Tetra Tech 10-Q 2011
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Commission File Number 0-19655
TETRA TECH, INC.
(Exact name of registrant as specified in its charter)
3475 East Foothill Boulevard, Pasadena, California 91107
(Address of principal executive offices) (Zip Code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
As of August 1, 2011, 62,481,732 shares of the registrants common stock were outstanding.
TETRA TECH, INC.
Tetra Tech, Inc.
(unaudited - in thousands, except par value)
See accompanying Notes to Condensed Consolidated Financial Statements.
Tetra Tech, Inc.
(unaudited in thousands, except per share data)
See accompanying Notes to Condensed Consolidated Financial Statements.
Tetra Tech, Inc.
(unaudited in thousands)
See accompanying Notes to Condensed Consolidated Financial Statements.
TETRA TECH, INC.
The accompanying unaudited condensed consolidated financial statements and related notes of Tetra Tech, Inc. (we, us or our) have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended October 3, 2010.
Our condensed consolidated financial statements reflect all normal recurring adjustments that are considered necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year or for future years.
Our condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries, and joint ventures of which we are the primary beneficiary. For the joint ventures in which we do not have a controlling interest, but exert a significant influence, we apply the equity method of accounting (see Note 12 Joint Ventures for further discussion). All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation. For the three and nine months ended July 3, 2011, Interest expense net on the condensed consolidated statements of income reflects $0.2 million and $0.5 million in interest income compared to $0.2 million and $0.6 million for the same periods last year, respectively.
2. Accounts Receivable Net
Net accounts receivable and billings in excess of costs on uncompleted contracts consisted of the following:
Billed accounts receivable represent amounts billed to clients that have not been collected. Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or billed after the period end date. Substantially all unbilled receivables as of July 3, 2011 are expected to be billed and collected within twelve months. Unbilled accounts receivable include amounts related to requests for equitable adjustment to contracts that provide for price redetermination primarily with the U.S. federal government. These amounts are recorded only when they can be reliably estimated and realization is probable. Contract retentions represent amounts withheld by clients until certain conditions are met or the project is completed, which may be several months or years. The allowance for doubtful accounts is determined based on a review of client-specific accounts, and contract issues resulting from current events and economic circumstances. Billings in excess of costs on uncompleted contracts represent the amount of cash collected from clients and billings to clients on contracts in advance of
revenue recognized. The majority of billings in excess of costs on uncompleted contracts will be earned within twelve months.
Billed accounts receivable related to U.S. federal government contracts were $96.0 million and $86.3 million as of July 3, 2011 and October 3, 2010, respectively. U.S. federal government unbilled receivables, net of progress payments, were $97.6 million and $102.0 million as of July 3, 2011 and October 3, 2010, respectively. The non-current billings in excess of costs on uncompleted contracts are reported as part of our Other long-term liabilities on our condensed consolidated balance sheets. Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable as of July 3, 2011 and October 3, 2010.
3. Mergers and Acquisitions
On October 4, 2010, we acquired all of the outstanding capital stock of BPR, Inc. (BPR), a Canadian scientific and engineering services firm that provides multidisciplinary consulting and engineering support for water, energy, industrial plants, buildings and infrastructure projects. This acquisition further expands our geographic presence in eastern Canada, and enables us to provide clients with additional services throughout Canada. BPR is part of our Engineering and Consulting Services (ECS) segment. The estimated fair value of the purchase price was approximately $186 million, of which the initial payment of $157 million was financed with borrowings under our revolving credit facility and available cash resources. In addition, the former owners may receive over a two-year period from the acquisition date contingent earn-out payments up to an aggregate maximum of Canadian dollars (CAD) $40 million (equivalent to U.S. $41.7 million as of July 3, 2011) upon achievement of specified financial objectives. The estimated fair value of the contingent earn-out payments resulted in a discounted liability of $31.2 million, of which $15.5 million is reflected in Contingent earn-out liabilities and $15.7 million is included in Other long-term liabilities on our condensed consolidated balance sheet as of July 3, 2011. The contingent earn-out consideration is based on future operating income, and its fair value is estimated by management assessing the probability of the results being achieved in the future. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition:
BPR was acquired at the beginning of fiscal 2011 and its results are included in our consolidated results of operations for all of fiscal 2011. No pro forma results are presented for fiscal 2010 as the effect of the BPR acquisition was not considered material to our consolidated results of operations.
