

57,806

 

58,270

 

57,724

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4




Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited — in thousands)

 

 

Six Months Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19,835

 

$

16,987

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,211

 

6,663

 

Stock-based compensation

 

2,566

 

2,248

 

Deferred income taxes

 

5,083

 

8,231

 

Write-off of unamortized debt financing costs

 

1,069

 

 

Provision for losses on contracts and related receivables

 

410

 

199

 

Gain on sale of discontinued operations

 

(44

)

(1,415

)

Gain on disposal of property and equipment

 

(192

)

(3

)

 

 

 

 

 

 

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:

 

 

 

 

 

Accounts receivable

 

(2,923

)

21,450

 

Prepaid expenses and other assets

 

(1,545

)

(1,829

)

Accounts payable

 

(6,949

)

(38,434

)

Accrued compensation

 

(8,792

)

1,341

 

Billings in excess of costs on uncompleted contracts

 

2,579

 

(4,514

)

Other current liabilities

 

(8,362

)

987

 

Income taxes receivable/payable

 

(4,905

)

3,152

 

Net cash provided by operating activities

 

4,041

 

15,063

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(4,635

)

(5,857

)

Payments for business acquisitions

 

(4,124

)

(1,900

)

Proceeds from sale of discontinued operations

 

1,890

 

3,475

 

Proceeds from sale of property and equipment

 

253

 

125

 

Net cash used in investing activities

 

(6,616

)

(4,157

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Payments on long-term obligations

 

(98,158

)

(11,159

)

Proceeds from borrowings under long-term obligations

 

57,000

 

10,000

 

Payment of deferred financing fees

 

(1,032

)

 

Net proceeds from issuance of common stock

 

1,976

 

3,018

 

Net cash (used in) provided by financing activities

 

(40,214

)

1,859

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(42,789

)

12,765

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

65,353

 

26,861

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

22,564

 

$

39,626

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

4,398

 

$

4,418

 

Income taxes, net of refunds received

 

$

14,279

 

$

722

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5




TETRA TECH, INC.

Notes To Condensed Consolidated Financial Statements

1.      Basis of Presentation

The accompanying condensed consolidated balance sheet as of April 1, 2007, the condensed consolidated statements of income for the three and six months ended April 1, 2007 and April 2, 2006, and the condensed consolidated statements of cash flows for the six months ended April 1, 2007 and April 2, 2006 of Tetra Tech, Inc. (the ”Company”) are unaudited, and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position, the results of operations and cash flows 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 1, 2006.  The results of operations for the three and six months ended April 1, 2007 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2007.

2.      Accounts Receivable — Net

Net accounts receivable consisted of the following:

 

 

April 1,
2007

 

October 1,
2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

Billed

 

$

187,456

 

$

228,671

 

Unbilled

 

172,764

 

138,823

 

Contract retentions

 

7,176

 

8,156

 

Total accounts receivable — gross

 

367,396

 

375,650

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

(18,900

)

(29,107

)

Total accounts receivable — net

 

$

348,496

 

$

346,543

 

 

 

 

 

 

 

Billings in excess of costs on uncompleted contracts

 

$

43,924

 

$

41,345

 

 

Billed accounts receivable represent amounts billed to clients that have not been collected.  Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or billed after the accounting cut-off date.  Substantially all unbilled receivables as of April 1, 2007 are expected to be billed and collected within 12 months.  Contract retentions represent amounts withheld by clients until certain conditions are met or the project is completed, which may be several months or years.  The allowance for doubtful accounts was determined based on a review of customer-specific accounts, bankruptcy filings by clients, and contract issues due to current events and circumstances.

Billed accounts receivable related to federal government contracts were $72.5 million and $88.7 million as of April 1, 2007 and October 1, 2006, respectively.  The federal government unbilled receivables were $47.9 million and $44.0 million as of April 1, 2007 and October 1, 2006, respectively.  Other than the federal government, no single client accounted for more than 10% of the Company’s accounts receivable as of April 1, 2007 and October 1, 2006.

3.      Goodwill and Intangibles

In the second quarter of fiscal 2007, the Company acquired certain assets of Vector Colorado, LLC (“VCL”) and Vector Nevada, LLC (“VNL”), mining consulting companies, and Soil Testing Engineers, Inc. (“STE”), a geotechnical engineering company.  The purchase prices consisted of cash and, with respect to VCL, other cash consideration payable over a four-year period from the acquisition date.   These acquisitions, which were integrated into the resource management segment, offer complementary technical expertise and enable the Company to enhance its service offerings and expand its geographical presence.

6




The Company accounted for the above acquisitions as purchases of a business.  Accordingly, the purchase prices were allocated to the assets acquired and liabilities assumed based on their fair values.  The purchase price allocations are preliminary and subject to an adjustment based upon the final determination of the net assets acquired.  These acquisitions did not have a material impact on the Company’s financial position, results of operations or cash flows for the three and six months ended April 1, 2007 and, as such, no pro forma results are presented.

The changes in the carrying value of goodwill by segment for the six months ended April 1, 2007 were as follows:

 

October 1,
2006

 

Goodwill
Addition

 

April 1,
2007

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Resource management

 

$

84,512

 

$

395

 

$

84,907

 

Infrastructure

 

74,069

 

 

74,069

 

Total

 

$

158,581

 

$

395

 

$

158,976

 

 

The excess of the purchase cost of the acquisition over the fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill on the condensed consolidated balance sheet as of April 1, 2007. The goodwill addition of $0.4 million resulted from the acquisition of certain assets of STE.

The gross amount and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of April 1, 2007 and October 1, 2006, included in intangible assets-net on the condensed consolidated balance sheets, were as follows:

 

April 1, 2007

 

October 1, 2006

 

 

 

Gross
Amount

 

Accumulated
Amortization

 

Gross
Amount

 

Accumulated
Amortization

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

$

116

 

$

(5

)

$

 

$

 

Customer lists

 

1,938

 

(65

)

 

 

Backlog

 

9,821

 

(5,283

)

9,075

 

(4,568

)

Total

 

$

11,875

 

$

(5,353

)

$

9,075

 

$

(4,568

)

 

For the period ending April 1, 2007, $0.1 million, $1.9 million and $0.7 million were assigned to non-compete agreements, customer lists and backlog, respectively, for the VCL, VNL and STE acquisitions.  For the three months ended April 1, 2007 and April 2, 2006, amortization expense for acquired identifiable intangible assets with finite useful lives was $0.4 million and $0.3 million, respectively.  For the six months ended April 1, 2007 and April 2, 2006, the amortization expense was $0.8 million and $0.7 million, respectively.  Estimated amortization expense for the remainder of fiscal 2007 and the succeeding years is as follows:

 

Amount

 

 

 

(in thousands)

 

 

 

 

 

2007

 

$

1,044

 

2008

 

1,923

 

2009

 

1,867

 

2010

 

1,162

 

2011

 

450

 

2012

 

76

 

 

Subsequent Event.  In the third quarter of 2007, the Company acquired (i) all of the outstanding shares of capital stock of Delaney Construction Corporation, Delaney Crushed Stone Products, Inc. and Delaney Leasing Company, Inc.; and (ii) all of the limited liability company interests of Delaney Properties, LLC (collectively, “The

7




Delaney Group”).  The Delaney Group provides planning, development and construction services for wind energy programs, base realignment and closure (“BRAC”) projects, and water and wastewater treatment and conveyance facilities to its broad-based clients.  This acquisition enables the Company to provide a wider range of service to its current and prospective wind energy clients, as The Delaney Group offers complementary technical capabilities and customer relationships.  The initial purchase price consisted of cash of $31.0 million, and is subject to a purchase price adjustment based upon the final determination of the net assets acquired.  In addition, the former shareholders have certain earn-out rights that will allow them to receive, over a four-year period from the acquisition date, guaranteed deferred cash payments in the aggregate amount of $9.0 million and additional payments up to an aggregate maximum of $12.0 million upon achievement of certain financial objectives.  The Delaney Group is part of the resource management segment.

