UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2014
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 |
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95-4148514 |
(State or other jurisdiction of |
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(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
(Registrants 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 x 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 x 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 x |
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 x
As of July 28, 2014, 64,243,795 shares of the registrants common stock were outstanding.
TETRA TECH, INC.
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3 | ||
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Condensed Consolidated Balance Sheets as of June 29, 2014 and September 29, 2013 |
3 |
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4 | |
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5 | |
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6 | |
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7 | |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
21 | |
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39 | ||
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39 | ||
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40 | ||
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60 |
Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
(unaudited - in thousands, except par value)
ASSETS |
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June 29, |
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September 29, |
| ||
Current assets: |
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Cash and cash equivalents |
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$ |
188,872 |
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$ |
129,305 |
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Accounts receivable net |
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674,447 |
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660,847 |
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Prepaid expenses and other current assets |
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49,939 |
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61,446 |
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Income taxes receivable |
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17,570 |
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20,044 |
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Total current assets |
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930,828 |
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871,642 |
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Property and equipment net |
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78,208 |
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88,026 |
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Investments in and advances to unconsolidated joint ventures |
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1,938 |
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2,198 |
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Goodwill |
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722,583 |
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722,792 |
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Intangible assets net |
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66,115 |
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86,929 |
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Other long-term assets |
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24,548 |
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27,505 |
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Total assets |
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$ |
1,824,220 |
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$ |
1,799,092 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
173,024 |
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$ |
142,813 |
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Accrued compensation |
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115,730 |
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114,810 |
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Billings in excess of costs on uncompleted contracts |
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79,160 |
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79,507 |
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Deferred income taxes |
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25,120 |
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18,170 |
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Current portion of long-term debt |
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8,441 |
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4,311 |
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Estimated contingent earn-out liabilities |
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8,673 |
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23,281 |
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Other current liabilities |
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68,031 |
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100,241 |
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Total current liabilities |
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478,179 |
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483,133 |
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Deferred income taxes |
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26,480 |
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30,525 |
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Long-term debt |
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195,501 |
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203,438 |
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Long-term estimated contingent earn-out liabilities |
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22,830 |
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58,508 |
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Other long-term liabilities |
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35,069 |
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24,685 |
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Commitments and contingencies |
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Equity: |
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Preferred stock Authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at June 29, 2014, and September 29, 2013 |
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Common stock Authorized, 150,000 shares of $0.01 par value; issued and outstanding, 64,348 and 64,134 shares at June 29, 2014, and September 29, 2013, respectively |
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643 |
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641 |
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Additional paid-in capital |
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447,864 |
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443,099 |
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Accumulated other comprehensive (loss) income |
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(16,588) |
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1,858 |
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Retained earnings |
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633,339 |
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552,165 |
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Tetra Tech stockholders equity |
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1,065,258 |
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997,763 |
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Noncontrolling interests |
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903 |
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1,040 |
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Total equity |
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1,066,161 |
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998,803 |
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Total liabilities and equity |
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$ |
1,824,220 |
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$ |
1,799,092 |
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See Notes to Condensed Consolidated Financial Statements.
Tetra Tech, Inc.
Condensed Consolidated Statements of Operations
(unaudited in thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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June 29, |
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June 30, |
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June 29, |
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June 30, |
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Revenue |
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$ |
629,502 |
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$ |
614,835 |
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$ |
1,861,635 |
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$ |
1,915,379 |
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Subcontractor costs |
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(170,746) |
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(139,693) |
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(463,904) |
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(422,092) |
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Other costs of revenue |
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(381,319) |
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(469,398) |
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(1,164,761) |
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(1,314,219) |
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Selling, general and administrative expense |
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(47,175) |
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(56,744) |
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(138,778) |
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(151,539) |
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Contingent consideration fair value adjustments |
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8,905 |
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7,716 |
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34,878 |
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8,662 |
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Impairment of goodwill |
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(56,600) |
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(56,600) |
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Operating income (loss) |
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39,167 |
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(99,884) |
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129,070 |
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(20,409) |
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Interest expense |
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(2,454) |
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(2,010) |
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(7,373) |
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(5,330) |
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Income (loss) before income tax (expense) benefit |
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36,713 |
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(101,894) |
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121,697 |
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(25,739) |
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Income tax (expense) benefit |
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(10,002) |
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23,779 |
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(35,751) |
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(1,108) |
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Net income (loss) including noncontrolling interests |
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26,711 |
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(78,115) |
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85,946 |
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(26,847) |
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Net income attributable to noncontrolling interests |
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(54) |
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(270) |
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(266) |
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(495) |
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Net income (loss) attributable to Tetra Tech |
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$ |
26,657 |
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$ |
(78,385) |
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85,680 |
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$ |
(27,342) |
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Net income (loss) per share attributable to Tetra Tech: |
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Basic |
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$ |
0.41 |
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$ |
(1.21) |
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1.32 |
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$ |
(0.42) |
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Diluted |
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$ |
0.41 |
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$ |
(1.21) |
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1.31 |
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$ |
(0.42) |
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Weighted-average common shares outstanding: |
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Basic |
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64,566 |
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64,832 |
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64,683 |
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64,554 |
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Diluted |
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65,302 |
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64,832 |
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65,493 |
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64,554 |
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Cash dividends paid per share |
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$ |
0.07 |
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$ |
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$ |
0.07 |
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$ |
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See Notes to Condensed Consolidated Financial Statements.
Tetra Tech, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited in thousands)
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Three Months Ended |
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Nine Months Ended |
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June 29, |
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June 30, |
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June 29, |
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June 30, |
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Net income (loss) including noncontrolling interests |
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$ |
26,711 |
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$ |
(78,115) |
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$ |
85,946 |
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$ |
(26,847) |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments, net of tax |
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19,177 |
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(22,430) |
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(18,642) |
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(40,197) |
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(Loss) gain on cash flow hedge valuations, net of tax |
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(645) |
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(206) |
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93 |
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Other comprehensive income (loss) |
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18,532 |
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(22,430) |
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(18,848) |
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(40,104) |
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Comprehensive income (loss) including noncontrolling interests |
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45,243 |
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(100,545) |
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67,098 |
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(66,951) |
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Net income attributable to noncontrolling interests |
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(54) |
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(270) |
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(266) |
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(495) |
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Foreign currency translation adjustments attributable to noncontrolling interests, net of tax |
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330 |
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33 |
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403 |
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66 |
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Comprehensive income (loss) attributable to noncontrolling interests |
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276 |
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(237) |
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137 |
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(429) |
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Comprehensive income (loss) attributable to Tetra Tech |
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$ |
45,519 |
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$ |
(100,782) |
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$ |
67,235 |
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$ |
(67,380) |
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See accompanying Notes to Condensed Consolidated Financial Statements.
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited in thousands)
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Nine Months Ended |
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June 29, |
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June 30, |
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Cash flows from operating activities: |
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Net income (loss) including noncontrolling interests |
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$ |
85,946 |
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$ |
(26,847) |
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Adjustments to reconcile net income (loss) to net cash from operating activities: |
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Depreciation and amortization |
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42,147 |
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47,148 |
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Loss on settlement of foreign currency forward contract |
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270 |
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Equity in earnings of unconsolidated joint ventures |
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(1,929) |
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(2,495) |
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Distributions of earnings from unconsolidated joint ventures |
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2,145 |
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2,868 |
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Stock-based compensation |
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8,329 |
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7,628 |
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Excess tax benefits from stock-based compensation |
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(692) |
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(875) |
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Deferred income taxes |
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2,040 |
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(27,005) |
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Provision for doubtful accounts |
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384 |
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12,125 |
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Fair value adjustments to contingent consideration |
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(34,878) |
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(8,662) |
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Loss (gain) on disposal of property and equipment |
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66 |
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(142) |
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Lease termination costs and related asset impairment |
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6,463 |
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Impairment of goodwill |
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56,600 |
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Changes in operating assets and liabilities, net of effects of business acquisitions: |
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Accounts receivable |
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(9,166) |
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117,687 |
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Prepaid expenses and other assets |
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(3,738) |
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7,435 |
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Accounts payable |
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28,944 |
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(43,911) |
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Accrued compensation |
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817 |
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(12,458) |
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Billings in excess of costs on uncompleted contracts |
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(351) |
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(10,986) |
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Other liabilities |
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(16,437) |
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5,569 |
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Income taxes receivable/payable |
|
10,670 |
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(15,144) |
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Net cash provided by operating activities |
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114,297 |
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115,268 |
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Cash flows from investing activities: |
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Capital expenditures |
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(14,879) |
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(20,533) |
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Payments for business acquisitions, net of cash acquired |
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(10,695) |
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(168,660) |
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Payment in settlement of foreign currency forward contract |
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(4,177) |
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Receipt in settlement of foreign currency forward contract |
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|
3,907 |
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Changes in restricted cash |
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|
470 |
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Payment received on note for sale of operation |
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3,900 |
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Proceeds from sale of property and equipment |
|
3,740 |
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1,763 |
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Net cash used in investing activities |
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(17,934) |
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(187,230) |
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Cash flows from financing activities: |
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Payments on long-term debt |
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(3,641) |
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(167,185) |
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Proceeds from borrowings |
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296,098 |
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Payments of earn-out liabilities |
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(18,662) |
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(24,015) |
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Payments of debt issuance costs |
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(1,938) |
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Net change in overdrafts |
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(915) |
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291 |
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Excess tax benefits from stock-based compensation |
|
692 |
|
875 |
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Repurchases of common stock |
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(26,088) |
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(4,147) |
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Dividends paid |
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(4,506) |
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Net proceeds from exercise of stock options |
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18,310 |
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15,697 |
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Net cash (used in) provided by financing activities |
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(34,810) |
|
115,676 |
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Effect of foreign exchange rate changes on cash |
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(1,986) |
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(2,227) |
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Net increase in cash and cash equivalents |
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59,567 |
|
41,487 |
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Cash and cash equivalents at beginning of period |
|
129,305 |
|
104,848 |
| ||
Cash and cash equivalents at end of period |
|
$ |
188,872 |
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$ |
146,335 |
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Supplemental information: |
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Cash paid during the period for: |
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Interest |
|
$ |
6,181 |
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$ |
3,801 |
|
Income taxes, net of refunds of $12,122 and $4,646 |
|
$ |
22,109 |
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$ |
34,913 |
|
See Notes to Condensed Consolidated Financial Statements.
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 September 29, 2013.
These financial statements reflect all normal recurring adjustments that are considered necessary for the 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. Certain immaterial reclassifications were made to the prior year to conform to current year presentation.
2. Accounts Receivable Net and Revenue Recognition
Net accounts receivable and billings in excess of costs on uncompleted contracts consisted of the following:
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June 29, |
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September 29, |
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(in thousands) |
| ||||
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| ||
Billed |
|
$ |
307,905 |
|
$ |
375,149 |
|
Unbilled |
|
381,429 |
|
306,969 |
| ||
Contract retentions |
|
25,885 |
|
23,353 |
| ||
Total accounts receivable gross |
|
715,219 |
|
705,471 |
| ||
|
|
|
|
|
| ||
Allowance for doubtful accounts |
|
(40,772) |
|
(44,624) |
| ||
Total accounts receivable net |
|
$ |
674,447 |
|
$ |
660,847 |
|
|
|
|
|
|
| ||
Billings in excess of costs on uncompleted contracts |
|
$ |
79,160 |
|
$ |
79,507 |
|
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 June 29, 2014 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 represents amounts that may become uncollectible or unrealizable in the future. We determine an estimated allowance for uncollectible accounts based on managements consideration of trends in the actual and forecasted credit quality of our clients, including delinquency and payment history; type of client, such as a government agency or a commercial sector client; and general economic and particular industry conditions that may affect a clients ability to pay. Billings in excess of costs on uncompleted contracts represent the amount of 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, excluding those related to claims, will be earned within 12 months.
Once contract performance is underway, we may experience changes in conditions, client requirements, specifications, designs, materials and expectations regarding the period of performance. Such changes result in change orders and may be initiated by us or by our clients. In many cases, agreement with the client as to the terms of change orders is reached prior to work commencing; however, sometimes circumstances require that work progresses without obtaining a definitive client agreement. Unapproved change orders constitute claims in excess of agreed contract prices that we seek to collect from our clients (or other third parties) for delays, errors in specifications and designs, contract terminations, or other causes of unanticipated additional costs. Revenue on claims is recognized when contract costs related to claims have been incurred and when their addition to contract value can be reliably estimated. This can lead to a situation in which costs are recognized in one period and revenue is recognized in a subsequent period such as when client agreement is obtained or a claims resolution occurs.
Total accounts receivable at June 29, 2014 and September 29, 2013 include approximately $86 million and $41 million, respectively, related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination. The increase from the end of fiscal 2013 includes the impact of changes in scope on an oil and gas project in Western Canada in fiscal 2014 that is currently in negotiation with the client. The remainder of the increase in claims primarily related to revenue recognized as progress continued on projects with claims that were in process at the end of fiscal 2013. We regularly evaluate all claim amounts and record appropriate adjustments to operating earnings when it is probable that the claim will result in a different contract value than the amount previously estimated. As a result of this assessment, we recognized revenue and an increase to operating income of $3.4 million for the second quarter and first nine months of fiscal 2014. We recognized net losses of approximately $17 million and $17 million related to the evaluation of collectability of claims during the third quarter and first nine months of fiscal 2013, respectively.
Billed accounts receivable related to U.S. federal government contracts were $59.5 million and $50.5 million at June 29, 2014 and September 29, 2013, respectively. U.S. federal government unbilled receivables, net of progress payments, were $81.0 million and $79.3 million at June 29, 2014 and September 29, 2013, respectively. Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at June 29, 2014 and September 29, 2013.
We recognize revenue for most of our contracts using the percentage-of-completion method, primarily utilizing the cost-to-cost approach to estimate the progress towards completion in order to determine the amount of revenue and profit to recognize. Revenue and cost estimates for each significant contract are reviewed and reassessed quarterly. Changes in those estimates could result in recognition of cumulative catch-up adjustments to the contracts inception-to-date revenue, costs and profit in the period in which such changes are made. As a result, we recognized the net unfavorable operating income adjustments of $5.0 million and $10.3 million during the third quarter and the first nine months of fiscal 2014, respectively. No material operating income adjustments were recognized during the three and nine months ended June 30, 2013 due to updated cost to complete estimates. Changes in revenue and cost estimates could also result in a projected loss that would be recorded immediately in earnings. As of June 29, 2014 and September 29, 2013, we recorded a liability for anticipated losses of $10.4 million and $13.3 million, respectively. The estimated cost to complete the related contracts as of June 29, 2014 was $37.2 million.
3. Mergers and Acquisitions
In the second quarter of fiscal 2013, we acquired American Environmental Group, Ltd. (AEG), headquartered in Richfield, Ohio. AEG provides environmental, design, construction and maintenance services primarily to solid and hazardous waste, environmental, energy and utility clients. Also in the second quarter of fiscal 2013, we acquired Parkland Pipeline Contractors Ltd., Parkland Pipeline Equipment Ltd., Park L Projects Ltd. and Parkland Projects Ltd. (collectively, Parkland), headquartered in Alberta, Canada. Parkland serves the oil and gas industry in Western Canada, and specializes in the technical support, engineering support and construction of pipelines and oilfield facilities. AEG and Parkland are both included in our Remediation and Construction Management (RCM) segment. We also made other acquisitions that enhanced our service offerings and expanded our geographic presence in our Engineering and Consulting Services (ECS) and Technical Support Services (TSS) segments during fiscal 2013. The aggregate fair value of the purchase prices for fiscal 2013 acquisitions was $248.9 million. Of this amount, $171.6 million was paid to the sellers, $2.0 million was recorded as liabilities in accordance with the purchase agreements, and $75.3 million was the estimated fair value of contingent earn-out obligations as of the respective acquisition dates, with an aggregate maximum of $86.7 million upon the achievement of specified financial objectives. In the first quarter of fiscal 2014, we acquired a company that enhanced our service offerings in our ECS segment.
Goodwill additions resulting from the above business combinations are primarily attributable to the existing workforce of the acquired companies and the synergies expected to arise after the acquisitions. Specifically, the goodwill additions related to the fiscal 2013 acquisitions primarily represent the value of workforces with distinct expertise in the solid and hazardous waste, and oil and gas markets. In addition, these acquired capabilities, when combined with our existing global consulting and engineering business, result in opportunities that allow us to provide services under contracts that could not have been pursued individually by either us or the acquired companies. The results of these acquisitions were included in the consolidated financial statements from their respective closing dates. The purchase price allocations related to acquisitions completed during the fourth quarter of fiscal 2013 and the first quarter of fiscal 2014 are preliminary, and subject to adjustment, based on the valuation and final determination of net assets acquired. We do not believe that any such adjustment will have a material effect on our consolidated results of operations. None of the acquisitions were considered material, individually or in the aggregate, to our condensed consolidated financial statements. As a result, no pro forma information has been provided for the respective periods.
Most of our acquisition agreements include contingent earn-out agreements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based on our valuations of the acquired companies, and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of any earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in Estimated contingent earn-out liabilities and Long-term estimated contingent earn-out liabilities on the condensed consolidated balance sheets. We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former owners of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination.
We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy (as described in Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the fiscal year ended September 29, 2013). We use a probability-weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally two or three years), and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our condensed consolidated statements of cash flows. Any amount paid in excess of the contingent earn-out liability on the acquisition date is reflected as cash used in operating activities.
We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income. During the three and nine months ended June 29, 2014, we recorded net decreases in our contingent earn-out liabilities and reported related net gains in operating income of $8.9 million and $34.9 million, respectively, compared with net gains of $7.7 million and $8.7 million, respectively, in the same periods last year. The fiscal 2014 gains primarily resulted from updated valuations of the contingent consideration liability for AEG in the third quarter and Parkland in the second quarter. Adverse weather conditions during the second and third quarter of fiscal 2014 hindered AEGs ability to complete construction field work. We recognized a net unfavorable operating income adjustment for Parkland related to a single project during the second quarter of fiscal 2014. As a result, we lowered our income projections over the remaining earn-out periods and recorded corresponding reductions of the earn-out liabilities for AEG and Parkland. We also determined that these lower income projections were the result of temporary events, and would not negatively impact AEG and Parklands longer-term performance or result in goodwill impairment. However, if our income projections for AEG and Parkland were to decline further, this could result in the impairment of a portion of the combined related goodwill balance of approximately $139 million. In this event, we would also likely have gains in our operating income up to a maximum of the remaining related contingent consideration liabilities. Conversely, if AEG or Parklands performance increases beyond our projections, we could incur future losses in operating income if the resulting contingent consideration earned exceeds the current recorded liability.
At June 29, 2014, there was a total maximum of $68.3 million of outstanding contingent consideration related to completed acquisitions. Of this amount, $31.5 million was estimated as the fair value and accrued on our condensed consolidated balance sheets. For the nine months ended June 29, 2014, we made $20.6 million of earn-out payments to former owners. Of this amount, we reported $18.7 million as cash used in financing activities and $1.9 million as cash used in operating activities. For the nine months ended June 30, 2013, we made $24.4 million of earn-out payments to former owners. Of this amount, we reported $24.0 million as cash used in financing activities and $0.4 million as cash used in operating activities.
4. Goodwill and Intangible Assets
The following table summarizes the changes in the carrying value of goodwill:
|
|
ECS |
|
TSS |
|
RCM |
|
Total |
| ||||
|
|
(in thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Balance at September 29, 2013 |
|
$ |
353,608 |
|
$ |
177,579 |
|
$ |
191,605 |
|
$ |
722,792 |
|
Goodwill additions |
|
11,472 |
|
|
|
|
|
11,472 |
| ||||
Foreign exchange impact |
|
(8,725) |
|
51 |
|
(3,482) |
|
(12,156) |
| ||||
Goodwill adjustments |
|
|
|
161 |
|
314 |
|
475 |
| ||||
Balance at June 29, 2014 |
|
$ |
356,355 |
|
$ |
177,791 |
|
$ |
188,437 |
|
$ |
722,583 |
|
Goodwill additions are attributable to an acquisition completed in the first quarter of fiscal 2014. Substantially all of the goodwill additions are not deductible for income tax purposes. The foreign exchange impact relates to our foreign subsidiaries with functional currencies that are different than our reporting currency. The gross amounts of goodwill for ECS were $413.9 million and $411.1 million at June 29, 2014 and September 29, 2013, respectively, excluding $57.5 million of accumulated impairment.
