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 June 30, 1995
OR
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 July 31, 1995 the registrant had issued and outstanding an aggregate of
35,785,823 shares of its common stock.
1
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INTERNATIONAL TECHNOLOGY CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1995
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
as of June 30, 1995 (unaudited) and
March 31, 1995. 3
Condensed Consolidated Statements of Operations
for the First Fiscal Quarters Ended June 30, 1995
and 1994 (unaudited). 4
Condensed Consolidated Statements of Cash Flows
for the First Fiscal Quarters Ended June 30, 1995
and 1994 (unaudited). 5
Notes to Condensed Consolidated Financial
Statements (unaudited). 6-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 8-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 17
Item 6. Exhibits and Reports on Form 8-K. 18
Signature. 19
2
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PART I
Item 1. Financial Statements.
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1995 1995
-------- --------
(Unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 7,065 $ 6,547
Receivables, net 139,847 137,896
Prepaid expenses and other current assets 6,167 5,630
Deferred income taxes 14,600 14,600
------- -------
Total current assets 167,679 164,673
------- -------
Property, plant and equipment, at cost:
Land and land improvements 1,766 1,766
Buildings and leasehold improvements 10,947 9,561
Machinery and equipment 141,833 140,800
------- -------
154,546 152,127
Less accumulated depreciation and amortization 85,709 82,324
------- -------
Net property, plant and equipment 68,837 69,803
------- -------
Construction-in-progress 1,846 2,381
Investment in Quanterra 35,361 36,316
Other assets 45,789 47,274
Long-term assets of discontinued operations 41,705 41,705
------- -------
Total assets $ 361,217 $ 362,152
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,636 $ 28,823
Accrued liabilities 42,655 42,660
Billings in excess of revenues 2,155 3,977
Short-term debt, including current portion of
long-term debt 285 1,154
Net current liabilities of discontinued operations 14,637 14,221
------- -------
Total current liabilities 89,368 90,835
------- -------
Long-term debt 83,125 80,189
Long-term accrued liabilities of discontinued
operations 36,542 39,480
Other long-term accrued liabilities 5,556 5,727
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; 35,787,001 shares issued at
June 30, 1995, and 35,737,313 shares issued
and outstanding at March 31, 1995 35,787 35,737
Additional paid-in capital 172,237 172,137
Treasury stock, at cost (233,920 shares
at June 30, 1995) (740) -
Deficit (63,058) (64,353)
------- -------
Total stockholders' equity 146,626 145,921
------- -------
Total liabilities and stockholders' equity $ 361,217 $ 362,152
======= =======
See accompanying notes.
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INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
First fiscal quarter ended
June 30,
--------------------------
1995 1994
------ ------
(Unaudited)
Revenues $ 100,292 $ 108,568
Cost and expenses:
Cost of revenues 83,348 92,650
Selling, general and administrative expenses 10,023 11,471
------- -------
Operating income 6,921 4,447
Equity in net loss of Quanterra, including
integration charge in 1994 955 9,264
Interest, net 1,991 1,469
------- -------
Income (loss) before income taxes 3,975 (6,286)
Provision for income taxes 1,630 -
------- -------
Net income (loss) 2,345 (6,286)
Less preferred stock dividends 1,050 1,050
------- -------
Net income (loss) applicable to common stock $ 1,295 $ (7,336)
======= =======
Net income (loss) per share $ .04 $ (.21)
======= =======
See accompanying notes.
