UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended July 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)

 

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 July 30, 2007, 58,355,562 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 1A.	Risk Factors
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)

		July 1, 2007			October 1, 2006
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	37,646		$	65,353
Accounts receivable — net		420,145			346,543
Prepaid expenses and other current assets		24,232			21,757
Income taxes receivable		6,799			5,063
Current assets of discontinued operations		445			865
Total current assets		489,267			439,581
PROPERTY AND EQUIPMENT:
Land and buildings		5,261			1,810
Equipment, furniture and fixtures		91,482			77,415
Leasehold improvements		9,488			8,798
Total		106,231			88,023
Accumulated depreciation and amortization		(61,125		)	(56,033		)
PROPERTY AND EQUIPMENT — NET		45,106			31,990
DEFERRED INCOME TAXES		10,577			12,909
INCOME TAXES RECEIVABLE		33,800			33,800
GOODWILL		182,467			158,581
INTANGIBLE ASSETS — NET		7,650			4,507
OTHER ASSETS		15,932			17,893
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS		2,418			2,418
TOTAL ASSETS		$	787,217		$	701,679
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	137,957		$	104,626
Accrued compensation		62,973			67,592
Billings in excess of costs on uncompleted contracts		55,635			41,345
Deferred income taxes		17,160			15,386
Current portion of long-term obligations		3,354			17,760
Other current liabilities		35,965			42,200
Current liabilities of discontinued operations		7			359
Total current liabilities		313,051			289,268
LONG-TERM OBLIGATIONS		75,354			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 July 1, 2007 and October 1, 2006		—			—
Common stock — authorized, 85,000 shares of $0.01 par value; issued and outstanding, 58,177 and 57,676 shares as of July 1, 2007 and October 1, 2006, respectively		583			577
Additional paid-in capital		277,196			265,444
Accumulated other comprehensive (loss) income		(11		)	1
Retained earnings		121,044			88,781
TOTAL STOCKHOLDERS’ EQUITY		398,812			354,803
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	787,217		$	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						Nine Months Ended
		July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
Revenue		$	403,951		$	359,055		$	1,119,123		$	1,019,139
Subcontractor costs		147,625			118,836			381,667			311,445
Revenue, net of subcontractor costs		256,326			240,219			737,456			707,694
Other contract costs		202,313			196,967			593,877			573,494
Gross profit		54,013			43,252			143,579			134,200
Selling, general and administrative expenses		31,928			27,112			81,751			84,713
Income from operations		22,085			16,140			61,828			49,487
Interest expense — net		657			1,212			1,901			5,317
Loss on retirement of debt		—			—			4,226			—
Income from continuing operations before income tax expense		21,428			14,928			55,701			44,170
Income tax expense		9,026			6,549			23,490			19,198
Income from continuing operations		12,402			8,379			32,211			24,972
Income (loss) from discontinued operations, net of tax		26			(533		)	52			(139		)
Net income		$	12,428		$	7,846		$	32,263		$	24,833
Basic earnings per share:
Income from continuing operations		$	0.21		$	0.15		$	0.56		$	0.43
Loss from discontinued operations, net of tax		—			(0.01		)	—			—
Net income		$	0.21		$	0.14		$	0.56		$	0.43
Diluted earnings per share:
Income from continuing operations		$	0.21		$	0.14		$	0.55		$	0.43
Income from discontinued operations, net of tax		—			—			—			—
Net income		$	0.21		$	0.14		$	0.55		$	0.43
Weighted average common shares outstanding:
Basic		58,030			57,476			57,859			57,280
Diluted		58,786			58,039			58,452			57,829

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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Tetra Tech, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

