Tetra Tech Inc (TTEK) 2016 Q1 法說會逐字稿

Good morning, and thank you for joining the Tetra Tech earnings call. By now, you should have received a copy of the press release. If you have not, please contact the Company's corporate office at 626-351-4664. With us from management are Dan Batrack, Chairman and Chief Executive Officer; and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results, and will then open up the call for questions.

During the course of the conference call, Tetra Tech's management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning future events and Tetra Tech's future financial performance. The statements are only predictions, and may differ materially from actual future events or results.

Tetra Tech's Form 10-K and 10-Q reports to the Securities and Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements.

In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the investor relations section of Tetra Tech's website. (Operator Instructions).

With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Great, thank you very much, Thea. And good morning, and welcome to our first quarter of fiscal year 2016 earnings conference call. While Steve Burdick, our Chief Financial Officer, will present the specifics of our financials, I will start with a brief overview of the Company and some of our key financial metrics.

For the first quarter, Tetra Tech generated $421 million in net revenue, near the midpoint of our guidance, and slightly above consensus for the first quarter. Now for the quarter, we also generated an earnings per share of $0.39, which was at the top end of our guidance, and in line with consensus. During the quarter, we did have some non-operational charges and contributions to our financials, and Steve Burdick will address these in more detail in his remarks.

But I'm sure you are more interested in the financial performance of our ongoing operations, which were the results that were presented and reported from our operating segments, both the water environment and infrastructure group and the resource management and energy group. So I'll be presenting the financials with year-on-year comparisons on a constant currency basis, which I believe best reflects our current performance.

So, for the first quarter, we delivered solid performance from our ongoing operations. Overall for the quarter, the Company generated from ongoing operations $540 million in revenue, $414 million in net revenue, with an operating income of $39 million, which corresponds to an earnings per share of $0.42.

For the first quarter, our total and net revenue were up 3% and 2%, respectively, from the prior year, due to growth in the United States commercial and state and local markets, with stable international revenues. Similarly, our operating income was up from the prior year due to strong margin performance by both of our reporting segments. And most notably, our backlog was up 5% year-on-year from the ongoing operations due to continued strong orders from our federal, commercial, and municipal clients.

Now, as of January 18, just last week, we added coffee Coffey International, a world-class consulting and engineering firm headquartered in Sydney, Australia, and we're really glad to welcome them to our team. With the addition of Coffey, they advanced us into a leadership position in international development worldwide. And they also provide us a platform for future growth in the Asia-Pacific region. With Coffey, we now have a network of 400 offices and 16,000 staff on six continents around the world.

Now, I'll provide additional details on the integration of Coffey and their financial contributions later in this presentation this morning. I'd now like to present our performance by segment.

The WEI segment generated 43% of our net revenue from ongoing operations this past quarter. WEI's margin for the quarter was at 11.2%, with good margin performance from our Canadian operations and the US work from our commercial clients. Revenue within WEI was down slightly from last year due to slow ramp up of our federal work, primarily from work that was awarded to us as new orders in the fourth quarter of fiscal year 2015. WEI's federal backlog continues, though, to increase both sequentially and year-over-year, indicating our federal work and revenue should increase in the coming quarters.

The RME segment is slightly larger, and generated 57% of our net revenues in the first quarter. RME delivered solid 10.9% margin for the quarter with strong performance in waste management, and very stable revenue contributions from our oil and gas midstream engineering and pipeline installation work, both in the United States and in Canada.

I'd now like to provide an overview of our performance by customer. Work for our US commercial clients was up 8% year-over-year and represented 34% of our ongoing work for the quarter. The growth included trust funded remediation work and environmental restoration activities across a broad base of our commercial customers. Our international net revenues for WEI and RME was up 2% year-over-year, and represented 28% of our ongoing revenue. Revenue in Canada, where currently the majority of our international revenues are generated, was quite stable across both the provincial and commercial clients, really across the entire country.

Our US federal revenues was 26% of our ongoing business, which was down 6% year-over-year due to the timing of project startups. As I just mentioned a few moments ago, I expect our federal work to slowly trend up for the remainder of the fiscal year as we convert backlog into revenue and continue to leverage our strong federal contract capacity that we have on hand right now.

Now, I would like to note -- and I'll mention this again on the next page for backlog -- that our backlog for federal work is up significantly, both year-over-year and sequentially, especially for selected federal clients at the USAID, Agency for International Development. The Army is up quite significantly; Air Force; and even the Department of Energy is up for us.