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INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
First fiscal quarter ended
June 30,
--------------------------
1995 1994
------ ------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ 2,345 $ (6,286)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity in net loss of Quanterra 955 -
Integration charge related to the
formation of Quanterra - 9,264
Depreciation and amortization 3,874 5,671
Deferred income taxes 1,554 (165)
Changes in assets and liabilities, net of effects
from acquisitions and dispositions of businesses:
Increase in receivables, net (1,951) (17,809)
Increase in prepaid expenses and other
current assets (537) (1,005)
Increase in accounts payable 813 6,246
(Decrease) increase in accrued liabilities (5) 4,635
Decrease in billings in excess of revenues (1,822) (76)
Decrease in other long-term accrued
liabilities (171) (104)
------- -------
Net cash provided by operating activities 5,055 371
------- -------
Cash flows from investing activities:
Capital expenditures (1,868) (4,716)
Investment in Quanterra - (1,208)
Other, net (574) 392
Investment activities of transportation,
treatment and disposal
discontinued operations (2,522) (2,726)
------- -------
Net cash used for investing activities (4,964) (8,258)
------- -------
Cash flows from financing activities:
Repayments of long-term borrowings (10,933) (6,204)
Long-term borrowings 13,000 13,000
Dividends paid on preferred stock (1,050) (1,050)
Purchase of treasury shares (740) -
Issuances of common stock 150 -
------- -------
Net cash provided by financing activities 427 5,746
------- -------
Net increase (decrease) in cash and
cash equivalents 518 (2,141)
Cash and cash equivalents at beginning of period 6,547 10,646
------- -------
Cash and cash equivalents at end of period $ 7,065 $ 8,505
======= =======
See accompanying notes.
5
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INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The condensed consolidated financial statements included herein have been
prepared by International Technology Corporation (Company or IT), without
audit, and include all adjustments of a normal, recurring nature which are,
in the opinion of management, necessary for a fair presentation of the
results of operations for the quarter ended June 30, 1995, 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. Certain
reclassifications have been made to prior period amounts to conform
to the current period's presentation.
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, 1995. The results of operations for the quarter
ended June 30, 1995 are not necessarily indicative of the results for the
full fiscal year.
2. The Company acquired 233,920 shares of treasury stock during the quarter
ended June 30, 1995. Most of these shares were issued to various employees
on July 5, 1995, pursuant to an incentive compensation program of the
Company.
3. For the quarter ended June 30, 1995, the Company had an effective income
tax rate of 41%, which exceeds the 34% federal statutory rate primarily
due to nondeductible expenses and state income taxes. In the corresponding
first quarter of the prior fiscal year, the Company recorded no income tax
benefit against its pre-tax loss due to the partial nondeductibility of
the integration charge recorded by the Company.
4. Net income (loss) per common share is computed by dividing net income
(loss) applicable to common stock by the weighted average number of
outstanding common shares and common share equivalents during each period
as follows:
Three months ended Average common and common
June 30, equivalent shares outstanding
------------------ -----------------------------
1995 35,758,245
1994 35,256,552
Common stock equivalents relate to dilutive stock options 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 Preferred Stock, is antidilutive.
5. 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 operations through sale of
some facilities and closure of certain other facilities. As of June 30,
1995, two of the Company's inactive disposal sites have been formally
closed and the other two are in the process of closure. In connection
with the plan of divestiture, at December 31, 1987, the Company
recorded a provision for loss on disposition of amount of $110,069,000,
net of income tax benefit of $24,202,00, which included the estimated net
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, principally 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 March 31, 1995, the Company recorded an increase in the provision
for loss on disposition of $10,603,000, net of income tax benefit of
$6,397,000, primarily for estimated increased costs resulting from
additional delays in the regulatory approval process at the Company's
6
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INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
inactive disposal sites in Northern California and and additional
accrual for estimated costs related to certain waste disposal
sites where IT has been named as a potentially responsible party (PRP).
At June 30, 1995, the Company's condensed consolidated balance sheet
included accrued liabilities of $51,179,000 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.
6. 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, 1995. Current developments are discussed in Part II
of this filing.
7. Unbilled receivables of $20,588,000 at June 30, 1995 ($20,869,000 at March
31, 1995) 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, negotiation of change
orders or completion of the project.
Included in unbilled receivables at June 30, and March 31, 1995 are
approximately $8,000,000 of claims related to the Helen Kramer project,
which is subject to a governmental investigation.
