<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 DECEMBER 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 January 30, 1998 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 DECEMBER 26, 1997
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
as of December 26, 1997 (unaudited) and
March 28, 1997. 3
Condensed Consolidated Statements of Operations
for the Fiscal Quarter and Three Fiscal Quarters ended
December 26, 1997 and December 27, 1996 (unaudited). 4
Condensed Consolidated Statements of Cash Flows
for the Three Fiscal Quarters ended December 26, 1997
and December 27, 1996 (unaudited). 5
Notes to Condensed Consolidated Financial
Statements (unaudited). 6-10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 11-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 6. Exhibits and Reports on Form 8-K. 24
Signatures 25
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 26, March 28,
1997 1997
---- ----
(Unaudited)
ASSETS
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 54,128 $ 78,897
Receivables, net 115,518 108,207
Prepaid expenses and other current assets 5,588 4,077
Deferred income taxes 10,370 11,324
--------- ---------
Total current assets 185,604 202,505
Property, plant and equipment, at cost:
Land and land improvements 695 1,330
Buildings and leasehold improvements 7,403 9,232
Machinery and equipment 132,357 140,630
--------- ---------
140,455 151,192
Less accumulated depreciation and amortization 101,320 106,891
--------- ---------
Net property, plant and equipment 39,135 44,301
Investment in Quanterra 16,300 16,300
Other assets 43,410 39,377
Long-term assets of discontinued operations 40,048 40,048
--------- ---------
Total assets $ 324,497 $ 342,531
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,735 $ 29,571
Accrued liabilities 29,699 32,640
Billings in excess of revenues 1,978 7,227
Short-term debt, including current portion of long-term debt 4,134 5,343
Net current liabilities of discontinued operations 11,168 17,019
--------- ---------
Total current liabilities 85,714 91,800
Long-term debt 65,650 65,874
Long-term accrued liabilities of discontinued operations, net 2,349 9,280
Other long-term accrued liabilities 7,321 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 4,382 4,204
Common stock, $.01 par value; 50,000,000 shares authorized;
9,733,288 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 246,074 244,287
Deficit (89,072) (81,717)
--------- ---------
Total stockholders' equity 163,463 168,853
--------- ---------
Total liabilities and stockholders' equity $ 324,497 $ 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 Three fiscal quarters ended
----------------------------- ---------------------------
December 26, December 27, December 26, December 27,
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 105,157 $ 92,513 $ 306,178 $ 266,419
Cost and expenses:
Cost of revenues 93,387 82,790 271,572 239,778
Selling, general and administrative expenses 6,844 7,626 21,182 25,339
Special charges 3,943 -- 8,554 8,403
--------- -------- --------- ---------
Operating income (loss) 983 2,097 4,870 (7,101)
Interest, net (1,237) (1,446) (3,386) (4,105)
--------- -------- --------- ---------
Income (loss) before income taxes (254) 651 1,484 (11,206)
(Provision) benefit for income taxes (1,586) (280) (4,316) 1,146
--------- -------- --------- ---------
Net income (loss) (1,840) 371 (2,832) (10,060)
Less preferred stock dividends (1,539) (1,295) (4,609) (3,395)
--------- -------- --------- ---------
Net loss applicable to common stock $ (3,379) $ (924) $ (7,441) $ (13,455)
========= ======== ========= =========
Basic loss per common share $ (.35) $ (.10) $ (.76) $ (1.48)
========= ======== ========= =========
</TABLE>
See accompanying notes.
4
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INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three fiscal quarters ended
---------------------------
December 26, December 27,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,832) $(10,060)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 7,528 11,208
Loss on disposal of remediation business 1,800 --
Loss on Helen Kramer claim 3,943 --
Minority interest in subsidiary 124 (27)
Deferred income taxes 3,988 (1,472)
Changes in assets and liabilities, net of effects
from acquisitions and dispositions of business
(Increase) decrease in receivables, net (10,377) 18,292
(Increase) decrease in prepaid expenses and other current assets (1,577) 697
Increase in accounts payable 6,683 5,410
Decrease in accrued liabilities (3,637) (378)
(Decrease) increase in billings in excess of revenues (5,266) 1,175
(Decrease) increase in other long-term accrued liabilities (312) 977
Decrease in liabilities of discontinued operations (12,932) (11,909)
-------- --------
Net cash (used for) provided by operating activities (12,867) 13,913
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of remediation business 2,800 --
Acquisition of businesses, net of cash acquired (5,417) (1,455)
Capital expenditures (2,540) (2,602)
Investment in Quanterra -- (3,325)
Cash on deposit as collateral (500) --
Other, net (2,412) 770
-------- --------
Net cash used for investing activities (8,069) (6,612)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term borrowings (2,036) (106)
Long-term borrowings -- 281
Net proceeds from preferred stock and warrants issued to Carlyle -- 41,000
Dividends paid on preferred stock (1,797) (3,150)
Issuances of common stock -- 1
-------- --------
Net cash (used for) provided by financing activities (3,833) 38,026
-------- --------
Net (decrease) increase in cash and cash equivalents (24,769) 45,327
Cash and cash equivalents at beginning of period 78,897 24,493
-------- --------
Cash and cash equivalents at end of period $ 54,128 $ 69,820
======== ========
</TABLE>
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 fiscal quarter ended December 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 December 26, 1997 are not necessarily indicative of the
results for the full fiscal year.