And the additional client segment, which is finally our state and local work, it was up 4% year-over-year and it was up 2% sequentially, which is a direct result of the increase in the water and environmental work that we are doing for cities and municipalities all across the United States. And this was not in any one state. It was very broad-based across the entire country.

We had a good first quarter for orders and contract wins in our ongoing business. On a constant currency basis, our WEI and RME segments backlog is up 5% year-over-year. Now, the backlog growth was driven by a broad base of orders, primarily across our public sector clients, especially the US federal government work for international development, which was primarily associated with USAID and the Department of State.

Now, we do continue to wind down our RCM segment, which is really the non-core fixed-price construction division. And at the end of the first quarter, we reduce the remaining backlog down to $53 million, which represents the balance of the work that we have to complete; and expect to have all of that work complete by the end of the calendar year.

At this point, I'd like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present the details of our financials for this past quarter.

Steve?

Thank you Dan. The first quarter saw solid performance from our WEI and RME operations. Both net revenue and EPS fell in line with management's expectations for the quarter. But before I present the GAAP financial results for Q1, I would like to briefly review a reconciliation of our ongoing operations, which Dan just spoke about, and reconcile that to our GAAP financials.

As a reminder, our ongoing operations reflect our financial results, excluding RCM results and any one-time charges or benefits. A condensed reconciliation of our GAAP financials for ongoing operations is on slide 7 of this investor presentation. And a full reconciliation of our GAAP results to ongoing operations is included in our earnings press release for the quarter.

So, for Q1 2016, revenue for our ongoing operations totaled about $540 million, and net revenue totaled about $414 million. Including RCM, our revenue was $561 million, and our net revenue was $421 million. Operating income for ongoing operations was about $39 million. This improvement in operating income resulted in an ongoing EPS of about $0.42.

So, overall, our EPS was impacted by a benefit for, one, an R&D tax credit that was passed in late December; two, an earn-out adjustment; and, three, a net loss in RCM. And so regarding this net loss in RCM, I want to point out that the RCM losses were for non-cash charges. And these charges were offset by gains on resolution of several claims where we collected additional monies from our ultimate clients. This all resulted in RCM contributing about $13 million in cash collections and cash from operations in the quarter.

So, now, I'd like to review our GAAP results for the quarter. Gross revenue was $560.7 million compared to about $581 million in the previous quarter. On a constant currency basis, revenue for this quarter totaled about $583 million. The year-over-year decreases in revenue was primarily due to our decision to exit the high-risk, low-margin, fixed-price construction business that Dan talked about in RCM, in addition to the adverse foreign exchange rates for the quarter when we compare this year to last year. So, excluding the impact of the foreign currency translation and RCM, revenue for ongoing operations for WEI and RME segments increased about 3% year-over-year.

Net revenue totaled $421 million, and was $441 million on a constant currency basis. So, excluding this FX, net revenue for ongoing operations was about 2% up year-over-year. Although lower in the first quarter of 2015, our net revenue results were within expectations and guidance for the range that we previously guided to. And this was due to the strength of our US commercial business, where growth in solid waste and environmental work resulted in an 8% improvement in net revenues year-over-year; as well as our US state and local business where broad-based infrastructure improvements led to about a 4% increase in our net revenues year-over-year.

Our operating income was $32.9 million for the quarter, and this compared to $36.6 million in the previous time period. And as we spoke about earlier, for our ongoing operations, operating income was about $39 million, which was about a 1% year-over-year improvement on a constant currency basis. Overall, operating margin was approximately 8.1%. And the operating margin for our ongoing operations was about 9.4%, roughly consistent with the previous year's time period.

Despite a decline in our operating income, our operating margins remain consistent due to the continued wind-down of RCM. And as we talked about, this has improved our cash flows and given us a bit more consistency and predictability in our operating results.

I'd also like to briefly note that while we did record a net loss in the RCM for the quarter, we do remain on track to run off the backlog by calendar 2016.

Diluted earnings per share was about $0.39 for the first quarter of 2016. And as we spoke about earlier, for our ongoing operations, diluted EPS was about $0.42 per share, which was an improvement of about 2% on a year-over-year basis.

I think an important aspect of Tetra Tech's solid quarterly performance remains our consistently strong balance sheet and our cash flow, which enables us to grow organically, make acquisitions like Coffey, and return capital to our shareholders. So I'd like to review a few of our key cash flow metrics for the quarter.