4.      Discontinued Operations

The results of Tetra Tech Canada Ltd. (“TTC”), Vertex Engineering Services, Inc. (“VES”) and Whalen & Company, Inc. (“WAC”) have been accounted for as discontinued operations in the condensed consolidated financial statements.  In fiscal 2006, the Company sold TTC and VES, operating units in the communications and resource management segments, respectively.  Further, in fiscal 2006, the Company ceased all revenue producing activities for WAC, an operating unit in the communications segment.  Accordingly, these three operating units were accounted for as discontinued operations for all reporting periods.

Discontinued operations reported a gain on sale, net of tax, of approximately $26,000 for the three and six months ended April 1, 2007.  The summarized results of the discontinued operations for the three and six months ended April 2, 2006 were as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 2,
2006

 

April 2,
2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

Revenue

 

$

64

 

$

9,697

 

 

 

 

 

 

 

Loss before income tax benefit

 

(433

)

(1,646

)

Income tax benefit

 

(175

)

(656

)

Loss from operations, net of tax

 

(258

)

(990

)

 

 

 

 

 

 

Gain on sale of discontinued operations, net of tax

 

1,117

 

1,384

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

$

859

 

$

394

 

 

5.      Retirement of Debt and Long-Term Obligations

In December 2006, the Company retired its senior secured notes and paid off the remaining principal balance of $72.9 million.  In connection with this early debt retirement, the Company incurred pre-payment premiums of $3.1 million and expensed the remaining unamortized deferred financing costs of $1.1 million in the first quarter of fiscal 2007.  In accordance with Statement of Financial Accounting Standards (“SFAS”) 145, Rescission of Financial Accounting Standards Board (“FASB”) Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, the Company reported a $4.2 million loss on retirement of debt as part of its income from continuing operations in the first quarter of fiscal 2007.

In March 2007, the Company entered into a Second Amended and Restated Credit Agreement (“Credit Agreement”).  Under the Credit Agreement, the Company’s revolving credit facility (“Facility”) was increased from $150.0 million to $300.0 million, and the term of the agreement was extended for five years through March 2012.  As part of the Facility, the Company may request standby letters of credit up to the aggregate sum of $50.0 million.  Other than the increased capacity under the Facility and improved pricing, the terms and conditions related to the Facility are substantially similar to those of the prior Facility.  As of April 1, 2007, the Company had $32.0 million outstanding under the Facility.  The amount outstanding is classified as a long-term liability since the Company does not intend to repay the Facility until its maturity in March 2012.  Under the Credit Agreement, the Company is required to comply

8




with various financial and operating covenants, including the maintenance of certain consolidated leverage and fixed charge coverage ratios.  As of April 1, 2007, the Company was in compliance with these covenants.

6.      Stockholders’ Equity and Stock Compensation Plans

The Company accounts for stock-based compensation in accordance with SFAS No. 123(R) (“SFAS 123R”), Share-Based Payment (revised 2004).  Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the value of the award granted, and recognized over the period in which the award vests.  Stock-based compensation expense for the three months ended April 1, 2007 and April 2, 2006 was $1.5 million and $1.2 million, respectively.  For the six months ended April 1, 2007 and April 2, 2006, stock-based compensation expense was $2.6 million and $2.2 million, respectively.  These amounts are primarily included in selling, general and administrative expenses in the condensed consolidated statements of income. Stock-based compensation expense for the three and six months ended April 1, 2007 may not be indicative of the expense for the entire fiscal year.

7.      Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding and dilutive potential common shares for the period.  The Company includes as potential common shares the weighted average dilutive effects of outstanding stock options using the treasury stock method.

The following table sets forth the number of weighted average shares used to compute basic and diluted EPS:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

 

 

(in thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

10,383

 

$

8,105

 

$

19,809

 

$

16,593

 

Income from discontinued operations

 

26

 

859

 

26

 

394

 

Net income

 

$

10,409

 

$

8,964

 

$

19,835

 

$

16,987

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share

 

57,838

 

57,262

 

57,773

 

57,182

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted earnings per share:

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share

 

57,838

 

57,262

 

57,773

 

57,182

 

Potential common shares - stock options

 

485

 

544

 

497

 

542

 

Denominator for diluted earnings per share

 

58,323

 

57,806

 

58,270

 

57,724

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.18

 

$

0.14

 

$

0.34

 

$

0.29

 

Income from discontinued operations

 

 

0.02

 

 

0.01

 

Net income

 

$

0.18

 

$

0.16

 

$

0.34

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.18

 

$

0.14

 

$

0.34

 

$

0.29

 

Income from discontinued operations

 

 

0.02

 

 

 

Net income

 

$

0.18

 

$

0.16

 

$

0.34

 

$

0.29

 

 

For the three and six months ended April 1, 2007, 4.1 million options for both periods were considered anti-dilutive and excluded from the calculation of dilutive potential common shares, compared to 2.7 million and 3.8 million options for the comparable periods last year, respectively.

8.      Reportable Segments

The Company currently manages its business in three reportable segments: resource management, infrastructure and communications.  The Company’s management established these segments based upon the

9




services provided, the different marketing strategies associated with these services and the specialized needs of their respective clients.  The resource management segment provides engineering, consulting and remediation services primarily addressing water quality and availability, environmental restoration, productive reuse of defense facilities and strategic environmental resource planning.  The infrastructure segment provides engineering, systems integration, program management and construction management services for the development, upgrading, replacement and maintenance of civil infrastructure.  The communications segment provides engineering, permitting, site acquisition and construction management services related to communications infrastructure.

Due to the Company’s exit from the wireless communications business, the remaining portion of the communications business, known as the wired business, represents a relatively small part of the Company’s overall business.  The wired business serves clients and performs services that are similar in nature to those of the infrastructure business.  These clients include state and local governments, telecommunications companies and cable operators, and the services include engineering, permitting, site acquisition and construction management.  During the first quarter of fiscal 2006, the Company developed and started implementing the initial phase of a plan to combine operating units and re-align its management structure.  Through the second quarter of fiscal 2007, the Company continued to implement the plan by re-aligning the leadership, defining strategic and operating plan objectives, and analyzing management information reporting requirements.  The Company expects to complete this implementation in fiscal 2007 without an impact on segment reporting.