8. Noncurrent other assets at June 30 and March 31, 1995 include a claim
amount of approximately $31,000,000 representing 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, the cleanup of a
Superfund site in Texas, and the filing of a $56,000,000 breach of
contract lawsuit against the Motco Trust, the PRP group that agreed to
finance remediation of the site, and Monsanto Company, the leader of the
PRP group. In May 1995, a federal court judge issued a judgment in favor
of IT in the amount of approximately $66,000,000 including interest,
subject to appeal by both parties. On August 1, 1995, the Company
announced that it had settled this lawsuit for $41,100,000. Such
settlement proceeds were received on August 7, 1995 and used principally
to pay down all outstanding borrowings against the Company's bank line of
credit. The Company announced that the settlement will result in a gain
of approximately $400,000, or $.01 per share, net of $8,200,000 of costs
related to certain incineration equipment (Hybrid Thermal Treatment System
(HTTS)) specially constructed for the Motco project which has been idle
since ceasing work on the project, legal and other expenses and taxes.
The gain will be recorded in the Company's second fiscal quarter ending
September 29, 1995.
7
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Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition.
INTERNATIONAL TECHNOLOGY CORPORATION
FOR QUARTER ENDED JUNE 30, 1995
RESULTS OF OPERATIONS
Overview
--------
The Company operates in one industry segment and provides a broad range of
environmental management services to clients principally in the United States.
The Company's principal strategy is to market its services on a full-service
basis. There are operating and economic synergies between its service areas, as
they are complementary and often used in combination.
Prior to the June 1994 formation of Quanterra (see Equity in Net Loss of
Quanterra), the Company was organized into three business areas, Environmental
Services, Construction and Remediation, and Analytical Services. Subsequent to
June 1994, the Company operated in the first two of these business areas.
Effective April 1, 1995, the Company implemented organizational structure
changes in an effort to deliver more cost-effective services to clients. The
Company's operations are now principally managed under a structure consisting
of three regions with full-service capabilities. Each region has its own
technical, project management, sales and administrative support functions.
The Construction and Remediation group's project management capabilities
and related infrastructure have been integrated throughout the Company
to strengthen project execution skills and enhance client service on a
company-wide basis. Accordingly, IT offers all of its services in each region
in which it operates.
Revenues
--------
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 historically was derived from the Company's other operations,
additional revenue now is being recorded in these operational areas related to
analytical services subcontracts performed by Quanterra for IT, similar to other
third party subcontracts. After excluding prior year Analytical Services
revenues other than those provided to the Company's other operations, revenues
for the first quarter of fiscal year 1996 were at the same level as the
corresponding period of the prior fiscal year. Project work on major
governmental programs increased, which offset the impact of the flat
commercial market.
Due to its technical expertise, project management experience and full-service
capabilities, the Company has successfully bid on and executed contracts with
federal and other governmental agencies for the performance of various
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
and Resource Conservation and Recovery Act (RCRA) projects. The Company's
governmental contracts are often multi-year but can generally be canceled,
delayed or modified at the sole option of the client. Additionally, government
contracts are typically subject to annual funding limitations and public sector
budgeting constraints. The major contracts with federal government agencies
typically involve a competitive bidding process pursuant to federal procurement
policies involving several bidders and result in a period of contract
negotiation after a successful bidder is selected. Although the Company
generally serves as the prime contractor on its contracts or as a part of a
joint venture which is a prime contractor, the Company serves as a subcontractor
to other prime contractors on some federal government programs. As has recently
become typical in the industry, the Company has entered into joint venture or
teaming arrangements with competitors when bidding on certain of the largest,
most complex contracts with federal governmental agencies, in order to provide
the increased work force capacity and breadth of technical expertise required
for the project.
The following table shows, for the fiscal quarters ended June 30, 1995 and 1994,
the Company's revenues attributable to federal, state and local governmental
contracts as a percentage of the Company's consolidated revenues, including
Analytical Services through June 1994:
8
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INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
Fiscal quarter
ended June 30,
-------------------
Source 1995 1994
------ ---- ----
Federal government:
U.S. Department of Defense (DOD) . . . . . 52% 36%
U.S. Department of Energy (DOE). . . . . . 10 14
Other federal agencies . . . . . . . . . . 4 2
---- ----
66 52
State and local governments . . . . . . . . . 4 15
---- ----
Total . . . . . . . . . . . . . . . . . . . . 70% 67%
==== ====
Revenues from the DOD increased significantly primarily due to work performed on
tasks issued under the Company's major indefinite delivery order programs,
several of which were awarded in the prior year. The Company expects to
continue to derive a substantial portion of its revenues from these contracts,
which are primarily related to remedial action type of work. Revenues from the
state and local government contracts declined, primarily due to the wind-up late
in fiscal year 1995 of the Sikes Disposal Pits contract, performed for the Texas
Natural Resources Conservation Commission.