Cash flow from operations totaled $23.6 million. And as Dan talked about earlier, excluding the cash collected on claims, this was an improvement of about 87% year-over-year. The strong cash -- or the strong increase in our cash flow resulted in a 7-day improvement in our days sales outstanding. And as a result, for the trailing 12 months, our cash flow from operations was $181 million. And this actually equates to about $3.00 per share.

Compared to a year ago, net debt declined to about $65 million for the quarter. So we've remained fairly unlevered, at about 0.4 times net debt to EBITDA, providing us with the opportunity to continue to invest in organic growth and to make certain acquisitions.

In looking specifically at our free cash flow over the last 12 months, we generated approximately $157 million (sic - see slide 9, "$161 million") of free cash flow. This was an improvement of 127% compared to the previous trailing 12 months. As such, we were able to return approximately $124 million of capital to our shareholders, through both dividends and share buybacks, over the past year.

And as just discussed, we continue to make progress in lowering our DSO. Our DSO outstanding of 80.7 days is lower from our last year by just over 7 days or one full week. So, excluding RCM and the claims, our aggregate DSO for our two front-end segments is about 74 days. This has gotten better, but it's still not in line with our expectations. And our ultimate goal is to be closer to 70 days for our DSO.

I'd like to now take a few moments just to update you all on our capital allocation strategy. So, we continue to focus on maintaining a balanced capital allocation strategy between dividends, share repurchases, and acquisitions that deliver value to our shareholders.

We have a targeted leverage ratio of about 1 to 2 times net debt to EBITDA, and our current leverage ratio is about 0.4 times. After the completion of our acquisition of Coffey, our leverage ratio will be about 1 times net debt to EBITDA. This is at the lower end of our range that we would like to be in, leaving us significant dry powder to invest both organically in our businesses and in acquisitions, while still having capital available to deliver returns to our shareholders.

In fact, we have about another $200 million to $250 million to invest and return to our shareholders, and still remain comfortably within our target leverage ratio.

So let me tell you briefly about how we plan to deploy this capital, beginning with organic growth. First, we will continue to invest in our ongoing business operations, both at WEI and RME, which we saw had a combined 3% revenue growth in the first quarter on a year-over-year basis. And so to achieve this growth, our CapEx will remain at approximately 1% of our revenues for the year.

Next, we will invest in strategic acquisitions and look to acquire market leaders like Coffey that will expand our consulting and engineering capabilities across water, environment, infrastructure, resource management, and international development markets. Currently, we have a combined $500 million in cash and credit facility available for acquisitions.

Let me highlight, though, that this $500 million is our total capital available is -- but is not our total capital available. In fact, that amount is much greater. And this is solely based on how much we have on our balance sheet and through our banking relationships today.

And last, but certainly not least, we continue to return capital to our shareholders. In the first quarter, we paid $4.7 million in dividends and repurchased $25 million in stock. We have about $75 million in share repurchases available under our stock buyback program. And I'd like to announce also that our Board of Directors recently approved Tetra Tech's eighth consecutive quarterly dividend which will be paid on February 26.

So just to summarize, Tetra Tech has a solid growth strategy in place. And our strong balance sheet position provides us the ability to successfully execute our capital allocation plan, and we will continue to update this plan for each of the next couple of quarters.

And with that said, I will hand the call back over to Dan to discuss Coffey further, as well as review the 2016 outlook and our growth strategy in more detail. Dan?

Great, thank you very much, Steve. We look very carefully for firms that we can add to our team that advance our strategy to be a premier worldwide provider of consulting and engineering services. And Coffey International meets this standard and that objective.

Coffey officially joined us here at Tetra Tech just 10 days ago; in fact, on January 18 of 2016, just this month. And our integration process is already well underway. With over 3,000 staff and an annual revenue of over $400 million, their addition to Tetra Tech will increase our revenues by approximately 15% on an annual basis.

Now, Coffey is known for two key service areas: international development and geoservices, or geotechnical engineering, which also includes a significant capability in program management. And they have an excellent and highly complementary network of offices to our own, especially in Australia and the Asia-Pacific region, and even in the United Kingdom.

Now, the addition of Coffey advances us into a leading position for delivery of international development services. Coffey also provides us with a network of offices to provide our engineering -- and that's Tetra Tech's --engineering and consulting services to clients in the Asia-Pacific region. Coffey's geotechnical expertise is a fundamental requirement in advance of almost every infrastructure planning and design project. And we are very happy to welcome Coffey to Tetra Tech, and look forward to a long, prosperous future with us.