We test our goodwill for impairment on an annual basis, and more frequently when an event occurs or circumstances indicate that the carrying value of the asset may not be recoverable. We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our last annual review at July 1, 2013, indicated that we had no impairment of goodwill, and all of our reporting units had estimated fair values that were in excess of their carrying values, including goodwill. During this review we identified three operating units (with goodwill totaling $214.0 million as of June 29, 2014) in the ECS segment and two recently acquired reporting units (with goodwill totaling $138.7 million as of June 29, 2014) in the RCM segment with fair values in excess of their carrying values of less than 20%. The goodwill related to the three reporting units in the ECS segment was adjusted to fair value in the third quarter of fiscal 2013, and a $56.6 million impairment charge was recorded. The two reporting units in the RCM segment were acquired at fair value in the second quarter of fiscal 2013. In addition, we regularly evaluate whether events and circumstances have occurred that may indicate a potential change in recoverability of goodwill. Based on these assessments as of June 29, 2014, we also determined that all of our reporting units had estimated fair values in excess of their carrying values, including goodwill as of June 29, 2014. However, four of the five aforementioned reporting units had fair value in excess of carrying value of less than 20%. Although we believe that our estimates of fair value for these reporting units are reasonable, if the financial performance for these reporting units falls significantly below our expectations or market prices for similar businesses decline, the goodwill for these reporting units could become impaired.
The gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives included in Intangible assets - net on the condensed consolidated balance sheets, were as follows:
|
|
June 29, 2014 |
|
September 29, 2013 |
| ||||||||||
|
|
Weighted- |
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
| ||||
|
|
($ in thousands) |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-compete agreements |
|
2.3 |
|
$ |
2,150 |
|
$ |
(1,456) |
|
$ |
6,160 |
|
$ |
(5,247) |
|
Client relations |
|
4.0 |
|
121,612 |
|
(58,214) |
|
128,839 |
|
(49,189) |
| ||||
Backlog |
|
0.4 |
|
1,459 |
|
(927) |
|
68,968 |
|
(64,675) |
| ||||
Technology and trade names |
|
2.3 |
|
3,300 |
|
(1,809) |
|
4,204 |
|
(2,131) |
| ||||
Total |
|
|
|
$ |
128,521 |
|
$ |
(62,406) |
|
$ |
208,171 |
|
$ |
(121,242) |
|
The gross amount and accumulated amortization for acquired identifiable intangible assets decreased due to the full amortization of assets in fiscal 2014. The fiscal 2014 acquisition added $2.2 million of identifiable intangible assets. Amortization expense for the identifiable intangible assets for the three and nine months ended June 29, 2014 was $6.1 million and $21.4 million, respectively, compared to $9.6 million and $24.2 million for the prior-year periods. Estimated amortization expense for the remainder of fiscal 2014 and succeeding years is as follows:
|
|
Amount |
| |
|
|
(in thousands) |
| |
|
|
|
| |
2014 |
|
$ |
5,988 |
|
2015 |
|
19,688 |
| |
2016 |
|
15,742 |
| |
2017 |
|
13,426 |
| |
2018 |
|
6,312 |
| |
Beyond |
|
4,959 |
| |
Total |
|
$ |
66,115 |
|
5. Property and Equipment
Property and equipment consisted of the following:
|
|
June 29, |
|
September 29, |
| ||
|
|
(in thousands) |
| ||||
|
|
|
|
|
| ||
Land and buildings |
|
$ |
5,429 |
|
$ |
5,565 |
|
Equipment, furniture and fixtures |
|
211,264 |
|
210,172 |
| ||
Leasehold improvements |
|
25,823 |
|
26,429 |
| ||
Total property and equipment |
|
242,516 |
|
242,166 |
| ||
Accumulated depreciation |
|
(164,308) |
|
(154,140) |
| ||
Property and equipment, net |
|
$ |
78,208 |
|
$ |
88,026 |
|
The depreciation expense related to property and equipment, including assets under capital leases, was $6.5 million and $20.2 million for the three and nine months ended June 29, 2014, respectively, compared to $8.1 million and $22.4 million for the prior-year periods.
6. Stock Repurchase and Dividends
In June 2013, our Board of Directors authorized a stock repurchase program (the Stock Repurchase Program) under which we may currently repurchase up to $100 million of our common stock. Stock repurchases may be made on the open market or in privately negotiated transactions with third parties. From the inception of the Stock Repurchase Program through June 29, 2014, we repurchased through open market purchases a total of 1.8 million shares at an average price of $25.50 per share, for a total cost of $46.6 million.
On April 28, 2014, the Board of Directors declared a quarterly cash dividend of $0.07 per share payable on June 4, 2014 to stockholders of record as of the close of business on May 16, 2014. We paid $4.5 million of cash dividends for the three months ended June 29, 2014.
Subsequent Events. On July 28, 2014, the Board of Directors declared a quarterly cash dividend of $0.07 per share payable on September 5, 2014 to stockholders of record as of the close of business on August 15, 2014. Further, on July 28, 2014, the Board of Directors amended the Stock Repurchase Program to authorize the repurchase of the remaining amount in the $100 million Stock Repurchase Program in open market purchases through September 2014 without regard to pricing parameters.
7. 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 three and nine months ended June 29, 2014 was $2.8 million and $8.3 million, respectively, compared to $2.8 million and $7.6 million for the same periods last year. The majority of these amounts was included in Selling, general and administrative (SG&A) expenses in our condensed consolidated statements of operations. In the three months ended June 29, 2014, no stock options were granted. For the nine months ended June 29, 2014, we granted 354,238 stock options with exercise prices of $28.58 - $28.68 per share and an estimated weighted-average fair value of $9.36 per share. In addition, we awarded 117,067 shares of restricted stock to our non-employee directors and executive officers at the fair value of $28.58 per share on the award date. All of these shares are performance-based and vest, if at all, 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 224,743 restricted stock units (RSUs) to our non-employee directors, executive officers and employees at the weighted-average fair value of $28.58 per share on the award date. All of the executive officer and employee RSUs have time-based vesting over a four-year period, and the non-employee director RSUs vest after one year.
8. 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 |
|
Nine Months Ended |
| ||||||||
|
|
June 29, |
|
June 30, |
|
June 29, |
|
June 30, |
| ||||
|
|
(in thousands, except per share data) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) attributable to Tetra Tech |
|
$ |
26,657 |
|
$ |
(78,385) |
|
$ |
85,680 |
|
$ |
(27,342) |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average common shares outstanding basic |
|
64,566 |
|
64,832 |
|
64,683 |
|
64,554 |
| ||||
Effect of dilutive stock options and unvested restricted stock |
|
736 |
|
|
|
810 |
|
|
| ||||
Weighted-average common stock outstanding diluted |
|
65,302 |
|
64,832 |
|
65,493 |
|
64,554 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings (loss) per share attributable to Tetra Tech: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
0.41 |
|
$ |
(1.21) |
|
$ |
1.32 |
|
$ |
(0.42) |
|
Diluted |
|
$ |
0.41 |
|
$ |
(1.21) |
|
$ |
1.31 |
|
$ |
(0.42) |
|
For the three and nine months ended June 29, 2014, 0.7 million and no 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 during the period. Therefore, their inclusion would have been anti-dilutive. The computation of diluted loss per share for the three and nine months ended June 30, 2013 excluded 0.7 million and 0.8 million of potential common shares due to their anti-dilutive effect.
9. Income Taxes
The effective tax rates for the first nine months of fiscal 2014 and 2013 were 29.4% and (4.3%), respectively. The fiscal 2014 effective rate reflects $26.2 million of gains related to the updated valuation of contingent consideration liabilities that were not taxable. The negative effective tax rate of 4.3% resulted primarily from the approximately $35 million goodwill impairment charge taken during the third quarter of fiscal 2013 that was not deductible for tax purposes. At June 29, 2014, undistributed earnings of our foreign subsidiaries, primarily in Canada, in the amount of approximately $43.3 million, are expected to be permanently reinvested. Accordingly, no provision for U.S. income taxes or foreign withholding taxes has been made. Upon distribution of those earnings, we would be subject to U.S. income taxes and foreign withholding taxes. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, the potential foreign tax credit associated with the deferred income would be available to partially reduce the resulting U.S. tax liabilities.
We review the realizability of deferred tax assets on a quarterly basis by assessing the need for a valuation allowance. As of June 29, 2014, we performed our assessment of net deferred tax assets. Significant management judgment is required to determine the provision for income taxes and, in particular, any valuation allowance recorded against our deferred tax assets. Applying the applicable accounting guidance requires an assessment of all available evidence, both positive and negative, regarding the realizability of the net deferred tax assets. Based upon recent results, we concluded that a cumulative loss in recent years exists in certain foreign jurisdictions. We have historically relied on the following factors in our assessment of the realizability of our net deferred tax assets:
· taxable income in prior carryback years as permitted under the tax law;
· future reversals of existing taxable temporary differences;
· consideration of available tax planning strategies and actions that could be implemented, if necessary; and
· estimates of future taxable income from our operations.
We considered these factors in our estimate of the reversal pattern of deferred tax assets, using assumptions that we believe are reasonable and consistent with operating results. However, as a result of projected cumulative pre-tax losses in these certain foreign jurisdictions for the 36 months ending September 28, 2014, we concluded that our estimates of future taxable income and certain tax planning strategies did not constitute sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable before expiration. Although we project earnings in the related business beyond 2014, we did not rely on these projections when assessing the realizability of our deferred tax assets. Based on our assessment, we concluded that it is more likely than not that the assets will be realized except for the assets related to loss carry-forwards in foreign jurisdictions for which a valuation allowance of $8.8 million had been provided in previous years.
In the third quarter of fiscal 2014, we received notification from the Internal Revenue Service that our appeals settlement in connection with three issues, research and experimentation tax credit (R&E credit), domestic production activities deduction, and meals and entertainment expenses, was approved for fiscal years 2005 through 2007. The settlement of these issues, including interest, resulted in a cash refund of $6.3 million, which was received in the third quarter of fiscal 2014. The settlement did not have a material impact on our financial statements as the amount received was consistent with the amount previously recognized in the financial statements.
During the second quarter of fiscal 2013, the American Taxpayer Relief Act of 2012 was signed into law. This law retroactively extended the federal R&E credits for amounts incurred from January 1, 2012 through December 31, 2013. Our effective tax rate for the first quarter of fiscal 2014 includes a tax benefit from R&E credits attributable to the first three months of fiscal 2014. Should the R&E credits provision be retroactively extended during fiscal 2014, additional benefits will be reflected in our effective tax rate during the quarter reporting period of enactment.
10. Reportable Segments
Our reportable segments are as follows:
ECS: provides front-end science, consulting engineering and project management services in the areas of surface water management, water infrastructure, solid waste management, mining, geotechnical sciences, arctic engineering, industrial processes and oil sands, transportation and information technology.
TSS: provides management consulting and engineering services and strategic direction in the areas of environmental assessments/hazardous waste management, climate change, international development, international reconstruction and stabilization, energy, oil and gas, technical government consulting, and building and facilities.
RCM: provides full-service support, including construction and construction management, to all of our client sectors, including the U.S. federal government in the United States and internationally, and commercial clients worldwide, in the areas of environmental remediation, infrastructure development, solid waste management, energy, and oil and gas.
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.
The following tables set forth summarized financial information regarding our reportable segments:
Reportable Segments
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
June 29, |
|
June 30, |
|
June 29, |
|
June 30, |
| ||||
|
|
(in thousands) |
| ||||||||||
Revenue |
|
|
|
|
|
|
|
|
| ||||
ECS |
|
$ |
246,977 |
|
$ |
251,239 |
|
$ |
707,952 |
|
$ |
788,600 |
|
TSS |
|
236,056 |
|
221,198 |
|
674,042 |
|
687,230 |
| ||||
RCM |
|
171,518 |
|
162,560 |
|
549,949 |
|
499,491 |
| ||||
Elimination of inter-segment revenue |
|
(25,049) |
|
(20,162) |
|
(70,308) |
|
(59,942) |
| ||||
Total revenue |
|
$ |
629,502 |
|
$ |
614,835 |
|
$ |
1,861,635 |
|
$ |
1,915,379 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Income (loss) |
|
|
|
|
|
|
|
|
| ||||
ECS |
|
$ |
18,351 |
|
$ |
(7,700) |
|
$ |
50,322 |
|
$ |
22,793 |
|
TSS |
|
22,867 |
|
5,118 |
|
68,971 |
|
49,723 |
| ||||
RCM |
|
(2,194) |
|
(35,285) |
|
836 |
|
(14,109) |
| ||||
Corporate (1) |
|
143 |
|
(62,017) |
|
8,941 |
|
(78,816) |
| ||||
Total operating income (loss) |
|
$ |
39,167 |
|
$ |
(99,884) |
|
$ |
129,070 |
|
$ |
(20,409) |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation |
|
|
|
|
|
|
|
|
| ||||
ECS |
|
$ |
1,737 |
|
$ |
2,941 |
|
$ |
5,950 |
|
$ |
8,154 |
|
TSS |
|
577 |
|
723 |
|
1,746 |
|
2,198 |
| ||||
RCM |
|
3,300 |
|
3,700 |
|
10,134 |
|
9,735 |
| ||||
Corporate |
|
840 |
|
726 |
|
2,330 |
|
2,333 |
| ||||
Total depreciation |
|
$ |
6,454 |
|
$ |
8,090 |
|
$ |
20,160 |
|
$ |
22,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes goodwill impairment charge, amortization of intangibles, other costs and other income not allocable to segments. The goodwill impairment charge of $56.6 million for the three and nine-month periods of fiscal 2013 was recorded at Corporate. The intangible asset amortization expense for the three and nine-month periods of fiscal 2014 was $6.1 million and $21.4 million, respectively, compared to $9.6 million and $24.2 million for the same periods last year.
|
|
June 29, |
|
September 29, |
| ||
|
|
(in thousands) |
| ||||
Total Assets |
|
|
|
|
| ||
ECS |
|
$ |
931,810 |
|
$ |
912,996 |
|
TSS |
|
742,047 |
|
673,864 |
| ||
RCM |
|
432,203 |
|
435,053 |
| ||
Corporate (1) |
|
(281,840) |
|
(222,821) |
| ||
Total assets |
|
$ |
1,824,220 |
|
$ |
1,799,092 |
|
|
|
|
|
|
|
|
|
(1) Corporate assets consist of intercompany eliminations and assets not allocated to segments including goodwill, intangible assets, deferred income taxes and certain other assets.
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.
The following table represents our revenue by client sector:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
June 29, |
|
June 30, |
|
June 29, |
|
June 30, |
| ||||
|
|
(in thousands) |
| ||||||||||
Client Sector |
|
|
|
|
|
|
|
|
| ||||
International (1) |
|
$ |
141,553 |
|
$ |
158,579 |
|
$ |
487,056 |
|
$ |
522,921 |
|
U.S. commercial |
|
183,757 |
|
167,280 |
|
517,907 |
|
488,722 |
| ||||
U.S. federal government (2) |
|
202,905 |
|
187,983 |
|
576,431 |
|
621,677 |
| ||||
U.S. state and local government |
|
101,287 |
|
100,993 |
|
280,241 |
|
282,059 |
| ||||
Total |
|
$ |
629,502 |
|
$ |
614,835 |
|
$ |
1,861,635 |
|
$ |
1,915,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes revenue generated from foreign operations, primarily in Canada, and revenue generated from non-U.S. clients.
(2) Includes revenue generated under U.S. federal government contracts performed outside the United States.
11. Fair Value Measurements
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 (Level 2 measurement, as described in Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the fiscal year ended September 29, 2013). The carrying value of our long-term debt approximated fair value at June 29, 2014 and September 29, 2013. As of June 29, 2014, we had outstanding borrowings of $202.4 million under our amended credit agreement to fund our business acquisitions, working capital needs and contingent earn-outs.
12. Joint Ventures
Consolidated Joint Ventures
The aggregate revenue of our consolidated joint ventures for the three and nine months ended June 29, 2014 was $3.1 million and $9.3 million, respectively, compared to $2.8 million and $9.8 million for the same periods last year. The assets and liabilities of these consolidated joint ventures were immaterial at June 29, 2014 and September 29, 2013. These assets are restricted for use only by those joint ventures and are not available for our general operations. Cash and cash equivalents maintained by the consolidated joint ventures at June 29, 2014 and September 29, 2013 were $0.9 million and $1.2 million, respectively.
Unconsolidated Joint Ventures
We account for 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 within Other costs of revenue in our condensed consolidated statements of operations. For the three and nine months ended June 29, 2014, we reported $0.4 million and $1.9 million of equity in earnings of unconsolidated joint ventures, respectively, compared to $0.6 million and $2.5 million for the same periods last year. Our maximum exposure to loss as a result of our investments in unconsolidated joint ventures is typically limited to the aggregate of the carrying value of the investment. Future funding commitments for our unconsolidated joint ventures are immaterial. The unconsolidated joint ventures are, individually and in aggregate, immaterial to our consolidated financial statements.
The aggregate carrying values of the assets and liabilities of the unconsolidated joint ventures were $22.1 million and $20.2 million, respectively, at June 29, 2014, and $24.0 million and $21.8 million, respectively, at September 29, 2013.
13. Derivative Financial Instruments
We use certain interest rate derivative contracts to hedge interest rate exposures on our variable rate debt. We have also entered into foreign currency derivative contracts with financial institutions to reduce the risk that cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. Our hedging program is not designated for trading or speculative purposes.
We recognize derivative instruments as either assets or liabilities on the accompanying condensed consolidated balance sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as accounting hedges in our condensed consolidated balance sheets as accumulated other comprehensive income.
In fiscal 2013, we entered into three interest rate swap agreements that we designated as cash flow hedges to fix the variable interest rates on a portion of borrowings under our term loan facility. In the first quarter of fiscal 2014, we entered into two additional interest rate swap agreements that we designated as cash flow hedges to fix the variable interest rates on the balance of the term loan facility. At June 29, 2014, the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect was immaterial, all of which we expect to reclassify from accumulated other comprehensive income to interest expense within the next 12 months.
As of June 29, 2014, the total notional principal amount of our outstanding interest rate swap agreements with expiration date of May 2018 was $205.0 million and the weighted average fixed rate was 1.32%.
The fair values of our outstanding derivatives designated as hedging instruments are as follows:
|
|
Balance Sheet Location |
|
June 29, |
|
September 29, |
| ||
|
|
|
|
(in thousands) |
| ||||
|
|
|
|
|
|
|
| ||
Interest rate swap agreements |
|
Other current liabilities |
|
$ |
1,284 |
|
$ |
987 |
|
The impact of the effective portions of derivative instruments in cash flow hedging relationships on income and other comprehensive income from our interest rate swap agreements was immaterial for the three and nine-month periods of fiscal 2014 and 2013. Additionally, there were no ineffective portions of derivative instruments. Accordingly, no amounts were excluded from effectiveness testing for our interest rate swap agreements. We had no derivative instruments that were not designated as hedging instruments for fiscal 2013 and the first nine months of fiscal 2014.
14. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
The accumulated balances and reporting period activities for the three and nine months ended June 29, 2014 and September 29, 2013 related to reclassifications out of accumulated other comprehensive income (loss) are summarized as follows:
|
|
Three Months Ended |
| |||||||
|
|
Foreign |
|
Loss on |
|
Accumulated |
| |||
|
|
(in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Balances at March 31, 2013 |
|
$ |
13,377 |
|
$ |
|
|
$ |
13,377 |
|
|
|
|
|
|
|
|
| |||
Other comprehensive loss before reclassifications |
|
(22,398) |
|
|
|
(22,398) |
| |||
Net current-period other comprehensive loss |
|
(22,398) |
|
|
|
(22,398) |
| |||
|
|
|
|
|
|
|
| |||
Balances at June 30, 2013 |
|
$ |
(9,021) |
|
$ |
|
|
$ |
(9,021) |
|
|
|
|
|
|
|
|
| |||
Balances at March 30, 2014 |
|
$ |
(35,406) |
|
$ |
(43) |
|
$ |
(35,449) |
|
|
|
|
|
|
|
|
| |||
Other comprehensive income (loss) before reclassifications |
|
19,507 |
|
(41) |
|
19,466 |
| |||
Amounts reclassified from accumulated other comprehensive income |
|
|
|
|
|
|
| |||
Interest rate contacts, net of tax (1) |
|
|
|
(605) |
|
(605) |
| |||
Net current-period other comprehensive income (loss) |
|
19,507 |
|
(646) |
|
18,861 |
| |||
|
|
|
|
|
|
|
| |||
Balances at June 29, 2014 |
|
$ |
(15,899) |
|
$ |
(689) |
|
$ |
(16,588) |
|
|
|
|
|
|
|
|
|
|
|
|
(1) This accumulated other comprehensive component is reclassified in Interest expense in our condensed consolidated statements of operations. See Note 13, Derivative Financial Instruments, for more information.
|
|
Nine Months Ended |
| |||||||
|
|
Foreign |
|
Loss on |
|
Accumulated |
| |||
|
|
(in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Balances at September 30, 2012 |
|
$ |
31,110 |
|
$ |
(93) |
|
$ |
31,017 |
|
|
|
|
|
|
|
|
| |||
Other comprehensive (loss) income before reclassifications |
|
(40,131) |
|
257 |
|
(39,874) |
| |||
Amounts reclassified from accumulated other comprehensive income |
|
|
|
|
|
|
| |||
Foreign exchange contracts, net of tax (1) |
|
|
|
(164) |
|
(164) |
| |||
Net current-period other comprehensive (loss) income |
|
(40,131) |
|
93 |
|
(40,038) |
| |||
|
|
|
|
|
|
|
| |||
Balances at June 30, 2013 |
|
$ |
(9,021) |
|
$ |
|
|
$ |
(9,021) |
|
|
|
|
|
|
|
|
| |||
Balances at September 29, 2013 |
|
$ |
2,340 |
|
$ |
(482) |
|
$ |
1,858 |
|
|
|
|
|
|
|
|
| |||
Other comprehensive (loss) income before reclassifications |
|
(18,239) |
|
1,481 |
|
(16,758) |
| |||
Amounts reclassified from accumulated other comprehensive income |
|
|
|
|
|
|
| |||
Interest rate contracts, net of tax (2) |
|
|
|
(1,688) |
|
(1,688) |
| |||
Net current-period other comprehensive income loss |
|
(18,239) |
|
(207) |
|
(18,446) |
| |||
|
|
|
|
|
|
|
| |||
Balances at June 29, 2014 |
|
$ |
(15,899) |
|
$ |
(689) |
|
$ |
(16,588) |
|
|
|
|
|
|
|
|
|
|
|
|
(1) This accumulated other comprehensive component is reclassified in Interest expense and foreign exchange expense in Selling, general and administrative expenses in our condensed consolidated statements of operations. See Note 13, Derivative Financial Instruments, for more information.