The Company accounts for inter-segment sales and transfers as if the sales and transfers were to third parties; that is, by applying a negotiated fee onto the cost of the services performed.  The Company’s management evaluates the performance of these reportable segments based upon their respective income from operations before the effect of any acquisition-related amortization.  All inter-company balances and transactions are eliminated in consolidation.

10




The following tables set forth summarized financial information concerning the Company’s reportable segments:

Reportable Segments:

 

 

Resource
Management

 

Infrastructure

 

Communications

 

Total

 

 

 

(in thousands)

 

Three months ended April 1, 2007:

 

 

 

 

 

 

 

 

 

Revenue

 

$

247,803

 

$

98,966

 

$

13,824

 

$

360,593

 

Revenue, net of subcontractor costs

 

146,258

 

81,226

 

8,775

 

236,259

 

Gross profit

 

28,496

 

15,225

 

1,426

 

45,147

 

Segment income from operations

 

11,991

 

5,834

 

184

 

18,009

 

Depreciation expense

 

979

 

549

 

297

 

1,825

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 2, 2006:

 

 

 

 

 

 

 

 

 

Revenue

 

$

219,449

 

$

98,634

 

$

15,577

 

$

333,660

 

Revenue, net of subcontractor costs

 

148,210

 

78,443

 

11,063

 

237,716

 

Gross profit

 

28,288

 

16,066

 

2,207

 

46,561

 

Segment income from operations

 

9,835

 

6,767

 

527

 

17,129

 

Depreciation expense

 

1,117

 

619

 

316

 

2,052

 

 

 

 

 

 

 

 

 

 

 

Six months ended April 1, 2007:

 

 

 

 

 

 

 

 

 

Revenue

 

$

514,671

 

$

197,255

 

$

29,353

 

$

741,279

 

Revenue, net of subcontractor costs

 

300,128

 

163,015

 

17,987

 

481,130

 

Gross profit

 

55,967

 

30,418

 

3,181

 

89,566

 

Segment income from operations

 

24,011

 

11,837

 

733

 

36,581

 

Depreciation expense

 

1,986

 

1,079

 

595

 

3,660

 

 

 

 

 

 

 

 

 

 

 

Six months ended April 2, 2006:

 

 

 

 

 

 

 

 

 

Revenue

 

$

458,578

 

$

190,656

 

$

36,879

 

$

686,113

 

Revenue, net of subcontractor costs

 

291,022

 

153,957

 

22,496

 

467,475

 

Gross profit

 

55,428

 

30,954

 

4,566

 

90,948

 

Segment income from operations

 

21,990

 

11,377

 

1,459

 

34,826

 

Depreciation expense

 

2,344

 

1,251

 

570

 

4,165

 

 

Reconciliations:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

 

 

(in thousands)

 

Revenue

 

 

 

 

 

 

 

 

 

Revenue from reportable segments

 

$

360,593

 

$

333,660

 

$

741,279

 

$

686,113

 

Elimination of inter-segment revenue

 

(14,574

)

(14,768

)

(26,107

)

(26,029

)

Total consolidated revenue

 

$

346,019

 

$

318,892

 

$

715,172

 

$

660,084

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

 

 

 

 

 

 

 

Segment income from operations

 

$

18,009

 

$

17,129

 

$

36,581

 

$

34,826

 

Other income (expense) (1)

 

813

 

(565

)

3,946

 

(821

)

Amortization of intangibles

 

(444

)

(340

)

(784

)

(658

)

Total consolidated income from operations

 

$

18,378

 

$

16,224

 

$

39,743

 

$

33,347

 


(1)   Other income (expense) includes corporate costs not allocable to the segments.  The three and six months ended April 1, 2007 include $1.8 million and $5.7 million reversals of accrued litigation liabilities, respectively.  See Note 11.

9.      Major Clients

For the three months ended April 1, 2007 and April 2, 2006, the Company generated 13.1% and 9.1% of its revenue, respectively, from the U.S. Air Force, a component of the U.S. Department of Defense.  For the same periods, the Company generated 13.2% and 10.8% of its revenue, respectively, from the U.S. Army Corps of

11




Engineers, also a component of the U.S. Department of Defense.  For the six months ended April 1, 2007 and April 2, 2006, the Company generated 13.8% and 10.3% of its revenue, respectively, from the U.S. Air Force.  For the same periods, the Company generated 11.2% and 9.0% of its revenue, respectively, from the U.S. Army Corps of Engineers.  The resource management and infrastructure segments generated revenue from federal government clients.  All three segments reported revenue from state and local government and commercial clients.

The following table presents revenue by client sector:

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

 

 

(in thousands)

 

Client Sector

 

 

 

 

 

 

 

 

 

Federal government

 

$

176,972

 

$

160,901

 

$

382,196

 

$

335,351

 

State and local government

 

59,620

 

53,486

 

116,566

 

111,405

 

Commercial

 

107,274

 

102,432

 

212,598

 

209,012

 

International

 

2,153

 

2,073

 

3,812

 

4,316

 

Total

 

$

346,019

 

$

318,892

 

$

715,172

 

$

660,084

 

 

10.    Comprehensive Income

The Company includes two components in its comprehensive income:  net income during a period and other comprehensive income.  Other comprehensive income consists of translation gains and losses from subsidiaries with functional currencies different than the Company’s reporting currency.

For the three and six months ended April 1, 2007, comprehensive income was $10.4 million and $19.8 million, respectively.  For the three and six months ended April 2, 2006, comprehensive income was $8.2 million and $16.2 million, respectively.  For both the three and six months ended April 1, 2007, the Company realized an insignificant net translation loss.  For both the three and six months ended April 2, 2006, the Company realized a net translation loss of $0.7 million.

11.    Commitments and Contingencies

The Company is subject to certain claims and lawsuits typically filed against the engineering, consulting and construction profession, alleging primarily professional errors or omissions.  The Company carries professional liability insurance, subject to certain deductibles and policy limits, against such claims.  However, in some actions, parties are seeking damages that exceed the Company’s insurance coverage or for which the Company is not insured.  Management’s opinion is that the resolution of its current claims will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

The Company has concluded its contract dispute with Horsehead Industries, Inc., doing business as Zinc Corporation of America (“ZCA”).  On March 29, 2007, the United States Bankruptcy Court, Southern District of New York, issued an Order approving the Memorandum of Understanding and Settlement Agreement among the parties to the ZCA litigation.  As a result of this Order, the Company reversed $1.8 million of the accrued liabilities in excess of the final settlement payment related to this matter and reduced selling, general and administrative (“SG&A”) expense by that amount in the second quarter of fiscal 2007.  There are no remaining contingencies relating to this matter.

On November 21, 2006, a stockholder filed a putative shareholder derivative complaint in the United States District Court, Central District of California (“Federal Court”), against certain current and former members of the Company’s Board of Directors and certain current and former executive officers, alleging proxy fraud, breach of fiduciary duty, abuse of control, constructive fraud, corporate waste, unjust enrichment and gross mismanagement in connection with the grant of certain stock options to the Company’s executive officers (the “Federal Action”).  The Company was also named as a nominal defendant in the Federal Action.  The complaint sought damages on the Company’s behalf in an unspecified amount, disgorgement of the options which are the subject of the action, any proceeds from the exercise of those options or from any subsequent sale of the underlying stock and equitable relief.

