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 quarter ended September 30, 1994
OR
X TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission file number 1-9037
International Technology Corporation
(Exact name of registrant as specified in its charter)
Delaware 33-0001212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23456 Hawthorne Boulevard, Torrance, California 90505
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 378-9933
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 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 ........
At October 31, 1994 the registrant had issued and outstanding an
aggregate of 35,533,926 shares of its common stock.
1
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1994
PART I. FINANCIAL INFORMATION
Page
--------
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
as of September 30, 1994 (unaudited) and
March 31, 1994. 3
Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended
September 30, 1994 and 1993 (unaudited). 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 1994
and 1993 (unaudited). 5
Notes to Condensed Consolidated Financial
Statements (unaudited). 6-9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 10-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 6. Exhibits and Reports on Form 8-K. 19
Signature. 20
2
<PAGE>
PART I
Item 1. Financial Statements.
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, March 31,
1994 1994
-------- --------
(Unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 7,093 $ 10,646
Receivables, net 146,305 126,910
Prepaid expenses and other current assets 6,599 7,674
Deferred income taxes 9,329 9,329
------- -------
Total current assets 169,326 154,559
------- -------
Property, plant and equipment, at cost:
Land and land improvements 1,759 2,127
Buildings and leasehold improvements 9,594 25,930
Machinery and equipment 122,888 154,929
------- -------
134,241 182,986
Less accumulated depreciation and
amortization 74,109 91,557
------- -------
Net property, plant and equipment 60,132 91,429
------- -------
Construction-in-progress 18,103 19,451
Investment in Quanterra 37,517 -
Other assets 47,063 52,059
Long-term assets of discontinued operations 41,705 41,705
------- -------
Total assets $ 373,846 $ 359,203
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,014 $ 27,314
Accrued liabilities 36,003 32,662
Billings in excess of revenues 10,224 9,315
Short-term debt, including current portion
of long-term debt 3,704 5,268
Net current liabilities of discontinued
operations 14,335 16,478
------- -------
Total current liabilities 97,280 91,037
------- -------
Long-term debt 82,323 68,625
Long-term accrued liabilities of
discontinued operations 29,131 32,547
Other long-term accrued liabilities 6,758 6,446
Commitments and contingencies
Stockholders' equity:
Preferred stock, $100 par value;
180,000 shares authorized; 24,000 shares
issued and outstanding 2,400 2,400
Common stock, $1 par value;
100,000,000 shares authorized;
35,534,052 and 35,201,052 shares
issued and outstanding, respectively 35,534 35,201
Additional paid-in capital 171,784 168,817
Deficit (51,364) (45,870)
------- -------
Total stockholders' equity 158,354 160,548
------- -------
Total liabilities and
stockholders' equity $373,846 $ 359,203
======= =======
See accompanying notes.
3
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INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------ ----------------
1994 1993 1994 1993
------- ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $102,509 $100,665 $211,077 $203,214
Cost and expenses:
Cost of revenues (86,081) (84,346) (178,731) (169,646)
Selling, general and administrative expenses (10,401) (11,154) (21,872) (22,640)
Equity in net income of Quanterra 507 - 507 -
Integration charge related to the
formation of Quanterra - - (9,264) -
------- ------- ------- -------
Operating income 6,534 5,165 1,717 10,928
Interest, net (1,634) (2,487) (3,103) (5,034)
------- ------- ------- -------
Income (loss) before income taxes 4,900 2,678 (1,386) 5,894
Provision for income taxes (2,009) (986) (2,009) (2,240)
------- ------- ------- -------
Net income (loss) 2,891 1,692 (3,395) 3,654
Less preferred stock dividends (1,050) (35) (2,100) (35)
------- ------- ------- -------
Net income (loss) applicable to common stock $ 1,841 $ 1,657 $ (5,495) $ 3,619
======= ======= ======= =======
Net income (loss) per share $ .05 $ .05 $ (.16) $ .11
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended
September 30,
----------------------
1994 1993
------ ------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ (3,395) $ 3,654
Adjustments to reconcile net income
(loss) to net cash (used for) provided
by operating activities:
Equity in net income of Quanterra (507) -
Integration charge related to the
formation of Quanterra 9,264 -
Depreciation and amortization 9,413 10,705
Deferred income taxes 1,702 1,852
Changes in assets and liabilities,
net of effects from acquisitions and
dispositions of businesses:
(Increase) decrease in
receivables, net (29,558) 6,839
Increase in prepaid expenses and
other current assets (483) (601)
Increase (decrease) in
accounts payable 6,872 (8,125)
Increase (decrease) in
accrued liabilities 3,926 (556)
Increase in billings in
excess of revenues 909 2,243
Increase (decrease) in other
long-term accrued liabilities 312 (619)
------- -------
Net cash (used for) provided by
operating activities (1,545) 15,392
------- -------
Cash flows from investing activities:
Capital expenditures (6,272) (7,295)
Investment in Quanterra (1,208) -
Other, net 610 678
Investment activities of transportation,
treatment and disposal discontinued
operations (5,559) (5,661)
------- -------
Net cash used for investing activities (12,429) (12,278)
------- -------
Cash flows from financing activities:
Repayments of long-term borrowings (15,479) (52,295)
Long-term borrowings 28,000 21,000
Dividends paid on preferred stock (2,100) -
Net proceeds from public offering of
depositary shares - 57,130
Issuances of common stock - 220
------- -------
Net cash provided by financing
activities 10,421 26,055
------- -------
Net (decrease) increase in cash and
cash equivalents (3,553) 29,169
Cash and cash equivalents at
beginning of period 10,646 8,659
------- -------
Cash and cash equivalents at
end of period $ 7,093 $ 37,828
======= =======
See accompanying notes.