The Company cannot predict the impact upon the Company of the failure, to-date,
of Congress to reauthorize CERCLA, or of the many legislative and regulatory
changes proposed since the November 1994 elections. Delays in the
reauthorization of CERCLA may adversely impact the environmental industry in
which the Company participates. Failure of Congress to reauthorize CERCLA, or
substantial changes in or uncertainty concerning the details of the legislation,
cleanup standards, and remedy selection (such as proposed changes that would
change CERCLA's preference for permanent treatment remedies such as incineration
in favor of confinement and containment), may result in project delays and/or
the failure of clients to initiate or proceed with projects. Additionally,
reductions in current and future environmental restoration budgets may adversely
affect future government contracting opportunities and funding of the Company's
backlog (see below). The Company believes that it generally has benefitted from
increased environmental regulations affecting business, and from more stringent
enforcement of those regulations. The currently contemplated changes in
regulations could decrease the demand for certain of the Company's services, as
customers anticipate and adjust to the new regulations. However, the proposed
legislation could also result in increased demand for certain of the Company's
services if regulatory changes decrease the cost of remediation projects or
result in more funds being spent for actual remediation. The ultimate impact of
the proposed changes will depend upon a number of factors, including the overall
strength of the economy and customers' views on the cost effectiveness of
remedies available under the changed regulations.
A significant portion of IT's revenues continue to be derived from large,
complex thermal remediation contracts utilizing the Company's HTTS incineration
technology. Incineration as an allowable remedy under CERCLA continues to come
under legislative and regulatory pressures. The U.S. Environmental Protection
Agency (USEPA) has adopted a strategy of favoring waste minimization over
combustion/incineration and of increasing regulatory burdens upon combustion and
incineration facilities, whether fixed-base or on-site. If policies were
implemented or regulations were changed such that the Company was unable to
permit and use incinerators on remediation projects due to either regulatory or
market factors, the Company would have to find alternative uses for its HTTS
equipment. If alternative uses, such as foreign installations, were not found
or were uneconomical, there could be a negative effect to the Company due to
impairment of HTTS assets as well as lost project opportunities. At June 30,
1995, IT's HTTS equipment had a net book value of approximately $27,000,000;
however, in the quarter ending September 29, 1995, the Company will reduce this
amount by $8,200,000 of costs related to equipment specially constructed for the
Motco project which has been idle since ceasing work on the project (see Note 8
to Condensed Consolidated Financial Statements).
9
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INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
The Company's total contract backlog at June 30, 1995 was approximately
$1,175,000,000 including approximately $720,000,000 of future project work the
Company estimates it will receive (based on historical experience) under
existing governmental indefinite delivery programs which provide for a general
undefined scope of work. Revenues from backlog and indefinite delivery order
contracts are expected to be earned over the next one to five years.
Gross Margin
------------
Gross margin percentage for the first quarter of fiscal year 1996 increased to
16.9% of revenues from 14.7% of revenues for the corresponding period of the
prior fiscal year primarily because of higher productivity resulting from
improved labor utilization and the cessation of reporting the low-margin
Analytical Services revenues in the consolidated revenues. During the first
fiscal quarter ended June 30, 1994, Analytical Services generated a gross margin
percentage of only 3.1% due to competitive market conditions as well as
operational inefficiencies experienced related to the planned start-up of
Quanterra. Excluding Analytical Services, gross margin in last year's first
quarter was 16.2%.