(2) This accumulated other comprehensive component is reclassified in Interest expense in our condensed consolidated statements of operations. See Note 13, Derivative Financial Instruments, for more information.
15. 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 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.
We acquired BPR Inc. (BPR), a Quebec-based engineering firm on October 4, 2010. Subsequently, we have been informed of the following with respect to pre-acquisition activities at BPR:
On April 17, 2012, authorities in the province of Quebec, Canada charged two employees of BPR Triax, a subsidiary of BPR, and BPR Triax, under the Canadian Criminal Code with allegations of corruption. Discovery procedures associated with the charges are currently ongoing, and the legal process is expected to continue through September 2014. We have conducted an internal investigation concerning this matter and, based on the results of our investigation, we believe these allegations are limited to activities at BPR Triax prior to our acquisition of BPR.
During late March 2013, the then-president of BPR gave testimony to the Charbonneau Commission, which is investigating possible corruption in the engineering industry in Quebec. He stated that, during 2007 and 2008, he and other former BPR shareholders paid personal funds to a political party official in exchange for the award of five government contracts. Further, prior to the testimony, we were not aware of the misconduct. We have accepted the resignation of BPRs former president, and are evaluating the impact of these pre-acquisition actions on our business and results of operations.
During March 2013, following the resignation of BPRs former president, we learned that criminal charges had been filed against BPR and its former president in France. The charges relate to allegations that, in 2009, a BPR subsidiary had hired an employee of another firm to be CEO of that BPR subsidiary as a part of a corrupt scheme that allegedly damaged, among others, the employees former employer. The hearing on this matter was held on May 9, 2014. On June 12, 2014, the Court dismissed all charges against all defendants. The Public Prosecutor did not file an appeal, and the Courts decision is therefore final.
On April 19, 2013, a class action proceeding was filed in Montreal in which BPR, BPRs former president, and other Quebec-based engineering firms and individuals are named as defendants. The plaintiff class includes all individuals and entities that have paid real estate or municipal taxes to the city of Montreal. The allegations include participation in collusion to share contracts awarded by the City of Montreal, conspiracy to reduce competition and fix prices, payment of bribes to officials, making illegal political contributions, and bid rigging. A class certification hearing was held in March 2014, and on May 7, 2014, the court dismissed the action. On June 5, 2014, the plaintiff filed an appeal, and the defendants are preparing their motion to dismiss.
The financial impact to us of the matters discussed above is unknown at this time.
16. Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (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. We 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 U.S. GAAP and financial statements prepared on the basis of International Financial Reporting Standards. This guidance became effective for us in the first quarter of fiscal 2014 on a retrospective basis. The adoption of this guidance had no impact on our consolidated financial statements.
In February 2013, the FASB issued an update to the reporting of reclassifications out of accumulated other comprehensive income. We are required to disclose additional information about changes in and significant items reclassified out of accumulated other comprehensive income. The guidance became effective for us in the first quarter of fiscal 2014. The adoption of this guidance did not have an impact on our consolidated financial statements.
In July 2013, the FASB issued an update on an inclusion of the Fed Funds Effective Swap as a benchmark interest rate (Overnight Interest Swap Rate) for hedge accounting purposes. This guidance permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under U.S. GAAP. This guidance became effective prospectively for qualifying new or redesigned hedging relationships entered into on or after July 17, 2013. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In July 2013, the FASB issued an update on the financial statement presentation of unrecognized tax benefits. We are required to present a liability related to an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. This guidance will be effective for us in the first quarter of fiscal 2015. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In April 2014, the FASB issued guidance that changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on our operations and financial results. For disposals of individually significant components that do not qualify as discontinued operations, we must disclose pre-tax earnings of the disposed component. This guidance is effective for us prospectively in the first quarter of fiscal 2016. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued an accounting standard which will supersede existing revenue recognition guidance under current U.S. GAAP. The new standard is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The accounting standard is effective for us in the first quarter of fiscal year 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt this standard and management is currently evaluating which transition approach to use. We are currently in the process of assessing what impact this new standard may have on our condensed consolidated financial statements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Managements 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, construction and technical services that focuses on addressing 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. Our commitment to continuous improvement and investment in growth has diversified our client base, expanded our geographic reach, and increased the breadth and depth of our service offerings to address existing and emerging markets. We currently have approximately 14,000 staff worldwide, located primarily in North America.
We derive income from fees for professional, technical, program management, construction 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 international and U.S. commercial 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 |
|
Nine Months Ended |
| ||||
|
|
June 29, |
|
June 30, |
|
June 29, |
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
Client Sector |
|
|
|
|
|
|
|
|
|
International (1) |
|
22.5% |
|
25.8% |
|
26.2% |
|
27.3% |
|
U.S. commercial |
|
29.2 |
|
27.2 |
|
27.8 |
|
25.5 |
|
U.S. federal government (2) |
|
32.2 |
|
30.6 |
|
31.0 |
|
32.5 |
|
U.S. state and local government |
|
16.1 |
|
16.4 |
|
15.0 |
|
14.7 |
|
Total |
|
100.0% |
|
100.0% |
|
100.0% |
|
100.0% |
|
|
|
|
|
|
|
|
|
|
|
(1) Includes revenue generated from foreign operations, primarily in Canada, and revenue generated from non-U.S. clients.
(2) Includes revenue generated under U.S. federal government contracts performed outside the United States.
We manage our business under the following three reportable segments:
Engineering and Consulting Services. ECS provides front-end science, consulting engineering and project management services in the areas of surface water management, water infrastructure, solid waste management, mining, geotechnical sciences, arctic engineering, industrial processes and oil sands, transportation and information technology.
Technical Support Services. TSS provides management consulting and engineering services and strategic direction in the areas of environmental assessments/hazardous waste management, climate change, international development, international reconstruction and stabilization, energy, oil and gas, technical government consulting, and building and facilities.
Remediation and Construction Management. RCM provides full-service support, including construction and construction management, to all of our client sectors, including the U.S. federal government in the United States and internationally, and commercial clients worldwide, in the areas of environmental remediation, infrastructure development, solid waste management, energy, and oil and gas.
The following table presents the percentage of our revenue by reportable segment:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||
|
|
June 29, |
|
June 30, |
|
June 29, |
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
Reportable Segment |
|
|
|
|
|
|
|
|
|
ECS |
|
39.2% |
|
40.9% |
|
38.0% |
|
40.1% |
|
TSS |
|
37.5 |
|
36.0 |
|
36.2 |
|
35.9 |
|
RCM |
|
27.3 |
|
26.4 |
|
29.5 |
|
26.1 |
|
Inter-segment elimination |
|
(4.0) |
|
(3.3) |
|
(3.7) |
|
(3.1) |
|
|
|
100.0% |
|
100.0% |
|
100.0% |
|
100.0% |
|
We provide services under three principal types of contracts: fixed-price, time-and-materials and cost-plus. The following table presents the percentage of our revenue by contract type:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||
|
|
June 29, |
|
June 30, |
|
June 29, |
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
Contract Type |
|
|
|
|
|
|
|
|
|
Fixed-price |
|
44.3% |
|
42.1% |
|
46.2% |
|
41.1% |
|
Time-and-materials |
|
36.3 |
|
39.1 |
|
35.9 |
|
40.4 |
|
Cost-plus |
|
19.4 |
|
18.8 |
|
17.9 |
|
18.5 |
|
|
|
100.0% |
|
100.0% |
|
100.0% |
|
100.0% |
|
Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur. Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and also paid for other expenses. Under cost-plus contracts, some of which are subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. Profitability on our contracts is driven by billable headcount and our ability to manage our subcontractors, vendors and material suppliers. 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 of these costs. Our SG&A expenses are comprised primarily of marketing and bid and proposal costs, and our corporate headquarters costs related to 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 Years 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. 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 governments 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.
In the second quarter of fiscal 2013, we acquired AEG, headquartered in Richfield, Ohio. AEG provides environmental, design, construction and maintenance services primarily to solid and hazardous waste, environmental, energy and utility clients. Also in the second quarter of fiscal 2013, we acquired Parkland, headquartered in Alberta, Canada. Parkland serves the oil and gas industry in Western Canada and specializes in the technical support, engineering support and construction of pipelines and oilfield facilities. AEG and Parkland are both included in our RCM segment. We also made other acquisitions that enhanced our service offerings and expanded our geographic presence in our ECS and TSS segments during fiscal 2013 and in the first quarter of fiscal 2014.
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 nine months of fiscal 2014 and 2013.
OVERVIEW OF RESULTS AND BUSINESS TRENDS
General. In the first nine months of fiscal 2014, our revenue declined 2.8% compared to the year-ago period. Our year-over-year comparisons reflect project-related charges in the third quarter of fiscal 2013 that impacted our U.S. commercial, U.S. federal and U.S. state and local government revenues. These charges are described under Fiscal 2013 Project-Related Charges. This decline was partially due to foreign exchange rate fluctuations as the U.S. dollar strengthened during fiscal year 2014 against most of the foreign currencies in which we conduct our international business. Excluding the impact of foreign exchange and the fiscal 2013 project charges, our revenue decreased 2.4% compared to the first nine months of last year. The revenue decline also reflects continued weakness in our U.S. federal government, global mining and Eastern Canada businesses. In addition, our construction activities declined compared to last year due to our exit from select fixed-price construction markets, the wind-down of large state and local transportation projects and abnormally severe weather conditions in several areas of the U.S. and Canada that hindered our field activities. We are currently reviewing the performance of business units within RCM to focus on higher margin projects, which may cause us to exit some businesses or project types, particularly those with fixed-price contracts.
Current economic conditions continue to be volatile, and there is ambiguity as to whether the U.S. or the global economy will grow slowly or modestly. Concerns over general economic conditions appear to be restraining some business owners from making the significant investment commitments needed to fund future growth. Strong economic expansion generally benefits our business while a tepid recovery could adversely impact the demand for our services. It is not possible to predict with certainty whether or when a stronger recovery may occur, or what impact this would have on our business, results of operations, cash flows or financial condition.
International. Our international business decreased 6.9% in the first nine months of fiscal 2014 compared to the year-ago period. Foreign exchange rate fluctuations had a significant adverse impact on our international revenue in fiscal 2014. Excluding the impact of foreign exchange, our international business was flat compared to the same period last year. We experienced growth in our international oil and gas business in Western Canada, primarily related to the Parkland acquisition. This increase was offset by lower results in our Eastern Canada and global mining operations, which were strong in the first half of last year and significantly weakened beginning in the third quarter of fiscal 2013. We anticipate lower international revenue levels to continue for the remainder of fiscal 2014.
U.S. Commercial. Our U.S. commercial business increased 6.0% in the first nine months of fiscal 2014 compared to the same period last year. An increase in solid waste management operations, primarily due to the AEG acquisition, contributed to this growth. In addition, we experienced continued growth from services provided for oil and gas clients, which generate higher profit margins. Conversely, we have experienced a slowdown in commercial wind-related project opportunities. We are optimistic regarding increased spending by our energy-focused clients, particularly in oil and gas, as well as by our larger industrial clients. Our U.S. commercial clients typically react rapidly to economic change. Accordingly, if the U.S. economy experiences a slowdown or pickup in the remainder of fiscal 2014, we would expect our U.S. commercial outlook to change correspondingly.
U.S. Federal Government. For the first nine months of fiscal 2013, our U.S. federal government business declined 7.3% compared to the year-ago period. Overall, this decline resulted from the broad-based slowdown in funding for discretionary U.S. federal government programs. The slowdown was due to the mandatory federal budget reductions, or sequestrations, that were in place in fiscal 2013, and the two-week federal government shutdown in October 2013. In addition, during the second quarter of fiscal 2014, many U.S. federal offices in which our employees perform services were closed due to severe weather conditions. Further, we are continuing to implement our strategy to exit select fixed-price construction markets. During periods of economic volatility, our U.S. federal government clients have historically been the most stable and predictable. However, increased Congressional debate on government spending and competing political agendas in the U.S. government, have created uncertainty in the spending habits of our clients. In December 2013, the Murray-Ryan Bipartisan Budget Act of 2013 (2013 Budget Act) was signed into law, raising government discretionary spending limits for fiscal years 2014 and 2015. The direct impact of the 2013 Budget Act on the programs we support is unclear at this point, and we remain cautious regarding the ability to grow our U.S. federal government revenue compared to fiscal 2013.
U.S. State and Local Government. Our U.S. state and local business decreased 0.6% in the first nine months of fiscal 2014 compared to the year-ago period. This stability followed a period of rapid growth in our state and local business, which increased 22.7% in fiscal 2013. The unusual growth in this sector last year resulted from increased spending on essential priority programs following a period of economic recession. In addition, we recorded significant revenue from several large transportation projects in fiscal 2013, which are currently winding down. Many state and local government agencies are experiencing improved financial conditions compared to recent years. 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 legal requirements that drive some of these programs, such as regulatory-mandated consent decrees. As a result, some programs, such as those focused on municipal water and solid waste, will progress despite budget pressures as demonstrated by the growth throughout fiscal 2013. We expect our U.S. state and local government business to decrease during the remainder of fiscal 2014 as a result of the completion of large, non-core transportation projects.
RESULTS OF OPERATIONS
Consolidated Results of Operations
|
|
Three Months Ended |
|
Nine Months Ended |
| |||||||||||||||||||
|
|
June 29, |
|
June 30, |
|
Change |
|
June 29, |
|
June 30, |
|
Change |
| |||||||||||
|
|
2014 |
|
2013 |
|
$ |
|
% |
|
2014 |
|
2013 |
|
$ |
|
% |
| |||||||
|
|
($ in thousands) |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenue |
|
$ |
629,502 |
|
$ |
614,835 |
|
$ |
14,667 |
|
2.4% |
|
$ |
1,861,635 |
|
$ |
1,915,379 |
|
$ |
(53,744) |
|
(2.8 |
)% |
|
Subcontractor costs |
|
(170,746) |
|
(139,693) |
|
(31,053) |
|
(22.2) |
|
(463,904) |
|
(422,092) |
|
(41,812) |
|
(9.9 |
) |
| ||||||
Revenue, net of subcontractor costs(1) |
|
458,756 |
|
475,142 |
|
(16,386) |
|
(3.4) |
|
1,397,731 |
|
1,493,287 |
|
(95,556) |
|
(6.4 |
) |
| ||||||
Other costs of revenue |
|
(381,319) |
|
(469,398) |
|
88,079 |
|
18.8 |
|
(1,164,761) |
|
(1,314,219) |
|
149,458 |
|
11.4 |
|
| ||||||
Selling, general and administrative expenses |
|
(47,175) |
|
(56,744) |
|
9,569 |
|
16.9 |
|
(138,778) |
|
(151,539) |
|
12,761 |
|
8.4 |
|
| ||||||
Contingent consideration - fair value adjustments |
|
8,905 |
|
7,716 |
|
1,189 |
|
15.4 |
|
34,878 |
|
8,662 |
|
26,216 |
|
302.7 |
|
| ||||||
Impairment of goodwill |
|
|
|
(56,600) |
|
56,600 |
|
NM |
|
|
|
(56,600) |
|
56,600 |
|
NM |
|
| ||||||
Operating income (loss) |
|
39,167 |
|
(99,884) |
|
139,051 |
|
139.2 |
|
129,070 |
|
(20,409) |
|
149,479 |
|
732.4 |
|
| ||||||
Interest expense |
|
(2,454) |
|
(2,010) |
|
(444) |
|
(22.1) |
|
(7,373) |
|
(5,330) |
|
(2,043) |
|
(38.3 |
) |
| ||||||
Income (loss) before income tax (expense) benefit |
|
36,713 |
|
(101,894) |
|
138,607 |
|
136.0 |
|
121,697 |
|
(25,739) |
|
147,436 |
|
572.8 |
|
| ||||||
Income tax (expense) benefit |
|
(10,002) |
|
23,779 |
|
(33,781) |
|
(142.1) |
|
(35,751) |
|
(1,108) |
|
(34,643) |
|
(3,126.6 |
) |
| ||||||
Net income (loss) including noncontrolling interests |
|
26,711 |
|
(78,115) |
|
104,826 |
|
134.2 |
|
85,946 |
|
(26,847) |
|
112,793 |
|
420.1 |
|
| ||||||
Net income attributable to noncontrolling interests |
|
(54) |
|
(270) |
|
216 |
|
80.0 |
|
(266) |
|
(495) |
|
229 |
|
46.3 |
|
| ||||||
Net income (loss) attributable to Tetra Tech |
|
$ |
26,657 |
|
$ |
(78,385) |
|
$ |
105,042 |
|
134.0 |
|
$ |
85,680 |
|
$ |
(27,342) |
|
$ |
113,022 |
|
413.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) We believe that the presentation of Revenue, net of subcontractor costs, which is 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 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.
NM = not meaningful
In the third quarter of fiscal 2014, revenue increased $14.7 million and revenue, net of subcontractor costs, decreased $16.4 million compared to the third quarter of last year. In the first nine months of fiscal 2014, revenue and revenue, net of subcontractor costs, decreased $53.7 million and $95.6 million, respectively, compared to the same period last year. These results reflect declines due to foreign exchange rate fluctuations as the U.S. dollar strengthened in fiscal 2014 against most of the foreign currencies in which we conduct our international business. These exchange rate variations impacted revenue by $8.8 million and $35.8 million, and impacted revenue, net of subcontractor costs, by $8.3 million and $31.5 million, for the third quarter and first nine months of fiscal 2014, respectively, compared to the same periods last year. In addition, our year-over-year comparisons reflect project-related charges in our TSS and RCM segments that are described under Fiscal 2013 Project-Related Charges.
Our revenue in the third quarter of fiscal 2014 was relatively stable compared to last years third quarter after adjusting for foreign exchange and last years project charges. However, we had a higher level of subcontractor activity, primarily on construction activities in our RCM segment, which resulted in the $37.7 million decline in related revenue, net of subcontractor costs. These lower quarter-over-quarter results include decreases of $15.9 million and $11.8 million from U.S federal and U.S. state and local government programs, respectively. The decline in U.S. federal activity reflects a broad-based slowdown caused by budgetary constraints that primarily impacted discretionary programs. The lower U.S. state and local government results reflect abnormally strong growth in fiscal 2013, partially due to significant revenue from several large transportation projects that are currently winding down. Our fiscal 2014 third quarter also reflects a decline in international revenue, net of subcontractor costs, of $15.1 million compared to last years third quarter due primarily to foreign exchange rate impact and reduced mining work and construction activities in Western Canada. These declines were partially offset by a $5.1 million increase in revenue from our U.S. commercial business, which reflects continued organic growth in our commercial oil and gas business.
In the first nine months of fiscal 2014, our revenue and revenue, net of subcontractor costs, decreased $47.5 million and $93.7 million, respectively, after adjusting for foreign exchange and last years project charges, compared to the same period last year. The trends that impacted our quarter-over-quarter comparisons are also reflected in our year-to-date results. Our U.S. government (federal and state and local combined) revenue and revenue, net of subcontractor costs, declined $64.4 million and $84.8 million, respectively, adjusted for last years project charges, year-to-date compared to the same period last year. These lower results reflect similar trends as described for our quarterly performance. However, the year-to-date declines were exacerbated by U.S. federal office closures due to inclement weather in the second quarter of fiscal 2014 and the two-week U.S. federal government shut-down in October 2013. In addition, our year-to-date results in fiscal 2014 reflect declines in our Eastern Canada and global mining businesses, which had strong results in the first half of fiscal 2013 and abruptly declined in the third quarter of fiscal 2013. On a combined basis for these operations, revenue and revenue, net of subcontractor costs, excluding the impact of foreign currency translation, decreased $54.0 million and $55.6 million, respectively, in the first nine months of fiscal 2014 compared to the same period last year. We continue to experience organic growth in our North American oil and gas business, which has partially offset the year-to-date declines in revenue. Further, the Parkland and AEG acquisitions, which focus on oil and gas and solid waste, respectively, completed in the second quarter of fiscal 2013, contributed additional revenue, adjusted for foreign exchange, of $55.3 million in the first nine months of fiscal 2014 compared to the same period in fiscal 2013.