5
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The condensed consolidated financial statements included
herein have been prepared by International Technology Corpora-
tion (Company or IT), without audit, and include all adjust-
ments of a normal, recurring nature which are, in the opinion
of management, necessary for a fair presentation of the
results of operations for the three-month and six-month
periods ended September 30, 1994 and 1993, pursuant to the
rules of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations although the Company
believes that the disclosures in such financial statements are
adequate to make the information presented not misleading.
These condensed consolidated financial statements should be
read in conjunction with the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1994. The results of
operations for the three-month and six-month periods ended
September 30, 1994 are not necessarily indicative of the
results for the full fiscal year.
2. On June 28, 1994, pursuant to a definitive agreement signed on
May 2, 1994, the Company and an affiliate of Corning Incorpo-
rated (Corning) combined the two companies' environmental
analytical services businesses into a newly formed 50/50
jointly-owned company (Quanterra). Quanterra operates
independently with a separate board of directors comprised of
representation from IT and Corning, and provides services to
the Company on a competitive basis.
In connection with the transaction, the Company contributed
the net assets of approximately $38,800,000 of its analytical
laboratory business into Quanterra. Additionally, IT incurred
cash costs of $1,208,000 and issued to Corning 333,000 shares
of IT common stock and a five-year warrant to purchase
2,000,000 shares of IT common stock at $5.00 per share which
are valued in the aggregate at $3,300,000.
IT's 50 percent investment in Quanterra is accounted for under
the equity method. Upon closing of the transaction, implemen-
tation of an aggressive integration plan was begun to elimi-
nate redundant laboratory facilities and duplicative overhead
and systems. In the fiscal quarter ended June 30, 1994, IT's
portion of the charge for integration was $9,264,000. In the
fiscal quarter ended September 30, 1994, Quanterra's first
quarter of operations, the Company's equity interest in the
net income of Quanterra was $507,000.
3. In a September 1993 public offering, the Company issued
2,400,000 depositary shares, each representing a 1/100th
interest in a share of the Company's 7% Cumulative Exchange-
able Preferred Stock (Preferred Stock). The depositary shares
entitle the holder to all proportional rights and preferences
of the Preferred Stock, including dividend, liquidation,
conversion, redemption, and voting rights and preferences.
The net proceeds from the issuance were $57,130,000.
4. For the six months ended September 30, 1994, in which the
Company reported a loss before income taxes of $1,386,000, the
Company recorded a $2,009,000 income tax provision due
principally to the partial nondeductibility of the integration
charge recorded by the Company in the first quarter of fiscal
year 1995 (see Note 2 above). In the corresponding first six
months of the prior fiscal year, the effective income tax rate
of 38% exceeded the 34% federal statutory rate due primarily
to nondeductible expenses and state income taxes.
6
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INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. Net income (loss) per common share is computed by dividing net
income applicable to common stock by the weighted average
number of outstanding common shares and common share equiva-
lents during each period as follows:
Three months ended Average common and common
September 30, equivalent shares outstanding
----------------- ---------------------------
1994 35,640,338
1993 34,542,231
Six months ended Average common and common
September 30, equivalent shares outstanding
----------------- ---------------------------
1994 35,448,445
1993 34,429,540
Common stock equivalents relate to dilutive stock options and
warrants using the treasury stock method. For all periods
presented, the computation of net income (loss) per share,
assuming conversion into common shares of the Company's Pre-
ferred Stock, is antidilutive.
6. In December 1987, the Company's Board of Directors adopted a
strategic restructuring program which included a formal plan
to divest the transportation, treatment and disposal opera-
tions through sale of some facilities and closure of certain
other facilities. As of September 30, 1994, two of the
Company's inactive disposal sites have been formally closed
and the other two are in the process of closure. In connec-
tion with the plan of divestiture at December 31, 1987, the
Company recorded a provision for loss on disposition of
transportation, treatment and disposal discontinued operations
in the amount of $110,069,000, net of income tax benefit of
$24,202,000, which included the estimated net loss on sale or
closure and the results of operations of the active disposal
sites and the transportation business through the then
estimated sale date. At March 31, 1992, the Company increased
the provision for loss on disposition by the amount of
$32,720,000, net of income tax benefit of $2,280,000, princi-
pally due to the write off of the $30,400,000 contingent
purchase price from the earlier sale of certain assets. At
March 31, 1993, the Company increased the provision for loss
on disposition by $6,800,000, with no offsetting income tax
benefit, related to estimated additional costs resulting from
delays in the regulatory approval process and associated
closure plan revisions. At September 30, 1994, the Company's
condensed consolidated balance sheet included accrued liabili-
ties of $43,466,000 to complete the closure and related post-
closure of its inactive disposal sites and related matters.
