XNAS:TTEK Tetra Tech Inc Quarterly Report 10-Q Filing - 1/1/2012

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Table of Contents

 

 

 

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 January 1, 2012

 

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

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

3475 East Foothill Boulevard, Pasadena, California  91107

(Address of principal executive offices)  (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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ý   No  o

 

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

 

Large accelerated filer   ý

Accelerated filer   o

Non-accelerated filer   o

(Do not check if a smaller reporting company)

Smaller reporting company 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  ý

 

As of January 30, 2012, 63,139,938 shares of the registrant’s common stock were outstanding.

 

 

 




Table of Contents

 

PART I.                 FINANCIAL INFORMATION

 

Item 1.            Financial Statements

 

Tetra Tech, Inc.

Condensed Consolidated Balance Sheets

(unaudited - in thousands, except par value)

 

ASSETS

 

January 1,
2012

 

October 2,
2011

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

105,720

 

 

$

90,494

 

 

Accounts receivable – net

 

664,970

 

 

657,179

 

 

Prepaid expenses and other current assets

 

71,351

 

 

84,612

 

 

Income taxes receivable

 

4,262

 

 

6,817

 

 

Total current assets

 

846,303

 

 

839,102

 

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT – NET

 

75,307

 

 

77,536

 

 

INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES

 

3,410

 

 

3,454

 

 

GOODWILL

 

577,406

 

 

569,414

 

 

INTANGIBLE ASSETS – NET

 

74,569

 

 

81,053

 

 

OTHER ASSETS

 

23,632

 

 

23,429

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,600,627

 

 

$

1,593,988

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

145,595

 

 

$

164,819

 

 

Accrued compensation

 

101,933

 

 

110,937

 

 

Billings in excess of costs on uncompleted contracts

 

93,571

 

 

84,754

 

 

Deferred income taxes

 

20,768

 

 

22,870

 

 

Current portion of long-term debt

 

2,259

 

 

2,556

 

 

Estimated contingent earn-out liabilities

 

54,487

 

 

64,119

 

 

Other current liabilities

 

85,774

 

 

81,654

 

 

Total current liabilities

 

504,387

 

 

531,709

 

 

 

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

30,194

 

 

25,394

 

 

LONG-TERM DEBT

 

134,570

 

 

144,868

 

 

OTHER LONG-TERM LIABILITIES

 

37,419

 

 

36,767

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EQUITY:

 

 

 

 

 

 

 

Preferred stock – Authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at January 1, 2012, and October 2, 2011

 

 

 

 

 

Common stock – Authorized, 150,000 shares of $0.01 par value; issued and outstanding, 62,748 and 62,495 shares at January 1, 2012, and October 2, 2011, respectively

 

627

 

 

625

 

 

Additional paid-in capital

 

404,896

 

 

399,420

 

 

Accumulated other comprehensive income

 

15,380

 

 

4,754

 

 

Retained earnings

 

472,536

 

 

449,926

 

 

Tetra Tech stockholders’ equity

 

893,439

 

 

854,725

 

 

Noncontrolling interests

 

618

 

 

525

 

 

TOTAL EQUITY

 

894,057

 

 

855,250

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,600,627

 

 

$

1,593,988

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

Tetra Tech, Inc.

Condensed Consolidated Statements of Income

(unaudited – in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

January 1,
 2012

 

January 2,
2011

 

 

 

 

 

 

 

Revenue

 

$

682,627

 

 

$

611,124

 

 

Subcontractor costs

 

(190,571

)

 

(205,544

)

 

Other costs of revenue

 

(407,336

)

 

(329,927

)

 

Selling, general and administrative expenses

 

(48,627

)

 

(41,328

)

 

Operating income

 

36,093

 

 

34,325

 

 

 

 

 

 

 

 

 

 

Interest expense - net

 

(1,311

)

 

(1,305

)

 

Income before income tax expense

 

34,782

 

 

33,020

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(12,079

)

 

(10,266

)

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interests

 

22,703

 

 

22,754

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

(93

)

 

(453

)

 

 

 

 

 

 

 

 

 

Net income attributable to Tetra Tech

 

$

22,610

 

 

$

22,301

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Tetra Tech:

 

 

 

 

 

 

 

Basic

 

$

0.36

 

 

$

0.36

 

 

Diluted

 

$

0.36

 

 

$

0.36

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

62,433

 

 

61,665

 

 

Diluted

 

63,068

 

 

62,443

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

Tetra Tech, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

 

 

 

Three Months Ended

 

 

 

January 1,
 2012

 

January 2,
 2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interests

 

$

22,703

 

 

$

22,754

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income including noncontrolling interests to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

15,206

 

 

13,553

 

 

Equity in earnings of unconsolidated joint ventures

 

(969

)

 

(948

)

 

Distributions of earnings from unconsolidated joint ventures

 

1,079

 

 

886

 

 

Stock-based compensation

 

2,916

 

 

2,774

 

 

Excess tax benefits from stock-based compensation

 

(35

)

 

(84

)

 

Deferred income taxes

 

494

 

 

4,318

 

 

Provision for doubtful accounts

 

2,879

 

 

(1,092

)

 

Exchange gain

 

(14

)

 

(72

)

 

Gain on disposal of property and equipment

 

(84

)

 

(101

)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Accounts receivable

 

(10,669

)

 

37,994

 

 

Prepaid expenses and other assets

 

11,172

 

 

(10,375

)

 

Accounts payable

 

(19,241

)

 

(43,900

)

 

Accrued compensation

 

(9,004

)

 

(2,477

)

 

Billings in excess of costs on uncompleted contracts

 

8,796

 

 

(7,929

)

 

Other liabilities

 

9,650

 

 

(2,332

)

 

Income taxes receivable/payable

 

3,434

 

 

(4,036

)

 

Net cash provided by operating activities

 

38,313

 

 

8,933

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

(4,593

)

 

(4,236

)

 

Payments for business acquisitions, net of cash acquired

 

(2,574

)

 

(166,877

)

 

Proceeds from sale of property and equipment

 

377

 

 

144

 

 

Net cash used in investing activities

 

(6,790

)

 

(170,969

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Payments on long-term debt

 

(11,012

)

 

(2,154

)

 

Proceeds from borrowings

 

546

 

 

21,867

 

 

Payments of earn-out liabilities

 

(9,368

)

 

 

 

Net change overdrafts

 

(738

)

 

 

 

Distributions paid to noncontrolling interests

 

 

 

(501

)

 

Excess tax benefits from stock-based compensation

 

35

 

 

84

 

 

Net proceeds from issuance of common stock

 

2,990

 

 

3,270

 

 

Net cash (used in) provided by financing activities

 

(17,547

)

 

22,566

 

 

 

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

1,250

 

 

83

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

15,226

 

 

(139,387

)

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

90,494

 

 

220,933

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

105,720

 

 

$

81,546

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

1,107

 

 

$

585

 

 

Income taxes, net of refunds received

 

$

8,772

 

 

$

8,809

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


 


Table of Contents

 

TETRA TECH, INC.

 

Notes to Condensed Consolidated Financial Statements

 

1.             Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and related notes of Tetra Tech, Inc. (“we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  They do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended October 2, 2011.

 

Our condensed consolidated financial statements reflect all normal recurring adjustments that are considered necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented.  The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year or for future years.

 

Our condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries, and joint ventures of which we are the primary beneficiary.  For the joint ventures in which we do not have a controlling interest, but exert a significant influence, we apply the equity method of accounting (see Note 12, “Joint Ventures” for further discussion).  In the first quarter of fiscal 2012, we re-aligned certain operating units within our reportable segments to improve organizational effectiveness and efficiency by better aligning operations with similar client types, project types and financial metrics (see Note 9, “Reportable Segments” for further discussion).  Prior year amounts for reportable segments have been reclassified to conform to the current year presentation.  For the first quarters of fiscal 2012 and 2011, “Interest expense – net” on the condensed consolidated statements of income includes $0.2 million in interest income for each period.

 

2.             Accounts Receivable – Net

 

Net accounts receivable and billings in excess of costs on uncompleted contracts consisted of the following:

 

 

 

January 1,
2012

 

October 2,
2011

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Billed

 

$

362,362

 

 

$

364,779

 

 

Unbilled

 

319,385

 

 

309,091

 

 

Contract retentions

 

19,850

 

 

15,553

 

 

Total accounts receivable – gross

 

701,597

 

 

689,423

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

(36,627

)

 

(32,244

)

 

Total accounts receivable – net

 

$

664,970

 

 

$

657,179

 

 

 

 

 

 

 

 

 

 

Current billings in excess of costs on uncompleted contracts

 

$

93,571

 

 

$

84,754

 

 

Non-current billings in excess of costs on uncompleted contracts

 

5,811

 

 

5,832

 

 

Total billings in excess of costs on uncompleted contracts

 

$

99,382

 

 

$

90,586

 

 

 

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 period end date.  Most of our unbilled receivables at January 1, 2012 are expected to be billed and collected within 12 months.  Unbilled accounts receivable at January 1, 2012 include approximately $19 million related to claims and requests for equitable adjustment on contracts that provide for price redetermination primarily with agencies of the U.S. federal government.  This amount is management’s estimate of the most probable amount to be realized upon the conclusion of claims settlement process.  Contract retentions represent amounts withheld by clients until certain conditions are met or the project is completed, which may take several months or years.  The allowance for doubtful accounts is determined based on a review of client-specific accounts, and contract issues resulting from current events and economic circumstances.  Billings in excess of costs on uncompleted contracts represent the amount of

 

6



Table of Contents

 

cash collected from clients and billings to clients on contracts in advance of revenue recognized.  The majority of billings in excess of costs on uncompleted contracts will be earned within 12 months.

 

Billed accounts receivable related to U.S. federal government contracts were $94.8 million and $88.5 million at January 1, 2012 and October 2, 2011, respectively.  U.S. federal government unbilled receivables, net of progress payments, were $109.9 million and $102.7 million at January 1, 2012 and October 2, 2011, respectively.  The non-current billings in excess of costs on uncompleted contracts are reported as part of our “Other long-term liabilities” on our condensed consolidated balance sheets.  Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at January 1, 2012 and October 2, 2011.

 

3.             Mergers and Acquisitions

 

At the beginning of the first quarter of fiscal 2011, we acquired all of the outstanding capital stock of BPR, Inc. (“BPR”), a Canadian scientific and engineering services firm that provides multidisciplinary consulting and engineering support for water, energy, industrial plants, buildings and infrastructure projects.  This acquisition further expanded our geographic presence in eastern Canada, and enabled us to provide clients with additional services throughout Canada.  BPR is part of our Engineering and Consulting Services segment.  As of the acquisition date, the estimated fair value of the purchase price was approximately $186 million, which resulted in $128.1 million of goodwill.  The goodwill amount represented the value paid for the assembled work force, the international geographic presence in eastern Canada, and engineering and consulting expertise.  The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:

 

 

 

Amount

 

 

 

(in thousands)

 

 

 

 

 

 

Current assets

 

$

77,698

 

 

Property and equipment

 

7,178

 

 

Goodwill

 

128,140

 

 

Intangible and other assets

 

36,988

 

 

Current liabilities

 

(42,481

)

 

Long-term deferred taxes

 

(9,622

)

 

Noncontrolling interests

 

(12,222

)

 

Net assets acquired

 

$

185,679

 

 

 

In fiscal 2011, we made other acquisitions that enhanced our service offerings and expanded our geographic presence in the Engineering and Consulting Services and Technical Support Services segments.  The aggregate fair value of the purchase price for these acquisitions was approximately $100 million.

 

The fair values of the purchase prices for acquisitions we completed in fiscal 2011 and 2010 include estimated contingent earn-out liabilities.  The fair values and ultimate payments of these liabilities are based upon the achievement of specified financial objectives typically over a two-year period from the respective acquisition dates.  The aggregate current estimated earn-out liabilities of $54.5 million and $64.1 million are reported in “Estimated contingent earn-out liabilities”, and the aggregate non-current estimated earn-out liabilities of $11.4 million and $11.0 million are reported in “Other long-term liabilities” on the condensed consolidated balance sheets at January 1, 2012 and October 2, 2011, respectively.

 

7



Table of Contents

 

4.             Goodwill and Intangibles

 

The following table summarizes the changes in the carrying value of goodwill:

 

 

 

Engineering
and Consulting
Services

 

Technical
Support
Services

 

Engineering
and
Architecture
Services 
(2)

 

Remediation
and
Construction
Management

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 2, 2011(1) 

 

$

376,340

 

 

$

127,526

 

 

$

17,710

 

 

$

47,838

 

 

$

569,414

 

 

Adjustments

 

35

 

 

 

 

 

 

 

 

35

 

 

Currency translation adjustments(3) 

 

7,957

 

 

 

 

 

 

 

 

7,957

 

 

Balance at January 1, 2012

 

$

384,332

 

 

$

127,526

 

 

$

17,710

 

 

$

47,838

 

 

$

577,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)     Prior year amounts for reportable segments have been reclassified to conform to the current year presentation as discussed in Note 1, “Basis of Presentation”.

(2)     Gross amount of goodwill for the Engineering and Architecture Services segment was $122.7 million for both January 1, 2012, and October 2, 2011. For both periods, accumulated impairment losses for this segment were $105 million, reflecting impairment charges in fiscal 2005. There were no impairment losses in the other reportable segments.

(3)     Currency translation adjustments relate to our foreign subsidiaries with functional currencies different than our reporting currency.

 

The gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives included in “Intangible assets - net” on the condensed consolidated balance sheets, were as follows:

 

 

 

January 1, 2012

 

October 2, 2011

 

 

 

Weighted-
Average
Remaining Life
(in Years)

 

Gross
Amount

 

Accumulated
Amortization

 

Gross
Amount

 

Accumulated
Amortization

 

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

1.7

 

$

5,257

 

 

$

(3,756

)

 

$

5,175

 

 

$

(3,430

)

 

Client relations

 

6.0

 

83,326

 

 

(21,390

)

 

81,619

 

 

(17,951

)

 

Backlog

 

0.7

 

53,623

 

 

(44,547

)

 

52,938

 

 

(39,452

)

 

Technology and trade names

 

4.4

 

2,755

 

 

(699

)

 

2,684

 

 

(530

)

 

Total

 

 

 

$

144,961

 

 

$

(70,392

)

 

$

142,416

 

 

$

(61,363

)

 

 

In the first quarter of fiscal 2012, gross amounts increased due to foreign currency translation adjustments.  Amortization expense for these intangible assets for the first quarters of fiscal 2012 and 2011 was $8.3 million and $6.8 million, respectively. Estimated amortization expense for the remainder of fiscal 2012 and succeeding years is as follows:

 

 

 

Amount

 

 

 

(in thousands)

 

 

 

 

 

 

2012

 

$

18,951

 

 

2013

 

12,291

 

 

2014

 

11,203

 

 

2015

 

10,910

 

 

2016

 

9,388

 

 

Beyond

 

11,826

 

 

Total

 

$

74,569

 

 

 

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Table of Contents

 

5.             Property and Equipment

 

Property and equipment consisted of the following:

 

 

 

January 1,
2012

 

October 2,
2011

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Land and buildings

 

$

11,729

 

 

$

11,729

 

 

Equipment, furniture and fixtures

 

163,999

 

 

160,644

 

 

Leasehold improvements

 

24,341

 

 

23,304

 

 

 

 

200,069

 

 

195,677

 

 

Accumulated depreciation and amortization

 

(124,762

)

 

(118,141

)

 

Property and equipment at cost, net

 

$

75,307

 

 

$

77,536

 

 

 

The depreciation expense related to property and equipment, including assets under capital leases, was $6.8 million and $6.7 million for the first quarters of fiscal 2012 and 2011, respectively.

 

6.             Stockholders’ Equity and Stock Compensation Plans

 

We recognize the fair value of our stock-based compensation awards as compensation expense on a straight-line basis over the requisite service period in which the award vests.  Stock-based compensation expense for the first quarters of fiscal 2012 and 2011 was $2.9 million and $2.8 million, respectively.  The majority of these amounts was included in “Selling, general and administrative (“SG&A”) expenses” in our condensed consolidated statements of income.  In the first quarter of fiscal 2012, we granted 407,249 stock options with an exercise price of $22.53 per share and an estimated weighted-average fair value of $9.36 per share.  In addition, we awarded 105,567 shares of restricted stock to our directors and executive officers at the fair value of $22.53 per share on the award date.  All of these shares are performance-based and vest over a three-year period.  The number of shares that ultimately vest is based on the growth in our diluted earnings per share.  Additionally, we awarded 181,348 restricted stock units (“RSUs”) to our employees at the fair value of $22.53 per share on the award date.  All of the RSUs have time-based vesting over a four-year period.

 

7.             Earnings Per Share (“EPS”)

 

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding, less unvested restricted stock for the period.  Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive potential common shares for the period.  Potential common shares include the weighted-average dilutive effects of outstanding stock options and unvested restricted stock 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

 

 

 

January 1,
2012

 

January 2,
2011

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

Net income attributable to Tetra Tech

 

$

22,610

 

 

$

22,301

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - basic

 

62,433

 

 

61,665

 

 

Effect of dilutive stock options and unvested restricted stock

 

635

 

 

778

 

 

Weighted-average common stock outstanding - diluted

 

63,068

 

 

62,443

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Tetra Tech:

 

 

 

 

 

 

 

Basic

 

$

0.36

 

 

$

0.36

 

 

Diluted

 

$

0.36

 

 

$

0.36

 

 

 

For the first quarters of fiscal 2012 and 2011, 3.4 million and 2.9 million options were excluded from the calculation of dilutive potential common shares, respectively.  These options were not included in the computation of dilutive potential common shares because the assumed proceeds per share exceeded the average market price per share for that period.  Therefore, their inclusion would have been anti-dilutive.

 

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8.             Income Taxes

 

The effective tax rates for the first quarters of fiscal 2012 and 2011 were 34.7% and 31.1%, respectively.  In the first quarter of fiscal 2011, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was re-signed into law, including a retroactive extension of federal research and experimentation credits (“R&E credits”) for amounts incurred from January 1, 2010 through December 31, 2011.  As a result of the retroactive extension, a $1.2 million benefit from R&E credits for the last nine months of fiscal 2010 was included in our first quarter of fiscal 2011 tax expense, resulting in a lower effective tax rate in fiscal 2011.  With the expiration of federal R&E credits on December 31, 2011, we estimated a benefit from these credits only through the expiration date.  Should the R&E credits provision be retroactively extended during fiscal 2012, additional benefits will be reflected in our effective tax rate during the quarter reporting period of enactment.

 

9.             Reportable Segments

 

In the first quarter of fiscal 2012, we implemented organizational changes that resulted in a realignment of certain operating units within our reportable segments.  These changes are intended to improve organizational effectiveness and efficiency by better aligning operations with similar client types, project types and financial metrics.  Prior year amounts have been reclassified to conform to the current year presentation.

 

Our reportable segments are as follows:

 

Engineering and Consulting Services (“ECS”).  ECS provides front-end science, consulting engineering services and project management in the areas of surface water management, groundwater, waste management, mining and geotechnical sciences, arctic engineering, industrial processes, and information technology.

 

Technical Support Services (“TSS”).  TSS advises clients through the study, design and implementation phases of projects. TSS provides management consulting and strategic direction in the areas of environmental assessments/hazardous waste management, climate change, international development/stabilization, energy services, and technical government staffing services.

 

Engineering and Architecture Services (“EAS”).  EAS provides engineering and architecture design services, including Leadership in Energy and Environmental Design (“LEED”) and sustainability services, together with technical and program administration services for projects related to water infrastructure, buildings, and transportation and facilities.

 

Remediation and Construction Management (“RCM”).  RCM is focused on providing full-service support to U.S. federal government, U.S. state and local governments, and U.S. commercial clients.  RCM’s service lines include environmental remediation, construction management, infrastructure development, and alternative energy.

 

Management evaluates the performance of these reportable segments based upon their respective segment operating income before the effect of amortization expense related to acquisitions and other unallocated corporate expenses.  We account 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 costs of the services performed.  All significant intercompany balances and transactions are eliminated in consolidation.

 

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The following tables set forth summarized financial information regarding our reportable segments:

 

Reportable Segments

 

 

 

ECS

 

TSS

 

EAS

 

RCM

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended January 1, 2012:

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

245,663

 

$

228,832

 

$

81,633

 

$

160,758

 

$

716,886

 

Segment operating income

 

19,491

 

15,502

 

4,405

 

5,890

 

45,288

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended January 2, 2011:

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

205,389

 

$

223,305

 

$

67,983

 

$

144,565

 

$

641,242

 

Segment operating income

 

18,301

 

15,789

 

4,744

 

3,111

 

41,945

 

 

Total assets by segment were as follows:

 

 

 

January 1,
2012

 

October 2,
2011

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

ECS

 

$

792,491

 

 

$

767,347

 

 

TSS

 

505,309

 

 

505,198

 

 

EAS

 

110,112

 

 

111,555

 

 

RCM

 

303,667

 

 

296,361

 

 

Total assets

 

$

1,711,579

 

 

$

1,680,461

 

 

 

Reconciliations

 

 

 

Three Months Ended

 

 

 

January 1,
2012

 

January 2,
2011

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

Revenue from reportable segments

 

$

716,886

 

 

$

641,242

 

 

Elimination of inter-segment revenue

 

(34,259

)

 

(30,118

)

 

Total consolidated revenue

 

$

682,627

 

 

$

611,124

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

Segment operating income

 

$

45,288

 

 

$

41,945

 

 

Amortization of intangibles

 

(8,264

)

 

(6,781

)

 

Other expense (1) 

 

(931

)

 

(839

)

 

Total consolidated operating income

 

$

36,093

 

 

$

34,325

 

 

 

 

 

 

 

 

 

 

(1)     Other expense includes corporate costs not allocable to segments.

 

 

 

 

 

 

 

 

 

 

January 1,
2012

 

October 2,
2011

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Total assets of reportable segments

 

$

1,711,579

 

 

$

1,680,461

 

 

Assets not allocated to segments and intercompany eliminations

 

(110,952

)

 

(86,473

)

 

Total consolidated assets

 

$

1,600,627

 

 

$

1,593,988

 

 

 

Major Clients

 

Other than the U.S. federal government, no single client accounted for more than 10% of our revenue.  All of our segments generated revenue from all client sectors.

 

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The following table represents our revenue by client sector:

 

 

 

Three Months Ended

 

 

 

January 1,
2012

 

January 2,
2011

 

 

 

(in thousands)

 

Client Sector

 

 

 

 

 

International (1) 

 

$

159,931

 

 

$

126,557

 

 

U.S. commercial

 

177,430

 

 

135,135

 

 

U.S. federal government (2) 

 

271,408

 

 

283,520

 

 

U.S. state and local government

 

73,858

 

 

65,912

 

 

Total

 

$

682,627

 

 

$

611,124

 

 

 

 

 

 

 

 

 

 

(1)              Includes revenue generated from our foreign operations, primarily in Canada, and revenue generated from non-U.S. clients.

(2)       Includes revenue generated under U.S. government contracts performed outside the United States.