In the second quarter of fiscal 2011, we acquired substantially all of the assets of a Canadian firm that enhances our service offerings in water treatment and tailings management for oil sand producers, which are included in our ECS segment. During the first nine months of fiscal 2010, we acquired three companies that enhanced our service offerings and expanded our geographic presence in the ECS and Remediation and Construction Management segments. The purchase price for two of these acquisitions consisted of cash payments. The purchase price for the remaining two acquisitions consisted of an initial cash payment and contingent earn-out payments based upon achievement of specified financial objectives. The estimated fair values of the contingent considerations were recorded as liabilities on our condensed consolidated balance sheets. No pro forma results are presented for the respective interim periods as the effect of these acquisitions was not considered material, individually or in aggregate, to our consolidated financial statements.
Subsequent Event. In the fourth quarter of fiscal 2011, we acquired substantially all of the assets of a mining engineering company located in Western Australia, using available cash resources. This acquisition enhances our technical expertise in the mining and minerals processing sector, expands our service offerings in Australia and serves as a gateway to new markets across Asia and Africa.
4. Goodwill and Intangibles
The changes in the carrying value of goodwill by segment for the nine months ended July 3, 2011 were as follows:
The goodwill additions are attributable to fiscal 2011 acquisitions described in Note 3, Mergers and Acquisitions and represent the value paid for the assembled workforce, the international geographic presence, and engineering and consulting expertise. Substantially all of the goodwill additions are not deductible for income tax purposes. The foreign currency translation adjustments relate to our Canadian operations. The goodwill adjustments reflect earn-out payments and accruals associated with acquisitions consummated prior to fiscal 2010, which are accounted for as goodwill adjustments under previous accounting rules. The purchase price allocations related to the fiscal 2011 acquisitions are preliminary, and subject to adjustment based on the valuation and final determination of net assets acquired. We do not believe that any adjustment will have a material effect on our consolidated results of operations.
The gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives included in Intangible assets - net on our condensed consolidated balance sheets, were as follows:
For the nine months ended July 3, 2011, the increases in gross amounts are attributable to fiscal 2011 acquisitions described in Note 3, Mergers and Acquisitions and, to a lesser extent, foreign currency translation adjustments. For the three and nine months ended July 3, 2011, amortization expense for these intangible assets was $7.0 million and $20.7 million, compared to $2.9 million and $8.9 million for the same periods last year, respectively. Estimated amortization expense for the remainder of fiscal 2011 and the succeeding years is as follows:
5. Stockholders Equity and Stock Compensation Plans
We recognize the fair value of our stock-based compensation awards as compensation expense on a straight-line basis over the requisite service period in which the award vests. For the three and nine months ended July 3, 2011, stock-based compensation expense was $2.5 million and $7.8 million, compared to $2.3 million and $7.7 million for the same periods last year, respectively. The majority of these amounts was included in Selling, general and administrative (SG&A) expenses in our condensed consolidated statements of income.
No stock options were granted in the third quarter of fiscal 2011. For the nine months ended July 3, 2011, we granted 1,060,849 stock options with exercise prices of $22.81 $23.48 per share and an estimated weighted-average fair value of $9.11 per share. In addition, we awarded 84,606 shares of restricted stock in the first quarter of fiscal 2011 to our directors and executive officers at the fair value of $23.48 per share on the award date. All of these shares are performance-based and vest over a three-year period. The number of shares that ultimately vest is based on the growth in our diluted earnings per share.
6. Earnings Per Share (EPS)
Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding, less unvested restricted stock for the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive potential common shares for the period. Potential common shares include the weighted-average dilutive effects of outstanding stock options and unvested restricted stock using the treasury stock method.
The following table sets forth the number of weighted-average shares used to compute basic and diluted EPS:
For the three and nine months ended July 3, 2011, 2.9 million and 2.7 million options were excluded from the calculation of dilutive potential common shares, compared to 2.1 million and 2.3 million options for the same periods last year, respectively. These options were not included in the computation of dilutive potential common shares because the assumed proceeds per share exceeded the average market price per share for that period. Therefore, their inclusion would have been anti-dilutive.