		Nine Months Ended
		July 1, 2007			July 2, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	32,263		$	24,833
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,841			9,749
Stock-based compensation		4,242			5,239
Deferred income taxes		4,106			8,505
Write-off of unamortized debt financing costs		1,069			—
Provision for losses on contracts and related receivables		1,737			42
Gain on sale of discontinued operations		(262		)	(1,415		)
Gain on disposal of property and equipment		(341		)	(71		)
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Accounts receivable		(66,272		)	(5,329		)
Prepaid expenses and other assets		(2,294		)	889
Accounts payable		28,636			(12,273		)
Accrued compensation		(4,619		)	5,661
Billings in excess of costs on uncompleted contracts		9,131			(6,876		)
Other current liabilities		(4,448		)	(4,353		)
Income taxes receivable/payable		(625		)	4,360
Net cash provided by operating activities		12,164			28,961
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(8,124		)	(8,425		)
Payments for business acquisitions, net of cash acquired		(30,174		)	(1,994		)
Proceeds from sale of discontinued operations		3,045			4,632
Proceeds from sale of property and equipment		425			177
Net cash used in investing activities		(34,828		)	(5,610		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations		(98,410		)	(28,041		)
Proceeds from borrowings under long-term obligations		88,000			10,000
Payment of deferred financing fees		(1,032		)	—
Net proceeds from issuance of common stock		6,399			6,509
Net cash used in financing activities		(5,043		)	(11,532		)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(27,707		)	11,819
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		65,353			26,861
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	37,646		$	38,680
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	5,552		$	8,173
Income taxes, net of refunds received		$	20,019		$	6,567

 

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 July 1, 2007, the condensed consolidated statements of income for the three and nine months ended July 1, 2007 and July 2, 2006, and the condensed consolidated statements of cash flows for the nine months ended July 1, 2007 and July 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 nine months ended July 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:

		July 1, 2007			October 1, 2006
		(in thousands)
Billed		$	228,492		$	228,671
Unbilled		199,864			138,823
Contract retentions		12,589			8,156
Total accounts receivable – gross		440,945			375,650
Allowance for doubtful accounts		(20,800		)	(29,107		)
Total accounts receivable – net		$	420,145		$	346,543
Billings in excess of costs on uncompleted contracts		$	55,635		$	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 July 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 $125.3 million and $88.7 million as of July 1, 2007 and October 1, 2006, respectively.  The federal government unbilled receivables were $72.2 million and $44.0 million as of July 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 July 1, 2007 and October 1, 2006.

3.             Goodwill and Intangibles

In the third quarter of fiscal 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 Delaney Group” or “DGI”).  DGI provides planning, development and construction services for wind energy programs, base realignment and closure 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

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prospective wind energy clients, as DGI offers complementary capabilities and customer relationships.  The initial purchase price consisted of cash of approximately $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 of $9.0 million.  In addition, the former shareholders may receive other earn-out payments of up to $12.0 million upon achievement of certain financial objectives.  DGI is part of the resource management segment.

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.

The Company accounted for the above acquisitions as purchases of businesses.  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 adjustments based upon the valuation and 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 nine months ended July 1, 2007 and, as such, no pro forma results are presented.

The excess of the purchase price of the above acquisitions 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 July 1, 2007.  In the third quarter of fiscal 2007, the Company recorded $22.1 million of goodwill related to the DGI acquisition.  The changes in the carrying value of goodwill by segment for the nine months ended July 1, 2007 were as follows:

		October 1, 2006			Goodwill Addition			July 1, 2007
		(in thousands)
Resource management		$	84,512		$	23,886		$	108,398
Infrastructure		74,069			—			74,069
Total		$	158,581		$	23,886		$	182,467

 

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

		July 1, 2007						October 1, 2006
		Gross Amount			Accumulated Amortization			Gross Amount			Accumulated Amortization
		(in thousands)
Non-compete agreements		$	210		$	(18	)	$	—		$	—
Customer lists		2,564			(145		)	—			—
Backlog		10,774			(5,735		)	9,075			(4,568		)
Total		$	13,548		$	(5,898	)	$	9,075		$	(4,568	)

 

For the nine months ended July 1, 2007, $0.2 million, $2.6 million and $1.7 million were assigned to non-compete agreements, customer lists and backlog, respectively, for the DGI, VCL, VNL and STE acquisitions.  For the three months ended July 1, 2007 and July 2, 2006, amortization expense for acquired identifiable intangible assets with finite useful lives was $0.5 million and $0.3 million, respectively.  For the nine months ended July 1, 2007 and July 2, 2006, the amortization expense was $1.3 million and $1.0 million, respectively.  Estimated amortization expense for the remainder of fiscal 2007 and the succeeding years is as follows:

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		Amount
		(in thousands)
2007		$	620
2008		2,377
2009		2,324
2010		1,382
2011		481
2012		323
2013		143

