<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 25, 1998
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 30, 1998 the registrant had issued and outstanding an aggregate of
22,628,433 shares of its common stock.
<PAGE> 2
INTERNATIONAL TECHNOLOGY CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 25, 1998
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
as of September 25, 1998 (unaudited) and
March 27, 1998. 3
Condensed Consolidated Statements of Operations
for the Fiscal Quarter and Two Fiscal Quarters ended
September 25, 1998 and September 26, 1997 (unaudited). 4
Condensed Consolidated Statements of Cash Flows
for the Two Fiscal Quarters ended September 25, 1998
and September 26, 1997 (unaudited). 5
Notes to Condensed Consolidated Financial
Statements (unaudited). 6-12
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 13-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 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>
September 25, March 27,
1998 1998
------------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,350 $ 24,765
Receivables, net 280,998 210,630
Prepaid expenses and other current assets 18,748 25,523
Deferred income taxes 12,144 12,750
--------- ---------
Total current assets 343,240 273,668
Property, plant and equipment, at cost:
Land and land improvements 642 846
Buildings and leasehold improvements 12,980 18,222
Machinery and equipment 81,449 159,433
--------- ---------
95,071 178,501
Less accumulated depreciation and amortization 49,257 102,480
--------- ---------
Net property, plant and equipment 45,814 76,021
Cost in excess of net assets of acquired businesses 331,283 211,878
Investment in Quanterra -- 16,300
Other assets 16,708 17,557
Deferred income taxes 86,716 73,745
Long-term assets of discontinued operations 40,048 40,048
--------- ---------
Total assets $ 863,809 $ 709,217
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 126,007 $ 82,597
Accrued liabilities 72,406 80,486
Billings in excess of revenues 5,415 3,723
Short-term debt, including current portion of long-term debt 13,416 16,738
Current liabilities of discontinued operations, net 9,706 15,200
--------- ---------
Total current liabilities 226,950 198,744
Long-term debt 326,423 240,147
8% convertible subordinated debentures 44,548 44,550
Long-term accrued liabilities of discontinued operations, net 500 3,773
Other long-term accrued liabilities 31,601 23,755
Minority interest 557 50,098
Commitments and contingencies
Stockholders' equity:
Preferred stock, $100 par value; 180,000 shared authorized:
7% cumulative convertible exchangeable, 20,556 shares issued
and outstanding 2,056 2,056
6% cumulative convertible participating, 45,819 and 45,271 shares issued
and outstanding, respectively 4,572 4,451
Common stock, $.01 par value; 50,000,000 shares authorized;
22,636,511 and 9,737,589 shares issued, respectively 226 97
Treasury stock at cost, 8,078 shares (74) (74)
Additional paid-in capital 348,447 246,681
Deficit (121,997) (105,061)
--------- ---------
Total stockholders' equity 233,230 148,150
--------- ---------
Total liabilities and stockholders' equity $ 863,809 $ 709,217
========= =========
</TABLE>
See accompanying notes
3
<PAGE> 4
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
---------------------------- ----------------------------
September 25, September 26, September 25, September 26,
1998 1997 1998 1997
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 260,187 $ 102,840 $ 485,375 $ 201,021
Cost and expenses:
Cost of revenues 229,634 91,428 427,764 178,185
Selling, general and administrative expenses 13,350 6,919 27,228 14,338
Special charges -- -- 24,971 4,611
--------- --------- --------- ---------
Operating income 17,203 4,493 5,412 3,887
Other (expense) income (122) -- 67 --
Interest, net (7,969) (1,121) (16,871) (2,149)
--------- --------- --------- ---------
Income (loss) before income taxes 9,112 3,372 (11,392) 1,738
Provision for income taxes (3,644) (1,450) (2,431) (2,730)
--------- --------- --------- ---------
Net income (loss) 5,468 1,922 (13,823) (992)
Less preferred stock dividends (1,569) (1,537) (3,138) (3,070)
--------- --------- --------- ---------
Net income (loss) applicable to common stock $ 3,899 $ 385 $ (16,961) $ (4,062)
========= ========= ========= =========
Net income (loss) per share:
Basic $ .17 $ .04 $ (.98) $ (.42)
========= ========= ========= =========
Diluted $ .16 $ .04 $ (.98) $ (.42)
========= ========= ========= =========
Weighted average common shares outstanding:
Basic 22,631 9,740 17,256 9,741
========= ========= ========= =========
Diluted 28,646 9,740 17,256 9,741
========= ========= ========= =========
</TABLE>
See accompanying notes
4
<PAGE> 5
INTERNATIONAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Two fiscal quarters ended
-----------------------------
September 25, September 26,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,823) $ (992)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 14,533 5,058
Special charges 24,971 1,800
Deferred income taxes 1,891 2,419
Other 16 130
Changes in assets and liabilities, net of effects from acquisitions and
dispositions of businesses:
Changes in assets and liabilities (20,918) (7,674)
Effects of acquisition and sale of businesses (32,231) (2,021)
Decrease in site closure costs of discontinued operation (8,767) (7,100)
-------- --------
Net cash used for operating activities (34,328) (8,380)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,504) (1,954)
Acquisition of businesses (39,193) (5,340)
Proceeds from sale of Quanterra and other assets 6,749 --
Proceeds from disposition of remediation business -- 2,800
Other, net 662 (603)
-------- --------
Net cash used for investing activities (35,286) (5,097)
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs (4,917) --
Net borrowing (repayments) of long-term debt 82,924 (2,274)
Dividends paid on preferred stock (1,808) (899)
-------- --------
Net cash provided by (used for) financing activities 76,199 (3,173)
-------- --------
Net increase (decrease) in cash and cash equivalents 6,585 (16,650)
Cash and cash equivalents at beginning of period 24,765 78,897
-------- --------
Cash and cash equivalents at end of period $ 31,350 $ 62,247
======== ========
</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 and year to date period ended September 25, 1998, pursuant to
the rules of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations although the Company believes that the disclosures in
such financial statements are adequate to make the information
presented not misleading.
The Company's fiscal year ended March 27, 1998 included four
thirteen-week fiscal quarters with the fourth quarter ending on the
last Friday in March. On June 9, 1998, the Board of Directors of IT
approved a change in IT's fiscal year end from the last Friday in
March of each year to the last Friday of December of each year. The
report covering the transition period will be IT's Annual Report on
Form 10-K for the nine month period ending December 25, 1998.
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 27, 1998. The results of
operations for the fiscal period ended September 25, 1998 are not
necessarily indicative of the results for the full fiscal year. The
March 27, 1998 balance sheet amounts were derived from audited
financial statements.
2. In January 1998, the Company entered into a merger agreement to
acquire OHM Corporation (OHM), an environmental and hazardous waste
remediation company servicing primarily industrial, federal
government and local government agencies located primarily in the
United States. The transaction was effected through a two-step
process for a total purchase price of $303.4 million consisting of
(a) the acquisition of 54% of the total outstanding shares through a
cash tender offer, which was consummated on February 25, 1998, at
$11.50 per share for 13,933,000 shares of OHM common stock, for a
total consideration of $160.2 million plus $4.6 million in asset
acquisition costs and (b) the acquisition on June 11, 1998 of the
remaining 46% of the total outstanding shares through the exchange of
12,900,000 shares of Company common stock valued at $8.04 per share,
or $103.8 million and payment of $30.8 million plus $4.0 million in
asset acquisition costs.