7. Income Taxes
For the first nine months of fiscal 2011, our effective tax rate was 33.4% compared to 37.9% for the same period last year. The lower effective tax rate was primarily the result of the extension of the research and experimentation credits (R&E credits) and the continued expansion of our foreign operations. In the first quarter of fiscal 2011, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed into law. The Act included a retroactive extension of R&E credits for amounts incurred from January 1, 2010 through December 31, 2011. As a result of this extension, a $1.2 million benefit from R&E credits for the last nine months of fiscal 2010 was included in the first quarter of fiscal 2011 tax expense. We completed R&E credit studies
for fiscal 2008 and fiscal 2009 during the second quarter of fiscal 2011. The results of these studies did not have a material impact on the benefit previously recognized for the R&E credits.
8. Reportable Segments
Our reportable segments are as follows:
Engineering and Consulting Services (ECS). ECS provides front-end science and consulting services and project management in the areas of surface water management, groundwater, waste management, mining and geotechnical sciences, and information technology and modeling.
Technical Support Services (TSS). TSS advises clients through the study, design and implementation of projects. TSS provides management consulting and strategic direction in the areas of environmental remedial planning, disaster management, climate change, international development, and technical government staffing services.
Engineering and Architecture Services (EAS). EAS provides engineering and architecture design services, including Leadership in Energy and Environmental Design (LEED) services, together with technical and program administration services for projects related to water infrastructure, buildings and facilities, and transportation and land development.
Remediation and Construction Management (RCM). RCM provides a wide array of services, including program management, engineering, procurement and construction, construction management, and operations and maintenance. RCM is focused on construction management for U.S. federal and state and local government, and commercial clients; environmental remediation including unexploded ordinance (UXO); wetland restoration; energy projects including wind, solar, nuclear and other alternative energies; and communications development.
Management evaluates the performance of these reportable segments based upon their respective segment operating income before the effect of amortization expense related to acquisitions and other unallocated corporate expenses. We account for inter-segment sales and transfers as if the sales and transfers were to third parties; that is, by applying a negotiated fee onto the costs of the services performed. All significant intercompany balances and transactions are eliminated in consolidation.
The following tables set forth summarized financial information concerning our reportable segments:
Total assets by segment were as follows:
(1) Other expense includes corporate costs not allocable to segments.
(2) Other includes depreciation expense from corporate headquarters.
Other than the U.S. federal government, no single client accounted for more than 10% of our revenue. All of our segments generated revenue from all client sectors.
The following table represents our revenue by client sector:
9. Comprehensive Income
Comprehensive income is comprised of net income, and translation gains and losses from foreign subsidiaries with functional currencies different than our reporting currency, and unrealized gains and losses on hedging activities. The components of comprehensive income, net of related tax, are as follows:
On March 28, 2011, we entered into a new credit agreement (Credit Agreement) and concurrently terminated our prior credit agreement. The Credit Agreement provides for a $460 million five-year revolving credit facility (Facility), which includes a $200 million sublimit for the issuance of standby letters of credit and a $100 million sublimit for multicurrency borrowings and letters of credit. At our election, the Facility may be increased from time to time by an amount up to $140 million in the aggregate, provided that no existing lender is required to commit to any such increased amount. As of July 3, 2011, we had $111.5 million in borrowings outstanding at a weighted-average interest rate of 1.92% per annum, $28.5 million in standby letters of credit and $320 million in availability under the Facility. We had $11.5 million in multicurrency borrowings and letters of credit under the Facility as of July 3, 2011.
Interest on borrowings under the Credit Agreement is payable, at our election, at either (a) a base rate (the highest of the U.S. federal funds rate plus 0.50% per annum, the banks prime rate and the Eurocurrency rate plus 1.00%) plus a margin that ranges from 0.50% to 1.50% per annum, or (b) a Eurocurrency rate plus a margin that ranges from 1.50% to 2.50% per annum.
The Credit Agreement contains certain financial and various other affirmative and negative covenants. They include, among others, a maximum consolidated leverage ratio of 2.5x (total funded debt/earnings before interest, tax, depreciation and amortization (EBITDA, as defined in the Credit Agreement)), and a minimum consolidated fixed charge coverage ratio of 1.25x (EBITDA minus capital expenditures/cash interest plus taxes plus principal payments). As of July 3, 2011, we were in compliance with these covenants with a consolidated leverage ratio of 1.04x, and a consolidated fixed charge coverage ratio of 2.02x.