Selling, General and Administrative Expenses
--------------------------------------------
For the three months ended June 30, 1995, selling, general and administrative
expenses represented 10.0% of revenues. This level compares favorably to the
related 10.6% of revenues reported for the corresponding period of the prior
fiscal year as a result of continued management attention to expenses.
Beginning with the second quarter of the prior fiscal year, the Company
experienced a decline in selling, general and administrative expenses as
approximately $5,000,000 of annual expenses were eliminated or transferred from
the Company upon the formation of Quanterra.
Equity in Net Loss of Quanterra
-------------------------------
In June 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). IT's 50 percent
investment in Quanterra is accounted for under the equity method. An
integration plan was implemented in the early stages of Quanterra's operations.
The plan included consolidation and closure of redundant lab facilities and
equipment, a reduction in force to eliminate duplicative overhead and
excess capacity and a consolidation of laboratory management and accounting
systems. IT reported a pre-tax charge of $9,264,000 related to the
integration in its operating results for the quarter ended June 30, 1994.
Although the implementation of the integration plan has resulted in operational
efficiencies and cost reductions, the environmental laboratory business
continues to be faced with excess capacity and intense price competition.
Consequently, in the quarter ended June 30, 1995, the Company reported equity in
net loss of Quanterra of $955,000, continuing a trend of losses which have
occurred for the past several quarters. Although this current trend is expected
to continue for the next several quarters, there are operating and strategic
activities underway to improve these operating trends.
In the quarter ended June 30, 1994, prior to the formation of Quanterra, the
Company's Analytical Services business experienced an operating loss of
approximately $850,000.
Interest, Net
-------------
Net interest expense represented 2.0% of revenues in the first quarter of fiscal
year 1996, compared with 1.4% of revenues reported in the first quarter of
fiscal year 1995. The increase in interest expense was due to the cessation of
capitalized interest on the Company's major financial and project management
software project which was substantially completed at September 30, 1994 and to
increased borrowing over the past year. Interest will decline in the quarter
ending September 29, 1995 due to the paydown of bank borrowings which occurred
in August 1995 utilizing the proceeds from the Motco settlement. (See Note 8 to
Condensed Consolidated Financial Statements.)
10
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INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
Income Taxes
------------
For the quarter ended June 30, 1995, the Company had an effective income tax
rate of 41%, which exceeds the 34% federal statutory rate due primarily to
nondeductible expenses and state income taxes. In the corresponding first
three months of the prior fiscal year, the Company recorded no income tax
benefit due to the partial nondeductibility of the integration charge recorded
by the Company.
11
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INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION
Working capital of $78,311,000 at June 30, 1995 increased by $4,473,000 or 6.1%
from $73,838,000 at March 31, 1995. The current ratio at June 30, 1995
increased to 1.88:1 from 1.81:1 at March 31, 1995.
Cash provided by operating activities for the first quarter of fiscal year 1996
totaled $5,055,000, compared to $371,000 cash provided by operating activities
in the corresponding first quarter of the prior fiscal year. During the current
first fiscal quarter, the increase in cash provided by operating activities is
principally due to the lack of receivables growth compared to the prior year
because of a reduced level of revenue compared to the immediately prior quarter
due to a revenue mix including less subcontract costs. Capital expenditures of
$1,868,000 for the current first fiscal quarter were $2,848,000 lower than the
$4,716,000 amount reported for the corresponding period of the prior fiscal year
principally due to the cessation of spending in the Analytical Services area due
to the formation of Quanterra and to the completion of a major company-wide
systems project which was in process in the prior year.
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 quarter of the current fiscal year, the Company
spent $2,522,000 relating to closure plans and construction costs for the sites
compared to $2,726,000 in the corresponding period of the prior fiscal year. At
June 30, 1995, the Company's condensed consolidated balance sheet included
accrued liabilities of $51,179,000 to complete the closure and post-closure of
its inactive Northern California 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).
While difficult to predict, the Company expects final determination on those
closure plans in fiscal year 1996 or early fiscal year 1997. The Company is
targeting completion of the closure for fiscal year 1999. 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
by 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.