Despite our revenue trends, operating income increased $139.1 million and $149.5 million in the third quarter and the first nine months of fiscal 2014, respectively, compared to the same periods of fiscal 2013. In the third quarter of fiscal 2013, our operating income was adversely impacted by weakness in certain areas of our business that resulted in significant costs totaling $10.3 million to right-size the related operations, and a non-cash goodwill impairment charge of $56.6 million. In addition, we recorded project-related charges and adjustments to estimated costs at completion during the third quarter of fiscal 2013 that reduced operating income by $35.5 million. These fiscal 2013 charges are described in detail under Fiscal 2013 Restructuring, Goodwill Impairment and Project-Related Charges. Excluding these fiscal 2013 charges, our operating income increased $36.7 million and $47.1 million in the third quarter and first nine months of fiscal 2014, respectively, compared to the same periods last year. The increased operating income, adjusted for the fiscal 2013 charges, in the third quarter of fiscal 2014 was primarily driven by improved labor utilization as well as higher income from commercial activities related to our work for oil and gas clients.
Our quarterly and year-to-date operating income compared to last year was also impacted by net gains from updated valuations of our contingent consideration liabilities. During the third quarter and first nine months fiscal 2014, we recorded net decreases in our contingent earn-out liabilities and reported related net gains in operating income of $8.9 million and $34.9 million, respectively, compared to net gains of $7.7 million and $8.7 million in the same periods last year. The third quarter fiscal 2014 net gain resulted from an updated valuation of the contingent consideration liability for AEG. The remaining year-to-date gains resulted from updated valuations for Parkland. In each case, the changes in valuation reflected lower income projections over the remaining earn-out periods. The increases in operating income also include lower amortization of intangibles of $3.5 million and $2.9 million for the third quarter and first nine months of fiscal 2014, respectively, compared to the same periods in fiscal 2013.
In the third quarter of fiscal 2014, we recorded income tax expense of $10.0 million representing an effective tax rate of 27.2%. We recorded a tax benefit of $23.8 million in the third quarter of fiscal 2013, representing an effective tax rate of (23.3%). These tax rates are significantly lower than our expected statutory tax rate primarily due to the impact of gains from changes to contingent consideration liabilities in both periods, most of which are not taxable. In addition, the fiscal 2013 effective tax rate was impacted by the $56.6 million goodwill impairment charge, approximately two-thirds of which was not tax deductible.
Fiscal 2013 Restructuring, Goodwill Impairment and Project-Related Charges
Fiscal 2013 Restructuring Charges
In Eastern Canada, poor economic conditions, including budget deficits, reduced customer spending and on-going government investigations into political corruption in Quebec, slowed procurements and business activity in that region beginning in the third quarter of fiscal 2013. As a result, we experienced weaker than expected financial performance in our Eastern Canada operations, and we took actions to right-size the business that resulted in significant severance and office closure charges in the third quarter of fiscal 2013.
Our work for mining customers also slowed more than expected in the third quarter of fiscal 2013 as those customers responded to lower global growth expectations. This was driven in large part by Chinas report in April 2013 of anticipated slower economic growth. As a result, our mining customers experienced a significant reduction in the global demand for commodities that caused a drop in mineral prices. Due to the subsequent slowdown in mining activities, we right-sized our global mining business by reducing staff and closing offices in the third quarter of fiscal 2013.
In connection with the actions taken to right-size our Eastern Canada and global mining operations, we recorded a combined charge of $10.3 million related to severance and the abandonment of certain leased facilities in our ECS segment. Of this amount, approximately $4.0 million, related to severance, was paid in cash in fiscal 2013, and $2.2 million, related to leases, was paid in cash in the first nine months of fiscal 2014. The remaining $4.1 million is expected to be paid in cash net of estimated sublease income over the remainder of fiscal 2014 and the following six years as the related leases expire. If these operations decline further, we may take further right-sizing actions and incur additional costs. No material right-sizing charges were incurred in the first nine months of fiscal 2014, and we do not anticipate further material charges at this time. The expected annual cost savings in fiscal 2014 in the ECS segment from lower compensation and rent expense is approximately $14.9 million. The reduction in the number of employees in the ECS segment may also result in lower future revenue, net of subcontractor costs.
Fiscal 2013 Goodwill Impairment Charge
During the third quarter of fiscal 2013, certain of our reporting units experienced declines in actual performance and lowered their financial projections for the remainder of fiscal 2013. In Eastern Canada, poor economic conditions, including budget deficits, reduced customer spending, and on-going government investigations into political corruption in Quebec, slowed procurements and business activity in that region. In addition, our work for mining customers continued to slow at a faster pace than previously anticipated due to reduced demand and significant declines in prices for certain commodities. To a lesser extent, we also experienced reduced performance from reporting units with a concentration of work for certain agencies of the U.S. federal government as a result of customer budgetary constraints. As a result of these factors, during the third quarter of fiscal 2013, we performed an interim goodwill impairment test for three reporting units in our ECS segment.
The reporting units tested for goodwill impairment included our Tetra Tech Canada (TTC) reporting unit, with operations primarily in Eastern Canada, particularly Quebec. A significant portion of TTCs business relates to work performed for city and provincial government clients in Quebec. This work, which had already slowed due to budgetary constraints, was curtailed almost completely during the third quarter of fiscal 2013 due to the political corruption investigations in Quebec. As a result, TTCs revenue declined 26% in the third quarter of fiscal 2013 compared to the prior year period, and TTC reported a quarterly loss. This negative trend was compared to the expected revenue growth of approximately 8% in the annual goodwill impairment test performed as of July 1, 2012. In response to these results, we made significant staff and office reductions in TTC during the third quarter of fiscal 2013 to align our costs with the expected lower level of revenue. Although these actions returned TTC to profitability in the fourth quarter of fiscal 2013, revenue and profits were at a lower level than previously expected. Due to the significance of the staff reductions and the expected prolonged government investigations, we concluded that TTC would likely experience a long-term deficit in performance compared to previous periods and expectations.
We also performed an interim goodwill impairment test for our Global Mining Practice (GMP) reporting unit, with operations primarily in the U.S., Canada, Australia and South America. Our work for mining customers slowed more than expected in the third quarter of fiscal 2013, as these customers responded to lower global growth expectations driven in large part by Chinas report in April 2013 of slower economic growth. As a result, our mining customers experienced a significant reduction in the global demand for commodities that caused a drop in mineral prices. Their response included a significant curtailment of capital spending for new mining projects. As a result, GMP experienced a 27% decline in revenue in the third quarter of fiscal 2013 compared to the same period of fiscal 2012 and reported a quarterly loss. This negative trend was compared to the expected revenue growth of approximately 15% in the previous goodwill impairment test, performed as of July 1, 2012. In response to these results, we made significant staff and office reductions in GMP during the third quarter of fiscal 2013 to align our costs with the expected lower level of revenue. Although these actions returned GMP to profitability in the fourth quarter of fiscal 2013, revenue and profits did not return to historical levels. Due to the significance of the staff reductions and the expected prolonged lower level of mining activity, we concluded that GMP would likely not return to historical levels of performance for the foreseeable future.
Lastly, we performed an interim goodwill impairment test for Advanced Management Technology, Inc. (AMT), a U.S. federal government contractor primarily doing business with the Federal Aviation Administration. In fiscal 2013, we experienced a decline in revenue from U.S. federal government programs as uncertainty regarding the U.S. federal budget delayed project funding and budget cuts were implemented. As a result, our overall U.S. federal government revenue declined 23% in the third quarter of fiscal 2013 compared to the same period last year. Correspondingly, AMTs revenue declined approximately 12%. Although AMT remained profitable despite this decline in revenue, the related operating income declined 46% as competition increased for the shrinking level of federal work. This negative trend was compared to the stable expectations for revenue and profit in the previous goodwill impairment test performed as of July 1, 2012. We expect the level of federal spending for the work AMT performs to remain stable at the reduced levels experienced in fiscal 2013 for the foreseeable future.
We performed the first step of the impairment test for each of these reporting units during the third quarter of fiscal 2013, and in each case determined that the carrying value of the reporting unit exceeded its fair value, indicating potential goodwill impairment. The significant change to the assumptions used in the interim test in the third quarter of fiscal 2013 compared to the previous annual impairment test as of July 1, 2012 was the projected revenue, operating income and cash flows for each reporting unit tested.
We performed the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, of the applicable reporting units. The second step of the test requires the allocation of the reporting units fair value to its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as an impairment loss. Based on the results of the step two analyses, we recorded an aggregate goodwill impairment charge of $56.6 million, or $48.1 million, net of tax, in the third quarter of fiscal 2013 for the TTC, GMP and AMT reporting units. The calculations of the reporting unit fair values for the second step of the goodwill impairment test are highly dependent on estimated future annual revenue growth rates. The revenue growth rate assumptions for the interim impairment test for TTC, GMP and AMT ranged from 0% to 5%. If it becomes apparent that these reporting units are unable to achieve the assumed growth rates, or they continue to decline, we would likely have further goodwill impairment charges in the future.
The carrying amounts of these reporting units, including goodwill were as follows:
|
|
June 30, 2013 |
| |||||||
|
|
TTC |
|
GMP |
|
AMT |
| |||
|
|
(in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Carrying value before impairment |
|
$ |
245,634 |
|
$ |
116,184 |
|
$ |
56,474 |
|
Goodwill impairment |
|
(27,900) |
|
(11,900) |
|
(16,800) |
| |||
Carrying value after impairment |
|
$ |
217,734 |
|
$ |
104,284 |
|
$ |
39,674 |
|
As of June 29, 2014, the goodwill amounts after the impairment charges for the TTC, GMP and AMT reporting units were $109.5 million, $71.9 million and $32.6 million, respectively.
Fiscal 2013 Project-Related Charges
In the third quarter of fiscal 2013, we recorded project-related charges and adjustments to estimated costs at completion that reduced revenue and increased project costs. These project charges primarily related to adverse developments on certain projects during the third quarter of fiscal 2013, and our subsequent evaluations and conclusions concerning the collectability of the related unbilled accounts receivable. These charges included amounts related to claims, including requests for equitable adjustment (REA), on three programs in the RCM segment with U.S. federal and state and local government clients. In addition, we recorded a project-related charge on a commercial development contract in the TSS segment due to a change in client ownership and the related modification of plans for completion of the project. These events adversely affected the collectability of certain related receivables and the profitability expectations for the project. Collectively, the project charges on these four programs reduced revenue and revenue, net of subcontractor costs, by $29.6 million and reduced operating income by $35.5 million in the third quarter of fiscal 2013.
The first of the four programs related to U.S. federal government fixed-price contracts in our RCM segment, awarded in fiscal 2010, for the construction of structures to reduce the risks associated with hurricanes and other storms in Southeastern Louisiana. During construction, we incurred costs in excess of the contract values to meet client requests, and submitted a related REA to the client. We concluded that there was a technical and legal basis for recovery of a portion of these costs and recorded revenue and associated accounts receivable deemed probable of collection related to the REA through the second quarter of fiscal 2013. The total amount of the excess costs and the REA significantly exceeded the revenue recognized, resulting in a loss for the program.
During the third quarter of fiscal 2013, we received a decision from the client affirmatively rejecting a portion of the costs submitted in the REA. Accordingly, during that quarter, we re-evaluated the collectability of the related accounts receivable and the estimated costs to complete the projects and recorded charges to pre-tax income of $6.8 million, including reductions to revenue of $5.7 million. As of September 29, 2013, the project was complete and no further costs are expected to be incurred. However, if it is determined that any or all of the remaining accounts receivable are uncollectible, we could recognize further losses in future periods. Conversely, we are pursuing all available legal methods to collect the entire amount of the submitted REA and, if successful, we could recognize gains on recovery in future periods. No gains or losses on this project were recorded during the first nine months of fiscal 2014.
The second program related to U.S. federal government fixed-price contracts in our RCM segment, awarded in fiscal 2012, to provide design and construction services for Afghan National Army camps in Afghanistan. Upon contract execution, we engaged a subcontractor under fixed-price arrangements to provide staffing, procure materials and engage local Afghan subcontractors. During the third quarter of fiscal 2013, as a result of non-performance, we terminated the subcontractor and began to self-perform the contracts. As a result of this change, we revised our estimates of the total costs to complete, including costs to self-perform the remainder of the contracts, and recorded charges to pre-tax income of $9.9 million including reductions to revenue of $7.9 million. Additionally, as a result of differing site conditions, changes to contract specifications by the client and other factors, we recorded revenue and associated accounts receivable through project completion in the first quarter of fiscal 2014 as we believe we have a technical and legal basis for recovery and such amount is probable of collection. We submitted REAs to the client during the first and second quarters of fiscal 2014. As of the end of the first quarter of fiscal 2014, the projects were complete and no further costs are expected to be incurred. However, if it is determined that any or all of the remaining accounts receivable are uncollectible, we could recognize further losses in future periods. Conversely, we are pursuing all available legal methods to collect the entire amount of the submitted REA and, if successful, we could recognize gains on recovery in future periods. No material gains or losses on this project were recorded during the first nine months of fiscal 2014.
The third program related to fixed-price transportation projects in our RCM segment with a state government agency awarded in fiscal 2011 and 2012. During the execution of these contracts, numerous issues and events disrupted our plans and progress, including weather delays, differing site conditions, drainage design changes, lane closure delays, and revised soil testing requirements. These issues caused us to incur costs in excess of the contract value. As a result, we submitted change orders including REAs to the client. In the third quarter of fiscal 2013, we determined that a portion of the costs in excess of the contract value was not recoverable. This assessment included an evaluation of the recoverability of change orders and REAs, and changes in estimated costs to complete. The result was a pre-tax charge to operating income of $6.5 million and a related reduction of revenue of $3.7 million. As of June 29, 2014, the related projects were substantially complete and no further material costs are expected to be incurred that could increase the loss. However, if it is determined that any or all of the remaining accounts receivable are uncollectible, we could recognize further losses in future periods. Conversely, we are pursuing all available legal methods to collect the entire amount of the submitted REA and, if successful, we could recognize gains on recovery in future periods. During the first nine months of fiscal 2014, we recognized a $3.4 million gain based on our updated evaluation of the collectability of these claims.
The fourth program related to a fixed-price design and construction environmental assurance agreement, and a separate fixed-price operation and maintenance (O&M) environmental assurance agreement in our TSS segment, with a commercial property developer that we entered into in fiscal 2008. At the time of contract execution, it was expected that the design and construction contract would be completed during the fourth quarter of fiscal 2011 and the O&M contract would cover related activities through December 31, 2027. Although the contract terms only allowed for final billing of the multiple project milestones upon their individual completion, we recognized revenue and the related receivable as the costs were incurred on a percentage-of-completion basis, as we believed that completion of all milestones was probable. As a result of changes in scope and delays in project execution as directed by the client, we have issued numerous change orders related to the design and construction contract, and this contract has not yet been completed.
In April 2013, our client was acquired by a larger commercial property developer. Subsequently, the new client implemented a plan to substantially modify the original scope and projected timeline associated with the contract. We determined that these proposed changes would result in increased risk and cost to and, potentially, the termination of the original contract. Accordingly, subsequent to significant discussions with the new client during the third quarter of fiscal 2013, we reviewed the recoverability of estimated costs to be incurred in anticipation of the potential project termination. We also reviewed the outstanding accounts receivable related to individual task orders under which we did not reach the required contract milestones and, therefore, would not be collectible. As a result of this process, we recorded a pre-tax charge to operating income of $12.4 million that reduced revenue by the same amount during the third quarter of fiscal 2013. This charge principally consisted of reserves established for the outstanding accounts receivable that were no longer considered probable of collection, a reversal of previously recognized profit based upon the change in estimate associated with the potential early project termination, and the write-off of previously recorded accounts receivable associated with partially completed milestones. No other gains or losses on this project were recorded during the first nine months of fiscal 2014.
In total for all four programs, we had $49.2 million of accounts receivable outstanding, including those related to REAs and change orders, and the related projects were substantially complete as of June 29, 2014. If we are unable to collect these accounts receivable or if our costs increase above these estimates, we could record further losses on these programs. Conversely, we intend to pursue all available legal methods to collect the entire amount of the REAs and change orders, and other amounts we believe are due us. The total amount, which is approximately $102.2 million, significantly exceeds the revenue recognized on the related contracts. If we are successful, we could recognize gains on recovery in future periods.
Segment Results of Operations
Engineering and Consulting Services
|
|
Three Months Ended |
|
Nine Months Ended |
| |||||||||||||||||||
|
|
June 29, |
|
June 30, |
|
Change |
|
June 29, |
|
June 30, |
|
Change |
| |||||||||||
|
|
2014 |
|
2013 |
|
$ |
|
% |
|
2014 |
|
2013 |
|
$ |
|
% |
| |||||||
|
|
($ in thousands) |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Revenue |
|
$ |
246,977 |
|
$ |
251,239 |
|
$ |
(4,262) |
|
(1.7)% |
|
$ |
707,952 |
|
$ |
788,600 |
|
$ |
(80,648) |
|
(10.2 |
)% |
|
Subcontractor costs |
|
(37,996) |
|
(28,696) |
|
(9,300) |
|
(32.4) |
|
(97,665) |
|
(99,289) |
|
1,624 |
|
1.6 |
|
| ||||||
Revenue, net of subcontractor costs |
|
$ |
208,981 |
|
$ |
222,543 |
|
$ |
(13,562) |
|
(6.1) |
|
$ |
610,287 |
|
$ |
689,311 |
|
$ |
(79,024) |
|
(11.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating income (loss) |
|
$ |
18,351 |
|
$ |
(7,700) |
|
$ |
26,051 |
|
338.3 |
|
$ |
50,322 |
|
$ |
22,793 |
|
$ |
27,529 |
|
120.8 |
|
|
Revenue declined $4.3 million and $80.6 million in the third quarter and first nine months of fiscal 2014, respectively, compared to the same periods last year. We experienced corresponding declines in revenue, net of subcontractor costs, of $13.6 million in the third quarter and $79.0 million in the first nine months of fiscal 2014. In fiscal 2014, the U.S. dollar strengthened against many foreign currencies compared to fiscal 2013. These fluctuations, particularly related to the Canadian dollar, reduced revenue by $8.2 million and $27.1 million for the third quarter and first nine months of fiscal 2014. The remainder of the declines in revenue, net of subcontractor costs, resulted primarily from reductions in our Canadian operations that focus on municipal government projects and in our global mining operations. Excluding the impact of foreign exchange, the aggregate revenue from these activities decreased by $5.7 million and $55.5 million, respectively, for the third quarter and first nine months of fiscal 2014 compared to the same periods last year.
Despite the decreases in revenue compared to last year, operating income increased $26.1 million and $27.5 million for the third quarter and the first nine months of fiscal 2014, respectively, compared to the same periods last year. In the third quarter of fiscal 2013, our operating income was adversely impacted by the weakness in our Canadian operations, resulting in significant severance and office-related closure costs totaling $10.3 million to right-size the related operations. In addition, the increased operating income reflects improved labor utilization. Prior to the right-sizing actions taken late in the third quarter of fiscal 2013, operating income in our Eastern Canada and global mining operations was significantly below historical levels due to a lower level of revenue and corresponding under-utilization of our labor and equipment resources. As a result of the right-sizing actions, utilization improved, and the combined operating income for these businesses increased $15.8 million in the third quarter of fiscal 2014 compared to last years third quarter, excluding the related charges. On a year-to-date basis, the comparable increase versus last year was $17.2 million.