2. On January 15, 1998, the Company signed a definitive agreement (the
"Agreement") to acquire OHM Corporation (OHM), a leading diversified
environmental services firm, for a total purchase price of approximately
$365 million including the assumption of OHM debt. On January 16, 1998, the
Company initiated the Offer to Purchase ("Tender Offer") for cash
13,933,000 shares of OHM common stock. According to the terms of the
Agreement, assuming successful completion of the merger, OHM shareholders
will receive $11.50 per share, comprised of $8.00 in cash and 0.42 shares
of IT common stock (valued at $3.50 assuming a per share price of $8.25 for
IT's shares). Concurrently with the purchase of shares in the Tender Offer,
OHM will repurchase from one of its principal shareholders, a number of
shares equal to approximately 19 percent of OHM's outstanding shares.
Assuming the Tender Offer to purchase 13,933,000 shares (50.6%) of OHM
common stock is successful, on February 17, 1998, IT will own approximately
63% of OHM and will be entitled to elect a majority of OHM's Board of
Directors. The Company will then consolidate OHM and record an approximate
37% minority interest in OHM. Upon the completion of the proposed
transaction (which is expected in mid-April 1998), OHM will then be merged
with a wholly-owned subsidiary of IT in which each of the remaining
outstanding shares of OHM not acquired through the Tender Offer will be
converted into 1.394 shares of IT common stock at which time the Company
will own and consolidate 100% of OHM.
IT will execute the Tender Offer with a $240 million credit facility, which
will be used to fund the Tender Offer, refinance IT's existing $65 million
principal amount of senior notes and for acquisitions and working capital.
To complete the merger, IT will effect a $425 million refinancing which
will refinance the Tender Offer loan and OHM's debt.
OHM is a public company that trades on the New York Stock Exchange under
the symbol OHM. OHM had revenue of $381 million and a net loss of $25.3
million or $(0.93) loss per share, including a special charge of $38
million for the nine months ended September 30, 1997.
The transaction is subject to a number of conditions, including approvals
related to the merger by the shareholders of both companies, and other
customary conditions and regulatory approvals. Early termination of the
waiting period under the Hart-Scott Rodino Act was granted on January 26,
1998.
3. In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (SFAS No.128), Earnings per Share, which was required to be adopted
on public company financial statements issued subsequent to December 15,
1997 and was implemented by the Company in the fiscal quarter ended
December 26, 1997. Under SFAS No. 128, earnings per share for all prior
periods are required to be restated to comply with the provisions of the
new statement.
6
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INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Under SFAS No. 128, basic earnings (loss) per common share is computed by
dividing net income (loss), adjusted for preferred stock dividends, by the
weighted average number of common shares outstanding for the period. For
all periods presented, the computation of diluted earnings (loss) per
share, assuming conversion into common shares of the Company's convertible
preferred stock, common stock warrants, contingently issuable shares and
common stock equivalents, which are stock options, is antidilutive. The
adoption of SFAS No. 128 had no effect on the basic and diluted earnings
(loss) per common share for the periods presented.
The weighted average number of common shares outstanding during the period
used in the calculation of basic earnings (loss) per common share follows:
Average
Fiscal quarter ended common shares outstanding
-------------------- -------------------------
December 26, 1997 9,734,233
December 27, 1996 9,048,249
Average
Three fiscal quarters ended common shares outstanding
--------------------------- -------------------------
December 26, 1997 9,738,568
December 27, 1996 9,099,726
4. 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 December 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 has recorded provisions for loss on disposition of transportation,
treatment and disposal discontinued operations (including the initial
provision and three subsequent adjustments) in the amount of $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 December 26, 1997, the Company's condensed consolidated balance
sheet included accrued liabilities of $13,517,000 to complete the closure
and related post-closure of its inactive disposal sites and related
matters, net of certain trust fund and annuity investments which are
legally restricted by trust agreements with the California EPA Department
of Toxic Substance Control 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.