The Facility is guaranteed by our material subsidiaries and certain additional designated subsidiaries. Borrowings under the Credit Agreement are collateralized by our accounts receivable, the stock of our subsidiaries and intercompany debt. As of July 3, 2011, we met all compliance requirements.
11. Fair Value Measurements
Derivative Instruments. In fiscal 2009, we entered into an intercompany promissory note with a wholly-owned Canadian subsidiary in connection with the acquisition of Wardrop Engineering, Inc. The intercompany note receivable is denominated in CAD and has a fixed rate of interest payable in Canadian dollars. In the first quarter of fiscal 2010, we entered into three foreign currency forward contracts to fix the U.S. dollar amount of interest income to be received over the next three annual periods. Each contract is for CAD $4.2 million (equivalent to U.S. $4.0 million at the date of inception) and one contract matures on each of January 27, 2010, January 27, 2011, and January 27, 2012. In the second quarter of fiscal 2010, we settled the first foreign currency forward contract for U.S. $3.9 million, and we entered into a new forward contract for CAD $4.2 million (equivalent to U.S. $3.9 million at the date of inception) that matures on January 28, 2013. In the second quarter of fiscal 2011, we settled the second foreign currency forward contract for U.S. $3.9 million. In the third quarter of fiscal 2011, we entered into a new forward contract for CAD $4.2 million (equivalent to U.S. $4.2 million at the date of inception) that matures on January 27, 2014. Our objective was to eliminate variability of our cash flows on the amount of interest income we receive on the promissory note from changes in foreign currency exchange rates for a three-year period. These contracts were designated as cash flow hedges. Accordingly, changes in the fair value of the contracts are recorded in Other comprehensive income. The fair value and the change in the fair value were not material for the three and nine-month periods of fiscal 2011 and 2010. No gains or losses were recognized in earnings as these contracts were deemed to be effective hedges.
Debt. The fair value of long-term debt was determined using the present value of future cash flows based on the borrowing rates currently available for debt with similar terms and maturities. The carrying value of our long-term debt approximates fair value.
12. Joint Ventures
On October 4, 2010, we adopted an accounting standard that requires us to perform an analysis to determine whether our variable interests give us a controlling financial interest in a variable interest entity (VIE) and whether we should therefore consolidate the VIE. This analysis requires us to assess whether we have the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. This guidance eliminates the quantitative approach previously required for determining the primary beneficiary of a VIE and significantly enhances disclosures.
In the normal course of business, we form joint ventures, including partnerships and partially-owned limited liability companies, with third parties primarily to bid on and execute specific projects. In accordance with the current consolidation standard, we analyzed all of our joint ventures and classified them into two groups: (1) joint ventures that must be consolidated because they are either not VIEs and we hold the majority voting interest, or because they are VIEs and we are the primary beneficiary; and (2) joint ventures that do not need to be consolidated because they are either not VIEs and we hold a minority voting interest, or because they are VIEs and we are not the primary beneficiary.
Joint ventures are considered VIEs if (1) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support; (2) as a group, the holders of the equity investment at risk lack the ability to make certain decisions, the obligation to absorb expected losses or the right to receive expected residual returns; or (3) an equity investor has voting rights that are disproportionate to its economic interest and substantially all of the entitys activities are on behalf of the investor. Many of our joint venture agreements provide for capital calls to fund operations, as necessary; however, such funding is infrequent and is not
anticipated to be material. The majority of our joint ventures are pass-through entities for client invoicing purposes. As such, these are VIEs because the total equity investment is typically nominal and not sufficient to permit the entity to finance its activities without additional financial support.
