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.

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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.

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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.

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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:

 

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:

 

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:

 

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

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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

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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

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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.

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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

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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:

 

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.

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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:

 

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.

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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.

 

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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:

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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:

 

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:

 

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

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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

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·                  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

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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	%

 

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