The provision for loss on disposition of transportation,
treatment and disposal discontinued operations is based on
various assumptions and estimates. Management believes the
provision, as adjusted, is reasonable; however, the ultimate
effect of the divestiture on the consolidated financial
condition of the Company is dependent upon future events, the
outcome of which cannot be determined at this time. Outcomes
significantly different from those used to estimate the
provision for loss could result in a material adverse effect
on the consolidated financial condition of the Company.
7. Litigation to which IT is a party is discussed in Item 3,
Legal Proceedings, in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994 and in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994. Current developments are discussed in Part II of this
filing.
7
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INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
8. Unbilled receivables of $17,194,000 at September 30, 1994
($16,316,000 at March 31, 1994) are included in accounts
receivable. Unbilled receivables typically represent amounts
earned under the Company's contracts but not yet billable
according to the contract terms, which usually consider the
passage of time, achievement of certain milestones, negotia-
tion of change orders or completion of the project.
Included in unbilled receivables at September 30 and March 31,
1994 are approximately $8,000,000 and $7,000,000, respective-
ly, of claims related to the Helen Kramer project, which is
subject to an audit by the Defense Contract Audit Agency and
a federal civil and criminal investigation into the claims.
9. Noncurrent other assets at September 30 and March 31, 1994
include a claim amount of approximately $31,000,000 represent-
ing direct costs incurred in excess of those recovered under
the Motco Site Trust Fund contract, a major fixed-price
remediation contract. On December 4, 1991, the Company
announced the suspension of work on the Motco project and the
filing of a $56,000,000 breach of contract lawsuit to recover
direct costs, overhead and profit from Motco Trust, the
potentially responsible party (PRP) group that agreed to
finance remediation of the site, and Monsanto Company, the
leader of the PRP group.
On December 26, 1991, the Motco Trust and Monsanto filed an
answer to IT's lawsuit and asserted a counterclaim against IT.
In its counterclaim, the Motco Trust seeks recovery of
$27,000,000 of monetary damages including all payments to
third parties to complete performance of the project, all
penalties or other liabilities to any governmental entity, and
any related damages which occur as a result of the breach of
contract by IT which is alleged to have occurred upon the
filing of the lawsuit by IT and concurrent suspension of work
at the site.
The case was tried to a jury during March and April of 1994.
As a result of that trial, the jury rendered a special verdict
in IT's behalf wherein they found that Monsanto had breached
its contract with IT, had defrauded IT and had provided IT
with information which constituted a negligent misrepresenta-
tion as to the waste characteristics at the Motco site. The
jury found that the amount of damages caused IT as a result of
these acts was in the amount of $52,800,000. The jury also
found that Monsanto should pay punitive damages in the amount
of $28,550,000, together with attorneys' fees in the amount of
approximately $2,300,000. The jury further found that IT did
not commit fraud against the defendants, that any breach of
contract IT may have committed was excused, and that Motco
Trust should not recover on its $27,000,000 counterclaim.
Post-trial motions contesting the verdict have been filed with
the court by Monsanto. The filing of those motions and the
briefings of the motions were completed on June 22, 1994. The
Company is awaiting the trial judge's rulings on the motions
and the entry of judgment for which no time frame has been
announced. The trial judge's decision is also subject to
appeal.
After consideration of the merits of the Company's position in
the lawsuit and after consultations with its outside counsel,
management believes that, subject to the inherent uncertain-
ties of litigation, the Company more likely than not will
recover the contract claim receivable recorded to date and
prevail on Motco Trust's counterclaim. However, if this
matter is resolved in an amount significantly lower than the
contract claim receivable recorded by IT or if the Motco Trust
prevails in its counterclaim and recovers any significant
amount of damages, a material adverse effect to the consoli-
dated financial condition of the Company would result.
8
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
10. In the fourth quarter of fiscal year 1994, the Company
recorded a nonrecurring charge of $4,500,000 related to the
actuarially determined present value of contractual retirement
benefits to be provided to its former Chairman of the Board
(who was also Chief Executive Officer from 1975 through 1992)
who retired from that position effective April 1, 1994. The
retirement agreement was approved by the Board of Directors,
following approval by the Compensation Committee and advice of
an independent compensation consulting firm. Terms of the
retirement agreement provide for total payments by the Company
of approximately $400,000 per year through the year 2003 and
approximately $300,000 per year thereafter for the duration of
the former executive's lifetime.
As a result of concerns expressed by shareholders, in June
1994 the Board of Directors formed a special committee
comprised of four non-employee directors to review this
retirement agreement. The special committee engaged indepen-
dent legal counsel and a new independent compensation consult-
ing firm to assist it in the review process. Following its
review of the retirement agreement, the special committee
recommended that the agreement be modified in various re-
spects. As of the date hereof, no agreement has been reached
concerning such proposed modifications.
9
<PAGE>
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition.
INTERNATIONAL TECHNOLOGY CORPORATION
FOR QUARTER ENDED SEPTEMBER 30, 1994
RESULTS OF OPERATIONS
Overview
The Company operates in one industry segment and provides a range
of services to clients principally in the United States which,
through June 28, 1994, were Environmental Services, Analytical
Services, and Construction and Remediation. The Company may
compete for contracts which utilize only one of its services;
however, the Company's principal strategy is to market its services
on a turnkey basis. There are operating and economic synergies
between these service areas, as they are complementary and often
used in combination.