In March 1995, the DTSC determined that the Company had met all the technical
requirements in its comments and published the administrative draft of the EIR
for the closure and post-closure plans. The Company expects the plan to be
approved in fiscal year 1996; however, significant work which will ultimately be
required for closure will have been completed by that time. The Company is
targeting completion of the closure for fiscal year 1998.
Closure construction was completed for the Montezuma Hills site and the Benson
Ridge facility in December 1991 and December 1992, respectively. Upon
completion of closure construction, 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 regulatory permit conditions.
12
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INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
Regulations of the DTSC and the USEPA require that owners and operators of
hazardous waste treatment, storage and disposal facilities provide financial
assurance for closure and post-closure costs of those facilities. The Company
has provided financial assurance equal to its estimate for closure costs at
March 31, 1995, which could be subject to increase at a later time as a result
of regulatory requirements, in the form of a corporate guarantee of
approximately $10,600,000, letters of credit totaling approximately $13,200,000
and a trust fund containing approximately $9,700,000, and has purchased
annuities which will ultimately mature over the next 30 years to pay for its
estimates of post-closure costs as part of a consent order with the DTSC entered
on June 27, 1989. Among other provisions, the consent order requires IT to
revise its financial assurance estimates on March 1 of each year to reflect
inflation adjustments and any changes in the cost estimates resulting from
completion of interim closure procedures and from revisions in the closure and
post-closure plans. Thereafter, the Company has 60 days to adjust its financial
assurance mechanisms to reflect the changed costs. IT completed cost revisions
required at March 1, 1995 and the DTSC has approved the revised amounts. The
Company has provided financial assurance on the amounts required by the cost
revisions.
IT's inactive disposal sites are subject to the RCRA and other federal laws
including the Toxic Substances Control Act, the Clean Water Act, the Clean Air
Act and the regulations of the Occupational Safety and Health Act. The
provisions of CERCLA and its amendments generally do not presently affect the
Company's four inactive disposal sites, but do apply in some cases to former
business operations where the Company is an alleged generator or transporter of
waste or former operator of a disposal site owned by others. California has
been one of the leading states in regulating the transportation, treatment and
disposal of hazardous waste substances. Under the Hazardous Waste Control Act,
the DTSC administers a comprehensive regulatory program. California operations
are also subject to regulation by the State Water Resources Control Board, the
California Air Resources Board, Regional Water Quality Control Boards (RWQCBs),
Air Quality Management Districts and various other state authorities. At the
local level, treatment and disposal sites are also subject to zoning and land
use restrictions, and other ordinances.
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 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 RWQCB. 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.
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 appli-
cable regulatory agencies. Such closure costs are comprised principally of
engineering, design and construction costs and of caretaker and monitoring costs
during closure. 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
require closure and/or post-closure procedures significantly different than
those in the plans developed by the Company or if there are additional delays in
the closure plan approval process. 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 June 30, 1995 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. During
fiscal year 1992, the Company entered into 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
13
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
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.
In June 1986, USEPA notified a number of entities, including the Company, that
they were PRPs under CERCLA with respect to the Operating Industries, Inc. (OII)
Superfund site in Monterey Park, California and, as such, faced joint and
several liability for the costs to investigate and cleanup this site. USEPA
requested these entities to work as a single group to settle with USEPA and DTSC
their alleged liability for certain past response costs and to perform future
remedial work. A number of these PRPs subsequently formed the OII Steering
Committee (Steering Committee) and negotiated a series of settlements
addressing cost reimbursement demands and performing certain interim remedial
measures (IRMs). The Company did not join the Steering Committee or enter these
settlements. In October 1994, USEPA advised the Company in writing that it
continued to regard the Company and its subsidiaries as liable for response
costs. In that notice, USEPA provided the Company and other non-Steering
Committee PRPs the opportunity to make a limited challenge as to USEPA's volume
determinations. Subject to its review of that challenge, USEPA further stated
it intended to offer the Company and other non-settling PRPs another opportunity
to resolve their liability for response costs incurred in the prior settlements
by paying an amount determined by USEPA based on volume plus a substantial
premium based on failure to join the earlier settlements. The Company submitted
a volume challenge on January 10, 1995. The USEPA responded to the Company's
volume challenges on July 25, 1995, and offered the Company and its predecessors
the opportunity to settle their alleged liabilities associated with the prior
settlements by executing a consent decree on or before September 1, 1995
pursuant to which the Company would pay approximately $10,900,000 to the
USEPA and receive protection against contribution claims by other PRPs. The
Company is in discussion with the USEPA regarding a reduction of the settlement
amount. Failure to join in the settlement within the time allowed by the USEPA
could result in enforcement actions by the USEPA against the Company. Any
settlement would be subject to court approval.