5. 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,
7
<PAGE> 8
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
as amended, for the fiscal year ended March 28, 1997; current developments
regarding material continuing operations' legal proceedings are discussed
in Note 6 below and 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.
6. In December 1997, the Company settled a contract claim which has been
outstanding in excess of five years with the US Army Corps of Engineers,
the Environmental Protection Agency and the Department of Justice (jointly
"Government") arising out of work performed by the joint venture of IT and
Davy International at the Helen Kramer Superfund project. On December 26,
1997, the joint venture received a $14,500,000 payment from the Government
to resolve all outstanding project claims related to additional work
resulting from differing site conditions. In early January 1998, the joint
venture paid $4,300,000 to the Government to resolve related civil claims
by the Government. IT's share of the joint venture results is 60%,
accordingly, IT received net cash of $6,000,000, its proportionate share of
the settlement. In December 1997, the Company recorded a non-cash pre-tax
charge of $3,943,000 related to this matter.
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 pre-tax charge of
$1,800,000 to sell its 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. As part of the plan of termination, the
Company laid-off 133 employees and paid over $2,460,000 in termination
benefits. In addition, the Company approved a plan to close 5 leased
facilities and reduce the size of 11 other leased facilities by either
sublease or abandonment. Most of the remaining costs to be paid relate to
the facility closures and office space reductions which will be paid out
over the terms of the lease. One of these facility closures has a remaining
lease obligation of approximately 7 years. At December 26, 1997,
$1,483,000 of the charge remained to be paid.
7. 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. 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 $4,000,000) from the Carlyle Investment were
$41,000,000.
8
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INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. Included in accounts receivable at December 26, 1997 are billed
receivables, unbilled receivables and retention in the amounts of
$102,725,000, $6,107,000 and $7,661,000, respectively. Billed receivables,
unbilled receivables and retention from the U.S. Government as of December
26, 1997 were $50,026,000, $651,000 and $3,409,000, respectively. At March
28, 1997, billed receivables, unbilled receivables and retention were
$89,975,000, $12,305,000 and $7,982,000, respectively. Billed receivables,
unbilled receivables and retention from the U.S. Government as of March 28,
1997 were $42,501,000, $9,162,000 and $4,105,000, respectively.
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 March 28, 1997 is approximately $9,200,000 of
claims related to the Helen Kramer project, which was subject to a
governmental investigation. The Company settled this claim in December 1997
as described in Note 6.
10. 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 including salvage value. The Hybrid
Thermal Treatment System(R) (HTTS(R)) transportable incineration units are
depreciated over the shorter of in-production operating days or on an
8-year straight-line basis (idle basis) to salvage value. Amortization of
leasehold improvements is provided using the straight-line method over the
term of the respective lease.
11. For the third quarter ended December 26, 1997, the Company recorded an
income tax provision of $1,586,000, reflecting an effective income tax rate
of 43% on income excluding special charges of $3,943,000 incurred in the
third quarter. For the three fiscal quarters ended December 26, 1997, the
Company recorded an income tax provision of $4,316,000, reflecting a 43%
tax rate on income excluding special charges of $8,554,000 incurred in the
first three quarters of fiscal year 1998. The income tax benefit related to
the special charges 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 special charges.
9
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INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the third fiscal quarter and the three fiscal quarters ended December
27, 1996, the Company had effective income tax benefit rates of 43% and 41%
respectively, excluding special charges of $8,403,000 incurred in the
second quarter ending September 27, 1996.
Based upon a net deferred tax asset of $27,121,000 (net of a valuation
allowance of $11,297,000) at December 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
$71,000,000. The Company evaluates the adequacy of the valuation allowance
and the realizability of the deferred tax asset on an ongoing basis.
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 matching 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 $27,121,000.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
INTERNATIONAL TECHNOLOGY CORPORATION
FOR QUARTER ENDED DECEMBER 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 services
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, historical research and investigation, environmental consulting,
engineering services and facility operation and maintenance. The Company's
business strategy is to be a global provider of environmental solutions to both
the government and private industry clients. As part of this strategy, the
Company entered into a definitive agreement to acquire OHM Corporation on
January, 15 1998. The acquisition, if successfully consummated, is expected to
be completed in April 1998 and will create a company with projected annual
revenues of approximately $1.0 billion and backlog of $3.0 billion (see
Financial Condition). The Company has also diversified through several
acquisitions of specialized companies primarily serving targeted commercial
markets.