We are considered the primary beneficiary and required to consolidate a VIE if we have the power to direct the activities that most significantly impact that VIEs economic performance, and the obligation to absorb losses or the right to receive benefits of that VIE that could potentially be significant to the VIE. In determining whether we are the primary beneficiary, our significant assumptions and judgments include the following: (1) identifying the significant activities and the parties that have the power to direct them; (2) reviewing the governing board composition and participation ratio; (3) determining the equity, profit and loss ratio; (4) determining the management-sharing ratio; (5) reviewing employment terms, including which joint venture partner provides the project manager; and (6) reviewing the funding and operating agreements. Examples of significant activities include engineering and design services; management consulting services; procurement and construction services; program management; construction management; and operations and maintenance services. If we determine that the power to direct the significant activities is shared by two or more joint venture parties, then there is no primary beneficiary and no party consolidates the VIE. In making the shared-power determination, we analyze the key contractual terms, governance, related party and de facto agency as they are defined in the accounting standard, and other arrangements.
In the first quarter of fiscal 2011, we assessed our joint ventures in accordance with the current consolidation standard and determined that a majority of our joint ventures were unconsolidated VIEs because we were not the primary beneficiary of those joint ventures. In some cases, we consolidated VIEs because we were the primary beneficiary of those joint ventures. None of our current joint ventures determined to be a VIE are individually significant to our condensed consolidated financial statements.
Through the third quarter of fiscal 2011, there were no changes in the status of the VIEs and no changes to the primary beneficiary designation of each VIE. Accordingly, we determined that none of the unconsolidated joint ventures should be consolidated and none of the consolidated joint ventures should be de-consolidated.
Consolidated Joint Ventures
The following represents the unaudited financial information of consolidated joint ventures included in our condensed consolidated financial statements:
The aggregate revenue of the consolidated joint ventures was $22.4 million and $60.8 million for the three and nine months ended July 3, 2011, respectively. The assets, liabilities and revenue of the consolidated joint ventures were immaterial for prior annual and interim periods as the largest consolidated joint ventures were acquired in connection with the BPR acquisition in the first quarter of fiscal 2011. The assets of our consolidated joint ventures are restricted for use only by those joint ventures and are not available for our general operations.
Unconsolidated Joint Ventures
We account for the majority of our unconsolidated joint ventures using the equity method of accounting. Under this method, we recognize our proportionate share of the net earnings of these joint ventures as a single line item under Other costs of revenue in our condensed consolidated statements of income. For the three and nine months ended July 3, 2011, we reported $1.0 million and $3.4 million of equity in earnings of unconsolidated joint ventures, compared to $0.3 million and $0.9 million for the same periods last year, respectively. Our maximum exposure to loss as a result of our investments in unconsolidated VIEs is typically limited to the aggregate of the carrying value of the investment and future funding commitments. Future funding commitments for the unconsolidated VIEs are immaterial. The unconsolidated VIEs are, individually and in aggregate, immaterial to our consolidated financial statements.
As of July 3, 2011, the aggregate carrying values of the assets and liabilities of the unconsolidated VIEs were $28.1 million and $25.2 million, respectively. The carrying values of these assets and liabilities as of October 3, 2010 were immaterial.
13. Commitments and Contingencies
We are subject to certain claims and lawsuits typically filed against the engineering, consulting and construction profession, alleging primarily professional errors or omissions. We carry professional liability insurance, subject to certain deductibles and policy limits, against such claims. However, in some actions, parties are seeking damages that exceed our insurance coverage or for which we are not insured. While management does not believe that the resolution of these claims will have a material adverse effect, individually or in aggregate, on our financial position, results of operations or cash flows, management acknowledges the uncertainty surrounding the ultimate resolution of these matters.