Technical Support Services
|
|
Three Months Ended |
|
Nine Months Ended |
| |||||||||||||||||||
|
|
June 29, |
|
June 30, |
|
Change |
|
June 29, |
|
June 30, |
|
Change |
| |||||||||||
|
|
2014 |
|
2013 |
|
$ |
|
% |
|
2014 |
|
2013 |
|
$ |
|
% |
| |||||||
|
|
($ in thousands) |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Revenue |
|
$ |
236,056 |
|
$ |
221,198 |
|
$ |
14,858 |
|
6.7% |
|
$ |
674,042 |
|
$ |
687,230 |
|
$ |
(13,188) |
|
(1.9 |
)% |
|
Subcontractor costs |
|
(72,112) |
|
(68,301) |
|
(3,811) |
|
(5.6) |
|
(197,626) |
|
(200,470) |
|
2,844 |
|
1.4 |
|
| ||||||
Revenue, net of subcontractor costs |
|
$ |
163,944 |
|
$ |
152,897 |
|
$ |
11,047 |
|
7.2 |
|
$ |
476,416 |
|
$ |
486,760 |
|
$ |
(10,344) |
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating income |
|
$ |
22,867 |
|
$ |
5,118 |
|
$ |
17,749 |
|
346.8 |
|
$ |
68,971 |
|
$ |
49,723 |
|
$ |
19,248 |
|
38.7 |
|
|
Revenue increased $14.9 million in the third quarter and decreased $13.2 million for the first nine months of fiscal 2014 compared to the same periods last year. We experienced a corresponding increase in revenue, net of subcontractor costs, of $11.0 million in the third quarter, and a decline of $10.3 million in the first nine months of fiscal 2014 compared the same periods in fiscal 2013. In the third quarter of fiscal 2013, we recorded a $12.3 million negative revenue adjustment related to a project charge on a U.S. commercial development project. Excluding the impact of this charge, revenue increased $2.6 million and revenue, net of subcontractor costs, declined $1.3 million in the third quarter of fiscal 2014 compared to the third quarter of last year. On the same basis, for the first nine months of fiscal 2014, revenue and revenue, net of subcontractor costs, declined $25.5 million and $22.6 million, respectively, compared with the same period last year. The declines in revenue, net of subcontractor costs, were primarily driven by lower activity from U.S. federal government programs across several agencies. Revenue and revenue, net of subcontractor costs, from these programs decreased by $10.1 million and $9.7 million, respectively, in the third quarter of fiscal 2014, and $60.1 million and $47.8 million, respectively, on a year-to-date basis compared to the same periods last year. Revenue growth in our U.S. commercial business, particularly for oil and gas clients, partially offset the decline in U.S. federal work. Revenue and revenue, net of subcontractor costs, from commercial activities increased by $9.8 million and $6.9 million, respectively, for the third quarter of fiscal 2014, and $30.8 million and $22.5 million, respectively, on a year-to-date basis compared to the same periods last year.
The project charge in the third quarter of fiscal 2013 also reduced operating income by $12.3 million. Excluding the impact of this charge, operating income increased $5.4 million and $6.9 million for the third quarter and first nine months of fiscal 2014, respectively, compared to the same periods in fiscal 2013. These increases reflect the significantly higher profit margin in our commercial business, particularly oil and gas, together with a reduction in discretionary overhead costs.
Remediation and Construction Management
|
|
Three Months Ended |
|
Nine Months Ended |
| |||||||||||||||||||
|
|
June 29, |
|
June 30, |
|
Change |
|
June 29, |
|
June 30, |
|
Change |
| |||||||||||
|
|
2014 |
|
2013 |
|
$ |
|
% |
|
2014 |
|
2013 |
|
$ |
|
% |
| |||||||
|
|
($ in thousands) |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Revenue |
|
$ |
171,518 |
|
$ |
162,560 |
|
$ |
8,958 |
|
5.5% |
|
$ |
549,949 |
|
$ |
499,491 |
|
$ |
50,458 |
|
10.1 |
% |
|
Subcontractor costs |
|
(85,687) |
|
(62,858) |
|
(22,829) |
|
(36.3) |
|
(238,921) |
|
(182,275) |
|
(56,646) |
|
(31.1 |
) |
| ||||||
Revenue, net of subcontractor costs |
|
$ |
85,831 |
|
$ |
99,702 |
|
$ |
(13,871) |
|
(13.9) |
|
$ |
311,028 |
|
$ |
317,216 |
|
$ |
(6,188) |
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating (loss) income |
|
$ |
(2,194) |
|
$ |
(35,285) |
|
$ |
33,091 |
|
93.8 |
|
$ |
836 |
|
$ |
(14,109) |
|
$ |
14,945 |
|
105.9 |
|
|
Revenue increased $9.0 million and $50.5 million in the third quarter and first nine months of fiscal 2014, respectively, compared to the same periods last year. Due to a higher level of subcontractor activity, we experienced corresponding declines in revenue, net of subcontractor costs, of $13.9 million in the third quarter and $6.2 million in the first nine months of fiscal 2014. In the third quarter of fiscal 2013, we recorded $17.3 million of negative revenue adjustments for project-related charges on three programs with U.S. federal and state and local clients. Excluding the impact of these charges, revenue and revenue, net of subcontractor costs, decreased $8.3 million and $31.2 million in the third quarter of fiscal 2014 compared to the third quarter of last year. On the same basis, for the first nine months of fiscal 2014, revenue increased $33.2 million, and revenue, net of subcontractor costs, decreased $23.5 million compared with the same period last year. The revenue declines reflect lower commercial activity both in the U.S. and Canada, driven by adverse weather conditions that delayed our field work, and by a decrease in wind projects. In addition, our third quarter and year-to-date revenues from U.S. state and local government work declined due to the wind-down of large transportation projects.
The project charges in the third quarter of fiscal 2013 reduced operating income by $23.2 million. Excluding the impact of these charges, operating income increased $9.9 million for the third quarter of fiscal 2014 compared to the same period in fiscal 2013; however, we reported a loss of $2.2 million. The increased operating income primarily reflects improved labor utilization. Prior to the right-sizing actions taken late in the third quarter of fiscal 2013, operating income in our U.S.-based construction business was significantly below historical levels due to a lower level of revenue and corresponding under-utilization of our labor and equipment resources. As a result of right-sizing actions, utilization improved, and the combined operating income for this business improved in fiscal 2014. Partially offsetting these improvements were charges totaling $5.0 million in the third quarter related to cost overruns on several construction projects for the U.S. federal government.
Excluding the fiscal 2013 project charges, operating income decreased $8.3 million for the first nine months of fiscal 2014 compared to the same period last year. In addition to the third quarter variances, during the second quarter of fiscal 2014, we incurred cost overruns on a fixed-price construction project caused by changes in scope that are currently in negotiation with the client. As a result, we revised our estimate of the total costs to complete the project, determined the project would break-even contingent upon partial recovery from the client, and recorded a charge of $5.3 million in the second quarter of fiscal 2014 to reverse profit recognized in prior periods. As a result, our profit on the project was approximately $14 million less than expected, which caused a similar decline in operating income for the related operations compared to the first half of last year.
Additionally, we recognized a gain of $3.4 million in the second quarter of fiscal 2014 based on our updated evaluation of a negotiated claim related to a fixed-price transportation project with a U.S. state government agency. Operating income for the first nine months of fiscal 2013 included a gain of $1.1 million from a claim settlement on a U.S. federal government construction project, which was recognized in the first quarter of fiscal 2013. The remainder of the year-to-date decline in operating income was due to project performance, exacerbated by inclement weather, particularly during the second and third quarters of fiscal 2014.
The $2.2 million loss in the third quarter of fiscal 2014 was primarily driven by poor project performance, including cost overruns and loss projects on fixed-price construction projects. These projects were primarily buildings and other structures for U.S. federal government clients and transportation projects for U.S. state and local government clients. These projects are at various stages of completion and there is a risk that our costs to complete could exceed our current expectations resulting in further charges. If we are unable to improve the performance of these businesses in the near future, the goodwill for these reporting units, which totals approximately $48 million as of June 29, 2014, could become impaired. We are reviewing the performance of these businesses as part of a review of our RCM segment to determine whether we should exit some businesses and restructure or consolidate the work presently done in our RCM business segment into our other business segments. The financial impact of this assessment is not known at this time, but could have an adverse impact on our results in the fourth quarter and fiscal 2014.
Non-GAAP Financial Measures
We are providing certain non-GAAP financial measures that we believe are appropriate 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.
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 |
|
Nine Months Ended |
| ||||||||
|
|
June 29, |
|
June 30, |
|
June 29, |
|
June 30, |
| ||||
|
|
(in thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) attributable to Tetra Tech |
|
$ |
26,657 |
|
$ |
(78,385) |
|
$ |
85,680 |
|
$ |
(27,342) |
|
Interest expense |
|
2,454 |
|
2,010 |
|
7,373 |
|
5,330 |
| ||||
Depreciation (1) |
|
6,454 |
|
8,090 |
|
20,160 |
|
22,420 |
| ||||
Amortization (1) |
|
6,081 |
|
9,555 |
|
21,385 |
|
24,239 |
| ||||
Income tax expense (benefit) |
|
10,002 |
|
(23,779) |
|
35,751 |
|
1,108 |
| ||||
EBITDA |
|
$ |
51,648 |
|
$ |
(82,509) |
|
$ |
170,349 |
|
$ |
25,755 |
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
|
$ |
629,502 |
|
$ |
614,835 |
|
$ |
1,861,635 |
|
$ |
1,915,379 |
|
Subcontractor costs |
|
(170,746) |
|
(139,693) |
|
(463,904) |
|
(422,092) |
| ||||
Revenue, net of subcontractors costs |
|
$ |
458,756 |
|
$ |
475,142 |
|
$ |
1,397,731 |
|
$ |
1,493,287 |
|
|
|
|
|
|
|
|
|
|
| ||||
(1) The total of depreciation and amortization expenses is different 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 primary sources of liquidity are cash flows from operations and borrowings under our credit facilities. Our primary uses of cash are to fund working capital, capital expenditures, repurchases of stock under our Stock Repurchase Program, cash dividends and repayment of debt, as well as to fund acquisitions and earn-out obligations from prior acquisitions. We believe that our existing cash and cash equivalents, operating cash flows and borrowing capacity under our Amended and Restated Credit Agreement (the Amended Credit Agreement) will be sufficient to meet our capital requirements for at least the next 12 months. On April 28, 2014, the Board of Directors declared a quarterly cash dividend of $0.07 per share payable on June 4, 2014 to stockholders of record as of the close of business on May 16, 2014.
Subsequent Events. On July 28, 2014, the Board of Directors declared a quarterly cash dividend of $0.07 per share payable on September 5, 2014 to stockholders of record as of the close of business on August 15, 2014. Further, on July 28, 2014, the Board of Directors amended the Stock Repurchase Program to authorize the repurchase of the remaining amount in the $100 million Stock Repurchase Program in open market purchases through September 2014 without regard to pricing parameters.
We use a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We also indefinitely reinvest our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely reinvested foreign funds or raise capital in the United States through debt. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay additional U.S. taxes less applicable foreign tax credits.
As of June 29, 2014, cash and cash equivalents were $188.9 million, an increase of $59.6 million compared to the fiscal year ended September 29, 2013. The increase was primarily due to net cash provided by operating activities and net proceeds from the issuance of common stock, partially offset by payments for a business acquisition and earn-outs, repurchases of common stock and capital expenditures.
Operating Activities. For the nine-month period, net cash provided by operating activities was $114.3 million, a decrease of $1.0 million compared to the prior-year period. The decrease was due primarily to a slowdown on the collection of accounts receivable caused by project milestone billing terms, and pending claims on contracts that provide for price redetermination, primarily with U.S. federal government agencies. The overall decrease was also attributable to changes in other liabilities as well as prepaid expenses and other assets. These declines were largely mitigated by increased EBITDA as a result of operating losses in the third quarter of fiscal 2013, and favorable changes in accounts payable, accrued compensation and billings in excess of costs on uncompleted contracts. Further, a net decrease of $12.8 million in income tax payments compared to the prior-year period also partially offset the decline.
Investing Activities. For the nine-month period, net cash used in investing activities was $17.9 million, a decrease of $169.3 million compared to the prior-year period. The decrease in cash used resulted from a $158.0 million decrease on net payments for business acquisitions, $3.9 million of cash received on a note for sale of an operation, a $5.7 million decrease in capital expenditures and a $2.0 million increase on proceeds from the sale of property and equipment.
Financing Activities. For the nine-month period, net cash used in financing activities was $34.8 million, compared to net cash provided by financing activities of $115.7 million in the prior-year period. The decline was primarily due to a $132.6 million decrease in net borrowings on long-term debt, and $21.9 million of common stock repurchases, partially offset by a reduction of $5.3 million in earn-out payments compared to the prior-year period.
Debt Financing. At September 30, 2012, we had a credit agreement that provided for a $460 million five-year revolving credit facility that matured in March 2016. On May 7, 2013, we entered into the Amended Credit Agreement and refinanced the indebtedness under the prior credit agreement. The Amended Credit Agreement is a $665 million senior secured, five-year facility that provides for a $205 million term loan facility (the Term Loan Facility) and a $460 million revolving credit facility (the Revolving Credit Facility). The Amended Credit Agreement allows us to, among other things, finance certain permitted open market repurchases of our common stock, permitted acquisitions, and cash dividends and distributions. The Revolving Credit Facility includes a $200 million sublimit for the issuance of standby letters of credit, a $20 million sublimit for swingline loans, and a $150 million sublimit for multicurrency borrowings and letters of credit.
The Term Loan Facility was drawn on May 7, 2013 and is subject to quarterly amortization of principal, with no principal payment due in year 1, $10.3 million payable in both years 2 and 3, and $15.4 million payable in both years 4 and 5, respectively. The Term Loan may be prepaid at any time without penalty. We may borrow on the Revolving Credit Facility, at our option, at either (a) a Eurocurrency rate plus a margin that ranges from 1.15% to 2.00% per annum, or (b) a base rate for loans in U.S. dollars (the highest of the U.S. federal funds rate plus 0.50% per annum, the banks prime rate or the Eurocurrency rate plus 1.00%) plus a margin that ranges from 0.15% to 1.00% per annum. In each case, the applicable margin is based on our Consolidated Leverage Ratio, calculated quarterly. The Term Loan Facility is subject to the same interest rate provisions. The interest rate of the Term Loan Facility at the date of inception was 1.57%. The Amended Credit Agreement expires on May 7, 2018, or earlier at our discretion upon payment in full of loans and other obligations.
As of June 29, 2014, we had $202.4 million in outstanding borrowings under the Amended Credit Agreement, consisting entirely of the Term Loan Facility at a weighted-average interest rate of 1.83% per annum and $1.4 million in standby letters of credit. Our average effective weighted-average interest rate on borrowings outstanding at June 29, 2014 under the Amended Credit Agreement, including the effects of interest rate swap agreements described in Note 13, Derivative Financial Instruments of the Notes to Condensed Consolidated Financial Statements, was 2.98%. At June 29, 2014, we had $458.7 million of available credit under the Revolving Credit Facility, of which $239.0 million could be borrowed without a violation of our debt covenants. In addition, we entered into agreements with three banks to issue up to $53.0 million in standby letters of credit. The aggregate amount of standby letters of credit outstanding under these additional facilities was $30.6 million, of which $6.5 million was issued in currencies other than the U.S. dollar.
The Amended Credit Agreement contains certain affirmative and restrictive covenants, and customary events of default. The financial covenants provide for a maximum Consolidated Leverage Ratio of 2.50 to 1.00 (total funded debt/EBITDA, as defined in the Amended Credit Agreement) and a minimum Consolidated Fixed Charge Coverage Ratio of 1.25 to 1.00 (EBITDA, as defined in the Amended Credit Agreement minus capital expenditures/cash interest plus taxes plus principal payments of indebtedness including capital leases, notes and post-acquisition payments).
On September 27, 2013, we entered into Amendment No. 1 (Amendment No. 1) to the Amended Credit Agreement to amend the definition of Consolidated EBITDA for purposes of the financial covenants contained in the Amended Credit Agreement to add back to Consolidated Net Income for the fiscal quarters ending September 29, 2013, December 29, 2013 and June 29, 2014 (i) up to $34 million in non-recurring charges incurred during the fiscal quarter ended June 30, 2013 in connection with corporate restructurings and (ii) up to $36 million in non-cash charges incurred during the fiscal quarter ended June 30, 2013 in connection with the Four Programs referenced in our Form 8-Ks, filed with the SEC on June 18, 2013 and August 7, 2013, and Form 10-Q for the fiscal quarter ended June 30, 2013. Amendment No. 1 also provides that Consolidated EBITDA will be calculated without giving effect to the add-backs referenced above for purposes of determining our applicable margin in effect at any time.
On June 23, 2014, we entered into Amendment No. 2 (Amendment No. 2) to the Amended Credit Agreement to amend the definition of Permitted Share Repurchases so that we may, during each fiscal year (beginning with the fiscal year that begins on September 29, 2014) make Permitted Share Repurchases in an amount equal to the greater of $75.0 million or 7.5% of Consolidated Net Worth at the end of the immediately preceding fiscal year (without any carry forward of unused portions of each basket to subsequent fiscal years).
At June 29, 2014, we were in compliance with these covenants with a consolidated leverage ratio of 1.31x and a consolidated fixed charge coverage ratio of 2.58x. Our obligations under the Amended Credit Agreement are guaranteed by certain of our subsidiaries and are secured by first priority liens on (i) the equity interests of certain of our subsidiaries, including those subsidiaries that are guarantors or borrowers under the Amended Credit Agreement, and (ii) our accounts receivable, general intangibles and intercompany loans, and those of our subsidiaries that are guarantors or borrowers.
Inflation. We believe our operations have not been, and, in the foreseeable future, are not expected to be, materially adversely affected by inflation or changing prices due to the average duration of our projects and our ability to negotiate prices as contracts end and new contracts begin.
Dividends. Our Board of Directors has authorized following dividends:
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Record Date |
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Total Maximum |
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Payment Date |
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(in thousands, except per share data) |
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April 28, 2014 |
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$ |
0.07 |
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May 16, 2014 |
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$ |
4,506 |
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June 4, 2014 |
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July 28, 2014 |
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$ |
0.07 |
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August 15, 2014 |
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NA |
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September 5, 2014 |
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Income Taxes
We review the realizability of deferred tax assets on a quarterly basis by assessing the need for a valuation allowance. As of June 29, 2014, we performed our assessment of net deferred tax assets. Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance recorded against our deferred tax assets. Applying the applicable accounting guidance requires an assessment of all available evidence, positive and negative, regarding the realizability of the net deferred tax assets. Based upon recent results, we concluded that a cumulative loss in recent years exists in certain foreign jurisdictions. We have historically relied on the following factors in our assessment of the realizability of our net deferred tax assets:
· taxable income in prior carryback years as permitted under the tax law;
· future reversals of existing taxable temporary differences;
· consideration of available tax planning strategies and actions that could be implemented, if necessary; and
· estimates of future taxable income from our operations.
We considered these factors in our estimate of the reversal pattern of deferred tax assets, using assumptions that we believe are reasonable and consistent with operating results. However, as a result of projected cumulative pre-tax losses in certain foreign jurisdictions for the 36 months ended September 28, 2014, we concluded that our estimates of future taxable income and certain tax planning strategies did not constitute sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable before expiration. Although we project earnings in the business beyond 2014, we did not rely on these projections when assessing the realizability of our deferred tax assets. Based on our assessment, we have concluded that it is more likely than not that the assets will be realized except for the assets related to loss carry-forwards in foreign jurisdictions for which a valuation allowance of $8.8 million had been provided in previous years.
Off-Balance Sheet Arrangements
In the ordinary course of business, we may use off-balance sheet arrangements if we believe that such an arrangement would be an efficient way to lower our cost of capital or help us manage the overall risks of our business operations. We do not believe that such arrangements have had a material adverse effect on our financial position or our results of operations.
The following is a summary of our off-balance sheet arrangements:
· Letters of credit and bank guarantees are used primarily to support project performance and insurance programs. We are required to reimburse the issuers of letters of credit and bank guarantees for any payments they make under the outstanding letters of credit or bank guarantees. Our Amended Credit Agreement and additional letter of credit facilities cover the issuance of our standby letters of credit and bank guarantees and are critical for our normal operations. If we default on the Amended Credit Agreement or additional credit facilities, our inability to issue or renew standby letters of credit and bank guarantees would impair our ability to maintain normal operations. At June 29, 2014, we had $1.4 million in standby letters of credit outstanding under our Amended Credit Agreement and $29.2 million in standby letters of credit outstanding under our additional letter of credit facilities.
· From time to time, we provide guarantees and indemnifications related to our services. If our services under a guaranteed or indemnified project are later determined to have resulted in a material defect or other material deficiency, then we may be responsible for monetary damages or other legal remedies. When sufficient information about claims on guaranteed or indemnified projects is available and monetary damages or other costs or losses are determined to be probable, we recognize such guaranteed losses.
· In the ordinary course of business, we enter into various agreements as part of certain unconsolidated subsidiaries, joint ventures, and other jointly executed contracts where we are jointly and severally liable. We enter into these agreements primarily to support the project execution commitments of these entities. The potential payment amount of an outstanding performance guarantee is typically the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts. However, we are not able to estimate other amounts that may be required to be paid in excess of estimated costs to complete contracts and, accordingly, the total potential payment amount under our outstanding performance guarantees cannot be estimated. For cost-plus contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract. For lump sum or fixed-price contracts, this amount is the cost to complete the contracted work less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete. In those cases where costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors, for claims.
· In the ordinary course of business, our clients may request that we obtain surety bonds in connection with contract performance obligations that are not required to be recorded in our consolidated balance sheets. We are obligated to reimburse the issuer of our surety bonds for any payments made thereunder. Each of our commitments under performance bonds generally ends concurrently with the expiration of our related contractual obligation.