12




The allegations of the complaint appeared to relate to options transactions that the Company disclosed in its Form 10-Q for the third quarter of fiscal 2006.  As reported in that Form 10-Q, the Company recorded additional pre-tax non-cash stock-based compensation charges of $3.2 million ($2.3 million related to continuing operations and $0.9 million related to discontinued operations), net of tax of $1.3 million ($0.9 million related to continuing operations and $0.4 million related to discontinued operations), in its consolidated financial statements for the three and nine month periods ended July 2, 2006 as a result of misdated option grants.  On January 3, 2007, a second putative shareholder derivative complaint (the “State Action”) was filed against the same defendants in the Superior Court of the State of California, County of Los Angeles (the “State Court”).  The complaint in the State Action contained substantially similar allegations to those set forth in the Federal Action complaint.  On April 6, 2007, the Federal Court approved the parties’ Joint Stipulation of Dismissal of the Federal Action without prejudice, and the case was thereby dismissed in its entirety.  In the State Action, the State Court has stayed the case pending a status conference that has not yet been scheduled.

12.    Lease Exit Costs

In connection with the consolidation of certain operations, and in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), the Company recorded a charge related to the abandonment of certain leased facilities in fiscal 2004 and 2005.  These amounts were recorded as SG&A expenses and are expected to be fully paid by December 2013.  The estimated costs were net of reasonably estimated sublease income.  These facilities are no longer in use.  The Company did not record any additional charges in the first half of fiscal 2007 as there were no other charges required to be accrued by SFAS 146.

The following is a summary of lease exit accrual activity during the six months ended April 1, 2007:

 

October 1,
2006

 

Reserve
Utilization

 

April 1,
2007

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Resource management

 

$

140

 

$

(40

)

$

100

 

Infrastructure

 

1,540

 

(270

)

1,270

 

Total

 

$

1,680

 

$

(310

)

$

1,370

 

 

13.    Recent Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).  This interpretation of SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), prescribes a recognition threshold or measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  In order to minimize the diversity in practice existing in the accounting for income taxes, FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  This interpretation is effective for the Company on October 1, 2007.  The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings for that fiscal year, presented separately.  The cumulative effect of the change on retained earnings in the statement of financial position should be disclosed in the year of adoption only.  The Company has not completed its evaluation of the effect of adoption of FIN 48.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  Early adoption is encouraged, provided that the Company has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year.  The Company will implement the new standard effective September 29, 2008.  The Company is currently evaluating the impact SFAS 157 may have on its financial statements and disclosures.

13




 

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”).  SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.  SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects of the error on each of the Company’s financial statements and the related financial statement disclosures.  SAB 108 is effective for the Company as of the end of fiscal 2007, allowing a one-time transitional cumulative effect adjustment to retained earnings as of October 1, 2007 for errors that were not previously deemed material, but are material under the guidance in SAB 108.  The Company believes SAB 108 will not have a material impact on its consolidated financial statements.

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”). This Statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The Company will implement the new standard effective September 29, 2008. The Company is currently evaluating the impact SFAS 159 may have on its financial statements and disclosures.

 

14




Item 2.                          Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbor provisions created under the Securities Act of 1933 and the Securities Exchange Act of 1934.  These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management.  Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements.  In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements.  Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below, as well as under the heading “Risk Factors,” and elsewhere herein.  Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.  We undertake no obligation to revise or update any forward-looking statements for any reason.

OVERVIEW

We are a leading provider of consulting, engineering and technical services focused on water resource management and civil infrastructure.  We serve our clients by defining problems and developing innovative and cost-effective solutions.  Our solution usually begins with a scientific evaluation of the problem, one of our differentiating strengths.  This solution may span the life cycle of a project.  The steps of this life cycle include research and development, applied science and technology, engineering design, program management, construction management, and operations and maintenance.

Since our initial public offering in December 1991, we have increased the size and scope of our business, expanded our service offerings, and diversified our client base and the markets we serve through internal growth and strategic acquisitions.  We expect to focus on internal growth, and to continue to pursue complementary acquisitions that expand our geographic reach and increase the breadth and depth of our service offerings to address existing and emerging markets.  As of April 2007, we had approximately 6,900 full-time equivalent employees worldwide, located primarily in North America in approximately 230 locations.

In fiscal 2006, we completed the sales of two operating units in our communications and resource management segments. Further, we discontinued the operations of another operating unit in the communications segment.  See “Acquisitions and Divestitures” below.  The results from these operating units have been reported as discontinued operations for all reporting periods.  Accordingly, the following discussions generally reflect summary results from our continuing operations unless otherwise noted.  However, the net income and net income per share discussions include the impact of discontinued operations.

We derive our revenue from fees for professional and technical services.  As a service-based company, we are labor-intensive rather than capital-intensive.  Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully.  Our income from continuing operations is derived from our ability to generate revenue and collect cash under our contracts in excess of our subcontractor costs, other contract costs, and selling, general and administrative (“SG&A”) expenses.

We provide our services to a diverse base of federal and state and local government agencies, as well as commercial and international clients.  The following table presents the approximate percentage of our revenue, net of subcontractor costs, by client sector:

15




 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

Client Sector

 

 

 

 

 

 

 

 

 

Federal government

 

45.1

%

45.9

%

46.8

%

45.4

%

State and local government

 

18.0

 

18.6

 

17.5

 

18.6

 

Commercial

 

36.2

 

34.9

 

35.0

 

35.3

 

International

 

0.7

 

0.6

 

0.7

 

0.7

 

 

 

100.0

%

100.0

%

100.0

%

100.0

%

 

We currently manage our business in three reportable segments: resource management, infrastructure and communications.  Management established these segments based upon the services provided, the different marketing strategies associated with these services and the specialized needs of their respective clients.  Our resource management segment provides engineering, consulting and construction services primarily addressing water quality and availability, environmental restoration, productive reuse of defense facilities and strategic environmental resource planning.  Our infrastructure segment provides engineering, systems integration, program management and construction management services for the development, upgrading, replacement and maintenance of civil infrastructure.  Our communications segment provides engineering, permitting, site acquisition and construction management services related  to communications infrastructure.

Due to our exit from the wireless communications business, the remaining portion of the communications business, known as our wired business, represents a relatively small part of our overall business.  Our wired business serves clients and performs services that are similar in nature to those of the infrastructure business.  These clients include state and local governments, telecommunications companies and cable operators, and the services include engineering, permitting, site acquisition and construction management.  During the first quarter of fiscal 2006, we developed and started implementing the initial phase of a plan to combine operating units and re-align our management structure.  Through the second quarter of fiscal 2007, we continued to implement the plan by re-aligning the leadership, defining strategic and operating plan objectives, and analyzing management information reporting requirements.  We expect to complete this implementation in fiscal 2007 without an impact on segment reporting.