 

 

10.          Comprehensive Income

 

Comprehensive income is comprised of net income, translation gains and losses from foreign subsidiaries with functional currencies different than our reporting currency, and unrealized gains and losses on hedging activities.  The components of comprehensive income, net of related tax, are as follows:

 

 

 

Three Months Ended

 

 

 

January 1,
2012

 

January 2,
2011

 

 

 

(in thousands)

 

 

 

 

 

 

 

Net income including noncontrolling interests

 

$

22,703

 

 

$

22,754

 

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

10,827

 

 

7,365

 

 

Foreign currency hedge

 

(201

)

 

(191

)

 

Comprehensive income including noncontrolling interests

 

33,329

 

 

29,928

 

 

Comprehensive income attributable to noncontrolling interests

 

(93

)

 

(453

)

 

Comprehensive income attributable to Tetra Tech

 

$

33,236

 

 

$

29,475

 

 

 

11.          Fair Value Measurements

 

Derivative Instruments.  In fiscal 2009, we entered into an intercompany promissory note with a wholly-owned Canadian subsidiary in connection with the acquisition of Wardrop Engineering, Inc.  The intercompany note receivable is denominated in Canadian dollars (“CAD”) and has a fixed rate of interest payable in CAD.  In the first quarter of fiscal 2010, we entered into a forward contract for CAD $4.2 million (equivalent to U.S. $4.0 million at the date of inception) that matures on January 27, 2012.  In the second quarter of fiscal 2010, we entered into a forward contract for CAD $4.2 million (equivalent to U.S. $3.9 million at the date of inception) that matures on January 28, 2013. In the third quarter of fiscal 2011, we entered into a forward contract for CAD $4.2 million (equivalent to U.S. $4.2 million at the date of inception) that matures on January 27, 2014.  In the second quarter of fiscal 2012, we settled one of the foreign currency forward contracts for U.S. $3.9 million.  Our objective was to eliminate variability of our cash flows on the amount of interest income we receive on the promissory note from changes in foreign currency exchange rates.  These contracts were designated as cash flow hedges. Accordingly, changes in the fair value of the contracts are recorded in “Other comprehensive income”.  The fair value and the change in the fair value were not material for the first quarters of fiscal 2012 and 2011.  No gains or losses were recognized in earnings as these contracts were deemed to be effective hedges.

 

Debt.  The fair value of long-term debt was determined using the present value of future cash flows based on the borrowing rates currently available for debt with similar terms and maturities.  The carrying value of our long-term debt approximates fair value.

 

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12.          Joint Ventures

 

We are required to perform an analysis to determine whether our variable interests give us a controlling financial interest in a variable interest entity (“VIE”) and whether we should therefore consolidate the VIE.  This analysis requires us to assess whether we have the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.  In the normal course of business, we form joint ventures, including partnerships and partially-owned limited liability companies, with third parties primarily to bid on and execute specific projects.  In accordance with the current consolidation standard, we analyzed all of our joint ventures and classified them into two groups: (1) joint ventures that must be consolidated because they are either not VIEs and we hold the majority voting interest, or because they are VIEs and we are the primary beneficiary; and (2) joint ventures that do not need to be consolidated because they are either not VIEs and we hold a minority voting interest, or because they are VIEs and we are not the primary beneficiary.

 

Joint ventures are considered VIEs if (1) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support; (2) as a group, the holders of the equity investment at risk lack the ability to make certain decisions, the obligation to absorb expected losses or the right to receive expected residual returns; or (3) an equity investor has voting rights that are disproportionate to its economic interest and substantially all of the entity’s activities are on behalf of the investor.  Many of our joint venture agreements provide for capital calls to fund operations, as necessary; however, such funding has been historically infrequent and is not anticipated to be material.  The majority of our joint ventures are pass-through entities for client invoicing purposes.  As such, these are VIEs because the total equity investment is typically nominal and not sufficient to permit the entity to finance its activities without additional financial support.

 

We are considered the primary beneficiary and required to consolidate a VIE if we have the power to direct the activities that most significantly impact that VIE’s economic performance, and the obligation to absorb losses or the right to receive benefits of that VIE that could potentially be significant to the VIE.  In determining whether we are the primary beneficiary, our significant assumptions and judgments include the following: (1) identifying the significant activities and the parties that have the power to direct them; (2) reviewing the governing board composition and participation ratio; (3) determining the equity, profit and loss ratio; (4) determining the management-sharing ratio; (5) reviewing employment terms, including which joint venture partner provides the project manager; and (6) reviewing the funding and operating agreements.  Examples of significant activities include engineering and design services; management consulting services; procurement and construction services; program management; construction management; and operations and maintenance services.  If we determine that the power to direct the significant activities is shared by two or more joint venture parties, then there is no primary beneficiary and no party consolidates the VIE.  In making the shared-power determination, we analyze the key contractual terms, governance, related party and de facto agency as they are defined in the accounting standard, and other arrangements.

 

A majority of our joint ventures were unconsolidated VIEs because we were not the primary beneficiary of those joint ventures.  In some cases, we consolidated VIEs because we were the primary beneficiary of those joint ventures.  In the first quarter of fiscal 2012, there were no changes in the status of the VIEs and no changes to the primary beneficiary designation of each VIE. Accordingly, we determined that none of the unconsolidated joint ventures should be consolidated and none of the consolidated joint ventures should be de-consolidated.

 

We account for the majority of our unconsolidated joint ventures using the equity method of accounting.  Under this method, we recognize our proportionate share of the net earnings of these joint ventures as a single line item under “Other costs of revenue” in our condensed consolidated statements of income.  For the first quarters of fiscal 2012 and 2011, we reported $1.0 million and $0.9 million of equity in earnings of unconsolidated joint ventures, respectively.  Our maximum exposure to loss as a result of our investments in unconsolidated VIEs is typically limited to the aggregate of the carrying value of the investment and future funding commitments.  Future funding commitments for the unconsolidated VIEs are immaterial.  For consolidated joint ventures, the assets are restricted for use only by those joint ventures and are not available for our general operations.  Our consolidated and unconsolidated joint ventures are each, individually and in aggregate, immaterial to our condensed consolidated financial statements.

 

13.          Commitments and Contingencies

 

We are subject to certain claims and lawsuits typically filed against the engineering, consulting and construction profession, alleging primarily professional errors or omissions.  We carry professional liability insurance, subject to certain deductibles and policy limits, against such claims.  However, in some actions, parties

 

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are seeking damages that exceed our insurance coverage or for which we are not insured.  While management does not believe that the resolution of these claims will have a material adverse effect, individually or in aggregate, on our financial position, results of operations or cash flows, management acknowledges the uncertainty surrounding the ultimate resolution of these matters.

 

In May 2003, Innovative Technologies Corporation (“ITC”) filed a lawsuit in Montgomery County, Ohio against Advanced Management Technology, Inc. (“AMT”) and other defendants for misappropriation of trade secrets, among other claims.  In June 2004, we purchased all the outstanding shares of AMT.  As part of the purchase agreement, the former owners of AMT agreed to indemnify us for all costs and damages related to this lawsuit.  In December 2007, the case went to trial and the jury awarded $5.8 million in compensatory damages to ITC.  In addition, the jury awarded $17 million in punitive damages to ITC plus reasonable attorneys’ fees.  In July 2008, the Common Pleas Court of Montgomery County denied AMT’s motion for judgment notwithstanding the verdict and conditionally denied AMT’s motion for a new trial.  Further, the court remitted the verdict to $2.0 million in compensatory damages and $5.8 million in punitive damages.  ITC accepted the remittitur, and AMT appealed.  The appellate court remanded the matter to the trial court for ruling on ITC’s motion for prejudgment interest and attorneys’ fees.  In December 2009, the trial court awarded ITC $2.9 million in attorneys’ fees and costs, and denied ITC’s motion for prejudgment interest.  AMT appealed the trial court’s decision awarding compensatory and punitive damages, and attorneys’ fees and costs.  ITC cross-appealed the trial court’s decision to remit the jury verdict and the trial court’s denial of prejudgment interest.  On October 28, 2011, the court of appeals issued its decision and affirmed the trial court’s rulings.  As of that date, the outstanding judgment against AMT, including post-judgment interest, approximated $12.9 million.  ITC has filed a motion seeking additional attorneys’ fees which is pending.  In December 2011, AMT appealed the court of appeals decision to the Ohio Supreme Court.  AMT has posted a bond, as required by the trial court, for $13.4 million.  The Ohio Supreme Court has stayed enforcement of the judgment pending appeal and the bond has been continued.  We believe that a reasonably possible range of exposure, including attorneys’ fees, is from $0 to approximately $14.5 million.  At January 1, 2012, we have recorded a liability representing our best estimate of a probable loss.  Further, for the same amount, we have recorded a receivable from the former owners of AMT as we believe it is probable they will fully honor their indemnification agreement with us for any and all costs and damages related to this lawsuit.