The Steering Committee also continues to contend the Company is liable to it for
a share of the settlement costs its members had paid and had previously
quantified the Company's share of the first two settlements at approximately
$2,700,000. On October 11, 1994, the Company was served with a summons and
complaint in a cost recovery action brought by members of the Steering
Committee. The action seeks (1) recovery from the Company of a portion of
certain of plaintiffs' costs incurred at OII allegedly attributable to the
Company and (2) a declaration from the court as to the Company's share of future
costs associated with the IRMs addressed in these prior settlements. The
Company is defending this action vigorously while continuing to attempt a joint
settlement with both the Steering Committee and the USEPA. Trial in this
action, which was set for July 17, 1995, has been taken off the calendar and has
not been rescheduled. On May 16, 1995, a second lawsuit was filed against the
Company (National Railroad Passenger Corporation v. ACF United, U.S.D.C.,
Central District, California, Case No. 95-2050 LGB (RMBx)) by the Steering
Committee, which seeks from the Company unspecified amounts for both cost
recovery and contribution and declaratory relief for response costs incurred by
Steering Committee members pursuant to the third settlement.
The Company believes the USEPA's and the Steering Committee's claims essentially
overlap. Both allege the Company or its predecessor and subsidiaries arranged
for the disposal of the same volume of wastes at OII and are based on the
relative percentage of that volume to the known volume of liquid wastes sent to
the site. Accordingly, the Company believes that any settlement with the USEPA
containing contribution protection would provide a substantially complete
defense to the Steering Committee's claims. The Steering Committee has not
quantified and the USEPA claim does not specifically address future costs for
site remediation and long-term monitoring and maintenance. Such future costs
would not be resolved by the current settlement discussions with the USEPA. The
amount of such costs are not known but are expected to be substantial.
14
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
The inability of the Company to effect a satisfactory resolution with the USEPA
and the Steering Committee of the claims subject to the present settlement
discussions with the USEPA and with respect to future costs for site remediation
and long-term monitoring and maintenance 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
Steering Committee's claims and requested indemnification and legal
representation. The carriers dispute their obligations to the Company.
The Company, as a major provider of hazardous waste transportation, treatment
and disposal operations in California prior to the December 1987 adoption of its
strategic restructuring program, has been named a PRP at other sites. The
Company has either denied responsibility and/or is participating with others
named by the USEPA, the DTSC or other state governmental agencies in conducting
investigations as to the nature and extent of contamination at such sites.
Additionally, the Company may, from time to time, be so named at additional
sites and may also face damage claims by third parties for alleged releases or
discharges of contaminants or pollutants arising out of its transportation,
treatment and disposal discontinued operations. With respect to the Yakima
Railroad Area state Superfund site in Yakima, Washington, in July 1995, the
Company and 16 other PRPs were issued an enforcement order, which, among other
things, orders the named parties to investigate conditions at the sites and
to take certain remedial measures. The Company disputes its
alleged liability, and is exploring its options with respect to the site,
including cooperation with other PRPs named in the enforcement order.
The provision for loss on disposition of transportation, treatment and disposal
discontinued operations is based on various assumptions 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 consolidated financial condition of the Company.
At June 30, 1995, a deferred tax asset in the amount of $17,621,000 (net of a
valuation allowance of $12,650,000) 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 inactive 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 evaluates the adequacy of the valuation allowance and the
realizability of the deferred tax asset on an ongoing basis.