The following table presents the approximate percentage of our revenue, net of subcontractor costs, by reportable segment:

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

Reportable Segment

 

 

 

 

 

 

 

 

 

Resource management

 

61.9

%

62.3

%

62.4

%

62.3

%

Infrastructure

 

34.4

 

33.0

 

33.9

 

32.9

 

Communications

 

3.7

 

4.7

 

3.7

 

4.8

 

 

 

100.0

%

100.0

%

100.0

%

100.0

%

 

Our services are billed under three principal types of contracts:  fixed-price, time-and-materials, and cost-plus.  The following table presents the approximate percentage of our revenue, net of subcontractor costs, by contract type:

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

Contract Type

 

 

 

 

 

 

 

 

 

Fixed-price

 

31.6

%

31.8

%

31.4

%

33.2

%

Time-and-materials

 

43.2

 

41.4

 

45.7

 

43.8

 

Cost-plus

 

25.2

 

26.8

 

22.9

 

23.0

 

 

 

100.0

%

100.0

%

100.0

%

100.0

%

 

Contract revenue and contract costs are recorded primarily using the percentage-of-completion (cost-to-cost) method.  Under this method, revenue is recognized in the ratio that contract costs incurred bear to total estimated

16




costs.  Revenue and profit on these contracts are subject to revision throughout the duration of the contracts and any required adjustments are made in the period in which the revisions become known.  Losses on contracts are recorded in full as they are identified.

In the course of providing our services, we routinely subcontract services.  Generally, these subcontractor costs are passed through to our clients and, in accordance with industry practice and generally accepted accounting principles (“GAAP”) in the United States, are included in revenue.  Because subcontractor services can change significantly from project to project, changes in revenue may not be indicative of our business trends.  Accordingly, we also report revenue less the cost of subcontractor services, and our discussion and analysis of financial condition and results of operations uses revenue, net of subcontractor costs, as the point of reference.

Our other contract costs include professional compensation and related benefits, together with certain direct and indirect overhead costs such as rents, utilities and travel.  Professional compensation represents the majority of these costs.  Our SG&A expenses are comprised primarily of marketing and bid and proposal costs, and our corporate headquarters’ costs related to the executive offices, corporate finance, accounting, administration and information technology.  Most of these costs are unrelated to specific client projects and can vary as expenses are incurred to support corporate activities and initiatives.

Our revenue, expenses and operating results may fluctuate significantly from quarter to quarter as a result of numerous factors, including:

·                  Unanticipated changes in contract performance that may affect profitability, particularly with contracts that are fixed-price or have funding limits;

·                  The seasonality of the spending cycle of our public sector clients, notably the federal government, and the spending patterns of our commercial sector clients;

·                  Budget constraints experienced by our federal, state and local government clients;

·                  Acquisitions or the integration of acquired companies;

·                  Divestiture or discontinuance of operating units;

·                  Employee hiring, utilization and turnover rates;

·                  The number and significance of client contracts commenced and completed during a quarter;

·                  Creditworthiness and solvency of clients;

·                  The ability of our clients to terminate contracts without penalties;

·                  Delays incurred in connection with a contract;

·                  The size, scope and payment terms of contracts;

·                  Contract negotiations on change orders and collections of related accounts receivable;

·                  The timing of expenses incurred for corporate initiatives;

·                  Reductions in the prices of services offered by our competitors;

·                  Costs related to threatened or pending litigation;

·                  Changes in accounting rules; and

17




·                  General economic or political conditions.

We experience seasonal trends in our business.  Our revenue is typically lower in the first quarter of our fiscal year, due primarily to the Thanksgiving, Christmas and, in certain years, New Year’s holidays that fall within the first quarter.  Many of our clients’ employees, as well as our own employees, take vacations during these holidays.  This results in fewer billable hours worked on projects and, correspondingly, less revenue recognized.  Our revenue is typically higher in the second half of the fiscal year, due to weather conditions during spring and summer that result in higher billable hours.  In addition, our revenue is typically higher in the fourth quarter of the fiscal year due to the federal government’s fiscal year-end spending.

BUSINESS TREND ANALYSIS

General.  We experienced broad-based revenue growth of 8.5% and 8.3% for the three and six months ended April 1, 2007, respectively, compared to the same periods last year.  Our business continues to grow as we focus on internal growth and pursue complementary acquisitions that expand our geographic reach and increase the breadth of our service offerings to address existing and emerging markets.  In the second quarter of fiscal 2007, we acquired certain assets of Vector Colorado, LLC (“VCL”), Vector Nevada, LLC (“VNL”), mining consulting companies, and Soil Testing Engineers, Inc. (“STE”), a geotechnical engineering company.  In the third quarter of fiscal 2007, we acquired four companies collectively referred to as The Delaney Group, which provide planning, development and construction services for wind energy programs, base realignment and closure (“BRAC”) projects, and water and wastewater treatment and conveyance facilities to its broad-based clients.  These acquisitions enhance our service offerings and expand our geographical presence.  We anticipate revenue growth from all client sectors as we continue to focus on internal growth and pursue complementary acquisitions.

Federal Government.  In the second quarter of fiscal 2007, we experienced 10.0% revenue growth in our federal government business compared to the same quarter last year.  The growth resulted from increased workload with the U.S. Department of Defense (“DoD”) and the National Aeronautics and Space Administration (“NASA”).  This growth was partially offset by reduced project activity due to inclement weather and reduced workload with other federal government clients, such as the U.S. Environmental Protection Agency (“EPA”), U.S. Department of Energy (“DOE”), and the Federal Aviation Administration (“FAA”).  We believe that the reduced workload was due primarily to the federal budget impasse, as well as the continued allocation of federal funds to projects in Iraq and Afghanistan.  Accordingly, we anticipate that our federal government business will experience moderate growth in fiscal 2007 due primarily to increased BRAC spending and reconstruction projects in Iraq, which may be partially offset by continued reduced activity on our EPA and FAA projects.

State and Local Government.  Our state and local government business experienced 11.5% revenue growth in the second quarter of fiscal 2007 compared to the same quarter last year.  The workload with our state and local government clients increased due to budget surpluses as most states continue to experience stable financial conditions.  Voters in several states recently approved significant infrastructure bond measures. Consequently, we anticipate that new infrastructure projects will be funded during 2007.  The increase was partially offset by a funding delay for a large fiber-to-the-premises project.  We anticipate modest revenue growth from our state and local government clients for the remainder of fiscal 2007 compared to last year.

Commercial.  In the second quarter of fiscal 2007, our commercial business increased 4.7% compared to the same quarter last year due to the continuing strength in the U.S. economy.  We anticipate that our commercial business will continue to follow the general trends of the U.S. economy.

ACQUISITIONS AND DIVESTITURES

Acquisitions.  In the second quarter of fiscal 2007, we acquired certain assets of VCL, VNL and STE. The purchase prices consisted of cash and, with respect to VCL, other cash consideration payable over a four-year period from the acquisition date.  The purchase price allocations are preliminary and subject to an adjustment based upon the final determination of the net assets acquired.  In the third quarter of fiscal 2007, we acquired The Delaney Group, consisting of (i) all of the outstanding shares of Delaney Construction Corporation, Delaney Crushed Stone Products, Inc. and Delaney Leasing Company, Inc.; and (ii) all of the limited liability company interests of Delaney Properties, LLC.  The

18




initial purchase price consisted of cash, and is subject to a purchase price adjustment based upon the final determination of the net assets acquired.  In addition, the former shareholders have certain earn-out rights that will allow them to receive, over a four-year period from the acquisition date, guaranteed deferred cash payments in the aggregate amount of $9.0 million and additional payments up to an aggregate maximum of $12.0 million upon achievement of certain financial objectives.  These operations are part of the resource management segment.

Divestitures.  In fiscal 2006, we sold Vertex Engineering Services, Inc. (“VES”) and Tetra Tech Canada Ltd. (“TTC”), operating units in the resource management and communications segments, respectively.  Further, in fiscal 2006, we ceased all revenue producing activities for Whalen & Company, Inc. (“WAC”), an operating unit in the communications segment.  For the three and six months ended April 1, 2007, discontinued operations did not report any revenue for both periods.  For the three months ended April 2, 2006, an insignificant amount was reported.  For the six months ended April 2, 2006, we generated a total of $9.7 million from discontinued operations.

RESULTS OF OPERATIONS

Overall, our results for the second quarter of fiscal 2007 improved compared to the same quarter last year.  We experienced broad-based revenue growth, particularly with the DoD work associated with reconstruction and unexploded ordnance ("UXO") projects in Iraq.  Revenue, net of subcontractor costs and gross profit decreased due to increased subcontracting requirements and inclement weather which adversely impacted project activities and staff utilization.  The improvement in our income from continuing operations resulted primarily from a reversal of litigation liabilities included in SG&A, and from lower net interest expense due to lower debt borrowings and higher interest income generated by short-term investments of cash.

Consolidated Results

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,

 

April 2,

 

Change

 

April 1,

 

April 2,

 

Change

 

 

 

2007

 

2006

 

$

 

%

 

2007

 

2006

 

$

 

%

 

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

346,019

 

$

318,892

 

$

27,127

 

8.5

%

$

715,172

 

$

660,084

 

$

55,088

 

8.3

%

Subcontractor costs

 

109,760

 

81,176

 

28,584

 

35.2

 

234,042

 

192,609

 

41,433

 

21.5

 

Revenue, net of subcontractor costs

 

236,259

 

237,716

 

(1,457

)

(0.6

)

481,130

 

467,475

 

13,655

 

2.9

 

Other contract costs

 

191,112

 

191,155

 

(43

)

(0.0

)

391,564

 

376,527

 

15,037

 

4.0

 

Gross profit

 

45,147

 

46,561

 

(1,414

)

(3.0

)

89,566

 

90,948

 

(1,382

)

(1.5

)

Selling, general and administrative expenses

 

26,769

 

30,337

 

(3,568

)

(11.8

)

49,823

 

57,601

 

(7,778

)

(13.5

)

Income from operations

 

18,378

 

16,224

 

2,154

 

13.3

 

39,743

 

33,347

 

6,396

 

19.2

 

Interest expense — net

 

495

 

1,873

 

(1,378

)

(73.6

)

1,244

 

4,105

 

(2,861

)

(69.7

)

Loss on retirement of debt

 

 

 

 

 

4,226

 

 

4,226

 

100.0

 

Income from continuing operations before income tax expense

 

17,883

 

14,351

 

3,532

 

24.6

 

34,273

 

29,242

 

5,031

 

17.2

 

Income tax expense

 

7,500

 

6,246

 

1,254

 

20.1

 

14,464

 

12,649

 

1,815

 

14.4

 

Income from continuing operations

 

10,383

 

8,105

 

2,278

 

28.1

 

19,809

 

16,593

 

3,216

 

19.4

 

Income from discontinued operations, net of tax

 

26

 

859

 

(833

)

(97.0

)

26

 

394

 

(368

)

(93.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,409

 

$

8,964

 

$

1,445

 

16.1

%

$

19,835

 

$

16,987

 

$

2,848

 

16.8

%

 

19




 

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

 

 

Three Months
Ended

 

Six Months
Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

 

 

 

 

 

 

 

 

 

 

Revenue, net of subcontractor costs

 

100.0

%

100.0

%

100.0

%

100.0

%

Other contract costs

 

80.9

 

80.4

 

81.4

 

80.5

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

19.1

 

19.6

 

18.6

 

19.5

 

Selling, general and administrative expenses

 

11.3

 

12.8

 

10.3

 

12.3

 

Income from operations

 

7.8

 

6.8

 

8.3

 

7.2

 

 

 

 

 

 

 

 

 

 

 

Interest expense — net

 

0.2

 

0.8

 

0.3

 

0.9

 

Loss on retirement of debt

 

 

 

0.9

 

 

Income from continuing operations before income tax expense

 

7.6

 

6.0

 

7.1

 

6.3

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

3.2

 

2.6

 

3.0

 

2.7

 

Income from continuing operations

 

4.4

 

3.4

 

4.1

 

3.6

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

 

0.4

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

Net income

 

4.4

%

3.8

%

4.1

%

3.7

%

 

For the three and six months ended April 1, 2007, revenue increased $27.1 million, or 8.5%, and $55.1 million, or 8.3%, compared to the same periods last year, respectively.  Overall, we experienced broad-based revenue growth.  Our federal government business continued to grow with the DoD and NASA, particularly with work related to our reconstruction and UXO projects in Iraq and work associated with high speed computing support, respectively.  This growth was partially offset by reduced project activity due to inclement weather and reduced funding from the EPA, DOE and FAA.  Our state and local workload also increased due to budget surpluses, partially offset by a funding delay for a large fiber-to-the-premises projects and the wind-down of work related to Hurricane Katrina.  To a lesser extent, our commercial business experienced growth due to an upturn in the U.S. economy.

For the three and six months ended April 1, 2007, revenue, net of subcontractor costs, decreased $1.5 million, or 0.6%, and increased $13.7 million, or 2.9%, compared to the same periods last year, respectively, for the reasons described above.  These growth rates were not consistent with our revenue growth because of higher subcontracting requirements due primarily to a change in contract mix in our federal and state and local government work, particularly with the reconstruction and UXO projects in Iraq.  Further, our program management activities on federal government contracts typically result in higher levels of subcontracting activities that are partially driven by government-mandated small business set-aside requirements.

Other contract costs were consistent for the three months ended April 1, 2007, and increased $15.0 million, or 4.0%, for the six months ended April 1, 2007, compared to the same periods last year, respectively.  For the six-month period, the increase was due primarily to additional costs incurred to support revenue growth.  To a lesser extent, we incurred higher contract costs compared to the same period last year due to a change in contract mix.  For the three and six months ended April 1, 2007, as a percentage of revenue, net of subcontractor costs, other contract costs were 80.9% and 81.4%, compared to 80.4% and 80.5% for the same periods last year, respectively.