 

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 $0.1 million and $0.2 million, respectively, for the three and nine months ended July 1, 2007.  The gain was recognized on an installment method of accounting.  The summarized results of the discontinued operations for the three and nine months ended July 2, 2006 were as follows:

		Three Months Ended			Nine Months Ended
		July 2, 2006			July 2, 2006
		(in thousands)
Revenue		$	—		$	9,697
Loss before income tax benefit		(888		)	(2,534		)
Income tax benefit		(355		)	(1,011		)
Loss from operations, net of tax		(533		)	(1,523		)
Gain on sale of discontinued operations, net of tax		—			1,384
Loss from discontinued operations, net of tax		$	(533	)	$	(139	)

 

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 July 1, 2007, the Company had $63.0 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 July 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 July 1, 2007 and July 2, 2006 was $1.7 million and $1.2 million, respectively.  For the nine months ended July 1, 2007 and July 2, 2006, stock-based compensation expense was $4.2 million and $3.5 million, respectively.  These amounts are primarily included in selling, general and administrative (“SG&A”) expenses in the condensed consolidated statements of income.  Stock-based compensation expense for the three and nine months ended July 1, 2007 may not be indicative of the expense for the entire fiscal year.  Further, upon the Company’s review of its stock option granting practices, the Company recorded an additional stock-based compensation charge of $3.2 million, of which $2.3 million related to continuing operations and $0.9 million related to discontinued operations for the three and nine months ended July 2, 2006.

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						Nine Months Ended
		July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
		(in thousands, except per share data)
Numerator:
Income from continuing operations		$	12,402		$	8,379		$	32,211		$	24,972
Income (loss) from discontinued operations		26			(533		)	52			(139		)
Net income		$	12,428		$	7,846		$	32,263		$	24,833
Denominator for basic earnings per share		58,030			57,476			57,859			57,280
Denominator for diluted earnings per share:
Denominator for basic earnings per share		58,030			57,476			57,859			57,280
Potential common shares - stock options		756			563			593			549
Denominator for diluted earnings per share		58,786			58,039			58,452			57,829
Basic earnings per share:
Income from continuing operations		$	0.21		$	0.15		$	0.56		$	0.43
Loss from discontinued operations		—			(0.01		)	—			—
Net income		$	0.21		$	0.14		$	0.56		$	0.43
Diluted earnings per share:
Income from continuing operations		$	0.21		$	0.14		$	0.55		$	0.43
Income from discontinued operations		—			—			—			—
Net income		$	0.21		$	0.14		$	0.55		$	0.43

 

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For the three and nine months ended July 1, 2007, 2.7 million and 3.9 million options were anti-dilutive and excluded from the calculation of dilutive potential common shares, compared to 3.4 million and 3.6 million options for the same 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 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.

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 third quarter of fiscal 2007, the Company has consolidated several of its operating units under common management structure, information system and back-office functions.  These changes have had no impact on the Company’s operating segment structure to date.  As a result of the Company’s exit from the wireless communications business in fiscal 2006, the remaining portion of the communication business, known as the wired business, represents a small part of the Company’s overall business.  In addition, the wired business operating units increasingly perform services and serve clients that are similar in nature to those of the infrastructure business.  The wired business operating units provide engineering, permitting, site acquisition and construction management to state and local governments, telecommunications and cable operators, utility companies and other commercial clients.  The Company continues to assess its operating and management structure, including the alignment of its wired business operating units.  Should further changes be effected, the Company will evaluate the impact on its segment reporting as appropriate.

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 July 1, 2007
Revenue		$	298,544		$	103,415		$	18,603		$	420,562
Revenue, net of subcontractor costs		159,891			84,213			12,222			256,326
Gross profit		34,304			17,339			2,370			54,013
Segment income from operations		15,037			8,102			971			24,110
Depreciation expense		1,554			496			334			2,384
Three months ended July 2, 2006
Revenue		$	258,738		$	99,775		$	14,474		$	372,987
Revenue, net of subcontractor costs		150,950			79,790			9,479			240,219
Gross profit		27,147			14,344			1,761			43,252
Segment income from operations		12,331			6,346			436			19,113
Depreciation expense		1,109			678			256			2,043
Nine months ended July 1, 2007
Revenue		$	813,215		$	300,670		$	47,956		$	1,161,841
Revenue, net of subcontractor costs		460,019			247,228			30,209			737,456
Gross profit		90,271			47,757			5,551			143,579
Segment income from operations		39,048			19,939			1,704			60,691
Depreciation expense		3,540			1,575			929			6,044
Nine months ended July 2, 2006
Revenue		$	717,316		$	290,431		$	51,353		$	1,059,100
Revenue, net of subcontractor costs		441,972			233,747			31,975			707,694
Gross profit		82,575			45,298			6,327			134,200
Segment income from operations		34,321			17,723			1,895			53,939
Depreciation expense		3,453			1,929			826			6,208

 

Reconciliations:

		Three Months Ended						Nine Months Ended
		July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
		(in thousands)
Revenue
Revenue from reportable segments		$	420,562		$	372,987		$	1,161,841		$	1,059,100
Elimination of inter-segment revenue		(16,611		)	(13,932		)	(42,718		)	(39,961		)
Total consolidated revenue		$	403,951		$	359,055		$	1,119,123		$	1,019,139
Income from operations
Segment income from operations		$	24,110		$	19,113		$	60,691		$	53,939
Other income (expense) (1)		(1,480		)	(2,633		)	2,466			(3,454		)
Amortization of intangibles		(545		)	(340		)	(1,329		)	(998		)
Total consolidated income from operations		$	22,085		$	16,140		$	61,828		$	49,487

 

(1) Other income (expense) includes corporate costs not allocable to the segments.  The nine months ended July 1, 2007 include a $5.7 million reversal of accrued litigation liabilities.

9.             Major Clients

For the three months ended July 1, 2007 and July 2, 2006, the Company generated 9.6% and 9.2% of its revenue, respectively, from the U.S. Air Force, a component of the U.S. Department of Defense (“DoD”).  For the same periods, the Company generated 17.3% and 15.3% of its revenue, respectively, from the U.S. Army Corps of

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Engineers, also a component of the DoD.  For the nine months ended July 1, 2007 and July 2, 2006, the Company generated 12.3% and 9.9% of its revenue, respectively, from the U.S. Air Force.  For the same periods, the Company generated 13.5% and 11.1% 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						Nine Months Ended
		July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
		(in thousands)
Client Sector
Federal government		$	190,876		$	193,529		$	575,557		$	528,880
State and local government		90,422			51,015			206,990			162,420
Commercial		119,171			112,791			329,283			321,803
International		3,482			1,720			7,293			6,036
Total		$	403,951		$	359,055		$	1,119,123		$	1,019,139

 

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 nine months ended July 1, 2007, comprehensive income was $12.4 million and $32.3 million, respectively.  For the three and nine months ended July 2, 2006, comprehensive income was $7.9 million and $24.1 million, respectively.  For both the three and nine months ended July 1, 2007, the Company realized an insignificant net translation loss.  For the three and nine months ended July 2, 2006, the Company realized an insignificant translation gain, and a translation loss of $0.8 million, respectively.

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 $5.7 million of the accrued liabilities in excess of the final settlement payment related to this matter and reduced SG&A expense by that amount in the first half of fiscal 2007.  There are no remaining contingencies relating to this matter.

On January 3, 2007, a stockholder filed a putative shareholder derivative complaint in the Superior Court of the State of California, County of Los Angeles 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 Company was also named as a nominal defendant in this 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.  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

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$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 months ended July 2, 2006 as a result of misdated option grants.  The plaintiff in this action filed an amended complaint on July 6, 2007, to which the defendants must respond by August 17, 2007.  Management believes that this lawsuit is without merit and no litigation charges have been recorded.

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.  In the third quarter of fiscal 2007, the Company recorded an adjustment related to the sublease of an exited lease facility of $0.2 million.  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 following is a summary of lease exit accrual activity during the nine months ended July 1, 2007:

		October 1, 2006			Reserve Utilization			Adjustments			July 1, 2007
		(in thousands)
Resource management		$	140		$	(59	)	$	—		$	81
Infrastructure		1,540			(421		)	162			1,281
Total		$	1,680		$	(480	)	$	162		$	1,362

 

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 entity 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.

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

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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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