Critical Accounting Policies
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended September 29, 2013. To date, there have been no material changes in our critical accounting policies as reported in our 2013 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.
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 Canadian dollar (CAD).
We are exposed to interest rate risk under our Amended Credit Agreement. We can borrow, at our option, under both the Term Loan Facility and Revolving Credit Facility. We may borrow on the Revolving Credit Facility, at our option, at either (a) a Eurocurrency rate plus a margin that ranges from 1.15% to 2.00% per annum, or (b) a base rate for loans in U.S. dollars (the highest of the U.S. federal funds rate plus 0.50% per annum, the banks prime rate or the Eurocurrency rate plus 1.00%) plus a margin that ranges from 0.15% to 1.00% per annum. Borrowings at the base rate have no designated term and may be repaid without penalty any time prior to the Facilitys 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 May 7, 2018. At June 29, 2014 we had borrowings outstanding under the Amended Credit Agreement of $202.4 million at a weighted-average interest rate of 1.83%, of which the entire amount was outstanding under the Term Loan Facility.
In fiscal 2013, we entered into three interest rate swap agreements with three banks to fix the variable interest rate on $153.8 million of our Term Loan Facility. In fiscal 2014, we entered into two interest rate swap agreements with two banks to fix the variable interest rate on $51.2 million of our Term Loan Facility. The objective of these interest rate swaps was to eliminate the variability of our cash flows on the amount of interest expense we pay under our Amended Credit Facility. Our average effective weighted-average interest rate on borrowings outstanding under the Amended Credit Agreement, including the effects of interest rate swap agreements, at June 29, 2014 was 2.98%. For more information, see Note 13, Derivative Financial Instruments of the Notes to Condensed Consolidated Financial Statements.
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 three and nine months ended June 29, 2014, we recognized foreign currency losses of 0.1 million and a gain of $0.2 million, respectively, compared to losses of $0.5 million and of $0.6 million for the prior-year quarter. Foreign currency gains and losses were recognized as part of Selling, general and administrative expenses in our condensed consolidated statements of operations.
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 the U.S. dollar strengthens against the CAD, the translation of these foreign currency denominated transactions will result in reduced revenue, operating expenses, assets and liabilities. Similarly, our revenue, operating expenses, assets and liabilities will increase if the U.S. dollar weakens against the CAD. For both the first nine months of fiscal 2014 and 2013, 26.2% and 27.3% of our consolidated revenue, respectively, was generated by our international business, and such revenue was primarily denominated in CAD. For the first nine months of fiscal 2014, the effect of foreign exchange rate translation on the condensed consolidated balance sheets was a reduction in equity of $18.6 million compared to a reduction in equity of $40.2 million in the first nine months of fiscal 2013. These amounts were recognized as an adjustment to equity through other comprehensive income.
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 CAD and has a fixed rate of interest payable in CAD. 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 matured 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) with a maturity date of January 27, 2014. 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. In the second quarter of fiscal 2013, we settled one of the foreign currency forward contracts for U.S. $3.9 million and terminated the remaining forward contract.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Please refer to the information we have included under the heading Financial Market Risks in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated herein by reference.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures and changes in internal control over financial reporting. As of June 29, 2014, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on our managements evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), were effective.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting during our third quarter of fiscal 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 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.
We acquired BPR, a Quebec-based engineering firm on October 4, 2010. Subsequently, we have been informed of the following with respect to pre-acquisition activities at BPR:
On April 17, 2012, authorities in the province of Quebec, Canada charged two employees of BPR Triax, a subsidiary of BPR, and BPR Triax, under the Canadian Criminal Code with allegations of corruption. Discovery procedures associated with the charges are currently ongoing, and the legal process is expected to continue through September 2014. We have conducted an internal investigation concerning this matter and, based on the results of our investigation, we believe these allegations are limited to activities at BPR Triax prior to our acquisition of BPR.
During late March 2013, the then-president of BPR gave testimony to the Charbonneau Commission, which is investigating possible corruption in the engineering industry in Quebec. He stated that, during 2007 and 2008, he and other former BPR shareholders paid personal funds to a political party official in exchange for the award of five government contracts. Further, prior to the testimony, we were not aware of the misconduct. We have accepted the resignation of BPRs former president, and are evaluating the impact of these pre-acquisition actions on our business and results of operations.
During March 2013, following the resignation of BPRs former president, we learned that criminal charges had been filed against BPR and its former president in France. The charges relate to allegations that, in 2009, a BPR subsidiary had hired an employee of another firm to be CEO of that BPR subsidiary as a part of a corrupt scheme that allegedly damaged, among others, the employees former employer. The hearing on this matter was held on May 9, 2014. On June 12, 2014, the Court dismissed all charges against all defendants. The Public Prosecutor did not file an appeal, and the Courts decision is therefore final.
On April 19, 2013, a class action proceeding was filed in Montreal in which BPR, BPRs former president, and other Quebec-based engineering firms and individuals are named as defendants. The plaintiff class includes all individuals and entities that have paid real estate or municipal taxes to the city of Montreal. The allegations include participation in collusion to share contracts awarded by the City of Montreal, conspiracy to reduce competition and fix prices, payment of bribes to officials, making illegal political contributions, and bid rigging. A class certification hearing was held in March 2014, and on May 7, 2014, the court dismissed the action. On June 5, 2014, the plaintiff filed an appeal, and the defendants are preparing their motion to dismiss.
The financial impact to us of the matters discussed above is unknown at this time.
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect our operations. Set forth below and elsewhere in this report and in other documents we file with the SEC are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. Additional risks we do not yet know of or that we currently think are immaterial may also affect our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected.
Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address.
General worldwide economic conditions have experienced a downturn due to the reduction of available credit, slower economic activity, concerns about inflation and deflation, increased energy and commodity costs, decreased consumer confidence and capital spending, adverse business conditions, and, in the United States, the negative impact on economic growth resulting from the combination of federal income tax increases and government spending restrictions. These conditions make it extremely difficult for our clients and our vendors to accurately forecast and plan future business activities and could cause businesses to slow spending on services, and they have also made it very difficult for us to predict the short-term and long-term impacts on our business. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery worldwide or in our industry. If the economy or markets in which we operate deteriorate from the level experienced in fiscal 2013, our business, financial condition and results of operations may be materially and adversely affected.
Our annual revenue, expenses and operating results may fluctuate significantly, which may adversely affect our stock price.
Our annual revenue, expenses and operating results may fluctuate significantly because of numerous factors, some of which may contribute to more pronounced fluctuations in an uncertain global economic environment. These factors include:
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general economic or political conditions; |
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unanticipated changes in contract performance that may affect profitability, particularly with contracts that are fixed-price or have funding limits; |
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contract negotiations on change orders, requests for equitable adjustment, and collections of related billed and unbilled accounts receivable; |
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seasonality of the spending cycle of our public sector clients, notably the U.S. federal government, the spending patterns of our commercial sector clients, and weather conditions; |
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budget constraints experienced by our U.S. federal, state and local government clients; |
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integration of acquired companies; |
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changes in contingent consideration related to acquisition earn-outs; |
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divestiture or discontinuance of operating units; |
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employee hiring, utilization and turnover rates; |
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loss of key employees; |
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the number and significance of client contracts commenced and completed during a quarter; |
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creditworthiness and solvency of clients; |
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the ability of our clients to terminate contracts without penalties; |
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delays incurred in connection with a contract; |
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the size, scope and payment terms of contracts; |
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the timing of expenses incurred for corporate initiatives; |
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reductions in the prices of services offered by our competitors; |
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threatened or pending litigation; |
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legislative and regulatory enforcement policy changes that may affect demand for our services; |
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the impairment of goodwill or identifiable intangible assets; |
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the fluctuation of a foreign currency exchange rate; |
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stock-based compensation expense; |
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actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the value of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our consolidated financial statements; |
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success in executing our strategy and operating plans; |
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changes in tax laws or regulations or accounting rules; |
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results of income tax examinations; |
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the timing of announcements in the public markets regarding new services or potential problems with the performance of services by us or our competitors, or any other material announcements; |
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speculation in the media and analyst community, changes in recommendations or earnings estimates by financial analysts, changes in investors or analysts valuation measures for our stock and market trends unrelated to our stock; and |
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continued volatility in the financial markets. |
As a consequence, operating results for a particular future period are difficult to predict and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations and financial condition that could adversely affect our stock price.
Demand for our services is cyclical and vulnerable to economic downturns. If economic growth slows, government fiscal conditions worsen, or client spending declines further, then our revenue, profits and our financial condition may deteriorate.
Demand for our services is cyclical, and vulnerable to economic downturns and reductions in government and private industry spending. Such downturns or reductions may result in clients delaying, curtailing or canceling proposed and existing projects. Our business traditionally lags the overall recovery in the economy; therefore, our business may not recover immediately when the economy improves. If economic growth slows, government fiscal conditions worsen, or client spending declines further, then our revenue, profits and overall financial condition may deteriorate. Our government clients may face budget deficits that prohibit them from funding new or existing projects. In addition, our existing and potential clients may either postpone entering into new contracts or request price concessions. Difficult financing and economic conditions may cause some of our clients to demand better pricing terms or delay payments for services we perform, thereby increasing the average number of days our receivables are outstanding and the potential of increased credit losses of uncollectible invoices. Further, these conditions may result in the inability of some of our clients to pay us for services that we have already performed. If we are not able to reduce our costs quickly enough to respond to the revenue decline from these clients, our operating results may be adversely affected. Accordingly, these factors affect our ability to forecast our future revenue and earnings from business areas that may be adversely impacted by market conditions.
We derive revenue from companies in the mining industry, which is a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of prices for commodities. If economic growth slows or global demand for commodities declines further, then our revenue, profits and our financial condition may deteriorate.
The businesses of our global mining clients are, to varying degrees, cyclical and have experienced declines over the last year due to lower global growth expectations and the associated decline in market prices. For example, depending on the market prices of uranium, precious metals, aluminum, copper, iron ore and potash, our mining company clients may cancel or curtail their mining projects, which could result in a corresponding decline in the demand for our services among these clients. Accordingly, the cyclical nature of the mining market could have a material adverse effect on our business, operating results or financial condition.
Demand for our oil and gas services fluctuates.
Demand for our oil and gas services fluctuates, and we depend on our customers willingness to make future expenditures to explore for, develop, produce and transport oil and natural gas in the United States and Canada. Our customers willingness to undertake these activities depends largely upon prevailing industry conditions that are influenced by numerous factors over which we have no control, including:
· prices, and expectations about future prices, of oil and natural gas;
· domestic and foreign supply of and demand for oil and natural gas;
· the cost of exploring for, developing, producing and delivering oil and natural gas;
· transportation capacity, including but not limited to train transportation capacity and its future regulation;
· available pipeline, storage and other transportation capacity;
· availability of qualified personnel and lead times associated with acquiring equipment and products;
· federal, state and local regulation of oilfield activities;
· environmental concerns regarding the methods our customers use to produce hydrocarbons;
· the availability of water resources and the cost of disposal and recycling services; and
· seasonal limitations on access to work locations.
Anticipated future prices for natural gas and crude oil are a primary factor affecting spending by our customers. Lower prices or volatility in prices for oil and natural gas typically decrease spending, which can cause rapid and material declines in demand for our services and in the prices we are able to charge for our services. In addition, should the proposed Keystone XL pipeline project application be denied or further delayed by the U.S. federal government, then there may be a slowing of spending in the development of the Canadian oil sands. Worldwide political, economic, military and terrorist events, as well as natural disasters and other factors beyond our control contribute to oil and natural gas price levels and volatility and are likely to continue to do so in the future.
We derive a substantial amount of our revenue from U.S. federal, state and local government agencies, and any disruption in government funding or in our relationship with those agencies could adversely affect our business.
In the third quarter of fiscal 2014, we generated 48.3% of our revenue from contracts with U.S. federal, state and local government agencies. A significant amount of this revenue is derived under multi-year contracts, many of which are appropriated on an annual basis. As a result, at the beginning of a project, the related contract may be only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent year. These appropriations, and the timing of payment of appropriated amounts, may be influenced by numerous factors as noted below. Our backlog includes only the projects that have funding appropriated.
The demand for our U.S. government-related services is generally driven by the level of government program funding. Accordingly, the success and further development of our business depends, in large part, upon the continued funding of these U.S. government programs, and upon our ability to obtain contracts and perform well under these programs. There are several factors that could materially affect our U.S. government contracting business. These and other factors could cause U.S. government agencies to delay or cancel programs, to reduce their orders under existing contracts, to exercise their rights to terminate contracts or not to exercise contract options for renewals or extensions. Such factors, which include the following, could have a material adverse effect on our revenue or the timing of contract payments from U.S. government agencies:
· the failure of the U.S. government to complete its budget and appropriations process before its fiscal year-end, which results in the funding of government operations by means of a continuing resolution that authorizes agencies to continue to operate but does not authorize new spending initiatives. As a result, U.S. government agencies may delay the procurement of services;
· changes in and delays or cancellations of government programs, requirements or appropriations;
· budget constraints or policy changes resulting in delay or curtailment of expenditures related to the services we provide;
· re-competes of government contracts;
· the timing and amount of tax revenue received by federal, state and local governments, and the overall level of government expenditures;
· curtailment in the use of government contracting firms;
· delays associated with insufficient numbers of government staff to oversee contracts;
· the increasing preference by government agencies for contracting with small and disadvantaged businesses;
· competing political priorities and changes in the political climate with regard to the funding or operation of the services we provide;
· the adoption of new laws or regulations affecting our contracting relationships with the federal, state or local governments;
· unsatisfactory performance on government contracts by us or one of our subcontractors, negative government audits, or other events that may impair our relationship with the federal, state or local governments;
· a dispute with or improper activity by any of our subcontractors; and
· general economic or political conditions.
On December 26, 2013, President Obama signed into law the 2013 Budget Act, which raises the sequestration caps mandated by the Budget Control Act of 2011 for fiscal years 2014 and 2015, and extends the caps into 2022 and 2023. The 2013 Budget Act therefore eliminates some of the spending cuts required by the sequestration that were scheduled to occur in January 2014 and in 2015.
As a U.S. government contractor, we must comply with various procurement laws and regulations and are subject to regular government audits; a violation of any of these laws and regulations or the failure to pass a government audit could result in sanctions, contract termination, forfeiture of profit, harm to our reputation or loss of our status as an eligible government contractor and could reduce our profits and revenue.
We must comply with and are affected by U.S. federal, state, local and foreign laws and regulations relating to the formation, administration and performance of government contracts. For example, we must comply with Federal Acquisition Regulation (FAR), the Truth in Negotiations Act, Cost Accounting Standards (CAS), the American Recovery and Reinvestment Act of 2009, the Services Contract Act and the U.S. Department of Defense security regulations, as well as many other rules and regulations. In addition, we must also comply with other government regulations related to employment practices, environmental protection, health and safety, tax, accounting and anti-fraud measures, as well as many others regulations in order to maintain our government contractor status. These laws and regulations affect how we do business with our clients and, in some instances, impose additional costs on our business operations. Although we take precautions to prevent and deter fraud, misconduct and non-compliance, we face the risk that our employees or outside partners may engage in misconduct, fraud or other improper activities. U.S. government agencies, such as the Defense Contract Audit Agency (DCAA), routinely audit and investigate government contractors. These government agencies review and audit a government contractors performance under its contracts and cost structure, and evaluate compliance with applicable laws, regulations and standards. In addition, during the course of its audits, the DCAA may question our incurred project costs. If the DCAA believes we have accounted for such costs in a manner inconsistent with the requirements for FAR or CAS, the DCAA auditor may recommend to our U.S. government corporate administrative contracting officer to disallow such costs. Historically, we have not experienced significant disallowed costs as a result of government audits. However, we can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future. In addition, U.S. government contracts are subject to various other requirements relating to the formation, administration, performance and accounting for these contracts. We may also be subject to qui tam litigation brought by private individuals on behalf of the U.S. government under the Federal Civil False Claims Act, which could include claims for treble damages. U.S. government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit and/or suspension of payment, any of which could make us lose our status as an eligible government contractor. We could also suffer serious harm to our reputation. Any interruption or termination of our U.S. government contractor status could reduce our profits and revenue significantly.
Our inability to win or renew U.S. government contracts during regulated procurement processes could harm our operations and significantly reduce or eliminate our profits.
U.S. government contracts are awarded through a regulated procurement process. The U.S. federal government has increasingly relied upon multi-year contracts with pre-established terms and conditions, such as indefinite delivery/indefinite quantity (IDIQ) contracts, which generally require those contractors who have previously been awarded the IDIQ to engage in an additional competitive bidding process before a task order is issued. As a result, new work awards tend to be smaller and of shorter duration, since the orders represent individual tasks rather than large, programmatic assignments. In addition, we believe that there has been an increase in the award of federal contracts based on a low-price, technically acceptable criteria emphasizing price over qualitative factors, such as past performance. As a result, pricing pressure may reduce our profit margins on future federal contracts. The increased competition and pricing pressure, in turn, may require us to make sustained efforts to reduce costs in order to realize revenue and profits under government contracts. If we are not successful in reducing the amount of costs we incur, our profitability on government contracts will be negatively impacted. In addition, the U.S. federal government has scaled back outsourcing of services in favor of insourcing jobs to its employees, which could reduce our revenue. Moreover, even if we are qualified to work on a government contract, we may not be awarded the contract because of existing government policies designed to protect small businesses and under-represented minority contractors. Our inability to win or renew government contracts during regulated procurement processes could harm our operations and significantly reduce or eliminate our profits.
Each year, client funding for some of our U.S. government contracts may rely on government appropriations or public-supported financing. If adequate public funding is delayed or is not available, then our profits and revenue could decline.
Each year, client funding for some of our U.S. government contracts may directly or indirectly rely on government appropriations or public-supported financing. Legislatures may appropriate funds for a given project on a year-by-year basis, even though the project may take more than one year to perform. In addition, public-supported financing such as U.S. state and local municipal bonds may be only partially raised to support existing projects. Similarly, the impact of the economic downturn on U.S. state and local governments may make it more difficult for them to fund projects. In addition to the state of the economy and competing political priorities, public funds and the timing of payment of these funds may be influenced by, among other things, curtailments in the use of government contracting firms, increases in raw material costs, delays associated with insufficient numbers of government staff to oversee contracts, budget constraints, the timing and amount of tax receipts and the overall level of government expenditures. If adequate public funding is not available or is delayed, then our profits and revenue could decline.
Our U.S. federal government contracts may give government agencies the right to modify, delay, curtail, renegotiate or terminate existing contracts at their convenience at any time prior to their completion, which may result in a decline in our profits and revenue.
U.S. federal government projects in which we participate as a contractor or subcontractor may extend for several years. Generally, government contracts include the right to modify, delay, curtail, renegotiate or terminate contracts and subcontracts at the governments convenience any time prior to their completion. Any decision by a U.S. federal government client to modify, delay, curtail, renegotiate or terminate our contracts at their convenience may result in a decline in our profits and revenue.
Our revenue from commercial clients is significant, and the credit risks associated with certain of these clients could adversely affect our operating results.
In the third quarter of fiscal 2014, we generated 46.7% of our revenue from U.S. and foreign commercial clients. Due to continuing weakness in general economic conditions, our commercial business may be at risk as we rely upon the financial stability and creditworthiness of our clients. To the extent the credit quality of these clients deteriorates or these clients seek bankruptcy protection, our ability to collect our receivables, and ultimately our operating results, may be adversely affected.
Our international operations expose us to legal, political and economic risks that could harm our business and financial results.
In the third quarter of fiscal 2014, we generated 22.5% of our revenue from our international operations, primarily in Canada, and from international clients for work that is performed by our domestic operations. International business is subject to a variety of risks, including:
· potential non-compliance with a wide variety of laws and regulations, including anti-corruption and anti-boycott rules, trade and export control regulations, and other international regulations;
· lack of developed legal systems to enforce contractual rights;
· greater risk of uncollectible accounts and longer collection cycles;
· currency exchange rate fluctuations, devaluations and other conversion restrictions;
· uncertain and changing tax rules, regulations and rates;
· the potential for civil unrest, acts of terrorism and greater physical security risks, which may cause us to leave a country quickly;
· logistical and communication challenges;
· imposition of governmental controls and potentially adverse changes in laws and regulatory practices, including tariffs and taxes;
· changes in labor conditions;
· general economic, political and financial conditions in foreign markets; and
· exposure to civil or criminal liability under the U.S. Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act, the Canadian Corruption of Foreign Public Officials Act, the Brazilian Clean Companies Act, the anti-boycott rules, trade and export control regulations, as well as other international regulations.
For example, an ongoing government investigation into political corruption in Quebec has contributed to the slow-down in procurements and business activity in that province, which has adversely affected our business. The Province of Quebec has adopted legislation that requires businesses and individuals seeking contracts with governmental bodies (including cities, towns, municipalities and the provincial government) be certified by a Quebec regulatory authority as deserving the trust of the public for contracts over a specified size. Our failure to obtain certification could adversely affect our business.