For the three and six months ended April 1, 2007, gross profit decreased $1.4 million, or 3.0%, and $1.4 million, or 1.5%, compared to the same periods last year, respectively.  Our gross profit was adversely impacted by inclement weather, increased subcontracting requirements and the aforementioned change in contract mix.  For the three and six months ended April 1, 2007, as a percentage of revenue, net of subcontractor costs, gross profit was 19.1% and 18.6%, compared to 19.6% and 19.5% for the same periods last year, respectively.

20




 

For the three and six months ended April 1, 2007, SG&A expenses decreased $3.6 million, or 11.8%, and $7.8 million, or 13.5%, compared to the same periods last year, respectively.  The SG&A expense reductions reflect reversals of $1.7 million and $5.7 million of the litigation liabilities related to the ZCA claim for the three and six months ended April 1, 2007, respectively.  In addition, we incurred lower bad debt expense in both periods compared to the same periods last year.  For the three and six months ended April 1, 2007, as a percentage of revenue, net of subcontractor costs, SG&A expenses were 11.3% and 10.3%, compared to 12.8% and 12.3% for the same periods last year, respectively.

For the three and six months ended April 1, 2007, net interest expense decreased $1.4 million, or 73.6%, and $2.9 million, or 69.7%, compared to the same periods last year, respectively.  The decrease for both periods resulted from lower debt borrowing and higher interest income generated by short-term investments of cash compared to the same periods last year.

In December 2006, we retired our senior secured notes and paid off the remaining principal balance of $72.9 million.  In connection with this debt retirement, we incurred pre-payment premiums of $3.1 million and expensed the remaining unamortized deferred financing costs of $1.1 million in the first quarter of fiscal 2007.  We reported an aggregate charge of $4.2 million related to early retirement of debt as part of our income from continuing operations in the first quarter of fiscal 2007.

For the three and six months ended April 1, 2007, income tax expense increased $1.3 million, or 20.1%, and $1.8 million, or 14.4%, compared to the same periods last year, respectively, due to higher pre-tax income.

For the three and six months ended April 1, 2007, we did not recognize a material amount of income from discontinued operations.  For the three and six months ended April 2, 2006, we recognized $0.9 million and $0.4 million from discontinued operations, respectively.  For the three and six months ended April 1, 2007, we recognized a minimal amount of gain related to one of the divestitures.  For the three and six months ended April 2, 2006, we recognized a gain of $1.1 million and $1.4 million, net of tax, respectively, related to the sale of a discontinued operation.

Results of Operations by Reportable Segment

Resource Management

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,

 

April 2,

 

Change

 

April 1,

 

April 2,

 

Change

 

 

 

2007

 

2006

 

$

 

%

 

2007

 

2006

 

$

 

%

 

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, net of subcontractor costs

 

$

146,258

 

$

148,210

 

$

(1,952

)

(1.3)%

 

$

300,128

 

$

291,022

 

$

9,106

 

3.1%

 

Other contract costs

 

117,762

 

119,922

 

(2,160

)

(1.8)   

 

244,161

 

235,594

 

8,567

 

3.6   

 

Gross profit

 

$

28,496

 

$

28,288

 

$

208

 

0.7% 

 

$

55,967

 

$

55,428

 

$

539

 

1.0%

 

 

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

 

Three Months
Ended

 

Six Months
Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

 

 

 

 

 

 

 

 

 

 

Revenue, net of subcontractor costs

 

100.0

%

100.0

%

100.0

%

100.0

%

Other contract costs

 

80.5

 

80.9

 

81.4

 

81.0

 

Gross profit

 

19.5

%

19.1

%

18.6

%

19.0

%

 

For the three and six months ended April 1, 2007, revenue, net of subcontractor costs, decreased $2.0 million, or 1.3%, and increased $9.1 million, or 3.1%, compared to the same periods last year, respectively.  For the three months ended April 1, 2007, the decrease resulted primarily from reduced project activity due to inclement weather and a decline in our federal government business with the DOE and EPA due to reduced funding. The decrease was partially offset by revenue growth with the DoD, particularly with work related to reconstruction and UXO projects in Iraq. To a lesser extent, the

21




decline was offset by revenue growth in our commercial business.  For the six months ended April 1, 2007, the increase was due to the same reasons described above; however, for the first six months of fiscal 2007 we experienced a higher revenue growth rate with the DoD and a lower revenue decline with the DOE in the first quarter of fiscal 2007 compared to the second quarter of fiscal 2007.

For the three and six months ended April 1, 2007, other contract costs decreased $2.2 million, or 1.8%, and increased $8.6 million, or 3.6%, compared to the same periods last year, respectively.  For the three and six months ended April 1, 2007, the change in costs for both periods corresponded to the change in revenue, net of subcontractor costs, for the respective periods.  For the three and six months ended April 1, 2007, as a percentage of revenue, net of subcontractor costs, other contract costs were 80.5% and 81.4%, compared to 80.9% and 81.0% for the three and six months ended April 2, 2006, respectively.

For the three and six months ended April 1, 2007, gross profit increased $0.2 million, or 0.7% and $0.5 million, or 1.0%, compared to the same periods last year, respectively, for the reasons described above.  For the three and six months ended April 1, 2007, as a percentage of revenue, net of subcontractor costs, gross profit was 19.5% and 18.6%, compared to 19.1% and 19.0% for the three and six months ended April 2, 2006, respectively.

Infrastructure

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,

 

April 2,

 

Change

 

April 1,

 

April 2,

 

Change

 

 

 

2007

 

2006

 

$

 

%

 

2007

 

2006

 

$

 

%

 

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, net of subcontractor costs

 

$

81,226

 

$

78,443

 

$

2,783

 

3.5%

 

$

163,015

 

$

153,957

 

$

9,058

 

5.9%

 

Other contract costs

 

66,001

 

62,377

 

3,624

 

5.8   

 

132,597

 

123,003

 

9,594

 

7.8   

 

Gross profit

 

$

15,225

 

$

16,066

 

$

(841

)

(5.2)%

 

$

30,418

 

$

30,954

 

$

(536

)

(1.7)%

 

 

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

 

Three Months
Ended

 

Six Months
Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

 

 

 

 

 

 

 

 

 

 

Revenue, net of subcontractor costs

 

100.0

%

100.0

%

100.0

%

100.0

%

Other contract costs

 

81.3

 

79.5

 

81.3

 

79.9

 

Gross profit

 

18.7

%

20.5

%

18.7

%

20.1

%

 

For the three and six months ended April 1, 2007, revenue, net of subcontractor costs, increased $2.8 million, or 3.5%, and $9.1 million, or 5.9%, compared to the same periods last year, respectively.  We experienced revenue growth in our federal government business due to increased workload with the DoD and NASA, which was partially offset by reduced workload with the FAA.  To a lesser extent, our commercial and international business also contributed to the revenue growth.

For the three and six months ended April 1, 2007, other contract costs increased $3.6 million, or 5.8%, and $9.6 million, or 7.8%, compared to the same periods last year, respectively.  The increase was due primarily to additional costs incurred to support revenue growth.  To a lesser extent, we incurred higher contract costs compared to the same periods last year due to a change in contract mix and decreased use of subcontractors as more work was performed in-house.  For the three and six months ended April 1, 2007, as a percentage of revenue, net of subcontractor costs, other contract costs were 81.3% for both periods, compared to 79.5% and 79.9% for the same periods last year, respectively.