REVENUES
The Company reported revenues of $105,157,000 in the third quarter of fiscal
year 1998, an increase of 13.7% or $12,644,000 when compared to revenues of
$92,513,000 in the third quarter of fiscal year 1997. Revenues for the first
three quarters of fiscal year 1998 were $306,178,000, an increase of 14.9% or
$39,759,000 from the reported revenues of $266,419,000 for the corresponding
period of the prior fiscal year. This improvement is primarily due to strong
revenue growth from the Department of Defense (DOD) business as well as
continued growth from targeted commercial industries and revenues generated from
recent business acquisitions. Overall, revenue levels from the Company's federal
government contracts have gradually improved during these comparative periods as
strong improvement in DOD activity was partially offset by the completion of
contracts funded by other federal government agencies including the Department
of Energy (DOE).
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 third fiscal quarter and the three fiscal quarters ended December 26,
1997 and December 27, 1996 are outlined in the table below:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED THREE FISCAL QUARTERS ENDED
---------------------------- ------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
SOURCE
- ------
Federal government:
U.S. Department of Defense (DOD) 46% 41% 45% 43%
U.S. Department of Energy (DOE) 8 14 9 14
Other federal agencies ......... 1 4 2 4
-- -- -- --
55 59 56 61
State and local governments ............. 5 8 6 7
-- -- -- --
Total .......................... 60% 67% 62% 68%
== == == ==
</TABLE>
11
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INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
During the third quarter of fiscal year 1998, DOD revenues of $47,915,000 were
$9,492,000 higher than the third quarter of the prior year and for the first
three quarters of fiscal year 1998, DOD revenues were $22,044,000 higher than
the corresponding period of the prior fiscal year. This increase is primarily
due to increased funding of the Company's DOD indefinite delivery order programs
during fiscal year 1998 in comparison to reduced funding in 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 the DOD revenues was partially offset by lower DOE revenues due
to the completion of contracts funded by the DOE last year. DOE revenues in the
third quarter and the first three quarters of fiscal year 1998 decreased by
$4,134,000 and $9,411,000, respectively, when compared to the corresponding
periods of fiscal year 1997. 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 a $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 from commercial clients in the third quarter of fiscal
year 1998 were $42,051,000, an increase of $11,469,000 or 38% when compared to
revenues of $30,582,000 that were reported during the third quarter of the prior
fiscal year. Of this $11,469,000 revenue increase, 57% was attributable to
targeted commercial industry opportunities and 43% was generated from business
acquisitions. Commercial revenues for the first three quarters of fiscal year
1998 were $115,812,000, an increase of $30,739,000 or 36% when compared to
revenues of $85,073,000 that were reported during the corresponding period of
the prior fiscal year. Of this $30,739,000 revenue increase, 58% was from
targeted commercial industry opportunities and 42% was from business
acquisitions.
Revenue growth from the commercial sector (excluding recent 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 4% in the first three quarters of
fiscal year 1998) were derived from a large 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. The Company has
been aggressively pursuing opportunities outside the United States to deploy
the HTTS equipment and related technology. The Company has entered into two
project specific joint ventures with international partners and has dedicated
personnel pursuing and evaluating several other potential projects. If the
joint venture and project opportunities are not executed and additional
contracts are not won, there could be a negative effect to the Company. At
December 26, 1997, IT's HTTS equipment had a net book value of approximately
$10,100,000 and this equipment is currently idle.
12
<PAGE> 13
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
The Company's total contract backlog at December 26, 1997 was approximately
$1,390,000,000, of which approximately $936,000,000 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 IDO backlog could be negatively impacted in the future due to
reductions in current and future federal government environmental restoration
budgets.
GROSS MARGIN
Gross margin percentage for the third quarter of fiscal year 1998 increased to
11.2% of revenues from 10.5% of revenues for the corresponding period of the
prior fiscal year. Gross margins have improved in fiscal year 1998 as management
continues to carefully monitor overhead costs and as a result of spreading fixed
overhead costs over higher revenue levels. In the near term, the Company expects
to maintain the improved gross margin levels achieved due to the organizational
streamlining initiated in the second quarter of fiscal year 1997. 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 three quarters of fiscal year 1998, gross margin of 11.3% of
revenues increased from the 10.0% of revenues in the corresponding period of the
prior year, generally for the same reasons noted above related to the third
quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the third fiscal quarter ended December 26, 1997, selling, general and
administrative expenses of $6,844,000 were $782,000 lower than the third quarter
of the prior fiscal year. Selling, general and administrative expenses of
$21,182,000 for the first three quarters of fiscal year 1998 were $4,157,000
lower than the level for the corresponding period of the prior fiscal year.