International risks and violations of international regulations may significantly reduce our revenue and profits, and subject us to criminal or civil enforcement actions, including fines, suspensions or disqualification from future U.S. federal procurement contracting. Although we have policies and procedures to monitor legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. As a result, our international risk exposure may be more or less than the percentage of revenue attributed to our international operations.
We could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws.
The FCPA and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. The U.K. Bribery Act of 2010 prohibits both domestic and international bribery, as well as bribery across both private and public sectors. In addition, an organization that fails to prevent bribery by anyone associated with the organization can be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented adequate procedures to prevent bribery. Improper payments are also prohibited under the Canadian Corruption of Foreign Public Officials Act and the Brazilian Clean Companies Act. Practices in the local business community of many countries outside the United States have a level of government corruption that is greater than that found in the developed world. Our policies mandate compliance with these anti-bribery laws and we have established policies and procedures designed to monitor compliance with these anti-bribery law requirements; however, we cannot ensure that our policies and procedures will protect us from potential reckless or criminal acts committed by individual employees or agents. If we are found to be liable for anti-bribery law violations, we could suffer from criminal or civil penalties or other sanctions that could have a material adverse effect on our business.
We could be adversely impacted if we fail to comply with domestic and international export laws.
To the extent we export technical services, data and products outside of the United States, we are subject to U.S. and international laws and regulations governing international trade and exports, including but not limited to the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries. A failure to comply with these laws and regulations could result in civil or criminal sanctions, including the imposition of fines, the denial of export privileges and suspension or debarment from participation in U.S. government contracts, which could have a material adverse effect on our business.
If we fail to complete a project in a timely manner, miss a required performance standard or otherwise fail to adequately perform on a project, then we may incur a loss on that project, which may reduce or eliminate our overall profitability.
Our engagements often involve large-scale, complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our clients and our ability to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner. We may commit to a client that we will complete a project by a scheduled date. We may also commit that a project, when completed, will achieve specified performance standards. If the project is not completed by the scheduled date or fails to meet required performance standards, we may either incur significant additional costs or be held responsible for the costs incurred by the client to rectify damages due to late completion or failure to achieve the required performance standards. The uncertainty of the timing of a project can present difficulties in planning the amount of personnel needed for the project. If the project is delayed or canceled, we may bear the cost of an underutilized workforce that was dedicated to fulfilling the project. In addition, performance of projects can be affected by a number of factors beyond our control, including unavoidable delays from government inaction, public opposition, inability to obtain financing, weather conditions, unavailability of vendor materials, changes in the project scope of services requested by our clients, industrial accidents, environmental hazards, labor disruptions and other factors. To the extent these events occur, the total costs of the project could exceed our estimates, and we could experience reduced profits or, in some cases, incur a loss on a project, which may reduce or eliminate our overall profitability. Further, any defects or errors, or failures to meet our clients expectations, could result in claims for damages against us. Failure to meet performance standards or complete performance on a timely basis could also adversely affect our reputation.
The loss of key personnel or our inability to attract and retain qualified personnel could impair our ability to provide services to our clients and otherwise conduct our business effectively.
As primarily a professional and technical services company, we are labor-intensive and, therefore, our ability to attract, retain and expand our senior management and our professional and technical staff is an important factor in determining our future success. The market for qualified scientists and engineers is competitive and, from time to time, it may be difficult to attract and retain qualified individuals with the required expertise within the timeframe demanded by our clients. For example, some of our U.S. government contracts may require us to employ only individuals who have particular government security clearance levels. In addition, we rely heavily upon the expertise and leadership of our senior management. If we are unable to retain executives and other key personnel, the roles and responsibilities of those employees will need to be filled, which may require that we devote time and resources to identify, hire and integrate new employees. With limited exceptions, we do not have employment agreements with any of our key personnel. The loss of the services of any of these key personnel could adversely affect our business. Although we have obtained non-compete agreements from certain principals and stockholders of companies we have acquired, we generally do not have non-compete or employment agreements with key employees who were once equity holders of these companies. Further, many of our non-compete agreements have expired. We do not maintain key-man life insurance policies on any of our executive officers or senior managers.
Our failure to attract and retain key individuals could impair our ability to provide services to our clients and conduct our business effectively.
Our actual business and financial results could differ from the estimates and assumptions that we use to prepare our financial statements, which may significantly reduce or eliminate our profits.
To prepare financial statements in conformity with GAAP, management is required to make estimates and assumptions as of the date of the financial statements. These estimates and assumptions affect the reported values of assets, liabilities, revenue and expenses, as well as disclosures of contingent assets and liabilities. For example, we typically recognize revenue over the life of a contract based on the proportion of costs incurred to date compared to the total costs estimated to be incurred for the entire project. Areas requiring significant estimates by our management include:
· the application of the percentage-of-completion method of accounting and revenue recognition on contracts, change orders and contract claims including related unbilled accounts receivable;
· unbilled accounts receivable including amounts related to requests for equitable adjustment to contracts that provide for price redetermination, primarily with the U.S. federal government. These amounts are recorded only when they can be reliably estimated and realization is probable;
· provisions for uncollectible receivables, client claims and recoveries of costs from subcontractors, vendors and others;
· provisions for income taxes, R&E credits, valuation allowances and unrecognized tax benefits;
· value of goodwill and recoverability of other intangible assets;
· valuations of assets acquired and liabilities assumed in connection with business combinations;
· valuation of contingent earn-out liabilities recorded in connection with business combinations;
· valuation of employee benefit plans;
· valuation of stock-based compensation expense; and
· accruals for estimated liabilities, including litigation and insurance reserves.
Our actual business and financial results could differ from those estimates, which may significantly reduce or eliminate our profits.
Our profitability could suffer if we are not able to maintain adequate utilization of our workforce.
The cost of providing our services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including:
· our ability to transition employees from completed projects to new assignments and to hire and assimilate new employees;
· our ability to forecast demand for our services and thereby maintain an appropriate headcount in each of our geographies and workforces;
· our ability to manage attrition;
· our need to devote time and resources to training, business development, professional development and other non-chargeable activities; and
· our ability to match the skill sets of our employees to the needs of the marketplace.
If we over-utilize our workforce, our employees may become disengaged, which will impact employee attrition. If we under-utilize our workforce, our profit margin and profitability could suffer.
Our use of the percentage-of-completion method of revenue recognition could result in a reduction or reversal of previously recorded revenue and profits.
We account for most of our contracts on the percentage-of-completion method of revenue recognition. Generally, our use of this method results in recognition of revenue and profit ratably over the life of the contract, based on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to revenue and estimated costs, including the achievement of award fees as well as the impact of change orders and claims, are recorded when the amounts are known and can be reasonably estimated. Such revisions could occur in any period and their effects could be material. Although we have historically made reasonably reliable estimates of the progress towards completion of long-term contracts, the uncertainties inherent in the estimating process make it possible for actual costs to vary materially from estimates, including reductions or reversals of previously recorded revenue and profit.
If we are unable to accurately estimate and control our contract costs, then we may incur losses on our contracts, which could decrease our operating margins and reduce our profits. In particular, our fixed-price contracts could increase the unpredictability of our earnings.
It is important for us to accurately estimate and control our contract costs so that we can maintain positive operating margins and profitability. We generally enter into three principal types of contracts with our clients: fixed-price, time-and-materials and cost-plus.
The U.S. federal government and some clients have increased the use of fixed-priced contracts. Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur and, consequently, we are exposed to a number of risks. We realize a profit on fixed-price contracts only if we can control our costs and prevent cost over runs on our contracts. Fixed-price contracts require cost and scheduling estimates that are based on a number of assumptions, including those about future economic conditions, costs and availability of labor, equipment and materials, and other exigencies. We could experience cost overruns if these estimates are originally inaccurate as a result of errors or ambiguities in the contract specifications, or become inaccurate as a result of a change in circumstances following the submission of the estimate due to, among other things, unanticipated technical problems, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, changes in the costs of raw materials, or inability of our vendors or subcontractors to perform. If cost overruns occur, we could experience reduced profits or, in some cases, a loss for that project. If a project is significant, or if there are one or more common issues that impact multiple projects, costs overruns could increase the unpredictability of our earnings as well as have a material adverse impact on our business and earnings.
Under our time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and also paid for other expenses. Profitability on these contracts is driven by billable headcount and cost control. Many of our time-and-materials contracts are subject to maximum contract values and, accordingly, revenue relating to these contracts is recognized as if these contracts were fixed-price contracts. Under our cost-plus contracts, some of which are subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain reimbursement for all of the costs we incur.
Profitability on our contracts is driven by billable headcount and our ability to manage our subcontractors, vendors and material suppliers. If we are unable to accurately estimate and manage our costs, we may incur losses on our contracts, which could decrease our operating margins and significantly reduce or eliminate our profits. Certain of our contracts require us to satisfy specific design, engineering, procurement or construction milestones in order to receive payment for the work completed or equipment or supplies procured prior to achievement of the applicable milestone. As a result, under these types of arrangements, we may incur significant costs or perform significant amounts of services prior to receipt of payment. If a client determines not to proceed with the completion of the project or if the client defaults on its payment obligations, we may face difficulties in collecting payment of amounts due to us for the costs previously incurred or for the amounts previously expended to purchase equipment or supplies.
Accounting for a contract requires judgments relative to assessing the contracts estimated risks, revenue, costs and other technical issues. Due to the size and nature of many of our contracts, the estimation of overall risk, revenue and cost at completion is complicated and subject to many variables. Changes in underlying assumptions, circumstances or estimates may also adversely affect future period financial performance. If we are unable to accurately estimate the overall revenue or costs on a contract, then we may experience a lower profit or incur a loss on the contract.
Our failure to win new contracts and renew existing contracts with private and public sector clients could adversely affect our profitability.
Our business depends on our ability to win new contracts and renew existing contracts with private and public sector clients. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which is affected by a number of factors. These factors include market conditions, financing arrangements and required governmental approvals. For example, a client may require us to provide a bond or letter of credit to protect the client should we fail to perform under the terms of the contract. If negative market conditions arise, or if we fail to secure adequate financial arrangements or the required government approval, we may not be able to pursue particular projects, which could adversely affect our profitability.
We have made and expect to continue to make acquisitions that could disrupt our operations and adversely impact our business and operating results. Our failure to conduct due diligence effectively or our inability to successfully integrate acquisitions could impede us from realizing all of the benefits of the acquisitions, which could weaken our results of operations.
A key part of our growth strategy is to acquire other companies that complement our lines of business or that broaden our technical capabilities and geographic presence. We expect to continue to acquire companies as an element of our growth strategy; however, our ability to make acquisitions is restricted under our Amended Credit Agreement. Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations or the expectations of securities analysts. For example:
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we may not be able to identify suitable acquisition candidates or to acquire additional companies on acceptable terms; |
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we are pursuing international acquisitions, which inherently pose more risk than domestic acquisitions; |
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we compete with others to acquire companies, which may result in decreased availability of, or increased price for, suitable acquisition candidates; |
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we may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions; |
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we may ultimately fail to consummate an acquisition even if we announce that we plan to acquire a company; and |
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acquired companies may not perform as we expect, and we may fail to realize anticipated revenue and profits. |
In addition, our acquisition strategy may divert managements attention away from our existing businesses, resulting in the loss of key clients or key employees, and expose us to unanticipated problems or legal liabilities, including responsibility as a successor-in-interest for undisclosed or contingent liabilities of acquired businesses or assets.
If we fail to conduct due diligence on our potential targets effectively, we may, for example, not identify problems at target companies or fail to recognize incompatibilities or other obstacles to successful integration. Our inability to successfully integrate future acquisitions could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations. The integration process may disrupt our business and, if implemented ineffectively, may preclude realization of the full benefits expected by us and could harm our results of operations. In addition, the overall integration of the combining companies may result in unanticipated problems, expenses, liabilities, and competitive responses, and may cause our stock price to decline. The difficulties of integrating an acquisition include, among others:
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issues in integrating information, communications and other systems; |
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incompatibility of logistics, marketing and administration methods; |
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maintaining employee morale and retaining key employees; |
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integrating the business cultures of both companies; |
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preserving important strategic client relationships; |
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consolidating corporate and administrative infrastructures and eliminating duplicative operations; and |
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coordinating and integrating geographically separate organizations. |
In addition, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all.
Further, acquisitions may cause us to:
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issue common stock that would dilute our current stockholders ownership percentage; |
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use a substantial portion of our cash resources; |
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increase our interest expense, leverage and debt service requirements (if we incur additional debt to pay for an acquisition); |
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assume liabilities, including environmental liabilities, for which we do not have indemnification from the former owners. Further, indemnification obligations may be subject to dispute or concerns regarding the creditworthiness of the former owners; |
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record goodwill and non-amortizable intangible assets that are subject to impairment testing and potential impairment charges; |
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experience volatility in earnings due to changes in contingent consideration related to acquisition earn-out liability estimates; |
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incur amortization expenses related to certain intangible assets; |
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lose existing or potential contracts as a result of conflict of interest issues; |
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incur large and immediate write-offs; or |
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become subject to litigation. |
Finally, acquired companies that derive a significant portion of their revenue from the U.S. federal government and that do not follow the same cost accounting policies and billing practices that we follow may be subject to larger cost disallowances for greater periods than we typically encounter. If we fail to determine the existence of unallowable costs and do not establish appropriate reserves in advance of an acquisition, we may be exposed to material unanticipated liabilities, which could have a material adverse effect on our business.
If our goodwill or other intangible assets become impaired, then our profits may be significantly reduced.
Because we have historically acquired a significant number of companies, goodwill and other intangible assets represent a substantial portion of our assets. At June 29, 2014, our goodwill was $722.6 million and other intangible assets were $66.1 million. We are required to perform a goodwill impairment test for potential impairment at least on an annual basis. We also assess the recoverability of the unamortized balance of our intangible assets when indications of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. The goodwill impairment test requires us to determine the fair value of our reporting units, which are the components one level below our reportable segments. In determining fair value, we make significant judgments and estimates, including assumptions about our strategic plans with regard to our operations. We also analyze current economic indicators and market valuations to help determine fair value. To the extent economic conditions that would impact the future operations of our reporting units change, our goodwill may be deemed to be impaired, and we would be required to record a non-cash charge that could result in a material adverse effect on our financial position or results of operations.
In the third quarter of fiscal 2013, we performed an interim goodwill impairment test and recorded a $56.6 million, or $48.1 million, net of tax, goodwill impairment charge in the ECS segment.
If we are not able to successfully manage our growth strategy, our business and results of operations may be adversely affected.
Our expected future growth presents numerous managerial, administrative, operational and other challenges. Our ability to manage the growth of our operations will require us to continue to improve our management information systems and our other internal systems and controls. In addition, our growth will increase our need to attract, develop, motivate and retain both our management and professional employees. The inability to effectively manage our growth or the inability of our employees to achieve anticipated performance could have a material adverse effect on our business.
Our backlog is subject to cancellation, unexpected adjustments and economic conditions, and is an uncertain indicator of future operating results.
Our backlog at June 29, 2014, was $1.9 billion, an increase of $20.8 million, or 1.1%, compared to year-end. We include in backlog only those contracts for which funding has been provided and work authorizations have been received. We cannot guarantee that the revenue projected in our backlog will be realized or, if realized, will result in profits. In addition, project cancellations or scope adjustments may occur, from time to time, with respect to contracts reflected in our backlog. For example, certain of our contracts with the U.S. federal government and other clients are terminable at the discretion of the client, with or without cause. These types of backlog reductions could adversely affect our revenue and margins. In fiscal 2013, the broad-based decline in our backlog resulted from the volatility of current economic conditions, and increased ambiguity as to whether the U.S. or the global economy will grow modestly or remain stagnant. As a result of these factors, our backlog as of any particular date is an uncertain indicator of our future earnings.
If our business partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation and profit reduction or loss on the project.
We routinely enter into subcontracts and, occasionally, joint ventures, teaming arrangements and other contractual arrangements so that we can jointly bid and perform on a particular project. Success under these arrangements depends in large part on whether our business partners fulfill their contractual obligations satisfactorily. In addition, when we operate through a joint venture in which we are a minority holder, we have limited control over many project decisions, including decisions related to the joint ventures internal controls, which may not be subject to the same internal control procedures that we employ. If these unaffiliated third parties do not fulfill their contract obligations, the partnerships or joint ventures may be unable to adequately perform and deliver their contracted services. Under these circumstances, we may be obligated to pay financial penalties, provide additional services to ensure the adequate performance and delivery of the contracted services and may be jointly and severally liable for the others actions or contract performance. These additional obligations could result in reduced profits and revenues or, in some cases, significant losses for us with respect to the joint venture, which could also affect our reputation in the industries we serve.
If our contractors and subcontractors fail to satisfy their obligations to us or other parties, or if we are unable to maintain these relationships, our revenue, profitability and growth prospects could be adversely affected.
We depend on contractors and subcontractors in conducting our business. There is a risk that we may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, client concerns about the subcontractor, or our failure to extend existing task orders or issue new task orders under a subcontract. In addition, if a subcontractor fails to deliver on a timely basis the agreed-upon supplies, fails to perform the agreed-upon services or goes out of business, then we may be required to purchase the services or supplies from another source at a higher price, and our ability to fulfill our obligations as a prime contractor may be jeopardized. This may reduce the profit to be realized or result in a loss on a project for which the services or supplies are needed.
We also rely on relationships with other contractors when we act as their subcontractor or joint venture partner. The absence of qualified subcontractors with which we have a satisfactory relationship could adversely affect the quality of our service and our ability to perform under some of our contracts. Our future revenue and growth prospects could be adversely affected if other contractors eliminate or reduce their subcontracts or teaming arrangement relationships with us, or if a government agency terminates or reduces these other contractors programs, does not award them new contracts or refuses to pay under a contract.
We may be required to pay liquidated damages if we fail to meet milestone requirements in our contracts.
We may be required to pay liquidated damages if we fail to meet milestone requirements in our contracts. Failure to meet any of the milestone requirements could result in additional costs, and the amount of such additional costs could exceed the projected profits on the project. These additional costs include liquidated damages paid under contractual penalty provisions, which can be substantial and can accrue on a regular basis.
Changes in resource management, environmental or infrastructure industry laws, regulations and programs could directly or indirectly reduce the demand for our services, which could in turn negatively impact our revenue.
Some of our services are directly or indirectly impacted by changes in U.S. federal, state, local or foreign laws and regulations pertaining to the resource management, environmental and infrastructure industries. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could result in a decline in demand for our services, which could in turn negatively impact our revenue.
Changes in capital markets could adversely affect our access to capital and negatively impact our business.
Our results could be adversely affected by an inability to access the revolving credit facility under our Amended Credit Agreement. Unfavorable financial or economic conditions could impact certain lenders willingness or ability to fund our revolving credit facility. In addition, increases in interest rates or credit spreads, volatility in financial markets or the interest rate environment, significant political or economic events, defaults of significant issuers and other market and economic factors may negatively impact the general level of debt issuance, the debt issuance plans of certain categories of borrowers, the types of credit-sensitive products being offered, and/or a sustained period of market decline or weakness could have a material adverse effect on us.
Restrictive covenants in our credit agreement may restrict our ability to pursue certain business strategies.
Our Amended Credit Agreement limits or restricts our ability to, among other things:
· incur additional indebtedness;
· create liens securing debt or other encumbrances on our assets;
· make loans or advances;
· pay dividends or make distributions to our stockholders;
· purchase or redeem our stock;
· repay indebtedness that is junior to indebtedness under our credit agreement;
· acquire the assets of, or merge or consolidate with, other companies; and
· sell, lease or otherwise dispose of assets.
Our Amended Credit Agreement also requires that we maintain certain financial ratios, which we may not be able to achieve. The covenants may impair our ability to finance future operations or capital needs or to engage in other favorable business activities.
Our industry is highly competitive and we may be unable to compete effectively.
Our industry is highly fragmented and intensely competitive. Our competitors are numerous, ranging from small private firms to multi-billion-dollar public companies. In addition, the technical and professional aspects of our services generally do not require large upfront capital expenditures and provide limited barriers against new competitors. Some of our competitors have achieved greater market penetration in some of the markets in which we compete, and some have substantially more financial resources and/or financial flexibility than we do. As a result of the number of competitors in the industry, our clients may select one of our competitors on a project due to competitive pricing or a specific skill set. This competitive environment could force us to make price concessions or otherwise reduce prices for our services. If we are unable to maintain our competitiveness, our market share, revenue and profits will decline.
Legal proceedings, investigations and disputes could result in substantial monetary penalties and damages, especially if such penalties and damages exceed or are excluded from existing insurance coverage.