Now, if you are following along on the webcast, I have summarized in the investor presentation the four key markets that we are focused on as a combined company. Our growth plans are targeted to where there are changes taking place in the marketplace, such as new regulations or new technologies, or even new investments by our clients. And these are markets where our lead-with-science approach differentiates us, and provides us with projects that have a much higher margin and overall lower risk.

Water and environment are markets where we are already well-established. And together with Coffey, we can leverage our presence and position in the Asia-Pacific region to cross-sell Tetra Tech's differentiated water and environmental services. Extreme weather conditions worldwide, from droughts to floods, are providing additional opportunities for a much more flexible smart water management solution to these issues.

And while Tetra Tech has some of the world's leading modeling, consulting, and engineering experts, we're going to be looking to add Big Data and IT capabilities into the Company to offer a more fully integrated solution to this rapidly growing market.

And in oil and gas, we continue to focus on our successful midstream strategy in the United States and Canada during this period of low oil prices. We're also going to be increasing our services to support early investigation and feasibility studies for LNG terminals. And Coffey brings us additional expertise in these LNG terminals, particularly with respect to their foundations and their long-term relationships with clients in this market sector.

Now, the international development market presents us new opportunities that combine our strengths and client relationships. And I'd like to discuss how we are going to approach this in a bit more detail now. International development is actually an excellent market for us, where we can provide our differentiated services for water, infrastructure, and environment in helping communities adapt and prepare for climate change.

We are in an excellent position now, with three major funding agencies in international development. And that's the US, with the United States Agency for International Development; the United Kingdom; and Australia. And this is an excellent timing for us to expand our services in this area as developing countries all around the world are challenged by extreme weather, changing economic conditions, and looming concerns over climate change.

So, for example, climate change is a big, emerging concern, especially for low-lying island communities through the Asia-Pacific region, where they are being impacted by sea-level rise and concern over sustainability of their coral reef ecosystems. They are also concerned, in the developing world, over changing weather patterns that are impacting their fragile agricultural economies. And, for us, we provide support across a complete range of services, such as infrastructure to provide clean, safe water supplies, and adaptation studies to identify alternative crops.

For example, we are working with the United States to assess strategies for climate change adaptation in West Africa. We are currently providing support for governance, such as the Jordan rule of law contract that's helping them develop the administrative infrastructure needed to provide reliable water and Energy Services.

And with the addition of Coffey, we also now have an even broader suite of services that, for the first time for Tetra Tech, will include health and education. So together with Coffey, we believe we can leverage the over $4 billion in contract capacities that we have for agencies like USAID, the contracts in the UK and Australia; and win new task orders that can actually make a difference, not only to our balance sheet, but difference in the lives of the communities all around the world.

I'd now like to present our guidance for the second quarter and for all of fiscal year 2016. And I will note that as I provide these updated numbers that we've moved up our guidance to recognize the addition of Coffey for the eight months that they will be with us in fiscal year 2016.

And just as a note, these increases in both net revenue for the year and for earnings per share are associated and related to Coffey. Our underlying performance of Tetra Tech remains in line with the forecast that we've provided entering this year.

So, for the second quarter of fiscal year 2016, our net revenue range in US dollars is $425 million to $475 million, with an associated diluted earnings per share of $0.33 to $0.38. For the entire year, our fiscal year 2016, our guidance is a range of $1.8 billion to $2 billion, with an associated diluted earnings per share of $1.75 to $1.95. And we do provide a guidance for cash earnings per share for the entire year. We don't do that per quarter, because timing of cash receipts can be highly variable. But for the entire year, cash earnings per share is from $2.70 to $3.00 per share.

I do want to spend just a moment on some of these assumptions. Because we have added a few new underlying assumptions to our guidance, and I want to make sure they are quite clear. The assumptions for our guidance for fiscal year 2016 does include Coffey's revenue and contribution to earnings for eight months. We do anticipate that there will be some annual synergies that we will recognize from the combination of Coffey into Tetra Tech. We do estimate those at $10 million per year on an ongoing basis. And we expect that that will be fully recognized at the beginning of 2017. And so we've not incorporated that synergy contributions into any component of 2016.

We did incur, and will incur, expenses both for transaction fees and integration costs. And our guidance does exclude Coffey transaction and integration expenses of approximately $15 million. At $15 million, it's comprised of just slightly over half of that in transaction costs. It should be incurred in the second quarter.

As I had mentioned in my prepared remarks, we have initiated integration process already. We expect a component of the remaining amount will be in Q2, with the rest of it in Q3 and Q4. But the total amount, both transaction and integration cost, is estimated to be $15 million which will result in an ongoing savings of $10 million per year, on a forward basis.

We have updated our intangible amortization to $19 million or $0.22 per share on a full-year basis. And that does include the intangible amortization associated with the Coffey acquisition. So that has been increased.

For the entire year, we anticipate we'll have a 32% effective tax rate. We do anticipate we will be at about 59.5 million average diluted shares outstanding. And this has been moving around a bit -- foreign-exchange -- but our guidance does anticipate and is based on the current exchange rate that we have with the countries that we are currently active in. And most noteworthy of that will be Canada and Australia.

So, in summary, our WEI and RME units, which is -- represent our ongoing operations, had solid performance in the first quarter and delivered results in line with our own management's expectation for the first quarter. We had strong cash flow and an excellent balance sheet that enabled us to return $30 million to our shareholders in buybacks -- in share buybacks and dividends during just this past quarter. And with the recent addition of Coffey, we've increased our fiscal year 2016 net revenue and EPS guidance.

And with that, I think we are off to a very good start to 2016, and I'd like to open up the call for questions.

Operator, Thea, if you could open it up to questions, we'd be happy to take our callers.

(Operator Instructions). Tahira Afzal, KeyBanc Capital Markets.

Congrats on the good quarter. So first question I had was -- it seems like, thankfully, federal activity is picking up again on the backlog side. Nevertheless, the book-to-bill was 0.9 times. So I would love to get a sense, as I look at your guidance and what you've embedded in it, what you expect from backlog growth for this year.

And number two, if I look at what the activity levels were, clearly federal was strong, but something else might not have been. Would love to get a sense of that.

The book-to-bill of slightly under 1, I believe, does not take into account foreign exchange, which is a component from Canada. So, it actually has been quite noteworthy to us that the Canadian exchange rate has come down to -- in fact, touched just quite below 0.7. And so it's about a 10% change, just in this last quarter, almost, from -- it was about 0.8 or just slightly under that.

So I think when you adjust for that and actually take out the RCM amount that we burned off this last quarter, I think we are actually a bit up. And in fact, what we said is we are 5% year-over-year up on our -- what I'll call our ongoing business.

Now I will say that we have seen strength -- and I mentioned this a few times in our prepared remarks -- that federal is up. The work that we are doing for the federal government are projects that are not for a specific platform or an asset that can be canceled. This is typically environmental consulting work. It's cleanup of projects or sites that have regulatory mandates, or something that has to proceed. So it's possible, and we have seen this move to the right; but you can move to the right but not go away. So I will say that we do have a relatively high confidence that this will convert from backlog to revenue. And I do think that much of that will take place this year on the federal side, so we should see the revenue in the federal side come up.

Now, the one area that we've seen also strengthen that is actually reassuring has been on the commercial side, and it has included oil and gas. We have seen a continued series of opportunities that have allowed us to keep our backlog relatively stable with oil and gas, which has translated into, I'll call it, stable but flat oil and gas revenues this last quarter. We're well into this year. So I think for 2016, notwithstanding some difficulties, the backlog we have in hand should allow us to be stable or flat for the rest of 2016 in oil and gas.

I do think that the backlog should grow during the year. Now, we do have $50 million of the RCM, of the construction work to complete. But if you take that out, I do expect that backlog will be increasing at a rate slightly in excess of the organic growth rates that we've had, which are sort of in the 3% to 5% range for 2016.

Got it. That's actually very helpful, Dan. Second question -- you did talk a lot about climate change. And obviously we've just very recently had, from very visible world summits that happened. There seem to be a lot of targets that are being pushed forward to help manage it. But really looking at it outside of the international component, and in the US, we've seen a lot of flooding, et cetera, and droughts as well.

I would love to get your thoughts on if you look at the opportunities in the US from climate change, what those would be for you, yourselves for the next couple of years.

And then outside of the climate change opportunity, we've been hearing about -- I'm sure you have, as well -- about the lead poisoning and pipes. Is that an opportunity for you, as well, there?

I'll answer both of those. I'll keep them succinct. With respect to climate change opportunities in the United States, there's no doubt. In the drought areas, we've had great opportunities with respect to water supply. We were a participant in one of the sort of consortium of design firms for desalination plants out here in California.

We are doing brand-new pilot programs for smart water, which is anticipating flood and snow melt, so it can divert the water into different holding bases and retention reservoirs for recharge of groundwater. Those are actually very promising programs. And in areas where there is enormous floods in the Midwest, the work for our levee system designs and actually flood protection is actually up, and we owned a few new programs there. So I think those are both at sort of the municipal and state level, for the most part.

There has been a new directive at the federal Department of Defense which is to evaluate their different programs for impact to climate change. So we are looking very carefully at how that's going to be translated into actual project tasks and planning activities, which is right up the alley for us. And we do believe we are the leader with respect to -- this is work done overseas but contracted here in the US -- for the State Department and the US Agency for International Development. And we are a leader in that, particularly in the marine environment, where you have the interaction between the coast and the land. And that's everything from impacts to communities, and those are funded by US dollars.

So I think all of those represent incremental upsides for us; because not replacing or taking market share from anyone, these are new programs that don't exist today. And I think we are at the forefront of all of those markets. So, it's an area we are really excited about here at the Company.

Thanks, Dan.

Andy Wittmann, Robert W. Baird.

I guess I wanted to follow-up a little bit on Tahira's first question on the backlog. I think in your prepared remarks, Dan, you said the backlog in the public sector is up. You talked about the federal. You said the commercial -- I think you called it steady overall. You said oil and gas was steady. I think commercial was generally steady.

I guess given that commercial has been the area of relative revenue strength, and a federal has been the area of relative revenue weakness, do you see that the growth rates in these two businesses will start converging and federal picking up? And maybe if the backlog isn't growing in commercial, does that maybe slow down? I'd like to get your thoughts on the outlook for those segments.

Well, I think that what we've seen is that the funding -- I don't want to call it habits -- but the funding activities of our commercial clients have changed a little bit in this environment. We've actually seen the funding not be for as long of projects. So for instance, some of the larger pipeline projects -- in fact, our largest pipeline project was funded and gave us visibility out for a year and a half to two years, so let's call it two years. We're actually seeing most of the projects are much shorter duration and moved to studies -- so, engineering work, environmental work. So a decrease in the size of them doesn't necessarily mean a decrease in the amount of work. So there can be a discontinuity there.

You will do work shorter, quicker, book and burn. But it will actually move toward studies, which is investigation, assessment, right-of-way, environmental permitting, and actually design. And that work typically has higher margin for us. So it is interesting. You can see, a lower backlog does not necessarily translate into lower revenues, but it can actually represent higher margin. So it's something that we look at on the commercial side.

And certainly with all the uncertainty on oil prices, many of the capital projects, which are construction, have been impacted quickly. But a lot of the study projects have still gone forward, looking more carefully at ways that they can save money, or look for alternatives. And that's where you use your consultants, engineers, and experts, to find ways to make your dollars go farther. So that's on the commercial side. I don't necessarily, at this moment, make a more flat backlog in commercial, meaning slowing of either the growth or decreasing of the revenues.

On the federal side, though, I will say that the method -- and I'll repeat for some of the listeners -- Tetra Tech's definition of backlog. We have to have been awarded a contract. We have to have been given been given the task order to complete. They have to have funded it, and they authorized us to do the work. So we don't have factored contract capacities in. So the work that we have in here is typically not canceled. In fact, it's extremely rare to have something canceled because we've already been asked to do the work, and we are in the field.

So, in that case, the federal work, things can slow down slightly because of permits being issued or other small items. But it typically can be pushed to the right, but not disappear or canceled. So I do believe that an increase in our federal backlog will convert into an increase in the revenues.

And one of the reasons I actually think we saw higher margins in the first quarter than we typically do for a first quarter is what you saw was commercial was up 8% year-over-year, and it's a higher-margin business -- work for us. International was up a couple percent, and that's a higher-margin business for us. And municipal is slightly higher than federal because federal has a lot of cost reimbursable. It's low-risk but low-margin work. So when you change that mix reflecting a lower federal, you will actually see our higher margin.

So, I think that it was quite favorable in the first quarter. You could possibly see, with a significant increase in federal margins abate slightly; but you will have your top line grow, and it will certainly exceed it on a total income basis. So, that's sort of how we see the mix between those two.