At June 30, 1995, the Company utilized approximately $13,200,000 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 June 30, 1995, letters of credit
totaling approximately $35,100,000 related to the Company's insurance program,
financial assurance requirements and bonding requirements were outstanding
against the Company's $95,000,000 bank line of credit which has an expiration
date of July 31, 1996. Additionally, the Company had outstanding $33,000,000 of
cash advances under the line, for total line usage of approximately
$68,100,000. The amount of the Company's current availability is limited to the
amount of collateral available in accordance with the loan agreement,
principally 70-80 percent of the Company's eligible accounts receivable.
At June 30, 1995, approximately $26,900,000 was available under the line, all of
which could be used based upon available collateral, subject to a limitation
that cash advances under the line may not exceed $45,000,000 at any time, with
such limitation being reduced to $25,000,000 upon the August 1995 collection of
the Company's settlement in the Motco litigation. (See Note 8 to Condensed
Consolidated Financial Statements.) Subsequent to the collection of the Motco
settlement proceeds, the Company paid down all of its outstanding bank
borrowings.
15
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
The Company's agreements with Corning relating to Quanterra contain general
provisions which could affect liquidity including restrictions on dividends to
the partners, buy-sell provisions obligating the Company to sell its interests
in Quanterra in certain circumstances 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. Although there are operating and strategic
activities underway to improve Quanterra's current weak operating trends, IT
anticipates that it will be required to contribute the $5,000,000 during fiscal
year 1996, subject to certain limitations under the Company's revolving credit
facility. Additionally, the credit agreements for Quanterra prohibit the
Company from pledging its interest in Quanterra to other lenders, including the
Company's current lenders.
The Company continues 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 $50,000,000
of the Company's 9 3/8% senior notes which mature on July 1, 1996, dividend
obligations on the depositary shares and contingent liabilities. Management is
currently evaluating its alternatives for refinancing the senior notes, which
management believes are enhanced by the receipt of the proceeds from the Motco
settlement.
16
<PAGE>
PART II
INTERNATIONAL TECHNOLOGY CORPORATION
Item 1. Legal Proceedings.
The following matter 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, 1995. See
Note 8 to Condensed Consolidated Financial Statements 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 and other
Discontinued Operations Legal Proceedings.
Class Action Lawsuit
--------------------
The trial in this action, which was scheduled for November 28, 1995, has
been continued until February 27, 1996.
17
<PAGE>
INTERNATIONAL TECHNOLOGY CORPORATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. This exhibit is numbered in accordance with the
Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description
---------- -----------
27 1. Financial Data Schedule for the quarter ended
June 30, 1995.
(b) Reports on Form 8-K.
Current report on Form 8-K, dated May 2, 1995, reporting under
Item 5, "Other Events," related to an amendment to the
Company's Rights Agreement approved by the Board of Directors
on April 6, 1995.
18
<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 August 14, 1995
----------------- ---------------
Anthony J. DeLuca
Senior Vice President, Chief Financial Officer
and Duly Authorized Officer
19
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM the Company's
Condensed Consolidated Balance Sheet as of June 30, 1995, and its Condensed
Consolidated Statement of Operations for the Three Months Ended June 30, 1995,
which were filed with the SEC on August 14, 1995 on Form 10-Q for the quarter
ended June 30, 1995 (commission file number 1-9037) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> QTR-1
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1995
<CASH> 7,065
<SECURITIES> 0
<RECEIVABLES> 139,847
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 167,679
<PP&E> 154,546
<DEPRECIATION> 85,709
<TOTAL-ASSETS> 361,217
<CURRENT-LIABILITIES> 89,368
<BONDS> 83,125
<COMMON> 35,787
0
2,400
<OTHER-SE> 108,439
<TOTAL-LIABILITY-AND-EQUITY> 361,217
<SALES> 0
<TOTAL-REVENUES> 100,292
<CGS> 0
<TOTAL-COSTS> 93,371
<OTHER-EXPENSES> 955
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,991
<INCOME-PRETAX> 3,975
<INCOME-TAX> 1,630
<INCOME-CONTINUING> 2,345
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