 

14.          Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated accounting guidance that amends the disclosure requirements with respect to fair value measurements.  Specifically, the new guidance requires disclosure of amounts transferred in and out of Levels 1 and 2 fair value measurements, a reconciliation presented on a gross basis rather than a net basis of activity in Level 3 fair value measurements, greater disaggregation of the assets and liabilities for which fair value measurements are presented, and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and 3 fair value measurements. Part of this guidance was effective for us in the first quarter of fiscal 2011.  We adopted the additional requirement on Level 3 fair value measurements on October 3, 2011.  The adoption of this guidance did not have a material impact on the consolidated financial statements.

 

In December 2010, the FASB issued updated accounting guidance to clarify that pro forma disclosures should be presented as if a business combination occurred at the beginning of the prior annual period for purposes of preparing both the current reporting period and the prior reporting period pro forma financial information.  These disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments.  The new accounting guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  We adopted this guidance on October 3, 2011; however, no business combinations have been completed since adoption.

 

In December 2010, the FASB issued updated accounting guidance to amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists.  The new accounting guidance is effective for fiscal years beginning after December 15, 2010.  We adopted the disclosures on October 3, 2011 and it did not have an impact on the consolidated financial statements.

 

In May 2011, the FASB issued updated guidance to improve comparability of fair value measurements between GAAP and International Financial Reporting Standards.  This update amends current fair value

 

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measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization.  The updated guidance is effective for fiscal years and interim periods beginning after December 15, 2011.  Early adoption is not permitted.  We will adopt the updated guidance in the first quarter of fiscal 2013, and we do not expect the adoption to have a material impact on the consolidated financial statements.

 

In June 2011, the FASB issued new guidance on the presentation of comprehensive income.  The new guidance allows an entity to present components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity.  While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance.  Additionally, in December 2011, the FASB issued new guidance to defer the effective date pertaining to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented.  During the deferral period, the existing requirements in the original guidance for the presentation of reclassification adjustments must continue to be followed.  This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011 (first quarter of fiscal 2013 for us) on a retrospective basis.

 

In September 2011, the FASB issued updated accounting guidance to simplify how an entity tests goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  An entity will not be required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The updated guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted.  We expect to adopt the guidance in fiscal 2012, and we do not expect the adoption to have a material impact on the consolidated financial statements.

 

In December 2011, the FASB issued new guidance to enhance disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position.  Entities are required to provide both net and gross information for these assets and liabilities in order to facilitate comparability between financial statements prepared on the basis of GAAP and financial statements prepared on the basis of International Financial Reporting Standards. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective application required.  We will adopt the updated guidance in the first quarter of fiscal 2014 and are evaluating the impact on the consolidated financial statements.

 

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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 the “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.  All statements other than statements of historical facts are statements that could be deemed forward-looking statements.  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 under “Part II, Item 1A. 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 publicly any forward-looking statements for any reason.

 

GENERAL OVERVIEW

 

We are a leading provider of consulting, engineering, program management, construction management and technical services that focuses on supporting the global fundamental needs for water, the environment, energy, infrastructure and natural resources.  We are a full-service company that leads with science.  We typically begin at the earliest stage of a project by identifying technical solutions to problems and developing execution plans tailored to our clients’ needs and resources.  Our solutions may span the entire life cycle of consulting and engineering projects and include applied science, research and technology, engineering, design, construction management, construction, operations and maintenance, and information technology.  We focus on both organic and acquisitive growth to expand our geographic reach, diversify our client base, and increase the breadth and depth of our service offerings to address existing and emerging markets.  We currently have approximately 13,000 employees worldwide, located primarily in North America.

 

We derive income from fees for professional, technical, project management and construction management services.  As primarily 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.  We provide our services to a diverse base of U.S. commercial and international clients, as well as U.S. federal and U.S. state and local government agencies.  The following table presents the percentage of our revenue by client sector:

 

 

 

Three Months Ended

 

 

 

January 1,
2012

 

January 2,
2011

 

Client Sector

 

 

 

 

 

International (1) 

 

23.4

%

 

20.7

%

 

U.S. commercial

 

26.0

 

 

22.1

 

 

U.S. federal government (2) 

 

39.8

 

 

46.4

 

 

U.S. state and local government

 

10.8

 

 

10.8

 

 

 

 

100.0

%

 

100.0

%

 

 

 

 

 

 

 

 

 

(1)       Includes revenue generated from our foreign operations, primarily in Canada, and revenue generated from non-U.S. clients.

(2)       Includes revenue generated under U.S. government contracts performed outside the United States.

 

 

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In the first quarter of fiscal 2012, we implemented organizational changes that resulted in a realignment of certain operating units within our reportable segments.  These changes are intended to improve organizational effectiveness and efficiency by better aligning operations with similar client types, project types and financial metrics.  Prior year amounts have been reclassified to conform to the current year presentation.

 

We manage our business under the following four reportable segments:

 

Engineering and Consulting Services.  ECS provides front-end science, consulting engineering services and project management in the areas of surface water management, groundwater, waste management, mining and geotechnical sciences, arctic engineering, industrial processes, and information technology.

 

Technical Support Services.  TSS advises clients through the study, design and implementation phases of projects.  TSS provides management consulting and strategic direction in the areas of environmental assessments/hazardous waste management, climate change, international development/stabilization, energy services, and technical government staffing services.

 

Engineering and Architecture Services.  EAS provides engineering and architecture design services, including LEED and sustainability services, together with technical and program administration services for projects related to water infrastructure, buildings, and transportation and facilities.

 

Remediation and Construction Management.  RCM is focused on providing full-service support to U.S. federal government, U.S. state and local governments, and U.S. commercial clients.  RCM’s service lines include environmental remediation, construction management, infrastructure development, and alternative energy.

 

The following table represents the percentage of our revenue by reportable segment:

 

 

 

Three Months Ended

 

 

 

January 1,
2012

 

January 2,
2011

 

Reportable Segment

 

 

 

 

 

ECS

 

36.0

%

 

33.6

%

 

TSS

 

33.5

 

 

36.5

 

 

EAS

 

12.0

 

 

11.1

 

 

RCM

 

23.5

 

 

23.7

 

 

Inter-segment elimination

 

(5.0

)

 

(4.9

)

 

 

 

100.0

%

 

100.0

%

 

 

We provide services under three principal types of contracts: fixed-price, time-and-materials and cost-plus. The following table represents the percentage of our revenue by contract type:

 

 

 

Three Months Ended

 

 

 

January 1,
2012

 

January 2,
2011

 

Contract Type

 

 

 

 

 

Fixed-price

 

42.5

%

 

37.6

%

 

Time-and-materials

 

38.5

 

 

37.4

 

 

Cost-plus

 

19.0

 

 

25.0

 

 

 

 

100.0

%

 

100.0

%

 

 

A majority of our contract revenue and contract costs are recorded using the percentage-of-completion (cost-to-cost) method. Under this method, revenue is recognized in the ratio of contract costs incurred compared to total estimated contract 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.

 

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 a large portion

 

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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, finance, accounting, administration and information technology.  Our SG&A expenses also include a portion of stock-based compensation and depreciation of property and equipment related to our corporate headquarters, and the amortization of identifiable intangible assets.  Most of these costs are unrelated to specific clients or projects and can vary as expenses are incurred to support company-wide activities and initiatives.

 

We experience seasonal trends in our business.  Our revenue and operating income are typically lower in the first half of our fiscal year, primarily due to the Thanksgiving, Christmas and New Year’s holidays.  Many of our clients’ employees, as well as our own employees, take vacations during these holiday periods.  Further, seasonal inclement weather conditions occasionally cause some of our offices to close temporarily or may hamper our project field work, particularly in the ECS and RCM segments.  These occurrences result 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 favorable weather conditions during spring and summer months that may result in higher billable hours.  In addition, our revenue is typically higher in the fourth fiscal quarter due to the U.S. federal government’s fiscal year-end spending.

 

ACQUISITIONS AND DIVESTITURES

 

Acquisitions.  We continuously evaluate the marketplace for strategic acquisition opportunities.  Due to our reputation, size, financial resources, geographic presence and range of services, we have numerous opportunities to acquire privately and publicly held companies or selected portions of such companies.  During our evaluation, we examine the effect an acquisition may have on our long-range business strategy and results of operations.  Generally, we proceed with an acquisition if we believe that it would have a positive effect on future operations and could strategically expand our service offerings.  As successful integration and implementation are essential to achieving favorable results, no assurance can be given that all acquisitions will provide accretive results.  Our strategy is to position ourselves to address existing and emerging markets.  We view acquisitions as a key component of our growth strategy, and we intend to use cash, debt or securities, as we deem appropriate, to fund acquisitions.  We may acquire other businesses that we believe are synergistic and will ultimately increase our revenue and net income, strengthen our ability to achieve our strategic goals, provide critical mass with existing clients and further expand our lines of service.  We typically pay a purchase price that results in the recognition of goodwill, generally representing the intangible value of a successful business with an assembled workforce specialized in our areas of interest. For analytical purposes, acquisitive revenue consists of revenue derived from acquired companies during the first 12 months following their respective acquisition dates.

 

During fiscal 2011, we made acquisitions that enhanced our service offerings and expanded our geographic presence in the ECS and TSS segments.  The largest of these acquisitions was BPR, which was completed in the first quarter of fiscal 2011. BPR is a Canadian scientific and engineering services firm that provides multidisciplinary consulting and engineering support for water, energy, industrial plants, buildings and infrastructure projects.  This acquisition further expanded our geographic presence in eastern Canada, and enabled us to provide clients with additional services throughout Canada.  BPR is part of the ECS segment.

 

Divestitures.  To complement our acquisition strategy and our focus on internal growth, we regularly review and evaluate our existing operations to determine whether our business model should change through the divestiture of certain businesses. Accordingly, from time to time, we may divest certain non-core businesses and reallocate our resources to businesses that better align with our long-term strategic direction.  We did not have any divestitures in the first quarters of fiscal 2012 and 2011.

 

OVERVIEW OF RESULTS AND BUSINESS TRENDS

 

General.  In the first quarter of fiscal 2012, our business grew compared to the year-ago quarter despite continuing challenges for the markets in which we operate.  We continued our focus on organic growth and the pursuit of strategic acquisitions that are expected to enhance our service offerings and expand our geographic presence.  As a result, our revenue grew 11.7% compared to the year-ago quarter due to contributions from fiscal 2011 acquisitions and strength in projects for Fortune 500 companies worldwide.

 

We foresee the continuation of a slow and gradual economic recovery in the United States following the severe economic weakness experienced during the global financial crisis and a continuation of strong demand in our international markets.  We believe that our non-U.S. markets will experience a faster economic recovery.  As such, we expect that our revenue will grow moderately in fiscal 2012 compared to fiscal 2011 due to anticipated growth in our business and contributions from our international activities.

 

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International.  Our international business grew 26.4% in the first quarter of fiscal 2012 compared to the year-ago quarter. The growth was driven by strong demand for our water, environmental and infrastructure design services in Canada, Australia and Chile. We expect that our international business will continue its strong growth in fiscal 2012 compared to fiscal 2011 as a result of our continued expansion in Canada, our recent expansion into Australia and Chile, and demand for our services from broad-based clients worldwide.

 

U.S. Commercial.  Our U.S. commercial business grew 31.3% in the first quarter of fiscal 2012 compared to the year-ago quarter.  The growth was primarily attributable to increased revenue from industrial and energy projects for Fortune 500 companies. Many of our largest U.S. commercial clients are returning to more typical environmental and infrastructure capital spending levels following a period of budgetary constraints during the global financial crisis.  Therefore, although we expect that some economic weakness may continue in certain sectors of our U.S. commercial business, we are optimistic regarding the growth in this business due to increased spending by our largest U.S. commercial clients.  Accordingly, we expect that our U.S. commercial business will grow moderately in fiscal 2012 compared to fiscal 2011.  Our U.S. commercial clients typically react rapidly to economic change. However, if the U.S. economy experiences a slowdown in fiscal 2012, we would expect our U.S. commercial outlook to change accordingly.

 

U.S. Federal Government.  Our U.S. federal government business declined 4.3% in the first quarter of fiscal 2012 compared to the year-ago quarter.  The decline was primarily due to reduced activity on U.S. Army Corps of Engineers (“USACE”) and other U.S. Department of Defense (“DoD”) programs.  The decline was partially offset by revenue growth from international development services for the U.S. Department of State (“DoS”) and from our front-end water, environmental, and infrastructure engineering and design services for other federal government agencies.  These agencies included the National Science Foundation (“NSF”), the U.S. Department of Agriculture (“DOA”), and the Federal Aviation Administration (“FAA”).  During periods of economic volatility, our U.S. federal government business has historically been the most stable and predictable.  However, due to U.S. federal budget uncertainties, we have remained cautious.  We expect revenue from our U.S. federal government business to be stable in fiscal 2012 compared to fiscal 2011.

 

U.S. State and Local Government.  Our U.S. state and local government business increased 12.1% in the first quarter of fiscal 2012 compared to the year-ago quarter.  The growth was driven by increased revenue from essential infrastructure projects.  Many state and local government agencies continue to face serious economic challenges, including budget deficits and difficult cost-cutting decisions.  Simultaneously, states are facing major long-term infrastructure needs, including the need for maintenance, repair and upgrading of existing critical infrastructure and the need to build new facilities.  The funding risks associated with our U.S. state and local government programs are partially mitigated by regulatory requirements driving some of these programs, such as regulatory-mandated consent decrees.  As a result, some programs will generally progress despite budget pressures as demonstrated by the growth in the first quarter of fiscal 2012.  However, because we anticipate that many state and local government agencies will continue to face serious economic challenges, we expect our U.S. state and local government business to experience slow growth in fiscal 2012 compared to fiscal 2011.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

Consolidated Results of Operations

 

 

 

Three Months Ended

 

 

 

January 1,

 

January 2,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

682,627

 

 

$

611,124

 

 

$

71,503

 

 

11.7

%

 

Subcontractor costs

 

(190,571

)

 

(205,544

)

 

14,973

 

 

7.3

 

 

Revenue, net of subcontractor costs (1) 

 

492,056

 

 

405,580

 

 

86,476

 

 

21.3

 

 

Other costs of revenue

 

(407,336

)

 

(329,927

)

 

(77,409

)

 

(23.5

)

 

Selling, general and administrative expenses

 

(48,627

)

 

(41,328

)

 

(7,299

)

 

(17.7

)

 

Operating income

 

36,093

 

 

34,325

 

 

1,768

 

 

5.2

 

 

Interest expense - net

 

(1,311

)

 

(1,305

)

 

(6

)

 

(0.5

)

 

Income before income tax expense

 

34,782

 

 

33,020

 

 

1,762

 

 

5.3

 

 

Income tax expense

 

(12,079

)

 

(10,266

)

 

(1,813

)

 

(17.7

)

 

Net income including noncontrolling interests

 

22,703

 

 

22,754

 

 

(51

)

 

(0.2

)

 

Net income attributable to noncontrolling interests

 

(93

)

 

(453

)

 

360

 

 

79.5

 

 

Net income attributable to Tetra Tech

 

$

22,610

 

 

$

22,301

 

 

$

309

 

 

1.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)                We believe that the presentation of “Revenue, net of subcontractor costs”, a non-GAAP financial measure, enhances investors’ ability to analyze our business trends and performance because it substantially measures the work performed by our employees.  In the course of providing services, we routinely subcontract various services and, under certain U.S. Agency for International Development (“USAID”) programs, issue grants.  Generally, these subcontractor costs and grants are passed through to our clients and, in accordance with GAAP and industry practice, are included in our revenue when it is our contractual responsibility to procure or manage these activities.  The grants are included as part of our subcontractor costs.  Because subcontractor services can vary significantly from project to project and period to period, changes in revenue may not necessarily be indicative of our business trends.  Accordingly, we segregate subcontractor costs from revenue to promote a better understanding of our business by evaluating revenue exclusive of costs associated with external service providers.

 

 

We experienced strong growth in our U.S. commercial, international, and U.S. state and local government sectors, driven by demand for our water, environmental, infrastructure design and construction management services in the industrial, energy and mining markets worldwide.  Additionally, the growth resulted from strength in our front-end water, environmental, and infrastructure engineering and design services for certain U.S. federal government clients including FAA, U.S. General Services Administration (“GSA”), NSF and various military branches of the DoD.  The growth in revenue and revenue, net of subcontractor costs, was due partially to the contributions of $37.1 million and $34.0 million, respectively, from fiscal 2011 acquisitions.  The overall growth was partially offset by a decline in our U.S. federal government business due primarily to the wind-down of several large projects for the USACE, USAID, U.S. Department of Energy (“DOE”) and U.S. Environmental Protection Agency (“EPA”), and delays on new awards for certain large U.S. federal construction management in the U.S. and abroad.  Revenue, net of subcontractor costs, grew at a faster pace than revenue due to an increase in self-performed work on energy and USAID programs.  Additionally, a revenue decline on USACE construction management programs did not have a significant impact to our revenue, net of subcontractor costs, because these programs had a high level of subcontracting activities.

 

Operating income increased due to business growth and improved project execution on fixed-price contracts.  The increase was partially offset by additional SG&A expenses incurred to support our international expansion, and an additional $1.5 million of amortization expense for intangible assets.  Prior-year operating income also benefited from favorable claim settlements.

 

Income tax expense grew as a result of an increase in pre-tax income and a higher effective tax rate.  Our effective tax rate was 34.7% compared to 31.1% for the year-ago period.  The lower tax rate in the first quarter of 2011 resulted from a $1.2 million, or $0.02 on a diluted EPS basis, benefit from federal R&E credits for the last nine months of fiscal 2010.

 

Net income attributable to noncontrolling interests declined because we acquired the remaining interests in a consolidated joint venture in the fourth quarter of fiscal 2011.  Net income attributable to Tetra Tech grew for the reasons described above.

 

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Table of Contents

 

Segment Results of Operations

 

Engineering and Consulting Services

 

 

 

Three Months Ended

 

 

January 1,

 

January 2,

 

Change

 

 

2012

 

2011

 

$

 

%

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

245,663

 

 

$

205,389

 

 

$

40,274

 

 

19.6

%

Subcontractor costs

 

(42,668

)

 

(40,633

)

 

(2,035

)

 

(5.0

)

Revenue, net of subcontractors costs (1)

 

$

202,995

 

 

$

164,756

 

 

$

38,239

 

 

23.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

19,491

 

 

$

18,301

 

 

$

1,190

 

 

6.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)       Represents a non-GAAP financial measure.  For more information, see the “Consolidated Results of Operations” discussion above.

 

Revenue growth was driven by the continued international expansion of our water, environmental and infrastructure design services.  Our international operations, primarily in Canada, contributed an additional $35 million and $36.4 million to revenue and revenue, net of subcontractor costs, respectively, compared with last year’s first quarter. Acquisitions completed during fiscal 2011 contributed to this growth.  To a lesser extent, the growth resulted from increased activity on U.S. commercial projects and economically driven priority U.S. federal government programs.  Operating income increased due to revenue growth, partially offset by increased contract costs on certain projects.

 

Technical Support Services

 

 

 

Three Months Ended

 

 

January 1,

 

January 2,

 

Change

 

 

2012

 

2011

 

$

 

%

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

228,832

 

 

$

223,305

 

 

$

5,527

 

 

2.5

%

Subcontractor costs

 

(82,974

)

 

(96,045

)

 

13,071

 

 

13.6

 

Revenue, net of subcontractors costs (1) 

 

$

145,858

 

 

$

127,260

 

 

$

18,598

 

 

14.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

15,502

 

 

$

15,789

 

 

$

(287

)

 

(1.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)       Represents a non-GAAP financial measure.  For more information, see the “Consolidated Results of Operations” discussion above.

 

Revenue and revenue, net of subcontractor costs, increased in the first quarter of fiscal 2012 compared to the year-ago quarter.  This growth resulted from the expansion of international development services provided to the DoS, including USAID.  These services contributed $4.2 million of increased revenue and $17.5 million of increased revenue, net of subcontractor costs, compared to the first quarter of fiscal 2011. An acquisition completed in the fourth quarter of fiscal 2011 made a significant contribution to this growth.  Despite overall revenue growth, operating income decreased due to a change in contract mix resulting in a lower proportion of higher profit margin fixed-price contracts.

 

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Table of Contents

 

Engineering and Architecture Services

 

 

 

Three Months Ended

 

 

January 1,

 

January 2,

 

Change

 

 

2012

 

2011

 

$

 

%

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

81,633

 

 

$

67,983

 

 

$

13,650

 

 

20.1

%

Subcontractor costs

 

(27,107

)

 

(15,893

)

 

(11,214

)

 

(70.6

)

Revenue, net of subcontractors costs (1) 

 

$

54,526

 

 

$

52,090

 

 

$

2,436

 

 

4.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

4,405

 

 

$

4,744

 

 

$

(339

)

 

(7.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)       Represents a non-GAAP financial measure.  For more information, see the “Consolidated Results of Operations” discussion above.

 

Revenue growth was driven by demand for our building and facility design services from several large U.S. commercial clients.  Additionally, the growth resulted from increased workload on certain design-build projects for U.S. state and local government clients, and on design-build and international development projects for the U.S. federal government.  The growth was partially offset by reduced activity on certain infrastructure projects for U.S. state and local government clients.  Revenue, net of subcontractor costs, grew at a slower pace than revenue due primarily to increased subcontracting activities on several large design-build projects that transitioned into the construction phase.  Operating income in the prior year benefited from a $2.5 million claim settlement on a U.S. commercial development and infrastructure project.  Excluding this favorable claim settlement from the prior year, operating income in the current year increased as a result of revenue growth and improved project execution.

 

Remediation and Construction Management

 

 

 

Three Months Ended

 

 

January 1,

 

January 2,

 

Change

 

 

2012

 

2011

 

$

 

%

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

160,758

 

 

$

144,565

 

 

$

16,193

 

 

11.2

%

Subcontractor costs

 

(72,081

)

 

(83,092

)

 

11,011

 

 

13.3

 

Revenue, net of subcontractors costs (1) 

 

$

88,677

 

 

$

61,473

 

 

$

27,204

 

 

44.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

5,890

 

 

$

3,111

 

 

$

2,779

 

 

89.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)       Represents a non-GAAP financial measure.  For more information, see the “Consolidated Results of Operations” discussion above.

 

Revenue growth was driven by demand for our remediation and construction management services in the energy and mining markets.  Additionally, the growth resulted from increased project execution on infrastructure projects for our U.S. state and local government clients.  We also experienced growth on certain U.S. federal government projects for GSA, DOA and various military branches of the DoD.  The overall growth was partially offset by the wind-down of several large construction management programs for USACE.  Revenue, net of subcontractor costs, grew at a faster pace than revenue due to the increase in self-performed work on energy projects and mining programs, and the wind-down of certain USACE construction management programs, which typically have higher subcontracting activities.  Operating income increased due to revenue growth and improved project execution on fixed-price contracts, partially offset by the prior-year favorable claim settlements.

 

Non-GAAP Financial Measures

 

We are providing certain non-GAAP financial measures that we believe are appropriate measures for evaluating the operating performance of our business.  These non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or cash flows from operating activities, as determined in accordance with U.S. GAAP.

 

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Table of Contents

 

EBITDA represents net income attributable to Tetra Tech plus net interest expense, income taxes, depreciation and amortization.  We believe EBITDA is a useful representation of our operating performance because of significant amounts of acquisition-related non-cash amortization expense, which can fluctuate significantly depending on the timing, nature and size of our business acquisitions.  Revenue, net of subcontractor costs, is defined as revenue less subcontractor costs.  For more information, see the “Consolidated Results of Operations” discussion above.  EBITDA and revenue, net of subcontractor costs, as we calculate them, may not be comparable to similarly titled measures employed by other companies.

 

The following is a reconciliation of EBITDA to net income attributable to Tetra Tech as well as revenue, net of subcontractor costs:

 

 

 

Three Months Ended

 

 

January 1,
2012

 

January 2,
2011

 

 

($ in thousands)

 

 

 

 

 

 

 

Net income attributable to Tetra Tech

 

$

22,610

 

 

$

22,301

 

Interest expense, net

 

1,311

 

 

1,305

 

Depreciation (1) 

 

6,786

 

 

6,670

 

Amortization (1) 

 

8,264

 

 

6,781

 

Income tax expense

 

12,079

 

 

10,266

 

EBITDA

 

$

51,050

 

 

$

47,323

 

 

 

 

 

 

 

 

Revenue

 

$

682,627

 

 

$

611,124

 

Subcontractor costs

 

(190,571

)

 

(205,544

)

Revenue, net of subcontractors costs

 

$

492,056

 

 

$

405,580

 

 

 

 

 

 

 

 

 

 

(1)            The total of depreciation and amortization expenses varied slightly from the amounts on the condensed consolidated statements of cash flows, which include amortization of deferred debt costs.

 

 

Financial Condition, Liquidity and Capital Resources

 

Capital Requirements.  Our capital requirements are to fund working capital needs, capital expenditures and debt service requirements, as well as to fund acquisitions and earn-out obligations from prior acquisitions.  We believe that our cash balances, operating cash flow and available borrowing under the credit agreement described below will be sufficient to meet our capital requirements for at least the next 12 months.

 

Operating Activities.  Net cash provided by operating activities was $38.3 million, an increase of $29.4 million compared to the year-ago quarter.  The increase was driven by additional advance payments from clients on contract work and increased EBITDA. Further, favorable changes in accounts payable, other liabilities, and prepaid expenses and other assets compared to the year-ago quarter caused by the timing of cash collections, and payments to vendors and subcontractors, contributed to the increase.

 

Investing Activities.  Net cash used in investing activities was $6.8 million, a decrease of $164.2 million compared to the year-ago quarter.  The decrease resulted primarily from a net cash payment related to the BPR acquisition in the year-ago quarter.

 

Financing Activities.  Net cash used in financing activities was $17.5 million, compared to net cash provided by financing activities of $22.6 million in the year-ago quarter.  In the first quarter of fiscal 2012, we repaid $10.8 million of debt under our credit agreement, and paid $9.4 million of contingent earn-out liabilities related to a prior-year acquisition.  The year-ago quarter included $20 million in borrowing under our credit agreement to fund our working capital needs.

 

Debt Financing.  Under our credit agreement (“Credit Agreement”), our revolving credit facility (“Facility”) is a $460 million, five-year Facility that matures on March 28, 2016.  The Facility includes a $200 million sublimit for the issuance of standby letters of credit and a $100 million sublimit for multicurrency borrowings and letters of credit.  At January 1, 2012, we had $133.7 million in borrowings under the Facility at a weighted-average interest rate of 2.12% per annum, $29.7 million in standby letters of credit and $296.6 million in

 

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Table of Contents

 

availability under the Facility.  Of these amounts outstanding, we had $13.7 million in multicurrency borrowings and letters of credit under the Facility at January 1, 2012.

 

The Credit Agreement contains certain financial and various other affirmative and negative covenants.  They include, among others, a maximum consolidated leverage ratio of 2.5x (total funded debt/EBITDA, as defined in the Credit Agreement) and a minimum consolidated fixed charge coverage ratio of 1.25x (EBITDA as defined in the Credit Agreement minus capital expenditures/cash interest plus taxes plus principal payments of indebtedness including capital leases, notes and post acquisition payments).  At January 1, 2012, we were in compliance with these covenants with a consolidated leverage ratio of 1.07x and a consolidated fixed charge coverage ratio of 2.41x.  The Facility is guaranteed by our material subsidiaries and certain additional designated subsidiaries.  Borrowings under the Credit Agreement are collateralized by our accounts receivable, the stock of our subsidiaries and intercompany debt.

 

Inflation.  We believe our operations have not been, and, in the foreseeable future, are not expected to be, materially adversely affected by inflation or changing prices due to the average duration of our projects and our ability to negotiate prices as contracts end and new contracts begin.

 

Off-Balance Sheet Arrangements

 

Variable Interest Entities.  In the normal course of business, we form joint ventures, including partnerships and partially owned limited liability companies, with third parties primarily to bid on and execute specific projects.  We analyzed all of our joint ventures to determine whether they are VIEs.  If a joint venture is determined to be a VIE, we assess whether we are the primary beneficiary and need to consolidate that joint venture.  At January 1, 2012, none of our unconsolidated joint ventures had any debt other than operating payables and accruals.  For further discussion of our VIEs, see Note 12, “Joint Ventures” of the “Notes to Condensed Consolidated Financial Statements”.

 

Critical Accounting Policies

 

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended October 2, 2011.  To date, there have been no material changes in our critical accounting policies as reported in our 2011 Annual Report on Form 10-K.

 

New Accounting Pronouncements

 

For information regarding recent accounting pronouncements, see “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report.

 

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Table of Contents

 

Financial Market Risks

 

We do not enter into derivative financial instruments for trading or speculation purposes.  In the normal course of business, we have exposure to both interest rate risk and foreign currency transaction and translation risk, primarily related to the CAD.

 

We are exposed to interest rate risk under our Credit Agreement.  We may borrow on our Facility, at our option, at either (a) a base rate (the highest of the U.S. federal funds rate plus 0.50% per annum, the bank’s prime rate or the Eurocurrency rate plus 1.00%) plus a margin that ranges from 0.50% to 1.50% per annum, or (b) a Eurocurrency rate plus a margin that ranges from 1.50% to 2.50% per annum.  Borrowings at the base rate have no designated term and may be repaid without penalty any time prior to the Facility’s maturity date.  Borrowings at a Eurodollar rate have a term no less than 30 days and no greater than 90 days.  Typically, at the end of such term, such borrowings may be rolled over at our discretion into either a borrowing at the base rate or a borrowing at a Eurodollar rate with similar terms, not to exceed the maturity date of the Facility.  The Facility matures on March 28, 2016, or earlier at our discretion upon payment in full of loans and other obligations.  At January 1, 2012, we had $133.7 million in borrowings outstanding under the Facility at a weighted-average interest rate of 2.12% per annum.

 

Most of our transactions are in U.S. dollars; however, some of our subsidiaries conduct business in foreign currencies, primarily the CAD.  Therefore, we are subject to currency exposure and volatility because of currency fluctuations.  We attempt to minimize our exposure to these fluctuations by matching revenue and expenses in the same currency for our contracts.  For the first quarters of fiscal 2012 and fiscal 2011, our foreign currency gains were immaterial.  These gains were recognized as part of SG&A expenses in our condensed consolidated statements of income.

 

We have foreign currency exchange rate exposure in our results of operations and equity primarily as a result of the currency translation related to our Canadian subsidiaries where the local currency is the functional currency.  To the extent th