On June 28, 1994, pursuant to a definitive agreement signed on May
2, 1994, the Company and an affiliate of Corning Incorporated
(Corning) combined the two companies' environmental analytical
services businesses into a newly formed 50/50 jointly-owned company
(Quanterra). Quanterra operates independently with a separate
board of directors comprised of representation from IT and Corning,
and provides services to the Company on a competitive basis. (See
Note 2 to Condensed Consolidated Financial Statements.) The
financing of Quanterra is provided by a $60,000,000 bank line of
credit. IT's 50 percent investment in Quanterra is accounted for
under the equity method. An aggressive integration plan is being
implemented in the early stages of Quanterra's operations. The
plan includes consolidation and closure of redundant laboratory
facilities and equipment, a reduction in force to eliminate
duplicative overhead and excess capacity and a consolidation of
laboratory management and accounting systems. The Company expects
these actions will result in productivity gains achieved through
economies of scale. Consequently, IT reported a charge of
$9,264,000 related to the integration in its condensed consolidated
statement of operations for the fiscal quarter ended June 30, 1994.
Upon completion of the integration process, Quanterra will have
estimated annual revenues of $140,000,000 and employ approximately
1,300 people in its laboratory network throughout the United
States.
In the fiscal quarter ended September 30, 1994, Quanterra's first
quarter of operations, the Company reported equity in net income of
Quanterra of $507,000. The analytical services business continues
to be intensely competitive and has historically been impacted by
weather-related and other cyclical factors during the Company's
third and fourth fiscal quarters.
<TABLE>
Comparison of the Three Months Ended September 30, 1994
to the Three Months Ended September 30, 1993
<CAPTION>
Three months ended September 30,
------------------------------------------------------------------
1994 1993
-------------------- -----------------------
(Dollars in thousands)
Gross Percentage revenue Gross
Margin increase (decrease) Margin
Revenues Percentage 1993 to 1994 Revenues Percentage
-------- --------- ------------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Environmental Services $ 67,713 17.6% 4.6% $ 64,737 19.6%
Analytical Services - - (100.0) 13,891 8.2
Construction and Remediation 34,796 13.0 57.9 22,037 11.4
------- -------
Total $102,509 16.0 1.8 $100,665 16.2
======= =======
</TABLE>
10
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INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
Comparison of the Six Months Ended September 30, 1994
to the Six Months Ended September 30, 1993
<CAPTION>
Six months ended September 30,
--------------------------------------------------------------------
1994 1993
---------------------- -----------------------
(Dollars in thousands)
Gross Percentage revenue Gross
Margin increase (decrease) Margin
Revenues Percentage 1993 to 1994 Revenues Percentage
-------- ---------- ------------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Environmental Services $131,028 17.8% 1.1% $129,650 18.4%
Analytical Services 13,075 3.1 (55.4) 29,315 13.2
Construction and Remediation 66,974 12.9 51.4 44,249 13.2
------- -------
Total $211,077 15.3 3.9 $203,214 16.5
======= =======
</TABLE>
Revenues
- - --------
Revenues for the second quarter of fiscal year 1995 increased
$1,844,000 or 1.8% from the level of the related quarter of the
prior fiscal year. For the first six months of fiscal year 1995,
revenues increased by $7,863,000 or 3.9% from the amount reported
in the corresponding period of fiscal year 1994. Effective with
the inception of operations for Quanterra in the second quarter of
fiscal year 1995, the Company no longer records any revenue in the
Analytical Services area. However, since approximately 30 percent
of Analytical Services area revenue has been derived from Environ-
mental Services or Construction and Remediation projects, addition-
al revenue now is being recorded in those two business areas
related to analytical services subcontracts performed by Quanterra
for IT, similar to other third party subcontracts. After excluding
current and prior year Analytical Services revenues other than
those provided to Environmental Services or Construction and
Remediation projects, revenues for the Company increased 12.2% and
10.5% in the first three months and six months of fiscal year 1995,
respectively.
For the three and six months ended September 30, 1994, the
Environmental Services division experienced increases of $2,976,000
and $1,378,000 or 4.6% and 1.1%, respectively, from the related
revenue levels of the prior fiscal year. The increase in Environ-
mental Services revenue in the quarter was due primarily to the
start-up of work at the Department of Energy (DOE) site in Hanford,
Washington under the Environmental Restoration Management Contract
(ERMC) program and the recording of analytical services subcon-
tract revenue. Excluding these two factors, Environmental Services
revenue for the three-month and six-month periods declined
slightly.
Due to a general increase in governmental civil remediation
delivery order programs and significant seasonal activity in
certain of these programs, the Construction and Remediation
division reported increased revenues for the current three-month
and six-month periods of $12,759,000 and $22,725,000, or 57.9% and
51.4%, respectively, in comparison to the corresponding periods of
the prior fiscal year.
A significant portion of the revenues of the Construction and
Remediation division continue to be derived from large, complex
thermal remediation contracts utilizing the Company's Hybrid
Thermal Treatment System (HTTS) incineration technology.