In May 2003, Innovative Technologies Corporation (ITC) filed a lawsuit in Montgomery County, Ohio against Advanced Management Technology, Inc. (AMT) and other defendants for misappropriation of trade secrets, among other claims. In June 2004, we purchased all the outstanding shares of AMT. As part of the purchase agreement, the former owners of AMT agreed to indemnify us for all costs and damages related to this lawsuit. In December 2007, the case went to trial and the jury assessed $5.8 million in compensatory damages against AMT. In addition, the jury assessed $17 million in punitive damages against AMT plus reasonable attorneys fees. In July 2008, the Common Pleas Court of Montgomery County denied AMTs motion for judgment notwithstanding the verdict and conditionally denied AMTs motion for a new trial. Further, the court remitted the verdict to $2.0 million in compensatory damages and $5.8 million in punitive damages. ITC accepted the remittitur, and AMT appealed. The appellate court remanded the matter to the trial court for ruling on ITCs motion for prejudgment interest and attorneys fees. In December 2009, the trial court assessed ITC $2.9 million in attorneys fees and costs, and denied ITCs motion for prejudgment interest. AMT appealed the trial courts decision assessing compensatory and punitive damages, and attorneys fees and costs. ITC cross-appealed the trial courts decision to remit the jury verdict and the trial courts denial of prejudgment interest. Final briefs were filed with the court of appeals and oral arguments were heard in December 2010. AMT has posted a bond, as required by the trial court, for $13.4 million. We believe that a reasonably possible range of exposure, including attorneys fees, is from $0 to approximately $14.5 million. As of July 3, 2011, we have recorded a liability representing our best estimate of a probable loss. Further, for the same amount, we have recorded a receivable from the former owners of AMT as we believe it is probable they will fully honor their indemnification agreement with us for any and all costs and damages related to this lawsuit.
14. Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued updated accounting guidance that provides amendments to the criteria of Accounting Standards Codification Topic 605, Revenue Recognition, for separately recognizing consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable. We adopted this guidance on October 4, 2010 and it did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued an updated accounting guidance that amends the disclosure guidance with respect to fair value measurements. Specifically, the new guidance requires disclosure of amounts transferred in and out of Levels 1 and 2 fair value measurements, a reconciliation presented on a gross basis rather than a net
basis of activity in Level 3 fair value measurements, greater disaggregation of the assets and liabilities for which fair value measurements are presented, and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and 3 fair value measurements. This guidance is effective for us, with the exception of the new guidance concerning the Level 3 activity reconciliations. The adoption of the effective portion of the guidance had no impact on our consolidated financial statements. The disclosure requirements for certain Level 3 activities will become effective for fiscal years beginning after December 15, 2010. As we do not currently have any significant Level 3 fair value measurements, we do not expect the adoption to have a material impact on our consolidated financial statements.
In December 2010, the FASB issued updated accounting guidance to clarify that pro forma disclosures should be presented as if a business combination occurred at the beginning of the prior annual period for purposes of preparing both the current reporting period and the prior reporting period pro forma financial information. These disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments. The new accounting guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. We will adopt the new disclosures in the first quarter of fiscal 2012.
In December 2010, the FASB issued updated accounting guidance to amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The new accounting guidance is effective for fiscal years beginning after December 15, 2010. Early adoption is not permitted. We will adopt the new disclosures in the first quarter of fiscal 2012. We are currently evaluating the impact of this guidance, and we do not expect the adoption to have a material impact on our consolidated financial statements.
In May 2011, the FASB issued updated guidance to improve comparability of fair value measurements between GAAP and International Financial Reporting Standards. This update amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The updated guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Early adoption is not permitted. We will adopt the updated guidance in the first quarter of fiscal 2013, and we do not expect the adoption to have a material impact on our consolidated financial statements.
In June 2011, the FASB issued new guidance on the presentation of comprehensive income. The new guidance allows an entity to present components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011 on a retrospective basis. We will adopt the updated guidance in the first quarter of fiscal 2013.
This Quarterly Report on Form 10-Q, including the Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbor provisions created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as expects, anticipates, targets, goals, projects, intends, plans, believes, seeks, estimates, continues, may, variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below under Part II, Item 1A. Risk Factors and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
We are a leading provider of consulting, engineering, program management, construction management and technical services focusing on resource management, infrastructure and the environment. We typically begin at the earliest stage of a project by applying science to problems and developing solutions tailored to our clients needs and resources. Our solutions may span the entire life cycle of the project and include applied science, research and technology, engineering, design, construction management, construction, operations and maintenance, and information technology.
We are a full-service company with a global reach in the areas of water, the environment, energy, natural resources and infrastructure. We focus on both organic and acquisitive growth to expand our geographic reach, diversify our client base, and increase the breadth and depth of our service offerings to address existing and emerging markets. We currently have more than 12,600 employees worldwide, located primarily in North America.
We derive income from fees for professional, technical, project management and construction services. As primarily a service-based company, we are labor-intensive rather than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. We provide our services to a diverse base of U.S. federal and state and local government agencies, as well as commercial and international clients. The following table presents the percentage of our revenue by client sector: