<PAGE> 1
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 26, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 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.)
2790 Mosside Boulevard, Monroeville, Pennsylvania 15146-2792
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 372-7701
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, 1997 the registrant had issued and outstanding an aggregate of
9,733,288 shares of its common stock.
1
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INTERNATIONAL TECHNOLOGY CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 26, 1997
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
as of September 26, 1997 (unaudited) and
March 28, 1997. 3
Condensed Consolidated Statements of Operations
for the Fiscal Quarter and Two Fiscal Quarters ended
September 26, 1997 and September 27, 1996 (unaudited). 4
Condensed Consolidated Statements of Cash Flows
for the Two Fiscal Quarters ended September 26, 1997
and September 27, 1996 (unaudited). 5
Notes to Condensed Consolidated Financial
Statements (unaudited). 6-8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 9-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 5. Other Information. 20
Item 6. Exhibits and Reports on Form 8-K. 21
Signatures 22
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 26, March 28,
1997 1997
------------- ---------
(Unaudited)
ASSETS (In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 62,247 $ 78,897
Receivables, net 120,836 108,207
Prepaid expenses and other current assets 3,949 4,077
Deferred income taxes 10,286 11,324
-------- --------
Total current assets 197,318 202,505
Property, plant and equipment, at cost:
Land and land improvements 693 1,330
Buildings and leasehold improvements 7,878 9,232
Machinery and equipment 132,047 140,630
-------- --------
140,618 151,192
Less accumulated depreciation and amortization 100,024 106,891
-------- ---------
Net property, plant and equipment 40,594 44,301
Investment in Quanterra 16,300 16,300
Other assets 42,791 39,377
Long-term assets of discontinued operations 40,048 40,048
-------- ---------
Total assets $337,051 $342,531
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,757 $ 29,571
Accrued liabilities 33,726 32,640
Billings in excess of revenues 1,957 7,227
Short-term debt, including current portion of long-term debt 3,820 5,343
Net current liabilities of discontinued operations 17,000 17,019
-------- --------
Total current liabilities 95,260 91,800
Long-term debt 65,711 65,874
Long-term accrued liabilities of discontinued operations, net 2,349 9,280
Other long-term accrued liabilities 7,464 6,724
Commitments and contingencies
Stockholders' equity:
Preferred stock, $100 par value; 180,000 shares authorized:
7% cumulative convertible exchangeable, 20,556 shares
issued and outstanding 2,056 2,056
6% cumulative convertible participating, 45,000 shares
issued and outstanding 4,330 4,204
Common stock, $.01 par value; 50,000,000 shares authorized;
9,734,233 and 9,738,375 shares issued and outstanding,
respectively 97 97
Treasury stock at cost, 8,078 and 6,208 shares, respectively (74) (74)
Additional paid-in capital 245,551 244,287
Deficit (85,693) (81,717)
-------- --------
Total stockholders' equity 166,267 168,853
-------- --------
Total liabilities and stockholders' equity $337,051 $342,531
======== ========
</TABLE>
See accompanying notes
3
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INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
------------------------------- -------------------------------
September 26, September 27, September 26, September 27,
1997 1996 1997 1996
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 102,840 $ 92,490 $ 201,021 $ 173,906
Cost and expenses:
Cost of revenues 91,428 83,351 178,185 156,988
Selling, general and administrative expenses 6,919 8,633 14,338 17,713
Special charges - 8,403 4,611 8,403
--------- --------- --------- ----------
Operating income (loss) 4,493 (7,897) 3,887 (9,198)
Interest, net (1,121) (1,303) (2,149) (2,659)
--------- --------- --------- ----------
Income (loss) before income taxes 3,372 (9,200) 1,738 (11,857)
(Provision) benefit for income taxes (1,450) 310 (2,730) 1,426
--------- --------- --------- ----------
Net income (loss) 1,922 (8,890) (992) (10,431)
Less preferred stock dividends (1,537) (1,050) (3,070) (2,100)
--------- --------- --------- ----------
Net income (loss) applicable to common stock $ 385 $ (9,940) $ (4,062) $ (12,531)
========= ========= ========= ==========
Net income (loss) per share $ .04 $ (1.09) $ (.42) $ (1.37)
========= ========= ========= ==========
</TABLE>
See accompanying notes.
4
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INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Two fiscal quarters ended
-----------------------------------
September 26, September 27,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (992) $ (10,431)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 5,058 7,868
Loss on disposal of remediation business 1,800 -
Minority interest in subsidiary 130 -
Deferred income taxes 2,419 (1,644)
Changes in assets and liabilities, net of effects
from acquisitions and dispositions of business
(Increase) decrease in receivables, net (14,078) 16,217
Decrease in prepaid expenses and other current assets 105 458
Increase in accounts payable 9,281 4,095
Increase in accrued liabilities 459 3,064
Decrease in billings in excess of revenues (5,287) (1,498)
(Decrease) increase in other long-term accrued liabilities (175) 1,354
-------- ---------
Net cash (used for) provided by operating activities (1,280) 19,483
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of remediation business 2,800 -
Acquisition of businesses (5,340) -
Capital expenditures (1,954) (1,584)
Investment in Quanterra - (950)
Cash on deposit as collateral - (4,187)
Other, net (603) 628
Investment activities of discontinued operations (7,100) (5,743)
-------- ---------
Net cash used for investing activities (12,197) (11,836)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term borrowings (2,274) (84)
Dividends paid on preferred stock (899) (2,100)
Issuances of common stock - 20
-------- ---------
Net cash used for financing activities (3,173) (2,164)
-------- ---------
Net (decrease) increase in cash and cash equivalents (16,650) 5,483
Cash and cash equivalents at beginning of period 78,897 24,493
-------- ---------
Cash and cash equivalents at end of period $ 62,247 $ 29,976
======== =========
</TABLE>
See accompanying notes
5
<PAGE> 6
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 fiscal quarter ended
September 26, 1997, pursuant to the rules of the Securities and
Exchange Commission. The Company's fiscal year includes four
thirteen-week fiscal quarters with the fourth quarter ending on the
last Friday in March. 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, as
amended, for the fiscal year ended March 28, 1997. The results of
operations for the fiscal period ended September 26, 1997 are not
necessarily indicative of the results for the full fiscal year.
2. 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 during each period as follows:
<TABLE>
<CAPTION>
Average
Fiscal quarter ended common shares outstanding
-------------------------- -------------------------
<S> <C>
September 26, 1997 9,739,755
September 27, 1996 9,101,267
</TABLE>
<TABLE>
<CAPTION>
Average
Two fiscal quarters ended common shares outstanding
------------------------- -------------------------
<S> <C>
September 26, 1997 9,740,735
September 27, 1996 9,125,863
</TABLE>
Common stock equivalents which are stock options are not included in
the computation because their effect is not material. For all periods
presented, the computation of fully diluted net income (loss) per
share, assuming conversion into common shares of the Company's
preferred stock and common stock equivalents is antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will
be excluded. The impact of Statement 128 on the calculation of basic
earnings per share and fully diluted earnings per share for the first
two fiscal quarters of 1998 and 1997 is not expected to be material.
3. 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 the sale of
some facilities and closure of certain other facilities. As of
September 26, 1997, 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, from December 1987 through
March 31, 1995, the Company recorded a provision for loss on
disposition of transportation, treatment and disposal discontinued
operations (including the initial provision and three subsequent
adjustments) in the amount of
6
<PAGE> 7
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
$160,192,000, net of income tax benefits of $32,879,000. The
adjustments principally related to a writeoff of the contingent
purchase price from the earlier sale of certain assets, increased
closure costs principally due to delays in the regulatory approval
process, and costs related to certain waste disposal sites where IT
has been named a potentially responsible party (PRP). At September 26,
1997, the Company's condensed consolidated balance sheet included
accrued liabilities of $19,349,000 to complete the closure and related
post-closure of its inactive disposal sites and related matters, net
of certain trust fund and annuity investments legally restricted to
closure and post-closure use.
The provision for loss on disposition of transportation, treatment and
disposal discontinued operations is based on various assumptions and
estimates. The adequacy of the provision for loss has been currently
evaluated in light of developments since the adoption of the
divestiture plan and 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, liquidity and results of operations
of the Company.
4. For information regarding legal proceedings of the Company's
continuing operations, please see the note "Commitments and
contingencies" in the Notes to Consolidated Financial Statements in
the Company's Annual Report on Form 10-K, as amended, for the fiscal
year ended March 28, 1997; current developments regarding continuing
operations' legal proceedings are discussed in Part II of this filing.
See Management's Discussion and Analysis of Results of Operations and
Financial Condition - Financial Condition - Transportation, Treatment
and Disposal Discontinued Operations for information regarding the
current developments in legal proceedings of the discontinued
operations of the Company.
5. Unbilled receivables of $20,726,000 at September 26, 1997 ($20,287,000
at March 28, 1997) 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 September 26, 1997 is approximately
$9,200,000 of claims related to the Helen Kramer project, which is
subject to a governmental investigation. Remedies which the government
could pursue include damages, penalties, and forfeiture of all or part
of the Company's claim. The Company is currently engaged in settlement
discussions concerning this matter and believes resolution will be
achieved by the end of fiscal year 1998.
6. The cost of property, plant and equipment is depreciated using
primarily the straight-line method over the following useful lives of
the individual assets: buildings-20 to 30 years, land improvements-3 to
20 years, and machinery and equipment-5 to 10 years. The Hybrid Thermal
Treatment System(R) (HTTS(R)) transportable incineration units are
generally depreciated on the basis of operating days. Amortization of
leasehold improvements is provided using the straight-line method over
the term of the respective lease.
7. The special charges that occurred in the first quarter of fiscal 1998
resulted from the relocation of the Company's corporate headquarters
from Torrance, California to Monroeville (Pittsburgh), Pennsylvania and
the sale of its California based small project remediation services
business. The headquarters relocation consolidated the corporate
overhead functions with the Company's largest operations office and
closer to its lenders and largest shareholders which are located in
the Eastern United States. As a result of this relocation, the Company
incurred a pre-tax charge of $2,811,000. In May 1997, the Company
incurred a non-cash charge of $1,800,000 to sell its unprofitable
California based small projects remediation services business.
In conjunction with the corporate restructuring which was initiated in
the second quarter of fiscal year 1997, the Company incurred a pre-tax
restructuring charge of $8,403,000. The restructuring charge included
$3,400,000 of costs for severance, $4,100,000 of costs for closing and
reducing the size of a number of the Company's offices, and $900,000
7
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INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
of costs for other related items. At September 26, 1997, $1,750,000 of
the charge remained to be paid.
8. At the November 20, 1996 Annual Meeting of Stockholders, IT's
shareholders voted to approve a $45,000,000 investment (the Carlyle
Investment) by The Carlyle Group (Carlyle), a Washington, D.C. based
merchant banking firm. The Carlyle Investment consists of 45,000 shares
of 6% Cumulative Convertible Participating Preferred Stock, par value
$100 per share (Convertible Preferred Stock) and warrants to purchase
1,250,000 shares of IT common stock, par value $.01 per share. The net
proceeds to IT (after related offering costs of $4,391,000) from the
Carlyle Investment were $40,609,000.
The Convertible Preferred Stock and warrants may at any time, at the
option of Carlyle, be converted into IT common shares. The conversion
price of the Convertible Preferred Stock is $7.59 per share and the
exercise price of the warrants is $11.39 per share. Carlyle presently
owns approximately 38% of the voting power of the Company , and
assuming the conversion of all of the Convertible Preferred Stock into
Common Stock and the exercise of all of the warrants, Carlyle would own
approximately 43% of the voting power of the Company. The terms of the
Convertible Preferred Stock provide that, to November 20, 2001, the
holders of the Convertible Preferred Stock have the right to elect a
majority of the Board of Directors of the Company, provided that
Carlyle continues to own at least 20% of the voting power of the
Company.
The Convertible Preferred Stock ranks, as to dividends and liquidation,
pari passu to the Company's 7% Preferred Stock and prior to the
Company's common stock. The Convertible Preferred Stock is entitled to
cumulative annual dividends. No dividends were payable in the first
year. Dividends will be paid quarterly in kind for the second year at
the rate of 3% per annum. Thereafter, dividends will be paid quarterly
in cash at the rate of 6% per annum. The Convertible Preferred Stock is
entitled to a liquidation preference of $1,000 per share. The Company
will be entitled at its option to redeem all of the Convertible
Preferred Stock at its liquidation preference plus accumulated and
unpaid dividends on or after November 21, 2003.
9. For the second quarter ended September 26, 1997, the Company recorded
an income tax provision of $1,450,000, reflecting an effective income
tax rate of 43% for the quarter. For the two fiscal quarters ended
September 26, 1997, the Company recorded an income tax provision of
$2,730,000, reflecting a 43% tax rate on income excluding special
charges of $4,611,000 incurred in the first quarter. The income tax
benefit related to the special charge was offset by an increase in IT's
deferred tax valuation allowance based on the tax attributes of the
special charges and the Company's assessment of the uncertainty as to
when it will generate a sufficient level of future earnings to realize
the deferred tax asset created by the first quarter special charges.
For the second fiscal quarter and the two fiscal quarters ended
September 27, 1996, the Company had effective income tax benefit rates
of 38% and 41% respectively, excluding special charges of $8,403,000
incurred in the second quarter ending September 27, 1996. The related
income tax benefit from the special charge in the second quarter was
offset by an increase in IT's deferred tax valuation allowance of
$3,168,000.
10. For fiscal year 1998, the Company adopted SOP 96-1, Environmental
Remediation Liabilities, which provides new guidance for the
recognition, measurement and disclosure of environmental remediation
liabilities. The adoption of SOP 96-1 had no material effect on the
Company's financial condition, liquidity and results of operations. The
Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable.
Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental
remediation obligations are generally not discounted to their present
value.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
INTERNATIONAL TECHNOLOGY CORPORATION
FOR QUARTER ENDED SEPTEMBER 26, 1997
RESULTS OF OPERATIONS
OVERVIEW
The Company provides a full range of technology-driven, value-added consulting,
engineering and construction capabilities through a network of more than 40
offices in the U.S. and selected international locations. The Company's business
strategy is to be a global provider of environmental solutions to both
government and private industry clients. Turnkey capabilities include
information management, risk assessment, air quality management, pollution
prevention and waste minimization, construction and remediation, land-use
planning, decontamination and decommissioning, design/build, wastewater
treatment and facility operation and maintenance.
REVENUES
Revenues for the second quarter of fiscal year 1998 increased 11.1% to
$102,840,000, compared to revenues of $92,490,000 reported in the second quarter
of the prior fiscal year. Of this $10,350,000 comparative quarterly revenue
increase, 49% reflects growth from targeted commercial industry opportunities
and 43% resulted from business acquisitions, principally Chi Mei
Entech/Scientech, Ltd, a Taiwan-based waste water treatment design/build firm
which was acquired in November 1996. Revenues from the Company's federal
government contracts were stable during these comparative periods as increased
Department of Defense (DOD) activity was offset by the completion of contracts
funded by other federal government agencies including the Department of Energy
(DOE).
Revenues reported by the Company for the first two quarters of fiscal year 1998
were $201,021,000, an increase of 15.6% when compared to revenues of
$173,906,000 for the corresponding period of the prior fiscal year. Of this
$27,115,000 revenue increase, 42% was from targeted commercial industry
opportunities and 29% was from business acquisitions, principally Chi Mei. The
remaining increase is due to revenue growth from government clients. The
Company's DOD contracts and indefinite delivery order programs during the first
half of fiscal year 1998 experienced more consistent funding in comparison to
the reduced funding experienced during late fiscal year 1996 and early fiscal
year 1997 when disputes over the federal budget approval caused delays
in government-sponsored cleanup programs. The Company expects to continue to
derive a substantial portion of its revenues from the DOD indefinite delivery
order contracts, which are primarily related to remedial action work. The
increase in DOD revenue for the period was partially offset by the completion of
contracts funded by the DOE last year. Management believes future revenues from
the DOE will increase due to an expected transition by the DOE from study and
design to field remediation. Recent evidence of the Company's efforts to benefit
from this transition is the award in October 1997 of the $122 million project to
perform the excavation, pretreatment and thermal drying of an estimated one
million tons of contaminated materials for the DOE's Fernald Environmental
Management Project.
The Company's revenues attributable to U.S. federal, state and local
governmental contracts as a percentage of the Company's consolidated revenues
for the second fiscal quarter and the two fiscal quarters ended September 26,
1997 and September 27, 1996 is outlined in the table below:
9
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INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED TWO FISCAL QUARTERS ENDED
------------------------------ ------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1997 1996 1997 1996
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
SOURCE
- ------
Federal government:
U.S. Department of Defense (DOD)............ 44% 43% 45% 44%
U.S. Department of Energy (DOE)............. 10 15 10 15
Other federal agencies ..................... 3 5 2 4
--- --- --- ---
57 63 57 63
State and local governments.......................... 6 6 6 6
--- --- --- ---
Total .................................... 63% 69% 63% 69%
=== === === ===
</TABLE>
Revenue growth from the commercial sector (excluding acquisitions) could be
restricted in the near term partly due to increased emphasis on lower cost
solutions and partly due to delaying certain work until final Congressional
action is taken on the reauthorization of Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA). As for CERCLA, it is uncertain when
reauthorization will occur or what the details of the legislation, including
retroactive liability, cleanup standards, and remedy selection, may include.
Uncertainty regarding possible rollbacks of environmental regulation and/or
reduced enforcement have led commercial clients to delay projects as well.
Contemplated changes in regulations could further decrease the demand for
certain of the Company's services, as customers anticipate and adjust to the new
regulations. However, legislative or regulatory changes could also result in
increased demand for certain of the Company's services if such changes decrease
the cost of remediation projects or result in more funds being spent for actual
remediation. The ultimate impact of any such changes will depend upon a number
of factors, including the overall strength of the U.S. economy and customers'
views on the cost effectiveness of the remedies available.
A portion of IT's revenues (approximately 5% and 6% in the second quarter and
first two quarters, respectively, of fiscal year 1998) continue to be derived
from a large, complex thermal remediation contract utilizing the Company's
Hybrid Thermal Treatment System(R) (HTTS(R)) incineration technology.
Incineration as a remedy under the CERCLA continues to come under legislative
and regulatory pressures as well as commercial pressures due to its relatively
high cost. If the Company is unable to permit and use thermal treatment on
future remediation projects in the United States due to either regulatory or
market factors, the Company would have to find alternative uses for its HTTS
equipment, such as foreign installations. In July 1997, the Company announced
the formation of a 50/50 joint venture with KOHAP Group, a South Korean
diversified multinational company. The joint venture company, KOHAP-IT, expects
its first major project to involve the design, supply, construction and start-up
of an incineration facility that will utilize IT's HTTS technology and
equipment. The Company will continue to seek alternative uses similar to the
anticipated KOHAP-IT project. The Company, through a joint venture, is also in
the permitting phase for a project in Mexico that would utilize IT's HTTS
equipment. If the KOHAP-IT project or the Mexican joint venture opportunity are
not executed and additional opportunities are not found or are uneconomical,
there could be a negative effect to the Company due to impairment of HTTS assets
as well as lost project opportunities. At September 26, 1997, IT's HTTS
equipment had a net book value of approximately $10,100,000.
The Company's total contract backlog at September 26, 1997 was approximately
$1,210,000,000, of which approximately $850,000,000 is future project work the
Company estimates it will receive (based on historical experience) under
existing governmental indefinite delivery order (IDO) programs which provide for
a general undefined scope of work. Revenues from backlog and IDO contracts are
expected to be earned over the next one to five years. Continued funding of
existing backlog could be negatively impacted in the future due to reductions in
current and future federal government environmental restoration budgets.
10
<PAGE> 11
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
GROSS MARGIN
Gross margin percentage for the second quarter of fiscal year 1998 increased to
11.1% of revenues from 9.9% of revenues for the corresponding period of the
prior fiscal year. Favorable gross margins continued in the second quarter as
overhead costs were reduced due to organizational streamlining in the second
quarter of fiscal year 1997. Gross margin also improved as a result of spreading
fixed overhead costs over higher revenue levels. In the near term, the Company
expects to continue to maintain the improved gross margins of the past year. The
Company's ability to maintain or improve its gross margins is heavily dependent
on increasing utilization of professional staff, properly executing projects,
and successfully bidding new contracts at adequate margin levels.
For the first two quarters of fiscal year 1998, gross margin of 11.4% of
revenues increased from the 9.7% of revenues in the corresponding period of the
prior year, generally for the same reasons noted above related to the second
quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the second fiscal quarter ended September 26, 1997, selling, general and
administrative expenses of $6,919,000 were $1,714,000 lower than the second
quarter of the prior fiscal year. Selling, general and administrative expenses
of $14,338,000 for the first two quarters of fiscal year 1998 were $3,375,000
lower than the level for the corresponding period of the prior fiscal year.
Selling, general and administrative expenses declined during both the second
quarter and the first two quarters of fiscal year 1998 primarily due to the
favorable impact of the corporate restructuring initiated in the second quarter
of fiscal year 1997 and due to the relocation of the Company's corporate
headquarters which resulted in reduced lease expense and labor cost as the
Company integrated and consolidated management and corporate functions into the
Company's largest facility.
SPECIAL CHARGES
The special charges that occurred in the first quarter of fiscal 1998 resulted
from the relocation of the Company's corporate headquarters from Torrance,
California to Monroeville (Pittsburgh), Pennsylvania and the sale of its
California based small project remediation services business. The headquarters
relocation consolidated the corporate overhead functions with the Company's
largest operations office and closer to its lenders and largest shareholders
which are located in the Eastern United States. As a result of this relocation,
the Company incurred a pre-tax charge of $2,811,000. In May 1997, the Company
incurred a non-cash charge of $1,800,000 to sell its unprofitable California
based small projects remediation services business.
In conjunction with the corporate restructuring which was initiated in the
second quarter of fiscal year 1997, the Company incurred a pre-tax restructuring
charge of $8,403,000. The restructuring charge included $3,400,000 of costs for
severance, $4,100,000 of costs for closing and reducing the size of a number of
the Company's offices, and $900,000 of costs for other related items. At
September 26, 1997, $1,750,000 of the charge remained to be paid.
INTEREST, NET
For the second quarter and first six months of fiscal year 1998, net interest
expense represented 1.1% of revenues compared to 1.4% and 1.5% of revenues,
respectively, for the second quarter and first six months of fiscal year 1997.
The lower net interest expense level compared to a year ago is due principally
to an increased level of cash and cash equivalents, as a result of the Carlyle
Investment and improved working capital management which generated increased
interest income.
11
<PAGE> 12
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES
For the second quarter ended September 26, 1997, the Company recorded an income
tax provision of $1,450,000, reflecting an effective income tax rate of 43% for
the quarter. For the two fiscal quarters ended September 26, 1997, the Company
recorded an income tax provision of $2,730,000, reflecting a 43% tax rate on
income excluding special charges of $4,611,000 incurred in the first quarter.
The income tax benefit related to the special charge was offset by an increase
in IT's deferred tax valuation allowance based on the tax attributes of the
special charges and the Company's assessment of the uncertainty as to when it
will generate a sufficient level of future earnings to realize the deferred tax
asset created by the first quarter special charges.
For the second fiscal quarter and the two fiscal quarters ended September 27,
1996, the Company had effective income tax benefit rates of 38% and 41%,
respectively, excluding special charges of $8,403,000 incurred in the second
quarter ending September 27, 1996. The related income tax benefit from the
special charge in the second quarter was offset by an increase in IT's deferred
tax valuation allowance of $3,168,000.
Based upon a net deferred tax asset of $28,632,000 (net of a valuation allowance
of $11,297,000) at September 26, 1997, and assuming a net 38% federal and state
effective tax rate, the level of future earnings necessary to fully realize the
deferred tax asset would be approximately $75,000,000. Because of the Company's
position in the industry, recent restructuring, existing backlog and acquisition
strategies, management expects that its future taxable income and the use of
tax-planning strategies (principally the maturing of any future capital gains
and losses during the relevant carryforward or carryback period) will more
likely than not allow the Company to fully realize its deferred tax asset of
$28,632,000. The Company evaluates the adequacy of the valuation allowance and
the realizability of the deferred tax asset on an ongoing basis.
DIVIDENDS
The reported dividend expense for the second quarter and the first two quarters
of fiscal year 1998 were $1,537,000 and $3,070,000, respectively. The
dividend expense includes imputed dividends of $639,000 and $1,273,000 which
are not payable in cash. The decrease in cash dividends is due to holders of
the Company's 7% Convertible Preferred Stock exchanging their stock for common
stock. The Company's dividends are summarized below:
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
---------------------------- ----------------------------
September 26, September 27, September 26, September 27,
Dividend Summary 1997 1996 1997 1996
- ---------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash 7%
Preferred Stock $ 898,000 $1,050,000 $1,797,000 $2,100,000
Imputed (Non-cash) 6%
Preferred Stock 639,000 - 1,273,000 -
---------- ---------- ---------- ----------
Total $1,537,000 $1,050,000 $3,070,000 $2,100,000
</TABLE>
Commencing with November 21, 1997 the 6% Preferred Stock outstanding is entitled
to a 3% inkind stock dividend for one year during which the statement of
operations will also include an imputed dividend expense at a rate of
approximately 3% per annum. This additional imputed dividend of approximately
3% will never be paid in cash. After November 21, 1998, the outstanding 6%
Preferred Stock is entitled to a 6% cumulative cash dividend payable quarterly.
12
<PAGE> 13
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION
Working capital at September 26, 1997 was $102,058,000 which is a decrease of
$8,647,000 from March 28, 1997. The current ratio at September 26, 1997 was
2.07:1 which compares to 2.21:1 at March 28, 1997.
Cash used by operating activities for the first two quarters of fiscal year 1998
totaled $495,000 compared to $19,483,000 provided by operating activities in the
corresponding six-month period of the prior fiscal year primarily due to an
increase in accounts receivable resulting from the increase in revenues. Capital
expenditures of $1,954,000 for the current two fiscal quarters were $370,000
higher than the prior fiscal year principally due to the corporate relocation
and information hardware upgrades; however, management believes capital
expenditures for fiscal year 1998 will be approximately the same as the
$3,400,000 spent during fiscal year 1997, excluding any business acquisitions.
In May 1997, the Company acquired PHR Environmental Consultants, Inc., a company
that provides environmental historical research and investigation, for an
initial payment and related expenses of $1,271,000. Also in May 1997, the
Company sold its California based remediation services business and received an
initial payment of $2,800,000. In September 1997, the Company acquired Pacific
Environmental Group (PEG), a leading provider of a broad range of environmental
consulting and engineering services to major oil companies for an initial
payment and related expenses of $4,266,000.
The Company's shareholder agreements relating to Quanterra (an environmental
analytical services business 81% owned by an affiliate of Corning Incorporated
and 19% owned by IT) contain certain provisions which have affected and, in the
future, could affect liquidity. IT is not committed to make, and does not
presently intend to make, additional contributions to Quanterra, but it has the
option to make future pro rata contributions to maintain its 19% interest.
Although Quanterra has experienced net losses in the past three years, the level
of net loss has decreased over the past several quarters, and Quanterra has
recently produced break-even operations and positive operating cash flow. The
Company will continue to evaluate the ultimate recoverability of its investment
in Quanterra (which is carried at $16,300,000 on the June 27, 1997 condensed
consolidated balance sheet) on an ongoing basis and will recognize any
impairment in value should it occur.
On October 25, 1995, the Company executed a combined $125,000,000 financing
which includes $65,000,000 of senior secured notes with a group of major
insurance companies and a $60,000,000 syndicated bank revolving credit facility.
The financing package, which is subject to a borrowing base, financial ratio and
net worth covenants, is secured by the accounts receivable and certain fixed
assets of the Company. The senior secured notes have an eight-year final
maturity with no principal payments until the sixth year, and the bank line has
a term of five years. The Company is presently in compliance with its covenants
and has no outstanding cash advances under the credit line at September 26,
1997. As of that date, the Company's borrowing base under its combined financing
package allowed for additional borrowing under the line of credit of up to
$7,280,000.
In aggregate, at September 26, 1997, letters of credit totaling approximately
$15,600,000 related to the Company's insurance program, financial assurance
requirements and bonding requirements were outstanding against the Company's
bank line of credit. Subsequent to September 26, 1997 letters of credit
outstanding for financial assurance were reduced from $2,700,000 to zero.
Invested cash on September 26, 1997 was approximately $55,000,000.
The Company has expanded its bonding capacity by $85,000,000 to a new total of
$220,000,000, of which approximately $95,000,000 is currently being utilized.
The Company's bonding lines generally require 3-7% collateral in the form of
letters of credit.
At the November 20 1996 Annual Meeting of Stockholders, IT's shareholders voted
to approve the Carlyle Investment. The Company issued to Carlyle 45,000 shares
of Convertible Preferred Stock having a liquidation preference of $1,000 per
share, and warrants to purchase 1,250,000 shares of IT common stock at $11.39
per share. The $40,609,000 net proceeds to the Company (after related offering
costs of $4,391,000) will be used by IT to finance business acquisitions, as
well as for working capital and general corporate purposes (see Note 8 to the
Condensed Consolidated Financial Statements for additional information regarding
the Carlyle Investment).
13
<PAGE> 14
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
The Company continues to have significant cash requirements, including working
capital, capital expenditures, expenditures for the closure of its inactive
disposal sites and PRP matters (see Transportation, Treatment and Disposal
Discontinued Operations below), interest, preferred dividend obligations and
contingent liabilities. As a result of the completion of the Carlyle Investment,
the Company's current liquidity position is expected to be sufficient to meet
foreseeable requirements, as well as to fund expansion and diversification of
the Company's business through both internal growth and acquisitions.
TRANSPORTATION, TREATMENT AND DISPOSAL DISCONTINUED OPERATION
With regard to the Company's transportation, treatment and disposal discontinued
operations, the Company has previously completed closure of its Montezuma Hills
and Benson Ridge facilities and is pursuing closure of its inactive Panoche and
Vine Hill Complex facilities. On November 17, 1995, the California EPA,
Department of Toxic Substances Control (DTSC) approved the final closure plan
and post-closure plan for the Vine Hill Complex facility. The approved final
closure plan provides for solidification and capping of waste sludges and
installation of underground barriers and groundwater control systems.
Substantial remediation has already been completed over both the past two years
since approval of the plan and over the prior several years based upon interim
approvals by DTSC, and the final closure is scheduled to be substantially
completed in fiscal year 1998 with final completion in fiscal year 1999.
On June 28, 1996, DTSC released a Draft Environmental Impact Report (DEIR) and
Draft Closure Plan for public comment for the Panoche facility. The DEIR
evaluates the Company's preferred closure plan as well as several alternative
plans and states that the Company's preferred closure plan is environmentally
superior. The alternative plans involve excavation and on-site relocation of
substantial quantities of waste materials in addition to landfill capping and
groundwater controls which are common to all alternatives. If implemented, the
alternative plans would extend the closure construction schedule and increase
the cost of closure. The DEIR and Draft Closure Plan were subject to a 90-day
comment period which ended September 30, 1996, during which interested parties
presented comments including some supporting alternative plans. DTSC, after
considering all comments received, will approve a final closure plan and certify
the final EIR. The DTSC continues to consider comments by the Company, and by
other interested parties supporting alternative plans, and it is uncertain what
plan DTSC may ultimately approve. While certification of the final EIR has been
delayed several times, the Company now expects a plan and all necessary permits
to be approved in the third and fourth quarters of fiscal year 1998. Closure
construction for the Company's preferred plan is scheduled to be completed
within three years of approval of the plan. If DTSC were to approve an
alternative plan or fail to timely approve any plan or if implementation of
any plan is delayed by litigation or appeals, the Company's cost to close
the site would increase, which could have a material adverse impact on the
consolidated financial condition, liquidity and results of operations of the
Company. As a part of the closure plan, the Company has requested permission,
and the DTSC has agreed, to allow the Company to excavate drums buried in a
portion of the facility. The drums are the alleged source of low levels of
contaminants which have migrated through groundwater underneath a portion of
municipally-owned land adjacent to the facility.
Closure construction was completed for the Montezuma Hills and Benson Ridge
facilities 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 facilities for at least 30 years. Operation of
the facilities 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 facilities in the future or to pay penalties
for alleged noncompliance with regulatory permit conditions.
Regulations of the DTSC and the United States Environmental Protection Agency
(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 provided such financial assurance equal
to its estimate for closure
14
<PAGE> 15
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
costs as of March 1, 1997 (which could be subject to increases at later dates as
a result of regulatory requirements) in the form of a corporate guarantee of
approximately $18,000,000, letters of credit totaling approximately $2,700,000
and a trust fund containing approximately $15,700,000, and has purchased
annuities which will mature over the next 30 years to pay for its estimates of
post-closure costs. Subsequent to September 26, 1997, the letters of credit in
support of these costs were reduced to zero.
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 DTSC,
USEPA, the California State Water Resources Control Board, the California Air
Resources Board, Regional Water Quality Control Boards (RWQCBs), Air Quality
Management Districts, various other state authorities and certain applicable
local 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 from 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 $40,048,000 at September 26, 1997 is
principally comprised of residual land at the inactive disposal facilities (a
substantial component of which is adjacent to those facilities and was never
used for waste disposal) and assumes that sales will occur at 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 pending approval of the Company's closure plan for its
adjacent disposal facility and local community review of growth strategy. This
review is proceeding and initially recommends, on a non-binding basis,
strategies for limiting growth in the area. Ultimately, if the developers' plans
change or the developers are unable to obtain entitlements, 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 liabilities for the cost to investigate and clean up this site.
Subsequently, USEPA alleged that the Company had generated approximately 2% by
volume of the hazardous wastes disposed of at the site, and the Company was also
served with lawsuits brought by members of a group of PRPs (the Steering
Committee). The Company has not been named as a defendant in any of the several
personal injury and property damage lawsuits brought by area residents.
In October 1995, the Company and the USEPA agreed to a settlement of the
Company's alleged liability for response costs incurred by the USEPA pursuant to
the first three partial consent decrees entered into in connection with the OII
site pursuant to which the Company paid $5,400,000 to the USEPA. While resolving
the Company's alleged liability for response costs incurred by the USEPA
pursuant to the first three partial consent decrees. The settlement does not
include a release of liability for future or final OII remedies. In September
1996, the USEPA released a final record of decision selecting the final remedy
for the site. Response costs for the final remedy are estimated by USEPA to be
approximately $161,800,000. The Company believes that this estimate does not
take into account the benefits of certain work to be performed under the
previous consent decrees and therefore substantially overstates the remaining
cost.
15
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INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
In April 1996, the Company reached a settlement of the lawsuits with the
Steering Committee, pursuant to which the Company paid $250,000 in settlement of
the Steering Committee's claims. The Company and the Steering Committee also
agreed, as a part of the settlement, to cooperate and share on a pro-rata basis
certain response and other defense costs with respect to certain groundwater
cleanup actions which may be a part of the final remedy for the site. The
Company and the Steering Committee have not agreed to share all costs related to
the final remedy at the site, inasmuch as the Steering Committee claims that
pursuant to earlier consent decrees it is excused from paying for or performing
certain actions which may be required as a part of any final remedy. The Company
does not agree with these claims. The Company's agreement with the Steering
Committee to cooperate and share costs may be terminated voluntarily by either
party, including in the event of a dispute as to the parties' respective
obligations to pay for or perform the final remedy for the site.
In October 1997 the Company and other PRPs at the site received special notice
from the USEPA requesting that within 60 days the Company and other PRPs submit
a good faith offer to pay for or perform the final remedy at the site and to
satisfy USEPA's demand for reimbursement of approximately $28,900,000 in
oversight costs. The Company is reviewing the USEPA's request and expects to
work cooperatively with interested parties to perform the final remedy.
Should the costs of the final remedy be greater than expected, or should the
Company be forced to assume a disproportionate share of the costs of the final
remedy (whether because of differences in the protections obtained by the
Steering Committee and the Company under the various consent decrees to which
Steering Committee members and the Company are subject, or otherwise), the cost
to the Company of concluding this matter could materially increase.
In September 1987, the Company was served with a Remedial Action Order (RAO)
issued by the DTSC, concerning the GBF Pittsburg landfill site near Antioch,
California, a site which had been proposed by the USEPA to be added to the
National Priorities List under CERCLA. IT and 17 other firms and individuals
were characterized as responsible parties in the RAO and directed to undertake
investigation and potential remediation of the site which consists of two
contiguous parcels. From the 1960's through 1974, a predecessor to IT
Corporation operated a portion of one parcel as a liquid hazardous waste site.
The activity ceased in 1974, and the Company's predecessor's facility was closed
pursuant to a closure plan approved by the appropriate RWQCB. Both of the
parcels were then operated by other parties as a municipal and industrial waste
site (overlying the former liquid hazardous waste site) and, until 1992,
continued to accept municipal waste. Water quality samples from monitoring wells
in the vicinity of the site were analyzed by the property owner in August 1986
and indicated the presence of volatile organics and heavy metals along the
periphery of the site.
Additional PRPs, consisting primarily of known waste generators, were
subsequently served with an amended RAO by the DTSC. IT and these other PRPs
(the PRP group) further investigated the nature and extent of any subsurface
contamination beneath the site and beyond its borders. The PRP group submitted
Remedial Investigation and Feasibility Study (RI/FS) reports which were accepted
by the DTSC. The studies indicate that groundwater quality impact is not
affecting drinking water supplies and is not attributable solely to the portion
of the site previously operated by IT's predecessor.
In July 1993, the Company, along with the other PRPs at the site, was issued a
revised RAO and Imminent and Substantial Endangerment Order that restated
previous RAOs and directed all previously named PRPs to undertake specific
additional tasks including the closure of the municipal landfill.
After a period of public review and comment, in June 1997, the DTSC completed
and released a final Remedial Action Plan (RAP) selecting DTSC's preferred
alternative of actively pumping and treating groundwater from both the alleged
source points of contamination and the edge of the allegedly contaminated
groundwater plume emanating from the site, which DTSC estimated to cost between
$18,000,000 and $33,000,000, depending upon whether certain options for
discharge of produced waters are available. The PRP group continues to believe
that its preferred alternative of natural attenuation and continued limited site
monitoring, which was estimated to cost approximately $4,000,000, is
appropriate. As part of the RAP, the DTSC also advised the PRP group of its
position that both the group and the current owner/operators are
16
<PAGE> 17
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
responsible for paying the future closure and postclosure costs of the overlying
municipal landfill, which have been estimated at approximately $4,000,000.
The Company and the PRP group initiated litigation (Members of the GBF/Pittsburg
Landfill(s) Respondents Group, etc., et al, v. State of California Environmental
Protection Agency Contra Costa County, California Superior Court Case No.
C97-02936) challenging the final RAP, and the ultimate outcome of the litigation
and any other available remedies cannot be predicted at this time.
The PRP group has also filed an application with the appropriate RWQCB for
designation of the site as a containment zone which, if approved, would
facilitate the PRP group's preferred remedial alternative. The DTSC has advised
the PRP group that if, at some point, the RWQCB designates all or part of the
site as a containment zone, DTSC will work with the PRPs to either amend or
modify the final RAP as appropriate. The DTSC also advised, in response to the
Respondents Group's legal challenge to the RAP, that compliance with remedial
design and other requirements of the RAP would be deferred until at least April,
1998, to allow the RWQCB time to evaluate the Respondents Group containment zone
application.
In the final RAP the DTSC also assigned the Company and the other members of the
PRP group collective responsibility for 50% of the site's response costs.
Although the DTSC's allocation of responsibility is not binding except in very
limited circumstances, the PRP group continues to believe that the current
owner/operators should pay a larger portion of the site's response costs and the
Company is attempting to continue to cooperate with the generators and other
members of the PRP group to affect an appropriate allocation of responsibility
for site costs.
The PRP group has initiated litigation (Members of the GBF/Pittsburg Landfill(s)
Respondents Group, etc., et al, v. Contra Costa Waste Service, etc., et al. U.S.
District Court, N. Dist Cal, Case No. C96-03147SI) against the current
owner/operators of the site and other non-cooperating PRPs to cause them to bear
their proportionate share of site remedial costs. The current owner/operators of
the site have not cooperated with the PRP group in its efforts to study and
characterize the site, except for limited cooperation which was offered shortly
after the September 1987 RAO and, currently, with respect to DTSC's attempts to
cause the selection of its preferred remedial alternative. The current
owner/operators also demanded indemnity from the Company pursuant to the lease
agreement under which IT Corporation's predecessor operated the site, which
demand the Company has rejected. The current owner/operators are vigorously
defending the PRP group's litigation, and the outcome of the litigation cannot
be determined at this time. Failure of the PRP group to affect a satisfactory
resolution with respect to the choice of appropriate remedial alternatives or to
obtain an appropriate contribution towards site remedial costs from the current
owner/operators of the site and other non-cooperating PRPs, could substantially
increase the cost to the Company of remediating the site, which could have a
material adverse effect on the Company's consolidated financial condition,
liquidity and results of operations.
In March 1995, IT was notified by the DTSC that it was among 13 companies
identified as potentially responsible for costs associated with investigation
and cleanup of the Environmental Protection Corporation (EPC) site known as the
Eastside Facility near Bakersfield, California. The DTSC notice letter states
that IT is believed to have arranged for disposal of hazardous substances at the
Eastside Facility during the period between 1972 and 1985 when it was permitted
and operated as a land treatment facility. In March 1997, the Company was
notified by a potentially responsible party which performed work at another site
near Bakersfield, California, formerly operated by EPC known as the Westside
Facility, that IT was considered a potentially responsible party to share in the
costs of that cleanup, which has been completed. IT has subsequently reached a
settlement of its alleged liability for response costs at the Westside Facility.
IT transported various waste streams both generated by IT and on behalf of its
customers to the Eastside Facility and the Westside Facility at various times
during those facilities' operations and it was a minority shareholder in EPC for
a period of its operations. In January 1996, the PRP group for the Eastside
Facility (of which the Company is a member) and the DTSC entered into an
agreement for the performance of a RI/FS for the site, as well as for cost
sharing for the RI/FS among the group and the DTSC. IT is cooperating with other
group members to perform the work outlined in the agreement.
17
<PAGE> 18
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
Because of the early stage of the matter, the potential costs associated with
the remediation of the Eastside Facility will not be reasonably estimable until
completion of the RI/FS.
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 a number of other sites
and 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. The Company 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. Based on the Company's experience in resolving claims against it at a
number of sites and upon current information, in the opinion of management, with
advice of counsel, claims with respect to sites not described above at which the
Company has been notified of its alleged status as a PRP will not individually
or in the aggregate result in a material adverse effect on the consolidated
financial condition, liquidity and results of operations of the Company.
The Company has initiated actions against a number of its past insurers claims
for recovery of certain damages and costs with respect to both its Northern
California sites and certain PRP matters. The carriers dispute their allegations
to the Company and the Company expects them to continue to contest the claims.
The Company has included in its provision for loss on disposition of
discontinued operations (as adjusted) an amount that, in the opinion of
management, with advice of counsel, represents a probable recovery with respect
to those claims.
FORWARD LOOKING STATEMENTS
Statements of the Company's or management's intentions, beliefs, expectations or
predictions for the future are forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially from those
projected in such forward-looking statements as a result of the above and other
factors including projected financial results, funding of backlog, the effects
of the Company's restructuring and industry-wide market factors.
18
<PAGE> 19
PART II
INTERNATIONAL TECHNOLOGY CORPORATION
ITEM 1.
LEGAL PROCEEDINGS.
The continuing operations litigation to which the Company is a party is more
fully discussed in the note "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements in the Company's annual Report on Form 10-K,
as amended, for the fiscal year ended March 28, 1997. For current developments
in the Helen Kramer matter, please see Note 5 to the Condensed Consolidated
Financial Statements in this report. See also Management's Discussion and
Analysis of Results of Operations and Financial Condition - Transportation,
Treatment and Disposal Discontinued Operations for information regarding current
developments in legal preceedings related to the discontinued operations of the
Company.
Central Garden
The Company has recently reached tentative settlements of the three
remaining personal injury cases. The tentative settlements are subject to
approval by individual plaintiffs and by the court. The settlements previously
reached with respect to the property damage claims and the remaining personal
injury cases (if approved), would be within the amounts previously reserved by
the Company and the coverage of the Company's insurance policies.
19
<PAGE> 20
INTERNATIONAL TECHNOLOGY CORPORATION
ITEM 5.
OTHER INFORMATION.
Employment Agreements--Severance Arrangements. In connection with the Carlyle
Investment, Anthony J. DeLuca, Franklin E. Coffman, James R. Mahoney and Raymond
J. Pompe each entered into an employment agreement with the Company effective
upon the closing of the Investment for a term of three years, unless terminated.
The employment agreements of each of Messrs. DeLuca and Mahoney replace in their
entirety their respective prior severance benefit agreements with the Company.
The new agreements provide for severance payments under certain circumstances.
Under the new agreements, the Company will have "good reason" to terminate
Messrs. DeLuca, Coffman, Mahoney or Pompe because of the Company's performance
if such persons fail to meet certain management forecasts for two consecutive
fiscal years. If the executive is terminated without reason, or because of the
Company's performance (under the circumstances permitted in the agreements)
within 24 months after a change in control, or resigns for cause, he is
entitled to receive his base salary as adjusted from time to time (presently
$320,000 in the case of Mr. DeLuca, $194,000 in the case of Mr. Coffman,
$260,000 in the case of Mr. Mahoney and $265,000 in the case of Mr. Pompe) for
12 months following the termination, or, if he is terminated because of the
Company's performance (under the circumstances permitted in the agreements) but
not within 24 months after a change in control, he is entitled to receive his
base salary for 6 months following the termination. In addition, under certain
circumstances, the executive's short-term incentive compensation will be paid
on a pro-rated basis, and he will be entitled to Company employee benefits for
a specified period. (The target short-term incentive compensation level is 40%,
and the maximum level is 60%, of base salary, except in the case of Mr. DeLuca,
for whom the target level is 50%, and the maximum level is 75%, of base salary.)
Additionally, as part of their employment agreements, each of Messrs. DeLuca,
Coffman, Mahoney and Pompe are bound by non-compete provisions with the Company
if any of them terminates his employment by resignation.
20
<PAGE> 21
INTERNATIONAL TECHNOLOGY CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. These exhibits are 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
September 26, 1997.
----------------
(b) Reports on Form 8-K
None
21
<PAGE> 22
INTERNATIONAL TECHNOLOGY CORPORATION
SIGNATURES
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 10, 1997
- ------------------------------------- --------------------------
Anthony J. DeLuca
President and Chief Executive Officer
and Duly Authorized Officer
HARRY J. SOOSE, JR. November 10, 1997
- ------------------------------------- --------------------------
Harry J. Soose, Jr.
Vice President, Finance and
Principal Accounting Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 26, 1997, AND ITS
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWO FISCAL QUARTERS ENDED
SEPTEMBER 26, 1997, WHICH WERE FILED WITH THE SEC ON NOVEMBER 10, 1997 ON FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 26, 1997 (COMMISSION NUMBER 1-9037) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (AMOUNTS
IN THOUSANDS EXCEPT PER SHARE DATA)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> SEP-26-1997
<CASH> 62,247
<SECURITIES> 0
<RECEIVABLES> 120,836
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 197,318
<PP&E> 140,618
<DEPRECIATION> 100,024
<TOTAL-ASSETS> 337,051
<CURRENT-LIABILITIES> 95,260
<BONDS> 65,711
0
6,386
<COMMON> 97
<OTHER-SE> 159,784
<TOTAL-LIABILITY-AND-EQUITY> 337,051
<SALES> 0
<TOTAL-REVENUES> 201,021
<CGS> 0
<TOTAL-COSTS> 178,185
<OTHER-EXPENSES> 4,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,149
<INCOME-PRETAX> 1,738
<INCOME-TAX> 2,730
<INCOME-CONTINUING> (992)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (992)
<EPS-PRIMARY> $(0.42)
<EPS-DILUTED> 0
</TABLE>