Selling, general and administrative expenses declined during both the third
quarter and the first three 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 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
In December 1997, the Company settled a contract claim which has been
outstanding in excess of five years with the US Army Corps of Engineers, the
Environmental Protection Agency and the Department of Justice (jointly
"Government") arising out of work performed by the joint venture of IT and Davy
International at the Helen Kramer Superfund project. On December 26, 1997, the
joint venture received a $14,500,000 payment from the Government to resolve all
outstanding project claims related to additional work resulting from differing
site conditions. In early January 1998, the joint venture paid $4,300,000 to the
Government to resolve related civil claims by the Government. IT's share of the
joint venture results is 60%, accordingly, IT received net cash of $6,000,000,
its proportionate share of the settlement. In December 1997, the Company
recorded a non-cash pre-tax charge of $3,943,000 related to this matter.
13
<PAGE> 14
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
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 brought IT 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 pre-tax charge of $1,800,000 to sell its
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
December 26, 1997, $1,483,000 of the charge remained to be paid.
INTEREST, NET
For the third quarter and first nine months of fiscal year 1998, net interest
expense represented 1.2% and 1.1% of revenues respectively, compared to 1.6% and
1.5% of revenues, respectively, for the third quarter and first nine 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 working capital management which generated
increased interest income.
INCOME TAXES
For the third quarter ended December 26, 1997, the Company recorded an income
tax provision of $1,586,000, reflecting an effective income tax rate of 43% on
income excluding special charges of $3,943,000 incurred in the third quarter.
For the three fiscal quarters ended December 26, 1997, the Company recorded an
income tax provision of $4,316,000, reflecting a 43% tax rate on income
excluding special charges of $8,554,000 incurred in the first three quarters of
fiscal year 1998. The income tax benefit related to the special charges 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 special charges.
For the third fiscal quarter and the three fiscal quarters ended December 27,
1996, the Company had effective income tax benefit rates of 43% 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 $27,121,000 (net of a valuation allowance
of $11,297,000) at December 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 $71,000,000. 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 matching 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
$27,121,000. The Company evaluates the adequacy of the valuation allowance and
the realizability of the deferred tax asset on an ongoing basis.
14
<PAGE> 15
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
DIVIDENDS
The reported dividends for the third quarter and the first three quarters of
fiscal year 1998 were $1,539,000 and $4,609,000, respectively. The reported
dividends include imputed dividends of $352,000 and $1,625,000, respectively,
which are not payable in cash. The decrease in cash dividends for the third
quarter and the three quarters of fiscal year 1998 of $151,000 and $454,000,
respectively, is due to the conversion to common stock by some holders of the
Company's 7% Convertible Preferred Stock during the third quarter of fiscal
year 1997. The Company's dividends are summarized below:
<TABLE>
<CAPTION>
Fiscal quarter ended Three fiscal quarters ended
------------------------------------ ----------------------------------
December 26, December 27, December 26, December 27,
Dividend Summary 1997 1996 1997 1996
---------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash 7% Preferred $ 899,000 $1,050,000 $2,696,000 $3,150,000
Non-cash 6%
Imputed 352,000 245,00 1,625,000 245,000
In kind common 3% stock dividend 288,000 -- 288,000 --
---------- ---------- ---------- ----------
Total $1,539,000 $1,295,000 $4,609,000 $3,395,000
</TABLE>
Commencing with November 21, 1997, the 6% Preferred Stock outstanding accrues a
3% in kind 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 and simply represents the amortization of the fair market value
adjustment recorded at the date of issuance. After November 21, 1998, the
outstanding 6% Preferred Stock is entitled to a 6% cumulative cash dividend
payable quarterly.
15
<PAGE> 16
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION
Working capital at December 26, 1997 was $99,890,000 which is a decrease of
$10,815,000 from March 28, 1997. The current ratio at December 26, 1997 was
2.17:1 which compares to 2.21:1 at March 28, 1997.
Cash used by operating activities, including cash outflows related to
discontinued operations, for the first three quarters of fiscal year 1998
totaled $12,867,000, compared to $13,913,000 provided by operating
activities in the corresponding nine-month period of the prior fiscal year
primarily due to an increase in accounts receivable resulting from the increase
in revenues in the current year. Cash (used for) provided by operating
activities, excluding cash flows related to discontinued operations, are
$(8,635,000) and $25,822,000 for the three fiscal quarters ended December 26,
1997 and December 27, 1996, respectively. Capital expenditures of $2,540,000 for
the current three fiscal quarters were approximately the same as the prior
fiscal year; and management believes capital expenditures for the remainder of
fiscal year 1998 will be approximately the same as the amount spent during
fiscal year 1997, excluding any business acquisitions. During the first three
quarters of fiscal year 1998, the Company has acquired two companies.
These include the May 1997 acquisition of PHR Environmental Consultants, Inc., a
company that provides environmental historical research and investigation, for
an initial payment and related expenses of $1,271,000 and the September 1997
acquisition of 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 $4,200,000. In
addition, the Company sold its California based remediation services business
and received an initial payment of $2,800,000 in May 1997. On December 23, 1997,
the Company purchased two Environmental Protection Agency (EPA) contracts for
approximately $2,000,000. These five year contracts are valued at approximately
$94 million and involve a broad range of remedial action work.
On January 15, 1998 the Company signed a definitive agreement (the "Agreement")
to acquire OHM Corporation (OHM), a leading diversified environmental services
firm, for a total purchase price of approximately $365 million including the
assumption of OHM debt.
On January 16, 1998, the Company initiated the Offer to Purchase ("Tender
Offer") for cash 13,933,000 shares of OHM common stock. According to the terms
of the Agreement, assuming successful completion of the merger, OHM shareholders
will receive $11.50 per share, comprised of $8.00 in cash and 0.42 shares of IT
common stock (valued at $3.50 assuming a per share price of $8.25 for IT's
shares). Concurrently with the purchase of shares in the Tender Offer, OHM will
repurchase from one of its principal shareholders, a number of shares equal to
approximately 19 percent of OHM's outstanding shares. Assuming the Tender Offer
to purchase 13,933,000 shares (50.6%) of OHM common stock is successful, on
February 17, 1998, IT will own approximately 63% of OHM and will be entitled to
elect a majority of OHM's Board of Directors. The Company will then consolidate
OHM and record an approximate 37% minority interest in OHM. Upon completion of
the proposed transaction (which is expected in mid-April 1998), OHM will then be
merged with a wholly-owned subsidiary of IT in which each of the remaining
outstanding shares of OHM not acquired through the Tender Offer will be
converted into 1.394 shares of IT common stock at which time the Company will
own and consolidate 100% of OHM.
IT will execute the Tender Offer with a $240 million credit facility, (the
"Tender Offer Credit Facilities") which will be used to fund the Tender Offer
and for acquisitions and working capital. In addition, the Tender Offer Credit
Facility will be used to refinance IT's existing $65 million principal amount of
senior notes. During the fourth quarter of fiscal year 1998, the Company will
incur a $8.7 million pre-tax charge as an extraordinary item as a result of the
refinancing and early extinguishment of the Company's $65 million senior notes.
This $8.7 million pre-tax charge will include an approximate $5.1 million
payment to the lenders of the $65 million senior notes as a prepayment penalty
(Make-Whole Provision) and a $3.6 million non-cash charge to write off the
related unamortized debt issue costs. The Company expects to take substantial
special charges in connection with the integration of OHM during fiscal year
1999. The Company believes substantial cost synergies will be achieved as a
result of the acquisition and related integration plan.
The Tender Offer Credit Facility, will be secured by a security interest in
substantially all of the assets of IT and its subsidiaries (including the shares
of OHM Common Stock acquired by the Company upon completion of the Tender Offer
but excluding the assets of OHM and its subsidiaries). Loans made under the
Tender Offer Credit Facilities
16
<PAGE> 17
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
bear interest at a rate equal to LIBOR plus 2.50% per annum (or Citibank's base
rate plus 1.50% per annum) for a period of four months from the tender offer
funding date. If the loans continue to be outstanding on that date, the rate
will increase by 1.00% per annum, and will increase by an additional 0.50% per
annum on the corresponding date in each of the six succeeding months, if the
loans are still outstanding on those dates. The loans made under the Tender
Offer Credit Facilities will not amortize, and will be payable in full at their
maturity at the earlier of the Merger Credit Facilities (as defined below)
funding date or 18 months.
To complete the merger, IT will effect a $425 million refinancing (the
"Merger Credit Facilities"). This new credit facility will replace
IT's Tender Offer Credit Facilities and OHM debt.
The Merger Credit Facilities will consist of an eight year amortizing term loan
of up to $225 million and a six-year revolving credit facility of up to $200
million. (The terms of the commitments provide that the lenders, at their
option, may reallocate up to $50.0 million from the revolving credit facility to
the term loan.) The proceeds of loans made under the Merger Credit Facilities
will be used to finance the cash consideration to be paid in the Merger, to pay
related expenses and costs, to refinance IT's loans outstanding under the Tender
Offer Credit Facility and OHM's loans outstanding under its existing credit
facility (under which approximately $60.2 million was outstanding as of February
9, 1998), to provide working capital for IT and its subsidiaries (including OHM
and its subsidiaries) and for general corporate purposes of IT and its
subsidiaries. The Merger Credit Facilities will be secured by a security
interest in substantially all of the assets of IT and its subsidiaries
(including the assets of OHM and its subsidiaries). The term loans made under
the Merger Credit Facilities will bear interest at a rate equal to LIBOR plus
2.50% per annum (or Citibank's base rate plus 1.50% per annum), and revolving
loans made under the Merger Credit Facilities will bear interest at a rate equal
to LIBOR plus 2.00% per annum (or Citibank's base rate plus 1.00% per annum),
through the date that is six months after completion of the Merger, with
adjustments thereafter based on the ratio of IT's consolidated total debt to
consolidated earnings before interest, taxes, depreciation and amortization. The
term loan made under the Merger Credit Facilities will amortize on a quarterly
basis in aggregate annual installments of $2.25 million for the first six years
after the Merger, with the remainder payable in eight equal quarterly
installments in the seventh and eighth years after the Merger. IT will also be
required to prepay portions of the term loans under the Merger Credit Facilities
with the net proceeds of any asset sales and certain debt and equity financings,
and with a portion of IT's consolidated excess cash flow annually. The Credit
Facilities include certain representations, warranties, covenants, and other
conditions customary for facilities of this type.
At the completion of the OHM merger, if successfully consummated, the Company
will have sufficient availability under the Merger Credit Facilities to meet
currently forseeable needs. As a result, management believes its current
liquidity position is sufficient to meet foreseeable requirements, as well as to
fund expansion and diversification of the Company's business through both
internal growth and acquisitions.
The transaction is subject to a number of conditions, including approvals
related to the merger by the shareholders of both companies, and other customary
conditions and regulatory approvals, including termination or expiration of the
waiting period under the Hart-Scott Rodino Act which occurred on January 26,
1998.
On January 21,1998 the Company announced the acquisition of Jellinek, Schwartz &
Connolly (JSC), a company providing economically driven, science-based
environmental consulting and advocacy services to clients in the areas of
chemical product registration, environmental regulatory strategy, and risk
management for an initial payment of approximately $5,200,000.
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
17
<PAGE> 18
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
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 December 26, 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 December 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
$18,582,000. As noted above, these facilities are to be replaced upon completion
of the merger with OHM.
In aggregate, at December 26, 1997, letters of credit totaling approximately
$12,900,000 relating to the Company's insurance program and bonding requirements
were outstanding against the Company's bank line of credit. In October 1997,
letters of credit outstanding for financial assurance were reduced from
$2,700,000 to zero.
During fiscal year 1998, the Company 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) is being 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).
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. Management believes that through its existing financing
package and the Merger Credit Facilities discussed previously, the Company's
liquidity position is expected to be sufficient to meet forseeable
requirements.
TRANSPORTATION, TREATMENT AND DISPOSAL DISCONTINUED OPERATIONS
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 closure is expected to be completed 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
evaluated the Company's preferred closure plan as well as several alternative
plans and
18
<PAGE> 19
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
stated that the Company's preferred closure plan was 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. Although in December 1997,
DTSC certified the final EIR, which determined that the Company's plan was the
environmentally superior alternative, the DTSC continues to consider comments on
the closure plans from the Company, and from other interested parties supporting
alternative plans, and it is uncertain what plan or hybrid of plans DTSC may
ultimately approve. While approval of the final closure plan continues to be
delayed, the Company now expects a plan and all necessary permits to be approved
in the fourth quarter 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
site closure, 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 of closure and post-closure costs (which could be subject to
increases at later dates as a result of regulatory requirements). At December
26, 1997, financial assurance was comprised of a corporate guarantee of
approximately $18,000,000 and a trust fund containing approximately $16,000,000,
and purchased annuities which will mature over the next 30 years to pay for
estimates of post-closure costs. In October 1997, certain letters of credit also
utilized 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. Revisions to the closure procedures could also result in
impairment of the residual land values attributed to certain of the sites.