This transaction was accounted for as a step acquisition purchase and
therefore the effects of the first phase of the merger were included
in the March 27, 1998 financial statements and the effects of both
phases were included in the June 26, 1998 financial statements. The
excess of the purchase price over the fair value of assets acquired
and liabilities assumed in the merger of $317.1 million is classified
as cost in excess of net assets of acquired businesses and is being
amortized over forty years.
The estimated fair value of the assets acquired and liabilities
assumed of OHM are as follows:
<TABLE>
<CAPTION>
Description Amount
----------- ------
(In thousands)
<S> <C>
Current assets $ 138,431
Property and equipment 21,295
Cost in excess of net assets of acquired businesses 317,093
Other long term assets 58,030
Current liabilities 124,096
Long term liabilities, primarily debt 107,268
</TABLE>
As a result of the merger with OHM (the "OHM Merger"), the Company has
commenced the process of closing specific overlapping facilities and
reducing consolidated employment. The acquired balance sheet includes
an accrual of $13.3 million for the estimated OHM severance, office
closure costs and lease termination costs of which $5.9 million has
been paid through September 25, 1998.
The purchase price allocation is preliminary and based upon
information currently available. Management is continuing to gather
and evaluate information regarding the valuation of assets and
liabilities at the dates of both the first and second phases of the
acquisition. Management does not anticipate material changes to the
preliminary allocation.
6
<PAGE> 7
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The following unaudited pro forma condensed statement of operations
gives effect to the OHM Merger as if both phases of the transaction
had occurred at the beginning of the six month period ended September
26, 1997.
<TABLE>
<CAPTION>
September 26, 1997
Pro Forma
------------------
(In thousands, except per share data)
<S> <C>
Revenues $483,358
Net loss (25,089)
Net loss applicable to common stock (28,159)
Loss per share:
Basic and diluted (1.28)
</TABLE>
The above amounts are based upon certain assumptions and estimates
which the Company believes are reasonable. The pro forma results do
not reflect anticipated cost savings and do not necessarily represent
results which would have occurred if the OHM Merger had taken place at
the date and on the basis assumed above.
3. In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income," and Statement No.
131, "Disclosures about Segments of an Enterprise and Related
Information." Statement No. 130 which does not materially impact the
Company and is effective for fiscal years beginning after December 15,
1997, requires separate reporting of certain items (cumulative
translation adjustment, selected pension accounts, certain hedging and
investment amounts) affecting shareholders' equity outside of those
included in arriving at net earnings. Statement No. 131, effective for
the period ending December 25, 1998, establishes requirements for
reporting information about operating segments in annual and interim
statements. This statement may require additional footnote disclosure
relating to certain operating segments of the Company, however, the
extent of this change, if any, has not been determined.
4. In February 1997, FASB issued Statement No. 128, Earnings per Share,
which was required to be adopted for periods ending after December 14,
1997. The Company has changed the method used to compute earnings per
share and restated all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock
options is excluded. The computation of diluted earnings (loss) per
share, assuming conversion into common shares of the Company's
convertible preferred stock, common stock warrants and common stock
options, is antidilutive except for the quarter ended September 25,
1998, and therefore excluded from the diluted earnings per share
calculation.
The weighted average number of common shares outstanding increased
significantly on June 11, 1998 as a result of the Company issuing
12,911,000 common shares in exchange for the remaining 46% of the
outstanding OHM shares. As of September 25, 1998, the number of IT
common shares outstanding is 22,628,433. Generally Accepted Accounting
Principles require per share data be calculated utilizing the weighted
average number of shares outstanding during the reporting period.
This calculation results in a weighted average number of common shares
outstanding of 17,256,081 and 22,631,273 for the six months and three
months ended September 25, 1998, respectively.
7
<PAGE> 8
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
-------------------------- ------------------------
September 25, September 26, September 25, September 26,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) $ 5,468 $ 1,922 $(13,823) $ (992)
Preferred stock dividends (1,569) (1,537) (3,138) (3,070)
-------- ------- -------- -------
Numerator for basic earnings per share-
income (loss) applicable to common
stock 3,899 385 (16,961) (4,062)
Effect of dilutive securities:
Preferred stock dividends 670 -- -- --
-------- ------- -------- -------
Numerator for diluted earnings per share-
income (loss) applicable to common
stock after assumed conversions $ 4,569 $ 385 $(16,961) $(4,062)
======== ======= ======== =======
DENOMINATOR:
Denominator for basic earnings per share-
weighted average shares 22,631 9,740 17,256 9,741
Effect of dilutive securities:
Convertible preferred stock 6,015 -- -- --
-------- ------- -------- -------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions 28,646 9,740 17,256 9,741
======== ======= ======== =======
BASIC EARNINGS (LOSS)
PER SHARE $ 0.17 $ 0.04 $ (0.98) $ (0.42)
======== ======= ======== =======
DILUTED EARNINGS (LOSS)
PER SHARE $ 0.16 $ 0.04 $ (0.98) $ (0.42)
======== ======= ======== =======
</TABLE>
5. In June of 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement will be
required to be adopted as of the first fiscal quarter of the year
2000. The Company intends to adopt FASB No. 133 by the effective date
although earlier adoption is permitted. The statement requires the
swap agreements, used by the Company to manage the interest rate risks
associated with the variable nature of the Company's Credit Facilities
(see Note 11), to be recorded at fair market value and reflected in
earnings. The Company has evaluated its existing interest rate
contracts and management does not believe that the effect of market
volatility on interest rates will have a material effect on earnings
for the existing contracts including anticipated modifications.
6. In December 1987 the Company's Board of Directors adopted a strategic
restructuring program which included a formal plan to divest the
transportation, treatment and disposal operations through the sale of
some facilities and closure of certain other facilities. Subsequent to
this date, the Company ceased obtaining new business for these
operations. As of September 25, 1998, two of the Company's inactive
disposal sites have been formally closed, a third is substantially
closed, and the fourth is in the process of closure. In connection
with the plan of divestiture, from December 1987 through March 27,
1998, 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 $168.2 million, net of income tax benefit of $35.9
million. At September 25, 1998, the Company's
8
<PAGE> 9
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
condensed consolidated balance sheet included accrued liabilities of
$10.2 million 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, liquidity and results of operations
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.
7. 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 27, 1998; 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
legal proceedings of the discontinued operations of the Company.
8. Included in accounts receivable, net at September 25, 1998 are billed
receivables, unbilled receivables and retention in the amounts of
$239.4 million, $28.7 million and $12.9 million, respectively. Billed
receivables, unbilled receivables and retention from the U.S.
Government as of September 25, 1998 were $142.5 million, $13.0 million
and $2.4 million, respectively. At March 27, 1998, billed receivables,
unbilled receivables and retention were $172.7 million, $27.0 million
and $10.9 million, respectively. Billed receivables, unbilled
receivables and retention from the U.S. Government as of March 27,
1998 were $93.1 million, $9.9 million and $2.2 million, 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 the completion of
the projects. Generally, unbilled receivables are expected to be
billed and collected in the subsequent year. Included in accounts
receivable at September 25, 1998 is approximately $18.0 million
associated with unapproved change orders and claims performed by the
Company, which management believes to be probable of realization. This
approximate $18.0 million includes contract claims in litigation (see
Note 7 to the Condensed Consolidated Financial Statements). While
management believes no material loss will be incurred related to these
unapproved change order claims, the actual amounts realized could be
materially different than the amounts recorded.