However, incineration as an allowable remedy under the Comprehen-
sive Environmental Response, Compensation and Liability Act
(CERCLA) continues to come under legislative and regulatory
pressures. In May 1993, the U.S. Environmental Protection Agency
(USEPA), citing its authority under the Resource Conservation and
Recovery Act, announced the Draft Strategy imposing additional
requirements and costs on incineration facilities, the effect of
which has been a "freeze" on the permitting of any new fixed-base
hazardous waste incinerators or cement kilns. Although the
"freeze" is presently scheduled to expire in late 1994, the effects
11
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
of the USEPA policy may continue for an undetermined period
thereafter. In May 1994, the USEPA issued a new policy which,
while seemingly affirming incineration as an allowable remedy under
CERCLA, calls for additional procedures and studies to be conducted
before incineration may be selected as a remedy, or which may
result in the deselection of incineration as a remedy, at a
Superfund site. The Company was advised in July 1994 by the USEPA
and the Texas Natural Resources Conservation Commission that
incineration at the Texarkana Wood Processing Co. (Texarkana)
Superfund site will be delayed until the Congressional Office of
Technology Assessment (OTA) completes a study on the safety of
incineration and the assessment of possible alternatives to
incineration and that all offerors' bids, including IT's, have been
allowed to expire. Additionally, during July 1994, an amendment to
proposed legislation in the U.S. House of Representatives has been
offered that would require General Accounting Office and OTA
studies on the safety of incineration prior to IT proceeding on the
Times Beach Superfund project. The impact upon the Company's
business of these actions cannot yet be predicted. If policies
were implemented or regulations were changed such that the Company
was unable to permit and use incinerators at Texarkana and Times
Beach and at future remediation projects due to either regulatory
or market factors, the Company would have to find alternative uses
for its HTTS equipment, which currently has a net book value of
approximately $35,000,000. If alternative uses, such as foreign
installations, were not found or were uneconomical, there could be
a material adverse effect to the Company's consolidated financial
condition due to impairment of HTTS assets as well as lost project
opportunities.
Although the impact upon the Company of the failure, to-date, of the U.S.
Congress to reauthorize CERCLA cannot be determined, additional delays may
result in lack of funding for certain government-funded projects.
Substantial changes in or uncertainty concerning the details of the
legislation and cleanup standards may result in project delays
and/or the failure of clients to initiate or proceed with projects.
Additionally, the change in the composition of the U.S. Congress
due to the recent election may impact the environmental industry if
it leads to a reduction in the enforcement of environmental regulations
or a decline in governmental spending for environmental cleanup.
The Company's total contract backlog, which excludes Analytical
Services, at September 30, 1994 was approximately $535,000,000
compared to approximately $500,000,000 at March 31, 1994. In
addition, based on prior experience, the Company estimates it will
receive approximately $605,000,000 of future project work under
existing governmental indefinite delivery order contracts.
Revenues from backlog and delivery order contracts are expected to
be earned over the next one to five years. Included in contract
backlog above is $144,000,000 related to the Hanford ERMC program.
The Hanford ERMC backlog includes a substantial amount of subcon-
tract costs. The scope of work and the Company's role at Hanford
ERMC are undergoing review by DOE and the prime contractor. Such
review may result in different or less work for the Company,
including elimination of its subcontract procurement responsibili-
ties, which could reduce the currently reported backlog. A change
in the Company's role may or may not impact the profitability of
the contract.
Gross Margin
- - ------------
Gross margin percentage for the second quarter of fiscal year 1995
declined to 16.0% of revenues from 16.2% of revenues for the
corresponding period of the prior fiscal year. For the first six
months of fiscal year 1995, gross margin of 15.3% of revenues
compared unfavorably with the 16.5% of revenues reported for the
corresponding period of the prior fiscal year.
Gross margin percentage for the current three-month period
decreased modestly from the related prior year level primarily
because of lower pricing in the Environmental Services division.
This more than offset the increased labor utilization experienced
in Environmental Services as well as an increase in Construction
and Remediation gross margin resulting from favorable performance
on one of the Company's major incineration projects.
12
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
For the current six-month period, gross margin percentage was
adversely impacted by a significant decline in Analytical Services
gross margin during the first quarter of fiscal year 1995 prior to
the formation of Quanterra on June 28, 1994 (see Overview above).
During the first fiscal quarter ended June 30, 1994, the decline in
Analytical Services gross margin percentage from the prior year
level was due to competitive market conditions as well as opera-
tional inefficiencies experienced related to the planned start-up
of Quanterra.
Selling, General and Administrative Expenses
- - --------------------------------------------
For the three months and six months ended September 30, 1994,
selling, general and administrative expenses represented 10.1% of
revenues and 10.4% of revenues, respectively. These levels compare
favorably to the related 11.1% of revenues reported for the two
corresponding periods of the prior fiscal year as a result of
continued management attention to expenses. During the second
quarter of the current fiscal year, the Company experienced a
decline in selling, general and administrative expenses as a result
of certain such expenses which were eliminated or transferred from
the Company upon the formation of Quanterra.
Interest, Net
- - -------------
For the second quarter and first six months of fiscal year 1995,
net interest expense declined to 1.6% of revenues and 1.5% of
revenues, respectively, from the 2.5% of revenues reported in each
of the two corresponding periods of the prior fiscal year.
The decline in net interest expense is due principally to lower
levels of outstanding debt resulting principally from debt
repayments which occurred during the second half of fiscal year
1994. The net proceeds received by the Company from the public
offering of 2,400,000 depositary shares (see Note 3 to Condensed
Consolidated Financial Statements) were utilized to repay
$30,000,000 of bank debt at September 30, 1993 and to prepay
$25,000,000 of the Company's 9 3/8% senior notes on November 15,
1993. Additionally, the Company received a combined $278,000 of
interest income resulting from the settlement of a lawsuit and an
income tax refund during the current fiscal year. Interest expense
will increase in the second half of the fiscal year due to
increasing interest rates being experienced on the Company's
floating rate bank borrowings and due to the cessation of capital-
ized interest on the Company's major financial and project
management software project which was substantially completed at
September 30, 1994.
Income Taxes
- - ------------
For the six months ended September 30, 1994, in which the Company
reported a loss before income taxes of $1,386,000, the Company
recorded a $2,009,000 income tax provision due principally to the
partial nondeductibility of the integration charge recorded by the
Company. (See Note 2 to Condensed Consolidated Financial State-
ments.) In the corresponding six-month period of the prior fiscal
year, the effective income tax rate of 38% exceeded the 34% federal
statutory rate due primarily to nondeductible expenses and state
income taxes.
13
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION
Working capital of $72,046,000 at September 30, 1994 increased by
$8,524,000 or 13.4% from $63,522,000 at March 31, 1994. The
current ratio at September 30, 1994 increased to 1.74:1 from 1.70:1
at March 31, 1994.
Cash used for operating activities for the first six months of
fiscal year 1995 totaled $1,545,000, a $16,937,000 unfavorable
reduction from the $15,392,000 cash provided by operating activi-
ties in the corresponding six-month period of the prior fiscal
year. Cash was utilized in the current six-month period to
maintain increased accounts receivable levels due to the increase
in revenues in the current quarter compared to the level being
experienced at March 31, 1994 and to slower cash collections.
Capital expenditures of $6,272,000 for the current six-month period
were $1,023,000 lower than the $7,295,000 amount reported for the
corresponding period of the prior fiscal year due primarily to the
cessation of spending in the Analytical Services area due to the
formation of Quanterra.
With regard to the Company's transportation, treatment and disposal
discontinued operations, the Company has closed two of the inactive
disposal sites and is pursuing formal permanent closure of its
Panoche and Vine Hill disposal sites, for which there will be
significant closure and post-closure costs over the next several
years. During the first six months of the current fiscal year, the
Company spent $5,559,000 relating to closure plans and construction
costs for the sites compared to $5,661,000 in the corresponding
period of the prior fiscal year. At September 30, 1994, the
Company's condensed consolidated balance sheet included accrued
liabilities of $43,466,000 to complete the closure and post-closure
of its inactive disposal sites and related matters.
Closure and post-closure plans for the Panoche facility were
revised to incorporate regulatory agency comments in March 1991 and
an Environmental Impact Report (EIR), required by California law
prior to plan approval, is being prepared by the California EPA
Department of Toxic Substances Control (DTSC). The Company expects
final determination on closure plans in fiscal year 1996. The
California Supreme Court in December 1991 reversed a lower court
decision regarding an aspect of the closure plan at Panoche
relating to the county of Solano's authority in the closure process
and the method of closure of peripheral waste areas at the facility
(the Buffer Zone Areas). During fiscal year 1993, the Company was
required to submit additional information and closure designs for
the Buffer Zone Areas, including a design for excavation and
relocation on-site of significant quantities of wastes and soils.
Clean closure by excavation and relocation on-site of materials in
the Buffer Zone Areas will be evaluated in the EIR. The additional
study of this and other alternatives has resulted in delays to the
closure plan approval. The delays have resulted in additional
costs for monitoring and maintaining the facility, conducting
engineering and permitting activities, and charges for the EIR
contractor. A determination to excavate and relocate a substantial
amount of materials in the Buffer Zone Areas would increase costs
substantially which would have a material adverse effect on the
consolidated financial condition of the Company.
Progress on the Vine Hill Complex facility closure plan continues,
with a revised closure plan submitted to the DTSC in August 1991.
In April 1992, the Company received and subsequently responded to
comments on the plan from DTSC. An EIR is being prepared by DTSC.
The Company expects the plan to be approved in fiscal year 1996;
however, significant work which will ultimately be required for
closure will have occurred prior to that time. The Company has
been targeting completion of the closure by the end of fiscal year
1997; however, discussions with DTSC regarding approvals of interim
construction work indicate that the timing of closure completion
may be delayed. Further delays in the closure plan approval
process at this site or at the Panoche site could cause an increase
in the provision for discontinued operations. (See Note 6 to
Condensed Consolidated Financial Statements.)
The California Toxic Pits Cleanup Act of 1984 (TPCA) required
operators of certain surface impoundments to cease discharging
liquid hazardous wastes into these units by a statutory deadline,
unless the units were retrofitted to meet minimum technology
requirements. The Company has taken reasonable measures and has
made substantial progress toward compliance at the Vine Hill
14
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
Complex, but cannot fully meet statutory requirements until final closure
plans have been approved. The Company has discussed its TPCA compliance
activities with the applicable Regional Water Quality Control Board.
Although substantial civil penalties are available for noncompliance with
TPCA, the Company does not expect that penalties, if imposed, would
be material to the Company's financial condition, given the
circumstances and the Company's good faith efforts to achieve
compliance and conclude closure.
The Company is required to perform post-closure monitoring and
maintenance of its disposal sites for at least 30 years. Operation
of the sites in the closure and post-closure periods is subject to
numerous federal, state and local regulations. The Company may be
required to perform unexpected remediation work at the sites in the
future or to pay penalties for alleged noncompliance with regulato-
ry permit conditions.
Closure and post-closure costs are incurred over a significant
number of years and are subject to a number of variables including,
among others, completion of negotiations regarding specific site
closure and post-closure plans with applicable regulatory agencies.
The Company has estimated the impact of closure and post-closure
costs in the provision for loss on disposition of transportation,
treatment and disposal discontinued operations; however, closure
and post-closure costs could be higher than estimated if regulatory
agencies were to delay the closure plan approval process or were to
require closure and/or post-closure procedures significantly
different than those in the plans developed by the Company.
Certain revisions to the closure procedures could also result in
impairment of the residual land values attributed to certain of the
sites.
The carrying value of the long-term assets of transportation,
treatment and disposal discontinued operations of $41,705,000 at
September 30, 1994 is principally comprised of residual land at the
inactive disposal sites and assumes that sales will occur at
current market prices estimated by the Company based on certain
assumptions (entitlements, development agreements, etc.), taking
into account market value information provided by independent real
estate appraisers. The Company has an agreement with a real estate
developer to develop some of this property as part of a larger
development in the local area involving a group of developers. The
entitlement process has been delayed due to uncertainties over the
Company's closure plans for its adjacent disposal site and local
community review of growth strategy. If the developers' plans
change or the developers are unable to obtain entitlements as
planned, the carrying value of this property could be significantly
impaired. With regard to this property or any of the other
residual land, there is no assurance as to the timing of sales or
the Company's ability to ultimately liquidate the land for the sale
prices assumed. If the assumptions used to determine such prices
are not realized, the value of the land could be materially
different from the current carrying value.
The USEPA and the DTSC are investigating certain transportation and
disposal activities conducted by numerous companies, including the
Company or its predecessors, involving certain disposal sites in
California, including the Operating Industries, Inc. (OII)
Superfund site. In connection with the OII action, the Company did
not elect to join various proposed settlements with the USEPA for
the first three interim remedial measures (IRMs). The claims
against the Company by the USEPA for these and certain past
response costs total approximately $8,500,000 (not including
interest). The claims by the PRP steering committee for costs
associated with the first two IRMs approximate $2,700,000. (The
Company believes there is substantial duplication between the
USEPA's and the PRP steering committee's claims.) Neither set of
claims include future costs for site remediation and long-term
monitoring and maintenance which are expected to be substantial.
Based on the nature of the waste streams handled by the Company's
subsidiaries and their conduct in handling the wastes, the Company
believes its proper share of responsibility for the site is less
than the share attributed to it by the USEPA and the PRP steering
committee. Accordingly, the Company has not been able to agree to
USEPA's or the PRP steering committee's claims. IT has met with
the USEPA to propose and negotiate a release from alleged liability
for past costs in return for IT undertaking remediation work at the
15
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
site. The USEPA has responded to the Company's proposal advising
that it was not acceptable and providing the Company with an
opportunity to submit additional data in support of its position.
The USEPA has also offered the Company, along with the other PRPs
who have not as yet settled with USEPA, the opportunity to have
reviewed on limited grounds, the volumes of waste attributed to it
and, subsequently, the opportunity to settle response cost claims
for the first three IRMs at a substantial premium over the amount
of its previous claims to effect a settlement. On October 11,
1994, the Company was served with a summons and complaint in the
PRP steering committee's cost recovery action (National Railroad
Passenger Corporation, et al v. Harshaw Filtrol, U.S.D.C. Central
District, No. CV 94 2861 WMB (GHK)). The Company intends to defend
this action vigorously while continuing to attempt a settlement
with the PRP steering committee and the USEPA. Trial in this
action is set for July 17, 1995. Inability of the Company to
effect satisfactory settlement with the PRP steering committee and
the USEPA could have a material adverse effect on the consolidated
financial condition of the Company. The Company has advised its
liability insurance carriers as to the pendency of the USEPA's and
the PRP steering committee's claims and requested indemnification
and legal representation. The carriers dispute the scope of their
coverage obligations to IT. The Company has also been named as a
PRP in several other investigations, and has either denied
responsibility and/or is participating with others named by the
USEPA and/or the DTSC in conducting investigations as to the nature
and extent of contamination at the sites.
The provision for loss on disposition of transportation, treatment
and disposal discontinued operations is based on various assump-
tions and estimates, including those discussed above. Management
believes that the provision, as adjusted, is reasonable; however,
the ultimate effect of the divestiture on the consolidated
financial condition of the Company is dependent upon future events,
the outcome of which cannot be determined at this time. Outcomes
significantly different from those used to estimate the provision
for loss could result in a material adverse effect on the consoli-
dated financial condition of the Company.
At September 30, 1994, a deferred tax asset in the amount of
$13,088,000 (net of a valuation allowance of $13,519,000) is
included in the Company's condensed consolidated balance sheet.
The asset represents the tax benefit of future tax deductions and
net operating loss, alternative minimum and investment tax
carryforwards. The asset will be realized principally as closure
expenditures related to the Company's Northern California disposal
sites are made over the next several years, as such expenditures
are deductible in the year made, but only to the extent the Company
has sufficient levels of taxable income. The Company will evaluate
the adequacy of the valuation allowance and the realizability of
the deferred tax asset on an ongoing basis.
The Company is using approximately $24,000,000 of letters of
credit, as well as a trust fund and annuities to fulfill regulatory
financial assurance requirements for the closure and post-closure
care of the Company's inactive disposal facilities. In aggregate,
at September 30, 1994, letters of credit totaling approximately
$53,000,000 were outstanding against the Company's $95,000,000 bank
line of credit which was amended on that date to a new expiration
date of January 2, 1996. Additionally, the Company has outstanding
$32,000,000 of cash advances under the line, leaving approximately
$10,000,000 unused at September 30, 1994. The amount of the
Company's current availability is limited to the amount of
collateral available in accordance with the loan agreement,
principally accounts receivable; however, collateral available at
September 30, 1994 allowed for use of the entire line.
The Company's agreements with Corning relating to Quanterra contain
general provisions which could affect liquidity including restric-
tions on dividends to the partners, buy-sell provisions obligating
the Company to sell its interests in Quanterra in certain circum-
stances and to contribute up to an additional $5,000,000 to
Quanterra under certain circumstances, and requirements that the
Company indemnify Quanterra and Corning from certain liabilities
arising prior to the closing of the transaction. The credit
agreements for Quanterra prohibit the Company from pledging its
interest in Quanterra to other lenders, including the Company's
current lenders.
16
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
Although the Company paid down $25,000,000 of its senior notes in
November 1993, the remaining $50,000,000 of senior notes outstand-
ing will come due on July 1, 1996, if not paid off prior to that
time. Management is currently evaluating its strategic alterna-
tives for repaying or refinancing the senior notes.
Over the past two years, the Company's liquidity has required
careful management. Although consummation of the September 1993
public offering and application of the net proceeds principally to
reduce debt has improved the Company's financial leverage and
provided it with greater liquidity and flexibility to address its
cash needs, the Company will continue to have significant cash
requirements, including working capital, capital expenditures,
expenditures for the closure of its inactive disposal sites, debt
service including repayment or refinancing of the remaining
$50,000,000 of the senior notes, dividend obligations on the
depositary shares and contingent liabilities. Any proceeds related
to the disposition of the Motco litigation could be used to address
the above cash needs of the Company. (See Note 9 to Condensed
Consolidated Financial Statements.)
17
<PAGE>
PART II
INTERNATIONAL TECHNOLOGY CORPORATION
Item 1. Legal Proceedings.
The following matters and other litigation to which the
Company is a party are more fully discussed in Item 3, Legal
Proceedings, in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994 and in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994. See Note 9 to Condensed Consolidated Financial State-
ments for a discussion of current developments related to the
Motco litigation. See also Management's Discussion and
Analysis of Results of Operations and Financial Condition -
Financial Condition for current developments related to the
Operating Industries, Inc. Superfund site matter.
Class Action Lawsuits
---------------------
Mancino et al. v. International Technology Corporation, et
al., U.S.D.C. - Central District No. 89-7244 RMT. Trial in
this action is now set for May 5, 1995.
Central Garden
--------------
The Company anticipates that all of the litigation related to
this matter will be submitted to nonbinding arbitration in the
Spring of 1995 and that trial will be set for the first
calendar quarter of 1996.
18
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
19
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
SIGNATURE
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.
INTERNATIONAL TECHNOLOGY CORPORATION
(Registrant)
ANTHONY J. DELUCA November 14, 1994
----------------- -----------------
Anthony J. DeLuca
Senior Vice President, Chief Financial Officer
and Duly Authorized Officer
20
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
Item 6. Exhibits and Reports on Form 8-K.
(a) This exhibit is numbered in accordance with
the Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description
---------- -----------------------------------------
27 Financial Data Schedule for the quarter
ended September 30, 1994
(b) Reports on Form 8-K.
None.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the Company's
condensed consolidated financial statements filed with the SEC on November 14,
1994 on Form 10-Q for the quarter ended September 30, 1994 (commission file
number 1-9037) and qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-2
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> SEP-30-1994
<CASH> 7,093
<SECURITIES> 0
<RECEIVABLES> 146,305
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 169,326
<PP&E> 134,241
<DEPRECIATION> 74,109
<TOTAL-ASSETS> 373,846
<CURRENT-LIABILITIES> 97,280
<BONDS> 82,323
<COMMON> 35,534
0
2,400
<OTHER-SE> 120,420
<TOTAL-LIABILITY-AND-EQUITY> 373,846
<SALES> 0
<TOTAL-REVENUES> 102,509
<CGS> 0
<TOTAL-COSTS> 95,975
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,634
<INCOME-PRETAX> 4,900
<INCOME-TAX> 2,009
<INCOME-CONTINUING> 2,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,891
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0
</TABLE>