19
<PAGE> 20
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
The carrying value of the long-term assets of transportation, treatment and
disposal discontinued operations of $40,048,000 at December 26, 1997 is
principally comprised of residual land at the inactive disposal facilities 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 had previously formulated development plans and an agreement with a
developer for some of this property as part of a larger development in the local
area. The entitlement process was delayed pending approval of the Company's
closure plan for its adjacent disposal facility and local community review of
growth strategy. This review recommended strategies for limiting growth in the
area. These growth-limiting recommendations have now been incorporated in a
draft general plan and environmental impact report which have been released for
public comments during a period ending in March 1998. Ultimately, if development
plans are materially restricted or acceptable entitlements are unobtainable, the
carrying value of this property could be significantly impaired. In regard to
any of the 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.
Consequently, 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.
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 reviewed the USEPA's request and submitted a
proposal 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
20
<PAGE> 21
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
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 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
21
<PAGE> 22
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION (CONTINUED)
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 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.
IT transported various waste streams both generated by IT and on behalf of its
customers to the Eastside 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. 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 claims against a number of its past insurers 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 completion of the OHM tender offer and acquisition, projected
financial results, funding of backlog, the effects of the Company's
restructuring and industry-wide market factors.
22
<PAGE> 23
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 6 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 proceedings related to the discontinued operations of the
Company.
Central Garden
The Company has reached settlements of the three remaining personal injury
cases, which are subject to approval 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 and
paid by the Company and the coverage of the Company's insurance policies.
Times Beach Investigation
In November 1997, the Company was advised that certain employees of its
affiliate Quanterra Incorporated had been subpoenaed by the United States
Attorney for Missouri to appear before a grand jury investigating certain
matters with respect to the integrity of the stack sampling for the Company's
Times Beach, Missouri incineration project. Although the Company believes that
the matters which are the subject of the current investigation have been
previously investigated by the Missouri Department of Natural Resources and the
United States Environmental Protection Agency, both of which agencies have
resolved such matters in favor of the Company, it is evaluating its remedies
with respect to the investigation.
23
<PAGE> 24
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.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of January 15, 1998,
among OHM Corporation, the registrant and IT-Ohio, Inc. (1)
2.2 Parent Voting Agreement dated January 15, 1998 among OHM
Corporation, the registrant and the stockholders of the
registrant named therein. (1)
2.3 Company Voting Agreement dated January 15, 1998 among OHM
Corporation, the registrant and the shareholders of OHM
Corporation named therein. (1)
2.4 Share Repurchase Agreement dated January 15, 1998 among OHM
Corporation, the registrant, Rust International, Inc. And
Waste Management, Inc. (1)
2.5 Confidentiality Agreement, dated September 25, 1997, between
OHM Corporation and the registrant. (1)
27 Financial Data Schedule for the quarter ended December 26,
1997.
</TABLE>
- ----------------
(1) Previously filed with the Securities and Exchange Commission as
Exhibits to the Registrant's Schedule 14D-1 Tender Offer Statement
dated January 16, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K
Report on Form 8-K, dated January 16, 1998, announcing the Company's
tender offer for and proposed merger with OHM Corporation.
24
<PAGE> 25
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 February 9, 1998
------------------------------------- ----------------------
Anthony J. DeLuca
President and Chief Executive Officer
and Duly Authorized Officer
HARRY J. SOOSE, JR. February 9, 1998
------------------------------------- ----------------------
Harry J. Soose, Jr.
Vice President, Finance and
Principal Accounting Officer
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 26, 1997, AND ITS
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 26,
1997, FILED FEBRUARY 9, 1998 ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 26,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> DEC-26-1997
<CASH> 54,128
<SECURITIES> 0
<RECEIVABLES> 115,518
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 185,604
<PP&E> 140,455
<DEPRECIATION> 101,320
<TOTAL-ASSETS> 324,497
<CURRENT-LIABILITIES> 85,714
<BONDS> 65,650
0
6,438
<COMMON> 97
<OTHER-SE> 156,928
<TOTAL-LIABILITY-AND-EQUITY> 324,497
<SALES> 0
<TOTAL-REVENUES> 306,178
<CGS> 0
<TOTAL-COSTS> 271,572
<OTHER-EXPENSES> 8,554
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,386
<INCOME-PRETAX> 1,484
<INCOME-TAX> 4,316
<INCOME-CONTINUING> (2,832)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,832)
<EPS-PRIMARY> $(.76)
<EPS-DILUTED> 0
</TABLE>