9. On May 27, 1998, IT's Board of Directors considered and approved the
divestiture of certain non-core assets. The non-core assets primarily
include the Company's 19% common stock ownership interest in
Quanterra, Inc., an environmental laboratory business, and the assets
associated with IT's Hybrid Thermal Treatment System (HTTS(R))
business. As a result of these actions, the Company recorded a
non-cash charge of $25.0 million in the quarter ending June 26, 1998
including $10.6 million (net of cash proceeds of $5.8 million) related
to the sale of the Quanterra investment and $14.4 million, primarily
related to assets associated with IT's HTTS(R) business.
Special charges of $4.6 million were recorded in the fiscal quarter
ended June 27, 1997. These special items included a $2.8 million
charge associated with the relocation of the Company's corporate
headquarters, and a $1.8 million loss from the sale of a small
remediation services business. The relocation of the Company's
headquarters from Torrance, California to Monroeville (Pittsburgh),
Pennsylvania has enabled the Company to consolidate corporate overhead
functions. As a result of this relocation, the Company incurred a
pre-tax charge of $2.8 million. The relocation charge included $0.8
million of costs for severance, $1.0 million of costs for the
relocation of IT employees, $0.7 million of costs related to the
closure of the offices in Torrance, California and $0.4 million of
other related costs. As part of this relocation, employment was
reduced by 32, primarily corporate management and administrative
support personnel. As of September 25, 1998, $0.3 million of the
charge remained to be paid.
9
<PAGE> 10
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
10. For the second quarter ended September 25, 1998, the Company recorded
an income tax provision of $3.6 million reflecting an income tax rate
of 40% for the quarter on income of $9.1 million. For the two fiscal
quarters ended September 25, 1998, the Company recorded an income tax
provision of $2.4 million (net of a $3,000,000 benefit), reflecting an
income tax rate of 40% on income of $13.6 million excluding special
charges of $25.0 million. The income tax benefit related to the
special charges incurred in the first quarter was offset by an
increase in the Company's deferred tax valuation allowance of $6.9
million, based on the Company's assessment of the uncertainty as to
when it will generate a sufficient level of future earnings of
applicable character to realize a portion of the deferred tax asset
created by the special charges.
For the second quarter ended September 26, 1997, the Company recorded
an income tax provision of $1.5 million, 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 $2.7 million, reflecting a 43% tax rate on income excluding special
charges of $4.6 million incurred in the first quarter. The income tax
benefit related to the special charges was offset by an increase in
IT's deferred tax valuation allowance of $1.8 million.
Based on a net deferred tax asset of $98.9 million (net of a valuation
allowance of $44.9 million) at September 25, 1998 and assuming a net
federal and state effective tax rate of 40%, the level of future
earnings necessary to fully realize the deferred tax asset would be
$247.2 million. 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 acquisitions, restructuring and existing backlog, management
expects that its future taxable income will more likely than not allow
the Company to fully realize its net deferred tax asset.
11. On June 11, 1998, the closing date of the second phase of the OHM
acquisition (see Note 2 above), the Company effected a $378.0 million
refinancing (the "Credit Facilities"). The Company recently modified
its Credit Facilities to permit the acquisition of Fluor Daniel GTI,
Inc. (see Note 12 below).
The Credit Facilities consist of an eight-year amortizing term loan
(term loans) of $228.0 million and a six-year revolving credit
facility (revolving loans) of $185.0 million, as amended (pursuant to
the First Amendment to the Credit Facilities) which increased the
revolving credit facility by $35.0 million effective September 16,
1998, and contains a sublimit of $50.0 million for letter of credit
issuance. As of September 25, 1998, the Company had utilized $126.3
million against the revolving credit facility and had $58.7 million of
availability under its revolving credit facility. The term loans made
under the Credit Facilities bear interest at a rate equal to LIBOR
plus 2.50% per annum (or Citibank's base rate plus 1.50% per annum)
and amortize on a semi annual basis in aggregate annual installments
of $4.5 million for the first six years or through June 2004, with the
remainder payable in eight equal quarterly installments in the seventh
and eighth years. The revolving loans made under the Credit Facilities
bear interest at a rate equal to LIBOR plus 2.00% per annum (or
Citibank's base rate plus 1.00% per annum). No later than 30 days
after the end of the Company's fiscal quarter ending December 25,
1998, adjustments, if any, to the interest rates will be made based on
the ratio of IT's consolidated total debt to consolidated earnings
before interest, taxes, depreciation and amortization. The Company was
required by the terms of the Credit Facilities to enter into interest
rate contracts for 40% or $126.0 million of the Company's outstanding
Credit Facilities borrowings as of June 11, 1998. These interest rate
contracts are derivative instruments and are considered to be cash
flow hedges used to protect the Company against the risk of rising
interest rates. The Company's term loans and revolving loans include
rates of interest that periodically adjust based upon the market level
of short term interest rates. The Credit Facilities are secured by
substantially all of the assets of the Company and its subsidiaries.
In addition, the facilities also contain certain restrictive covenants
that, among other things, prohibit the payment of cash dividends on
common stock, limit capital expenditures, and require the Company to
meet certain financial targets.
The Credit Facilities include certain representations, warranties and
covenants customary for facilities of this type. In addition, the
Credit Facilities contain customary events of default including
material adverse changes and a change of control provision which
includes among other things the sale, assignment, transfer or other
disposition of the Company's 6% Cumulative Convertible Participating
Preferred Stock or the warrants (the "Carlyle Warrants") issued to The
Carlyle Group ("Carlyle") to any person that is not a Carlyle investor
or permitted affiliate of Carlyle (a "Carlyle Control Affiliate").
10
<PAGE> 11
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
12. On October 27, 1998, the Company signed a definitive agreement (the
"GTI Merger Agreement") to acquire Fluor Daniel GTI, Inc. ("GTI"), a
broad-based environmental services firm, for a total purchase price of
approximately $71.4 million (including approximately $2.0 million of
acquisition related costs). On November 3, 1998, the Company commenced
a tender offer ("Tender Offer") to purchase for cash all of GTI's
common stock for $8.25 per share. The GTI Merger Agreement provides
that the Company's obligation to accept for payment and to pay for any
shares tendered is subject to the condition that Fluor Daniel, Inc.
("FD"), which owns approximately 52.3% of the shares, tender the
shares it owns, and at least a majority of the shares not owned by FD
are tendered (collectively, the "Minimum Condition"). Pursuant to the
GTI Merger Agreement, FD has agreed to tender the shares it owns in
the Tender Offer. The GTI Merger Agreement provides, among other
things, that as soon as practicable after the completion of the Tender
Offer and the satisfaction or waiver of the conditions set forth in
the GTI Merger Agreement, including the Minimum Condition, the
Company's acquisition subsidiary will be merged with and into GTI (the
"Merger"), and GTI will continue as the surviving corporation of the
Merger and as a wholly-owned subsidiary of the Company. At the
effective time of the Merger, each share then outstanding (other than
shares owned directly or indirectly by the Company or held in the
treasury of GTI, all of which will be canceled, and other than shares
held by stockholders who perfect appraisal rights under Delaware law)
will be converted into the right to receive $8.25 in cash or any
higher price per share paid in the Tender Offer. Unless extended, the
Tender Offer and related withdrawal rights will expire, and the shares
of GTI will be purchased, on Wednesday, December 2, 1998.
The purchase price will be financed through the Company's Credit
Facilities, which were amended to permit, under certain conditions,
the Tender Offer, and cash on hand at GTI. Approximately $51.0 million
of proceeds from the revolving loans and from the Company's cash on
hand together with approximately $20.0 million of GTI's cash on hand
(which will be loaned to the Company's newly formed acquisition
subsidiary and will be evidenced by an interest bearing promissory
note payable on demand), will be used by the Company's acquisition
subsidiary to pay for shares accepted for payment in the Tender Offer
and to pay cash consideration in the Merger.
The availability of financing under the Credit Facilities is subject
to several conditions including no default, continued accuracy of
representations and warranties, no material adverse change with
respect to the Company or certain of its principal operating
subsidiaries and certain other conditions customary for credit
facilities of this type. Additionally, to complete the GTI Tender
Offer and the Merger, the Credit Facilities require that revolving
credit availability under the Credit Facilities, be at least equal to
$25.0 million plus the amount necessary to complete the Merger on the
date of purchase of shares pursuant to the Tender Offer and that the
average credit availability under the Credit Facilities after
subtracting the amount of revolver loans made to finance the purchase
of shares in the Tender Offer shall not be less than $25.0 million for
the 60 days prior to the date of such purchase. The Credit Facilities
also require that the Merger be completed no later than February 15,
1999, and that all conditions to the Merger contained in the GTI
Merger Agreement are satisfied or waived with the consent of the
lenders.
Concurrently with the GTI Merger Agreement, the Company, FD and GTI
entered into an Amended and Restated Marketing Agreement, dated as of
October 27, 1998 (the "Marketing Agreement"). The Marketing Agreement
provides that, effective upon the consummation of the Tender Offer,
and for four years thereafter, the Company will become FD's contractor
of choice on a worldwide basis for certain environmental services. FD
will not be obligated to promote the Company's services for certain
types of projects, including FD's Fernald and Hanford projects, and
projects involving the management and operations and/or management
integration of U.S. Department of Energy facilities.
11
<PAGE> 12
INTERNATIONAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
13. On October 6, 1998, the Company announced that, subject to shareholder
consent, it is changing its name from International Technology
Corporation to "The IT Group, Inc.". The IT Group, Inc. intends to
continue the use of the names of wholly-owned subsidiaries such as
Gradient Corporation; PHR Environmental Consultants, Inc.; Jellinek,
Schwartz & Connolly, Inc.; Beneco Enterprises, Inc.; Pacific
Environmental Group, Inc. and LandBank, Inc., as well as IT
Corporation and OHM Remediation Services Corp.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTERNATIONAL TECHNOLOGY CORPORATION
FOR QUARTER ENDED SEPTEMBER 25, 1998
RESULTS OF OPERATIONS
OVERVIEW
The Company provides a full range of technology-driven, value-added consulting,
engineering and construction capabilities through a network of over 60 offices
in the United States and selected international locations. The Company's
services include construction and remediation, risk assessment, air quality
management, pollution prevention and waste minimization, information management,
land-use planning and restoration services of impaired properties,
decontamination and decommissioning, design/build, wastewater treatment,
historical research and investigation, environmental consulting and advocacy
services, engineering services and facility outsourcing for operation,
maintenance and construction. The Company's business strategy is to be a global
provider of environmental and infrastructure solutions to both the government
and private industry clients. As part of this strategy, the Company completed
its acquisition of OHM Corporation (OHM) on June 11, 1998. In addition, the
Company signed a definitive agreement to acquire Fluor Daniel GTI, Inc. (GTI) on
October 28, 1998. This transaction is expected to close in December 1998. GTI is
a broad-based environmental firm primarily serving the commercial industry
(including the petroleum, chemical, aerospace, utility and manufacturing
sectors) and should substantially advance the strategic objectives of the
Company to balance and strengthen the commercial and government revenue mix of
the Company.
REVENUES
Revenues for the three months ended September 25, 1998 increased $157.4 million
or 153% to $260.2 million compared to revenues of $102.8 million reported in the
same quarter last year. This increase is primarily attributable to the
additional revenue generated from the acquisition of OHM.
Revenues reported by the Company for the first two quarters ended September 25,
1998 were $485.4 million, an increase of 142% when compared to revenues of
$201.0 million for the corresponding period of the prior year. Revenues
generated from the Company's federal government contracts accounted for $334.1
million of the consolidated revenues during the first six months this year
compared to $114.7 million of federal government revenues during the first six
months last year. State and local government revenues also increased to $21.8
million or 73% above the $12.6 million reported in the six months ended
September 26, 1997. The Company's revenues attributable to U.S. federal, state
and local government contracts as a percentage of the Company's consolidated
revenues for the second quarter and the two quarters ended September 25, 1998
and September 26, 1997 is outlined in the table below.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED TWO FISCAL QUARTERS ENDED
---------------------------- -----------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Department of Defense (DOD)... 52% 44% 53% 45%
U.S. Department of Energy (DOE).... 11 10 9 10
Other federal agencies ............ 8 3 7 2
-- -- -- --
71 57 69 57
State and local governments ....... 5 6 4 6
-- -- -- --
Total ............................. 76% 63% 73% 63%
== == == ==
</TABLE>
13
<PAGE> 14
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
Completion of the recently announced GTI acquisition is expected to decrease the
percentage of the Company's total revenue attributable to U.S. federal
government contracts from the current approximately 70%, as outlined in the
table above, to 60%.
In the quarter ended September 25, 1998, DOD revenues of $135.5 million were
$89.9 million higher than the $45.6 million in revenues reported in the second
quarter of the prior year. DOD revenues of $254.7 million for the six months
ended September 25, 1998 exceeded last year DOD revenues by $165.1 million or
184%. This increase is primarily attributable to the OHM acquisition. 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.
DOE revenues increased by 157% from $10.6 million in the second quarter last
year to $27.2 million in the second quarter of this year. DOE revenues for the
six months ended September 25, 1998 were $45.3 million or $25.1 million above
DOE revenues of $20.2 million reported during the same six months last year. The
increase in the DOE revenues is due to the OHM acquisition and to the
performance of the Company's $122 million project involving the drying of an
estimated one million tons of contaminate soils at the DOE's Fernald Ohio 1,050
acre site. Revenues from other federal agencies also increased to $6.5 million
and $3.1 million for the six months and three months ended September 25, 1998,
respectively, compared to $2.8 million and $1.5 million reported during the same
six month and three month periods last year.
The Company's revenues from commercial and international operations were $129.5
million and $63.0 million for the six months and three months ended September
25, 1998, respectively, compared to $73.8 million and $37.8 million reported
during the same comparative periods last year. The revenue growth from the
commercial sector is primarily due to the Company's business acquisitions, over
the past two years, of firms serving the private sector. Revenue growth from the
commercial and international markets is uncertain partly due to increased
emphasis on competitively bid lower cost solutions and partly due to uncertainty
regarding possible rollbacks of environmental regulation and/or delaying certain
work until final Congressional action is taken on the reauthorization of CERCLA.
Contemplated changes in regulations could decrease the demand for certain of the
Company's services, as customers anticipate and adjust to the new regulations.
However, 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. The Company believes that, as a
result of greater flexibility by regulators on acceptable cleanup standards, the
overall strength of the U.S. economy and increased corporate profits, in the
near term at least, commercial opportunities are expanding. It is uncertain,
however, how long and to what extent this perceived expansion will continue.
The Company's total contract backlog at September 25, 1998 was approximately
$3.6 billion of which approximately $2.8 billion 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.
GROSS MARGIN
Gross margin percentage for the quarter ended September 25, 1998 increased to
11.7% of revenues from 11.1% of revenues for the corresponding period of the
prior fiscal year. The improvement in gross margin is primarily due to the
overhead cost efficiencies achieved as a result of the OHM acquisition. In the
short term, the Company expects to maintain the improved gross margin levels
achieved as a result of this acquisition and the recently announced GTI
acquisition. 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 ended September 25, 1998, gross margin of 11.9% of
revenues increased from the 11.4% of revenues in the corresponding period of the
prior year, generally for the same reasons noted above related to the second
quarter.
14
<PAGE> 15
INTERNATIONAL TECHNOLOGY CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the three months ended September 25, 1998, selling, general and
administrative (SG&A) expenses as a percentage of revenues decreased to 5.1%
from the 6.7% reported during the same period last year. Excluding goodwill
amortization resulting from the OHM acquisition, SG&A expenses were 4.2% of
revenues in the three months ended September 25, 1998 compared to 6.5% for the
same comparative period last year. This decrease is primarily due to the
elimination of certain duplicative overhead functions and other cost savings
achieved as a result of the OHM acquisition.
Selling, general and administrative expenses for the two quarters ended
September 25, 1998 were 5.6% of revenues compared to 7.1% of revenues for the
same two quarters last year. Excluding goodwill amortization resulting from the
OHM acquisition, SG&A expenses were 4.6% of revenues. In the near term, the
Company expects the current level of selling, general and administrative
expenses to be maintained.
SPECIAL CHARGES
The Company recorded a non-cash charge of $25.0 million during the six month
period ending September 25, 1998 relating to the divestiture of certain non-core
assets and special charges of $4.6 million during the six month period ending
September 26, 1997; including a $2.8 million charge associated with the
relocation of the Company's headquarters and a $1.8 million loss from the sale
of the Company's remediation services business. See Item 1. Financial Statements
- - Notes to Condensed Consolidated Financial Statements, Note 9.
INTEREST, NET
For the second quarter and first six months ended September 25, 1998, net
interest expense represented 3.1% and 3.5% of revenues, respectively, compared
to 1.1% of revenues for both the second quarter and first six months ended
September 26, 1997. The increase in the net interest expense is due principally
to the increased debt (See Item 1. Financial Statements-Notes to Condensed
Consolidated Financial Statements, Note 11) necessary to finance the OHM
acquisition and also due to the non-recurring write off of debt issuance costs
of $2.4 million related to the Credit Facilities.
INCOME TAXES
The Company recorded an income tax provision for the three and six month periods
ended September 25, 1998 in the amount of $3.6 million and $2.4 million,
respectively and for the three and six month periods ended September 26, 1997 in
the amount of $1.5 million and $2.7 million, respectively. The provision for
income tax was calculated utilizing an effective tax rate of 40% and 43% of
income for the three months ended September 25, 1998 and September 26, 1997,
respectively. The provision for income taxes for the six months ended September
25, 1998 and September 26, 1997 was calculated utilizing the 40% and 43%
effective rates, respectively, on income excluding special charges and giving
effect to changes in the Company's deferred tax valuation allowance. See Item 1.
Financial Statements - Notes to Condensed Consolidated Financial Statements,
Note 10.
DIVIDENDS
The reported dividends for the quarter and two fiscal quarters ended September
25, 1998 were $1.6 million and $3.1 million, respectively. The reported
dividends include imputed dividends of $0.3 million and $0.7 million,
respectively, which are never payable in cash or stock.
Commencing with November 21, 1997, the 6% Cumulative Preferred Stock outstanding
accrues an annual 3% in kind stock dividend payable quarterly 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 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
RESULTS OF OPERATIONS (CONTINUED)
The Company's dividends are summarized below:
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
----------------------------- ---------------------------------
September 25, September 26, September 25, September 26,
Dividend Summary 1998 1997 1998 1997
---------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash 7% Preferred $ 899,000 $ 898,000 $1,798,000 $1,797,000
Non-cash 6%
Imputed 327,000 639,000 657,000 1,273,000
In kind common 3% stock dividend 343,000 -- 683,000 --
---------- ---------- ---------- ----------
Total $1,569,000 $1,537,000 $3,138,000 $3,070,000
========== ========== ========== ==========
</TABLE>
16
<PAGE> 17
INTERNATIONAL TECHNOLOGY CORPORATION
FINANCIAL CONDITION
Working capital at September 25, 1998 was $116.3 million which is an increase of
$41.4 million from the March 27, 1998 working capital of $74.9 million. The
current ratio at September 25, 1998 was 1.51:1 which compares to 1.38:1 at March
27, 1998.
Cash used by operating activities, which includes cash outflows related to
discontinued operations, for the first two quarters ended September 25, 1998
totaled $34.3 million compared to $8.4 million used by operating activities in
the corresponding period of last year primarily due to the increase in accounts
receivable resulting from the seasonal increase in revenues, payment of
liabilities accrued in connection with the OHM merger and payment of certain
transaction and financing costs previously accrued. Capital expenditures of $3.5
million for the first two quarters were $1.6 million greater than the prior
fiscal year principally due to increased capital expenditure requirements due to
the acquisition of OHM. On June 25, 1998 the Company sold its investment in
Quanterra and received cash proceeds of $5.8 million.
In addition to the OHM acquisition, the Company acquired four consulting firms
during the year ended March 27, 1998. The acquisition agreements related to
these firms, along with the acquisition of Beneco by OHM, include potential
future earnout payments ranging from a low of zero to a maximum of approximately
$18.6 million of which $3.3 million can be payable in the Company's common stock
over the next three years. The Company has paid $1.3 million in earnouts on two
of these agreements in May and September 1998.
On June 11, 1998, the Company completed the second phase of the acquisition of
OHM. At that time, the Company replaced the $240.0 million credit facility
("Interim Credit Facilities") with a $378.0 million refinancing ("Credit
Facilities") and initially borrowed $228.0 million under the term loan and
approximately $87.0 million under the revolving credit facility. The proceeds of
the loans made under the Credit Facilities were used to finance the cash
consideration paid in the OHM merger, to pay related expenses and costs, to
refinance loans outstanding under the Interim Credit Facilities and OHM's loans
outstanding under its then existing credit facility. The Credit Facilities
consist of an eight-year amortizing term loan of $228.0 million and a six-year
revolving credit facility of $185.0 million, as amended, which increased the
revolving credit facility by $35.0 million effective September 16, 1998. The
$185.0 million revolving facility provides working capital for IT and its
subsidiaries (including OHM and its subsidiaries) and for general corporate
purposes. The Company is utilizing the increased credit capacity for seasonal
volume requirements and accelerated work at the Fernald OU1 Project. The Credit
Facilities are secured by an interest in substantially all of the assets of IT
and its subsidiaries.