For the three and six months ended April 1, 2007, gross profit decreased $0.8 million, or 5.2%, and $0.5 million, or 1.7%, compared to the same periods last year, respectively.   Our margin did not increase at the same rate as our revenue because our gross profit was adversely impacted by inclement weather and the aforementioned change in contract mix.  For the three and six months ended April 1, 2007, as a percentage of revenue, net of subcontractor costs, gross profit was 18.7% for both periods, compared to 20.5% and 20.1% for the same periods last year, respectively.

22




 

Communications

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 1,

 

April 2,

 

Change

 

April 1,

 

April 2,

 

Change

 

 

 

2007

 

2006

 

$

 

%

 

2007

 

2006

 

$

 

%

 

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, net of subcontractor costs

 

$

8,775

 

$

11,063

 

$

(2,288

)

(20.7)%

 

$

17,987

 

$

22,496

 

$

(4,509

)

(20.0)%

 

Other contract costs

 

7,349

 

8,856

 

(1,507

)

(17.0)   

 

14,806

 

17,930

 

(3,124

)

(17.4)   

 

Gross profit

 

$

1,426

 

$

2,207

 

$

(781

)

(35.4)%

 

$

3,181

 

$

4,566

 

$

(1,385

)

(30.3)%

 

 

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

 

Three Months
Ended

 

Six Months
Ended

 

 

 

April 1,
2007

 

April 2,
2006

 

April 1,
2007

 

April 2,
2006

 

 

 

 

 

 

 

 

 

 

 

Revenue, net of subcontractor costs

 

100.0

%

100.0

%

100.0

%

100.0

%

Other contract costs

 

83.7

 

80.1

 

82.3

 

79.7

 

Gross profit

 

16.3

%

19.9

%

17.7

%

20.3

%

 

For the three and six months ended April 1, 2007, revenue, net of subcontractor costs, decreased $2.3 million, or 20.7%, and $4.5 million, or 20.0%, compared to the same periods last year, respectively.  The decrease resulted from reduced workload, inclement weather and a funding delay for a large fiber-to-the premises project.

For the three and six months ended April 1, 2007, other contract costs decreased $1.5 million, or 17.0%, and $3.1 million, or 17.4%, compared to the same periods last year, respectively.  The decrease was due primarily to reduced costs associated with the revenue decline.  For the three and six months ended April 1, 2007, as a percentage of revenue, net of subcontractor costs, other contract costs were 83.7% and 82.3%, compared to 80.1% and 79.7% for the same periods last year, respectively.  This increase resulted from additional costs required to complete projects due to inclement weather, as well as higher equipment and fuel costs.

For the three and six months ended April 1, 2007, gross profit decreased $0.8 million, or 35.4%, and $1.4 million, or 30.3%, compared to the same periods last year, respectively.  The decrease resulted primarily from the revenue decline.  In addition, gross margin was adversely impacted by the aforementioned percentage increase in contract costs. For the three and six months ended April 1, 2007, as a percentage of revenue, net of subcontractor costs, gross profit was 16.3% and 17.7%, compared to gross profit of 19.9% and 20.3% for the same periods last year, respectively.

Liquidity and Capital Resources

Working Capital.  As of April 1, 2007, our working capital was $152.3 million, an increase of $2.0 million from $150.3 million as of October 1, 2006.  Cash and cash equivalents totaled $22.6 million as of April 1, 2007, compared to $65.4 million as of October 1, 2006.

Operating and Investing Activities.  For the six months ended April 1, 2007, net cash of $4.0 million was provided by operating activities and $6.6 million was used in investing activities.  For the six months ended April 2, 2006, net cash of $15.1 million was provided by operating activities and $4.2 million was used in investing activities.  The positive cash provided by operating activities resulted from successful management of our cash flow through favorable contract payment terms and timely project billings and collections.  Our net accounts receivable from continuing operations increased $2.0 million, or 0.6%, to $348.5 million as of April 1, 2007 from $346.5 million as of October 1, 2006, while our revenue increased 8.3% year to date compared to the same period last year.  For the six months ended April 1, 2007, our net cash provided by operating activities decreased by $11.0 million compared to the same period last year due primarily to higher income tax payments.

23




 

Capital Expenditures.  Our capital expenditures for the six months ended April 1, 2007 and April 2, 2006 were $4.6 million and $5.9 million, respectively.  The capital expenditures were primarily for the replacement of obsolete equipment and capital costs associated with our enterprise resource planning (“ERP”) system.

Debt Financing.  In March 2007, we entered into a Second Amended and Restated Credit Agreement (“Credit Agreement”). Under the Credit Agreement our revolving credit facility (“Facility”) was increased from $150.0 million to $300.0 million, and the term of the agreement was extended for five years through March 30, 2012.  As part of the Facility, we may request standby letters of credit up to the aggregate sum of $50.0 million. Other than the increased capacity under the Facility and improved pricing, the terms and conditions relating to the Facility are substantially similar to those of the prior Facility.  As of April 1, 2007, we had $32.0 million in borrowings under the Facility, standby letters of credit under the Facility totaled $14.1 million.

In May 2001, we issued two series of senior secured notes in the aggregate amount of $110.0 million (“Senior Notes”).  The Series A Notes, in the original amount of $92.0 million, were payable semi-annually and matured on May 30, 2011.  The Series B Notes, in the original amount of $18.0 million, were payable semi-annually and matured on May 30, 2008.  Based on our satisfaction of certain covenant compliance criteria, the Series A Notes and Series B Notes bore interest at 7.28% and 7.08% per annum, respectively.  In December 2006, we retired the Senior Notes and paid off the remaining principal balance of $72.9 million.  As part of the debt retirement, we incurred pre-payment premiums of $3.1 million and expensed deferred financing costs of $1.1 million.

The Credit Agreement requires us to comply with various financial and operating covenants. Specifically, (1) the maximum consolidated leverage ratio (defined as the ratio of funded debt to adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”)) is 2.50x for each quarter, and (2) the minimum fixed charge coverage ratio (defined as the ratio of EBITDA minus capital expenditures to interest expense plus taxes and principal payments) is 1.25x for each quarter.  As of April 1, 2007, our consolidated leverage ratio was .50x, and our fixed charge coverage ratio was 1.74x.  Further, the Credit Agreement contains other restrictions, including but not limited to, the creation of liens and the payment of dividends on our capital stock (other than stock dividends). Borrowings under the Credit Agreement are secured by our accounts receivable, the stock of our significant subsidiaries and our cash, deposit accounts, investment property and financial assets.  As of April 1, 2007, we have met all compliance requirements.  We expect to be in compliance over the next 12 months.

Capital Requirements.  We expect that internally generated funds, our existing cash balances and borrowing capacity under the Credit Agreement will be sufficient to meet our capital requirements for the next 12 months.

Acquisitions.   We continuously evaluate the marketplace for strategic acquisition opportunities. Historically, due to our reputation, size, geographic presence and range of services, we had numerous opportunities to acquire both privately h