We engage in consulting, engineering, program management, construction management, construction and technical services that can result in substantial injury or damages that may expose us to legal proceedings, investigations and disputes. For example, in the ordinary course of our business, we may be involved in legal disputes regarding personal injury claims, employee or labor disputes, professional liability claims, and general commercial disputes involving project cost overruns and liquidated damages as well as other claims. In addition, in the ordinary course of our business, we frequently make professional judgments and recommendations about environmental and engineering conditions of project sites for our clients, and we may be deemed to be responsible for these judgments and recommendations if they are later determined to be inaccurate. Any unfavorable legal ruling against us could result in substantial monetary damages or even criminal violations. We maintain insurance coverage as part of our overall legal and risk management strategy to minimize our potential liabilities; however, insurance coverage contains exclusions and other limitations that may not cover our potential liabilities. Generally, our insurance program covers workers compensation and employers liability, general liability, automobile liability, professional errors and omissions liability, property, and contractors pollution liability (in addition to other policies for specific projects). Our insurance program includes deductibles or self-insured retentions for each covered claim that may increase over time. In addition, our insurance policies contain exclusions that insurance providers may use to deny or restrict coverage. Excess liability and professional liability insurance policies provide for coverage on a claims-made basis, covering only claims actually made and reported during the policy period currently in effect. If we sustain liabilities that exceed or that are excluded from our insurance coverage or for which we are not insured, it could have a material adverse impact on our results of operations and financial condition (see Note 15, Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements for more information).
Unavailability or cancellation of third-party insurance coverage would increase our overall risk exposure as well as disrupt the management of our business operations.
We maintain insurance coverage from third-party insurers as part of our overall risk management strategy and because some of our contracts require us to maintain specific insurance coverage limits. If any of our third-party insurers fail, suddenly cancel our coverage or otherwise are unable to provide us with adequate insurance coverage, then our overall risk exposure and our operational expenses would increase and the management of our business operations would be disrupted. In addition, there can be no assurance that any of our existing insurance coverage will be renewable upon the expiration of the coverage period or that future coverage will be affordable at the required limits.
Our inability to obtain adequate bonding could have a material adverse effect on our future revenue and business prospects.
Certain clients require bid bonds and performance and payment bonds. These bonds indemnify the client should we fail to perform our obligations under a contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. In some instances, we are required to co-venture with a small or disadvantaged business to pursue certain U.S. federal or state government contracts. In connection with these ventures, we are sometimes required to utilize our bonding capacity to cover all of the payment and performance obligations under the contract with the client. We have a bonding facility but, as is typically the case, the issuance of bonds under that facility is at the suretys sole discretion. Moreover, due to events that can negatively affect the insurance and bonding markets, bonding may be more difficult to obtain or may only be available at significant additional cost. There can be no assurance that bonds will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and, as a result, to bid on new work could have a material adverse effect on our future revenue and business prospects.
Our failure to adequately recover on claims brought by us against clients for additional contract costs could have a negative impact on our liquidity and profitability.
We have brought claims against clients for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as client-caused delays or changes from the initial project scope, both of which may result in additional cost. Often, these claims can be the subject of lengthy arbitration or litigation proceedings, and it is difficult to accurately predict when these claims will be fully resolved. When these types of events occur and unresolved claims are pending, we have used working capital in projects to cover cost overruns pending the resolution of the relevant claims. A failure to promptly recover on these types of claims could have a negative impact on our liquidity and profitability.
Employee, agent or partner misconduct or our failure to comply with anti-bribery and other laws or regulations could harm our reputation, reduce our revenue and profits, and subject us to criminal and civil enforcement actions.
Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one of our employees, agents or partners could have a significant negative impact on our business and reputation. Such misconduct could include the failure to comply with government procurement regulations, regulations regarding the protection of classified information, regulations prohibiting bribery and other foreign corrupt practices, regulations regarding the pricing of labor and other costs in government contracts, regulations on lobbying or similar activities, regulations pertaining to the internal controls over financial reporting, environmental laws and any other applicable laws or regulations. For example, the FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these regulations and laws, and we take precautions to prevent and detect misconduct. However, since our internal controls are subject to inherent limitations, including human error, it is possible that these controls could be intentionally circumvented or become inadequate because of changed conditions. As a result, we cannot assure that our controls will protect us from reckless or criminal acts committed by our employees or agents. Our failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines and penalties, loss of security clearances, and suspension or debarment from contracting, any or all of which could harm our reputation, reduce our revenue and profits, and subject us to criminal and civil enforcement actions.
Our business activities may require our employees to travel to and work in countries where there are high security risks, which may result in employee death or injury, repatriation costs or other unforeseen costs.
Certain of our contracts may require our employees travel to and work in high-risk countries that are undergoing political, social and economic upheavals resulting from war, civil unrest, criminal activity, acts of terrorism or public health crises. For example, we currently have employees working in high security risk countries such as Afghanistan. As a result, we risk loss of or injury to our employees and may be subject to costs related to employee death or injury, repatriation or other unforeseen circumstances. We may choose or be forced to leave a country with little or no warning due to physical security risks.
Our failure to implement and comply with our safety program could adversely affect our operating results or financial condition.
Our safety program is a fundamental element of our overall approach to risk management, and the implementation of the safety program is a significant issue in our dealings with our clients. We maintain an enterprise-wide group of health and safety professionals to help ensure that the services we provide are delivered safely and in accordance with standard work processes. Unsafe job sites and office environments have the potential to increase employee turnover, increase the cost of a project to our clients, expose us to types and levels of risk that are fundamentally unacceptable, and raise our operating costs. The implementation of our safety processes and procedures are monitored by various agencies, including the U.S. Mine Safety and Health Administration, and rating bureaus and may be evaluated by certain clients in cases in which safety requirements have been established in our contracts. Our failure to meet these requirements or our failure to properly implement and comply with our safety program could result in reduced profitability or the loss of projects or clients, and could have a material adverse effect on our business, operating results or financial condition.
We may be precluded from providing certain services due to conflict of interest issues.
Many of our clients are concerned about potential or actual conflicts of interest in retaining management consultants. U.S. federal government agencies have formal policies against continuing or awarding contracts that would create actual or potential conflicts of interest with other activities of a contractor. These policies, among other things, may prevent us from bidding for or performing government contracts resulting from or relating to certain work we have performed. In addition, services performed for a commercial or government client may create a conflict of interest that precludes or limits our ability to obtain work from other public or private organizations.
We have, on occasion, declined to bid on projects due to conflict of interest issues.
If our reports and opinions are not in compliance with professional standards and other regulations, we could be subject to monetary damages and penalties.
We issue reports and opinions to clients based on our professional engineering expertise, as well as our other professional credentials. Our reports and opinions may need to comply with professional standards, licensing requirements, securities regulations and other laws and rules governing the performance of professional services in the jurisdiction in which the services are performed. In addition, we could be liable to third parties who use or rely upon our reports or opinions even if we are not contractually bound to those third parties. For example, if we deliver an inaccurate report or one that is not in compliance with the relevant standards, and that report is made available to a third party, we could be subject to third-party liability, resulting in monetary damages and penalties.
We may be subject to liabilities under environmental laws and regulations.
Our services are subject to numerous U.S. and international environmental protection laws and regulations that are complex and stringent. For example, we must comply with a number of U.S. federal government laws that strictly regulate the handling, removal, treatment, transportation and disposal of toxic and hazardous substances. Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA), and comparable state laws, we may be required to investigate and remediate regulated hazardous materials. CERCLA and comparable state laws typically impose strict, joint and several liabilities without regard to whether a company knew of or caused the release of hazardous substances. The liability for the entire cost of clean-up could be imposed upon any responsible party. Other principal U.S. federal environmental, health and safety laws affecting us include, but are not limited to, the Resource Conversation and Recovery Act, the National Environmental Policy Act, the Clean Air Act, the Occupational Safety and Health Act, the Federal Mine Safety and Health Act of 1977 (the Mine Act), the Toxic Substances Control Act and the Superfund Amendments and Reauthorization Act. Our business operations may also be subject to similar state and international laws relating to environmental protection. Further, past business practices at companies that we have acquired may also expose us to future unknown environmental liabilities. Liabilities related to environmental contamination or human exposure to hazardous substances, or a failure to comply with applicable regulations, could result in substantial costs to us, including clean-up costs, fines civil or criminal sanctions and third-party claims for property damage or personal injury or cessation of remediation activities. Our continuing work in the areas governed by these laws and regulations exposes us to the risk of substantial liability.
Force majeure events, including natural disasters and terrorist actions could negatively impact the economies in which we operate or disrupt our operations, which may affect our financial condition, results of operations or cash flows.
Force majeure or extraordinary events beyond the control of the contracting parties, such as natural and man-made disasters, as well as terrorist actions, could negatively impact the economies in which we operate by causing the closure of offices, interrupting projects and forcing the relocation of employees. Further, despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. We typically remain obligated to perform our services after a terrorist action or natural disaster unless the contract contains a force majeure clause that relieves us of our contractual obligations in such an extraordinary event. If we are not able to react quickly to force majeure, our operations may be affected significantly, which would have a negative impact on our financial condition, results of operations or cash flows.
We have only a limited ability to protect our intellectual property rights, and our failure to protect our intellectual property rights could adversely affect our competitive position.
Our success depends, in part, upon our ability to protect our proprietary information and other intellectual property. We rely principally on trade secrets to protect much of our intellectual property where we do not believe that patent or copyright protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent misappropriation of our confidential information. In addition, we may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights. Failure to obtain or maintain trade secret protection could adversely affect our competitive business position. In addition, if we are unable to prevent third parties from infringing or misappropriating our trademarks or other proprietary information, our competitive position could be adversely affected.
Systems and information technology interruption could adversely impact our ability to operate.
We rely heavily on computer, information, and communications technology and systems to operate. From time to time, we experience system interruptions and delays. If we are unable to effectively deploy software and hardware, upgrade our systems and network infrastructure, and take steps to improve and protect our systems, systems operations could be interrupted or delayed.
Our computer and communications systems and operations could be damaged or interrupted by natural disasters, telecommunications failures, acts of war or terrorism and similar events or disruptions. In addition, we face the threat of unauthorized system access, computer hackers, computer viruses, malicious code, organized cyber-attacks, and other security breaches and system disruptions. We devote significant resources to the security of our computer systems, but they may still be vulnerable to threats. Anyone who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in system operations. As a result, we may be required to expend significant resources to protect against the threat of system disruptions and security breaches, or to alleviate problems caused by disruptions and breaches.
Any of these or other events could cause system interruption, delays, and loss of critical data that could delay or prevent operations, and could have a material adverse effect on our business, financial condition, results of operations and cash flows, and could negatively impact our clients.
Delaware law and our charter documents may impede or discourage a merger, takeover or other business combination even if the business combination would have been in the best interests of our stockholders.
We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our stockholders. In addition, our Board of Directors has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock, which could be used defensively if a takeover is threatened. Our incorporation under Delaware law, the ability of our Board of Directors to create and issue a new series of preferred stock and provisions in our certificate of incorporation and bylaws, such as those relating to advance notice of certain stockholder proposals and nominations, could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, even if the business combination would have been in the best interests of our current stockholders.
Our stock price could become more volatile and stockholders investments could lose value.
In addition to the macroeconomic factors that have affected the prices of many securities generally, all of the factors discussed in this section could affect our stock price. Our common stock has previously experienced substantial price volatility. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies and that have often been unrelated to the operating performance of these companies. The overall market and the price of our common stock may fluctuate greatly. The trading price of our common stock may be significantly affected by various factors, including:
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quarter-to-quarter variations in our financial results, including revenue, profits, days sales outstanding, backlog, and other measures of financial performance or financial condition; |
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our announcements or our competitors announcements of significant events, including acquisitions; |
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resolution of threatened or pending litigation; |
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changes in investors and analysts perceptions of our business or any of our competitors businesses; |
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investors and analysts assessments of reports prepared or conclusions reached by third parties; |
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changes in environmental legislation; |
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investors perceptions of our performance of services in countries in which the U.S. military is engaged, including Afghanistan; |
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broader market fluctuations; and |
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general economic or political conditions. |
Volatility in the financial markets could cause a decline in our stock price, which could trigger an impairment of the goodwill of individual reporting units that could be material to our consolidated financial statements. A significant drop in the price of our stock could also expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert managements attention and resources, which could adversely affect our business. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom are granted stock options and shares of restricted stock, the value of which is dependent on the performance of our stock price.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In June 2013, our Board of Directors authorized our Stock Repurchase Program under which we may currently repurchase up to $100 million of our common stock. In February 2014, our Board of Directors amended the Stock Repurchase Program to authorize the repurchase of up to $30 million of the $100 million Stock Repurchase Program in open market purchases through September 2014, revise the pricing parameters and to extend the program through fiscal 2014. Stock repurchases may be made on the open market or in privately negotiated transactions with third parties. Because the repurchases under the Stock Repurchase Program are subject to certain pricing parameters, there is no guarantee as to the exact number of shares that will be repurchased under the program. From the inception of the Stock Repurchase Program through June 29, 2014, we repurchased through open market purchases a total of 1.8 million shares at an average price of $25.50 per share, for a total cost of $46.6 million.
A summary of the repurchase activity for the nine months ended June 29, 2014 is as follows:
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Total Number |
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Average Price |
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Total Number |
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Maximum |
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September 30, 2013 October 27, 2013 |
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$ |
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80,000,000 |
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October 28, 2013 November 24 2013 |
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80,000,000 |
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November 25, 2013 December 29, 2013 |
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80,000,000 |
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December 30, 2013 January 26, 2014 |
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80,000,000 |
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January 27, 2014 February 23, 2014 |
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70,700 |
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28.57 |
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70,700 |
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77,980,119 |
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February 24, 2014 March 30, 2014 |
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155,300 |
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29.57 |
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155,300 |
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73,388,335 |
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March 31, 2014 April 27, 2014 |
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120,600 |
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28.95 |
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120,600 |
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69,897,187 |
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April 28, 2014 May 25, 2014 |
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427,190 |
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26.25 |
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427,190 |
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58,684,703 |
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May 26, 2014 June 29, 2014 |
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199,661 |
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26.66 |
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199,661 |
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53,361,801 |
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We purchased approximately 855,000 additional shares in fiscal 2013 that were previously issued pursuant to awards issued under our stock-based compensation plans. These plans allow our employees to surrender shares of our common stock as payment toward the exercise cost and tax withholding obligations associated with the exercise of stock options or the vesting of restricted stock. | |||||||||||
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We may currently repurchase up to $100 million of our common stock under the Stock Repurchase Program, which was publicly announced in June 2013. The Stock Repurchase Program will currently expire at the earliest of (i) the close of business on September 28, 2014, (ii) any optional termination date, (iii) the date on which any required termination notice is received by our broker, (iv) the close of business on the date that the maximum $100 million of common stock has been purchased, or (v) the date that our broker becomes aware of the commencement or impending commencement of any voluntary or involuntary proceedings relating to our bankruptcy or insolvency. | |||||||||||
Item 4. Mine Safety Disclosure
Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) requires domestic mine operators to disclose violations and orders issued under the Mine Act by the U.S. Mine Safety and Health Administration. We do not act as the owner of any mines, but we may act as a mining operator as defined under the Mine Act where we may be an independent contractor performing services or construction at such mine. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 Regulations S-K is included in Exhibit 95.
The following documents are filed as Exhibits to this Report:
31.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a)/15d-14(a).
31.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a)/15d-14(a).
32.1 Certification of Chief Executive Officer pursuant to Section 1350.
32.2 Certification of Chief Financial Officer pursuant to Section 1350.
95 Mine Safety Disclosure.
101 The following financial information from our Quarterly Report on Form 10-Q, for the period ended June 29, 2014, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows, (v) Notes to Condensed Consolidated Financial Statements.*
* Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 (the Exchange Act) or otherwise subject to the liability of the section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 4, 2014 |
TETRA TECH, INC. | |
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By: |
/s/ Dan L. Batrack |
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Dan L. Batrack |
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Chairman, Chief Executive Officer and President |
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(Principal Executive Officer) |
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By: |
/s/ Steven M. Burdick |
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Steven M. Burdick |
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Chief Financial Officer and Treasurer |
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(Principal Financial Officer) |
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By: |
/s/ Brian N. Carter |
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Brian N. Carter |
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Senior Vice President, Corporate Controller |
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(Principal Accounting Officer) |
Exhibit 31.1
Chief Executive Officer Certification Pursuant to
Rule 13a-14(a)/15d-14(a)
I, Dan L. Batrack, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Tetra Tech, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Dated: August 4, 2014
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/s/ Dan L. Batrack |
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Dan L. Batrack |
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Chairman, Chief Executive Officer and President |
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(Principal Executive Officer) |
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Exhibit 31.2
Chief Financial Officer Certification Pursuant to
Rule 13a-14(a)/15d-14(a)
I, Steven M. Burdick, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Tetra Tech, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Dated: August 4, 2014
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/s/ Steven M. Burdick |
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Steven M. Burdick |
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Chief Financial Officer and Treasurer |
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(Principal Financial Officer) |
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Exhibit 32.1
Certification of Chief Executive Officer Pursuant to
Section 1350
In connection with the Quarterly Report of Tetra Tech, Inc. (the Company) on Form 10-Q for the quarterly period ended June 29, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Dan L. Batrack, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with requirements of Section 13(a) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Dan L. Batrack |
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Dan L. Batrack |
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Chairman, Chief Executive Officer and President |
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August 4, 2014 |
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A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Tetra Tech, Inc. and will be retained by Tetra Tech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-Q and shall not be considered filed as part of the Form 10-Q.
Exhibit 32.2
Certification of Chief Financial Officer Pursuant to
Section 1350
In connection with the Quarterly Report of Tetra Tech, Inc. (the Company) on Form 10-Q for the quarterly period ended June 29, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Steven M. Burdick, Chief Financial Officer and Treasurer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with requirements of Section 13(a) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Steven M. Burdick |
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Steven M. Burdick |
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Chief Financial Officer and Treasurer |
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August 4, 2014 |
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A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Tetra Tech, Inc. and will be retained by Tetra Tech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-Q and shall not be considered filed as part of the Form 10-Q.
Exhibit 95
MINE SAFETY DISCLOSURES
The following table shows, for each project performed at U.S. mines that is subject to the Federal Mine Safety and Health Act of 1977 (MSHA), the information required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K. Section references are to sections of MSHA.
FY Q3 Period Ending June 29, 2014 |
|
Ray |
|
Pinto |
|
Delaney |
|
Questa |
|
|
|
|
|
|
|
|
|
|
|
Alleged violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a mine safety or health hazard (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Section 104(b) orders (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Section 104(d) citations and orders (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Section 110(b)(2) violations (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Section 107(a) orders (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Proposed assessments under MSHA ($) whole dollars |
|
0 |
|
0 |
|
$200.00 |
|
0 |
|
Mining-related fatalities (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Section 104(e) notice |
|
No |
|
No |
|
No |
|
No |
|
Notice of the potential for a pattern of violations under Section 104(e) |
|
No |
|
No |
|
No |
|
No |
|
Legal actions before the Federal Mine Safety and Health Review Commission (FMSHRC) initiated (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Legal actions before the FMSHRC resolved (#) |
|
2 |
|
0 |
|
0 |
|
0 |
|
Legal actions pending before the FMSHRC, end of period: |
|
|
|
|
|
|
|
|
|
Contests of citations and orders referenced in Subpart B of 29 CFR Part 2700 (#) |
|
0 |
|
2 |
|
0 |
|
0 |
|
Contests of proposed penalties referenced in Subpart C of 29 CFR Part 2700 (#) |
|
0 |
|
1 |
|
0 |
|
1 |
|
Complaints for compensation referenced in Subpart D of 29 CFR Part 2700 (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Complaints of discharge, discrimination or interference referenced in Subpart E of 29 CFR Part 2700 (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Applications for temporary relief referenced in Subpart F of 29 CFR Part 2700 (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Appeals of judges decisions or orders referenced in Subpart H of 29 CFR Part 2700 (#) |
|
0 |
|
0 |
|
0 |
|
0 |
|
Total pending legal actions (#) |
|
0 |
|
3 |
|
0 |
|
1 |
|
Income Taxes (Details) (USD $)
In Millions, unless otherwise specified |
0 Months Ended | 3 Months Ended | 9 Months Ended | |
---|---|---|---|---|
Sep. 28, 2014
|
Jun. 29, 2014
item
|
Jun. 29, 2014
|
Jun. 30, 2013
|
|
Income Taxes | ||||
Effective tax rate (as a percent) | 29.40% | (4.30%) | ||
Gain related to updated valuation of contingent consideration liabilities | $ 26.2 | |||
Goodwill impairment charge, not deductible for tax purposes | 35 | |||
Undistributed earnings of foreign subsidiaries | 43.3 | 43.3 | ||
Loss carry-forwards in foreign jurisdictions, valuation allowance | 8.8 | 8.8 | ||
Represents the period of projected cumulative pre-tax losses in certain foreign jurisdictions | 36 months | |||
Number of issues under examination by the IRS | 3 | |||
Income tax cash refund, including interest related to settlement | $ 6.3 | $ 6.3 |
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