The term loans made under the Credit Facilities 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 Credit Facilities bear interest at a rate equal
to LIBOR plus 2.00% per annum (or Citibank's base rate plus 1.00% per annum),
from June 11, 1998 through January 25, 1999, with upward or downward adjustments
thereafter based on the ratio of IT's consolidated total debt to consolidated
earnings before interest and taxes and depreciation and amortization, as defined
by the Credit Facilities loan agreement. The Company was required by the terms
of the Credit Facilities to enter into interest rate contracts for 40% or $126.0
million of the Company's outstanding Credit Facilities borrowings as of June 11,
1998. These interest rate contracts are derivative instruments and are
considered to be cash flow hedges used to protect the Company against the risk
of rising interest rates. The Company's term loans and revolving loans include
rates of interest that periodically adjust based upon the market level of short
term interest rates.
The term loans under the Credit Facilities amortize on a semi annual basis in
aggregate annual installments of $4.5 million through June 2004, with the
remainder payable in eight equal quarterly installments in the seventh and
eighth years of the Credit Facilities agreement. IT is required to prepay the
loans under the Credit Facilities with the net proceeds of asset sales and
certain debt and equity financing, and with a portion of IT's consolidated
excess cash flow. In addition, the terms of OHM's 8% Convertible Subordinated
Debentures (guaranteed by IT) require annual sinking fund payments in an amount
equal to approximately $4.3 million which may be satisfied by repurchases of
debentures in the market. The Company has satisfied the sinking fund
requirements for this year. These Debentures are callable by the Company at par
and are convertible at the option of the holders into a combination of IT common
stock that converts each $1,000 8% debenture into 45.04 IT common shares and
$107.50 in cash.
17
<PAGE> 18
INTERNATIONAL TECHNOLOGY CORPORATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Credit Facilities include certain representations, warranties and covenants
customary for facilities of this type. In addition, the Credit Facilities
contain customary events of default including change of control provisions which
include as events of default, among other things, the sale, assignment, transfer
or other disposition of the 6% Cumulative Convertible Participating Preferred
Stock or the Carlyle Warrants to any person that is not a Carlyle Investor or a
Carlyle Control Affiliate.
On September 16, 1998, the Company entered into a First Amendment to the Credit
Facilities to increase availability under its revolving credit facility by $35.0
million.
In preparation for the GTI merger, the Company entered into a Second Amendment,
dated October 26, 1998, to its Credit Facilities ("Second Amendment"). The
Second Amendment permits the Credit Facilities to be used for the GTI merger
under certain conditions and modifies certain financial covenants in the Credit
Facilities, also to accommodate the GTI merger. Approximately $51.0 million of
proceeds from the revolving loans and from the Company's cash on hand together
with approximately $20.0 million of GTI's cash on hand (which will be loaned to
the Company's newly formed acquisition subsidiary and will be evidenced by an
interest bearing promissory note payable on demand), will be used by the
Company's acquisition subsidiary to pay for shares accepted for payment in the
Tender Offer and to pay cash consideration in the Merger.
The availability of financing under the Credit Facilities is subject to several
conditions including no default, continued accuracy of representations and
warranties, no material adverse change with respect to the Company or certain of
its principal operating subsidiaries and certain other conditions customary for
credit facilities of this type. Additionally, to complete the GTI Tender Offer
and the Merger, the Credit Facilities require that revolving credit availability
under the Credit Facilities be at least equal to $25.0 million plus the amount
necessary to complete the Merger on the date of purchase of shares pursuant to
the Tender Offer and that the average credit availability under the Credit
Facilities after subtracting the amount of revolver loans made to finance the
purchase of shares in the Tender Offer be not less than $25.0 million for the 60
days prior to the date of such purchase. The Credit Facilities also require that
the Merger be completed no later than February 15, 1999, and that all conditions
to the Merger contained in the GTI Merger Agreement are satisfied or waived with
the consent of the lenders.
Long-term debt (including the 8% convertible subordinated debentures) of $371.0
million at September 25, 1998 increased slightly from the $369.2 million at June
26, 1998 due to increased working capital requirements resulting from the OHM
acquisition. The Company's ratio of debt (including current portion) to equity
decreased to 1.65:1 at September 25, 1998 from 1.67:1 at June 26, 1998.
With regard to the transportation, treatment and disposal discontinued
operations, a number of items could potentially affect the liquidity and capital
resources of the Company, including changes in closure and post-closure costs,
realization of excess and residual land values, demonstration of financial
assurance and resolution of other regulatory and legal contingencies. (See
Transportation, Treatment and Disposal Discontinued Operations.)
On September 25, 1998, after giving effect to revolver borrowings and letters of
credit outstanding, the Company had $58.7 million of availability under its
revolving credit facility. The Company continues to have significant cash
requirements, including expenditures for the closure of its inactive disposal
sites and PRP matters (see Transportation, Treatment and Disposal Discontinued
Operations), interest, required term loan and subordinated debenture principal
payments, preferred dividend obligations, operating lease payments, contingent
liabilities, its obligations under the GTI Merger Agreement, and potential
future acquisitions. The Company's liquidity position will require careful
management to assure the Company's ability to complete the GTI Merger and its
various other cash requirements. In connection with the Company's plans for
continued internal growth and growth through acquisitions, additional capital
sources are being explored. The Credit Facility permits the issuance of $150.0
million of senior subordinated debt, and Carlyle has the option to invest an
additional $15.0 million as part of the November 20, 1996 investment.
18
<PAGE> 19
INTERNATIONAL TECHNOLOGY CORPORATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
TRANSPORTATION, TREATMENT AND DISPOSAL DISCONTINUED OPERATION
As a part of the Company's discontinued transportation, treatment, and disposal
operations, the Company operated a series of treatment, storage and disposal
facilities in California, including four major disposal facilities. Closure
plans for all four of these facilities have now been approved by all applicable
regulatory agencies. Closure construction has been completed at two of these
facilities (Montezuma Hills and Benson Ridge) and is substantially completed at
a third (Vine Hill), with final completion expected in the spring of 1999.
On March 18, 1998, the DTSC certified the Environmental Impact Report and
approved the Closure Plan for the Panoche facility. The approved plans provide
for submittal of technical studies that will be utilized to determine final
aspects, details and costs of closure construction and monitoring programs.
While IT believes that the approved closure plans substantially reduce future
cost uncertainties to complete the closure of the Panoche facility, the ultimate
costs will depend upon the results of the technical studies called for in the
approved plans. Closure construction for the plan is scheduled to be completed
in the fall of 2000. As a part of the closure process, the Company has excavated
all of the drum burial units in the facility. The drums were the alleged source
of low levels of contaminants which migrated through groundwater underneath a
portion of municipally-owned land adjacent to the facility.
Closure and post-closure costs are incurred over a significant number of years
and are subject to a number of variables including, among others, negotiations
regarding the details of site closure and post-closure, with DTSC, the United
States Environmental Protection Agency (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. Operation of
the facilities in the closure and post-closure periods is also subject to
regulation by the same agencies. Closure costs are comprised principally of
engineering, design and construction costs and of caretaker and monitoring costs
during closure. 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. The Company has estimated the impact of closure and
post-closure costs in the provision for loss on disposition of transportation,
treatment and disposal discontinued operations; however, closure and
post-closure costs could be higher than estimated if regulatory agencies were to
require closure and/or post-closure procedures significantly different than
those in the approved plans, or if the Company is required to perform unexpected
remediation work at the facilities in the future or to pay penalties for alleged
noncompliance with regulations or permit conditions.
Regulations of the DTSC and the USEPA require that owners and operators of
hazardous waste treatment, storage and disposal facilities provide financial
assurance for closure and post-closure costs of those facilities. The Company
provided such financial assurance equal to its estimate for closure and post
closure costs at March 1, 1998, which could be subject to increase at a later
time as a result of regulatory requirements, in the form of a corporate
guarantee of approximately $18.0 million, and approximately $25.6 million in
trust funds and purchased annuities which will ultimately mature over the next
30 years to pay for its estimates of post-closure costs. As a result of the
progress of ongoing closure work at the Panoche and Vine Hill Complex
facilities, the Company reduced, in October 1998, its cost estimate for closure
such that the amount required to be financially assured is less than the balance
in the trust funds, and the Company expects the DTSC to release excess funds as
closure construction is completed.
The carrying value of the long-term assets of transportation, treatment and
disposal discontinued operations of $40.0 million at September 25, 1998 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. A portion of the residual land is the
subject of a local community review of its growth strategy. This review has
recommended strategies for limiting growth in the area applicable to certain of
the Company's property, which have been incorporated in a draft general plan and
environmental impact report which were released for public comment in the spring
of 1998. Ultimately, if development plans are materially restricted or
acceptable entitlements are unobtainable, the carrying value of this property
could be significantly impaired. The Company is also pursuing favorable planning
changes with respect to certain other nearby property. None of these strategies
or changes have been finalized but are anticipated to be formally considered by
the community beginning as early as the fall of 1998. There is no assurance as
to the timing of development or sales of any of
19
<PAGE> 20
INTERNATIONAL TECHNOLOGY CORPORATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
the Company's residual land, 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.
With respect to the Operating Industries, Inc. (OII) Superfund site in Monterey
Park, California, for which USEPA notified a number of entities, including the
Company, that they were PRPs, there were no significant developments during the
quarter.
With respect to the GBF Pittsburg landfill site near Antioch, California, for
which in September 1987, the Company and 17 other companies were served with a
Remedial Action Order (RAO) issued by the DTSC, the PRP group continues to work
with the RWQCB and the DTSC to determine the scope of the studies necessary for
consideration of the group's containment zone application. The PRP group is
exploring the current site owner/operator's proposal to mediate the on-going
cost recovery litigation which mediation could commence as early as late
February 1999. Failure of the PRP group to effect a satisfactory resolution with
respect to the choice of appropriate remedial alternatives for the GBF Site 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.
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 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, including the Environmental
Protection Corporation Eastside facility near Bakersfield, California, 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 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 obligations
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.
YEAR 2000
The Company's core financial and administrative software system is certified as
Year 2000 compliant by the vendor. During fiscal year 1998, the Company
established an integration test plan to test this software and verify Year 2000
compliance. In February 1998, these integration tests were successfully
completed. The Company's core hardware was also tested and was found to be fully
compliant with the year 2000 requirements. As of September 25, 1998, the Company
has incurred costs of approximately $2.0 million to address Year 2000 issues.
The Company has begun communicating with customers, suppliers, financial
institutions and others with which it does business to coordinate year 2000
conversion. The total cost of compliance and its effect on the Company's future
results of operations is being determined as part of the detailed conversion
plan and is not expected to be material. At this time, the Company cannot
predict the impact on its consolidated financial condition, liquidity and
results of operations of the U.S. federal government's Year 2000 readiness. A
significant portion of the Company's business (approximately 70%) is
attributable to the federal government. The Company is currently developing a
contingency plan to address how the Company will handle the most reasonably
likely worst case scenarios including situations where the Company's customers,
suppliers, financial institutions and others are not Year 2000 compliant on
January 1, 2000. The Company does not have control over these third parties and,
as a result, cannot currently estimate to what extent future operating results
may be adversely affected by the failure of these third parties to successfully
address their Year 2000 issues. However, the Company's contingency plan includes
actions designed to identify and minimize any third party exposures and
management believes that, based on third party exposures identified to date,
these issues should be resolved by the year 2000.
20
<PAGE> 21
INTERNATIONAL TECHNOLOGY CORPORATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
FORWARD LOOKING STATEMENTS
Statements of the Company's or management's intentions, beliefs, expectations or
predictions for the future, denoted by the words "anticipate", "believe",
"estimate", "expect", "project", "imply", "intend", "foresee", and similar
expressions are forward-looking statements that reflect the current views of the
Company and its management about future events and are subject to certain risks,
uncertainties and assumptions. Such risks, uncertainties and assumptions include
those identified in the "Business - Operations" - "Regulations", -
"Environmental Contractor Risks", - "Insurance and Risk Management", - "Risk of
Achievement of Synergies and Integration of Operations", - "Leverage" - "History
of Losses", and "Legal Proceedings" sections of the Company's Report on Form
10-K (as amended) for the year ended March 27, 1998, and the business
opportunities (or lack thereof) that may be presented to and pursued by the
Company, changes in laws or regulations affecting the Company's operations, as
well as competitive factors and pricing pressures, bidding opportunities and
success, project results, management's judgment regarding revenue recognition
and adequacy of reserves, success in pursuing claims and change orders, ability
to collect receivables on a timely basis, to manage its cash resources, results
of litigation, funding of backlog, matters affecting contracting and engineering
businesses generally, such as the seasonality of work and weather and clients'
timing of projects, the ability to generate a sufficient level of future
earnings to utilize the Company's deferred tax assets, the ultimate costs and
results of closure and divestiture of the Company's discontinued operations, the
effects of the integration of OHM and any other major acquisitions, including
the proposed acquisition of Fluor Daniel GTI, Inc., and achievement of expected
synergies therefrom, and industry-wide market factors other general economic and
business conditions and other factors, many of which are beyond the control of
the Company. The Company's actual results could differ materially from those
projected in such forward-looking statements as a result of such factors.
21
<PAGE> 22
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 27, 1998. See also Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Transportation, Treatment and Disposal Discontinued Operations for information
regarding litigation related to the discontinued operations of the Company.
Except as noted, there have been no material changes in any of the Company's
legal proceedings since the date of the Company's Annual Report on Form 10-K.
Occidental Chemical Litigation
OHM Remediation Services Corporation and Occidental Chemical Corporation have
filed cross-motions for summary judgement on their various claims and anticipate
rulings on the motions in the late fall of 1998.
22
<PAGE> 23
INTERNATIONAL TECHNOLOGY CORPORATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the Company's Annual Meeting of Stockholders held October 6,
1998, the Company solicited proxies in connection with the election of the four
Directors elected by the holders of the Company's Common Stock (the "Common
Stock Directors").
Each of the incumbent Common Stock Directors was re-elected for a term ending at
the next Annual Meeting of Stockholders, or until his respective successor is
elected and qualified, pursuant to the following vote:
Total Vote For Total Vote Withheld
Each Director From Each Director
------------- ------------------
Anthony J. DeLuca 18,718,129 134,658
James C. McGill 18,502,852 349,935
Richard W. Pogue 18,713,542 139,245
Charles W. Schmidt 18,717,436 135,351
Each of the Company's five Directors elected by the holders of the Convertible
Preferred Stock, Daniel A. D'Aniello, Philip B. Dolan, E. Martin Gibson, Robert
F. Pugliese, and Admiral James D. Watkins, was also re-elected for a like term
by written action of the holders of the Convertible Preferred Stock.
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.
Exhibit No. Description
- ----------- --------------------------------------------------------------
10(ii) 25. First Amendment dated September 16, 1998 to the
Amended and Restated Credit Agreement, dated as of
June 11, 1998, among the Registrant, IT
Corporation, OHM Corporation, the institutions
from time to time party thereto as lenders, the
institutions from time to time party thereto as
issuing banks, Citicorp USA Inc., in its capacity
as administrative agent, and BankBoston, N.A., in
its capacity as documentation agent.**
26. Second Amendment dated October 26, 1998 to the
Amended and Restated Credit Agreement, dated as of
June 11, 1998, among the Registrant, IT
Corporation, OHM Corporation, the institutions
from time to time party thereto as lenders, the
institutions from time to time party thereto as
issuing banks, Citicorp USA Inc., in its capacity
as administrative agent, and BankBoston, N.A., in
its capacity as documentation agent.**
27. Agreement and Plan of Merger, dated as of October
27, 1998, among Fluor Daniel GTI, Inc., Fluor
Daniel, Inc., Tiger Acquisition Corporation and
the registrant.**
28. Amended and Restated Marketing Agreement dated as
of October 27, 1998 between Fluor Daniel GTI, Inc.
and Fluor Daniel, Inc.**
29. Intercompany Services Agreement dated October 27,
1998 between the registrant, Fluor Daniel, Inc.
and Fluor Daniel GTI, Inc.**
10(iii) 4. Form of Amendment dated October 23, 1998, to the
Restricted Stock and Escrow Agreement under the
Registrant's 1991 Stock Incentive Plan.*
27 1. Financial Data Schedule for the quarter ended
September 25, 1998.
* Filed as a management compensation plan or arrangement per
Item 14(a)(3) of the Securities Exchange Act.
** Filed as an Exhibit to the registrant's Schedule 14D-1 dated
November 3, 1998 and incorporated herein by reference.
- ----------------
(b) Reports on Form 8-K
Current Report on Form 8-K, dated October 27, 1998, reporting under
Item 5 the execution of the Agreement and Plan of Merger dated as of
October 27, 1998, among the registrant, Tiger Acquisition Corporation,
Fluor Daniel GTI, Inc. and Fluor Daniel, Inc.
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 November 9, 1998
- ------------------------------------ ----------------
Anthony J. DeLuca
President and Chief Executive Officer
and Duly Authorized Officer
PHILIP O. STRAWBRIDGE November 9, 1998
- ------------------------------------ ----------------
Philip O. Strawbridge
Senior Vice President, Chief
Administrative Officer and
Principal Financial Officer
HARRY J. SOOSE, JR. November 9, 1998
- ------------------------------------ ----------------
Harry J. Soose, Jr.
Vice President, Finance and
Principal Accounting Officer
25
<PAGE> 1
EXHIBIT 10(III)4
INTERNATIONAL TECHNOLOGY CORPORATION
RESTRICTED STOCK AND ESCROW AGREEMENT AMENDMENT
1991 STOCK INCENTIVE PLAN
This RESTRICTED STOCK AND ESCROW AGREEMENT AMENDMENT (this "Amendment")
is entered into as of October 23, 1998 by and between INTERNATIONAL TECHNOLOGY
CORPORATION, a Delaware corporation (the "Company"), and ___________________
("Employee").
RECITALS
WHEREAS, the Compensation Committee of the Board of Directors, which
administers the Company's 1991 Stock Incentive Plan (the "Plan"), has granted to
Employee on September 20, 1995, as a separate inducement in connection with his
or her employment with the Company, and not in lieu of any salary or other
compensation for his or her services, an award (the "Restricted Stock Award") to
purchase restricted shares of Common Stock, $0.01 par value, of the Company (the
"Common Stock") on the terms and conditions set forth in that certain Restricted
Stock and Escrow Agreement dated September 20, 1995 by and between the
undersigned and the Company (the "Escrow Agreement"); and
WHEREAS, said restricted stock award was modified resulting from the
one-for-four reverse stock split effective November 21, 1996 pursuant to which
each four shares of restricted stock were exchanged for one share of restricted
stock and the common stock price requirement set forth in paragraph 3(i) (B) was
adjusted from $4.00 to $16.00 and the common stock price requirement of
paragraph 3 (ii) (B) of the Escrow Agreement was adjusted from $5.00 to $20.00;
and
WHEREAS, at the October 6, 1998 meeting of the Compensation Committee of the
Board of Directors, a re-pricing of the above-mentioned common stock price
requirements was approved.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the parties hereto
hereby agree to amend paragraphs 3(i) (B) and 3(ii) (B) of the Escrow Agreement,
each such subparagraph to read in its entirety as follows:
3(i)(B) the closing price of the Company's Common Stock on the New
York Stock Exchange shall have averaged $10.00 or more per
share for any period of sixty consecutive calendar days
following the effective date of this Agreement.
<PAGE> 2
3(ii)(B) the closing price of the Company's Common Stock on the New
York Stock Exchange shall have averaged $14.00 or more per
share for a period of sixty consecutive calendar days
following the effective date of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized representative, and the Employee has hereunto
set his or her hand on the day and year first above written.
INTERNATIONAL TECHNOLOGY OPTIONEE:
CORPORATION:
By:________________________ _____________________________
Secretary Name (Signature)
_____________________________
The undersigned spouse of the Employee Street Address
hereby consents to the terms and
provisions of this amendment to the _____________________________
Escrow Agreement as of the day and City, State and Zip Code
year first above written.
_____________________________
___________________________ Social Security Number
(Spouse)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 25, 1998 AND ITS
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWO FISCAL QUARTERS ENDED
SEPTEMBER 25, 1998 FILED NOVEMBER 9, 1998 ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-25-1998
<PERIOD-START> MAR-28-1998
<PERIOD-END> SEP-25-1998
<CASH> 31,350
<SECURITIES> 0
<RECEIVABLES> 280,998
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 343,240
<PP&E> 95,071
<DEPRECIATION> 49,257
<TOTAL-ASSETS> 863,809
<CURRENT-LIABILITIES> 226,950
<BONDS> 370,971
0
6,628
<COMMON> 226
<OTHER-SE> 226,376
<TOTAL-LIABILITY-AND-EQUITY> 863,809
<SALES> 0
<TOTAL-REVENUES> 485,375
<CGS> 0
<TOTAL-COSTS> 427,764
<OTHER-EXPENSES> 24,971
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,871
<INCOME-PRETAX> (11,392)
<INCOME-TAX> 2,431
<INCOME-CONTINUING> (13,823)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,823)
<EPS-PRIMARY> (.98)
<EPS-DILUTED> (.98)
</TABLE>