That's helpful. Is it fair to say that federal and oil and gas are the biggest swing factors in your guidance (multiple speakers) to get to the top end of the federal that you really need to start getting not only positive, but more materially positive?

Yes. I think that's exactly right. So, for -- to hit the middle of our guidance, we need federal to move from minus to sort of flat or very modestly up. And to move to the upper end, we need federal to move to be more materially up for the year. And certainly I think we have the backlog to accomplish that. And then on oil and gas that you mentioned, we are not forecasting any growth, but we need it to remain stable through the rest of the year 2016. And I think we have pretty good visibility on that. But it's the one area that we are most cautious, like I believe everybody is on anything in the oil and gas sector.

Yes okay. So then just a couple of maybe technical questions here. The $10 million of synergies that you are looking to gather annually from the Coffey integration, just to be clear, was there any benefit that's in your 2016 guidance? Are you saying -- is that full $10 million excluded from 2016, and really should be seen in 2017?

I think that what we are seeing is that we will see the full benefit in 2017, and some of that benefit in the later part of 2016, as we go through the restructuring and some of the cutting, or the (multiple speakers).

Great. And then in terms of the buyback, Steve, it looks like the last couple of quarters you've been consistently just kind of $25 million. And I guess there's three quarters left in the fiscal year [and $75 million]. So is this kind of the way we should look at it, just kind of averaging in the market for $25 million per quarter? Or are you going to try to be more opportunistic? I'm just trying to get a sense about how you guys are thinking about that.

We don't announce when we are in the market. But we do have -- what we've been doing is spending about $25 million a quarter, the last couple of quarters. And our -- currently, we have about 59.5 million shares outstanding, on a diluted basis, for the whole year.

Got it. So, the guidance of 59.5 million doesn't assume any more incremental. So that would be upside to your EPS, as well, if you did execute the final $75 million this year.

Correct.

Yes, and Andy, what we've said on buyback, just real quick, is that we have $200 million over eight quarters. That's your $25 million; so if you're going to do that over a couple years. If you look back where we've reported, we've been almost exactly on $25 million. If there is a particular buying point we can become more opportunistic or aggressive. But we can also, in the event of something that's more material of an acquisition that would tax the upper end of the credit facility, we would look to then adjust the buyback.

And so if a buyback got adjusted down materially, or even turned off, you would anticipate that it would be associated with some other acquisition where the funds would be used. Because our goal is to get well into the range of 1 to 2 times. And as Steve indicated, even after Coffey, we've just hit the lower end. And the cash generation is quickly going to move it below that again. So, look for the buyback. And if you see it slow down, look for something else that would replace that.

Thanks a lot, guys.

Corey Greendale, First Analysis.

So I just had a few questions about Coffey, primarily. So first of all, just to kind of benchmark with the new guidance, can you give us some sense of how much net revenue you're including from Coffey in the Q2 net revenue guidance?

Corey, it's about $25 million.

And then, on the synergies, is that all cost? Are you anticipating any revenue synergies in that $10 million? And what are the kinds of sources of upside or risk to the synergy target?

That is all cost side, not revenue side. And by the way, I want to be very clear: it doesn't mean that we don't believe that there are revenue synergies that will drive opportunities. In fact, I covered some of them in the prepared remarks. I think they are quite significant. But we've not factored any of that into that $10 million. That's all on the cost side.

Okay. And sources of potential upside to the $10 million? Or is that kind of -- you are pretty confident that's going to be the number?

I know we are a long ways into this. We just hit 10 days yesterday. I think there is opportunity. And I will feel much better about getting into details on the progress and the timing of it, here in the next quarter. But that is -- I will say that is not a plug number. Just to be clear, it is not a plug number. We have identified areas where we think that we can save costs. And some of those are just classic public filing costs and items that Coffey was. For those not familiar, as much familiar, with Coffey, they were a publicly traded company. And I will say they are a publicly traded company, because we still have about three or four weeks to go before that concludes and we take them off the Australian exchange.

So, you do have the classic filing costs. You have some of the management reporting time, some of the other items that are just classically required as part of being a public company. And we'll take that on here at Tetra Tech. So there is no -- any reduction in anything, other than just cost there. So that, we actually have a very good number on.

On some of the other items, we actually think that outsourced services that they have for IT and other things -- I do think that Tetra Tech has one of the best in-house IT systems for platforms for getting our project managers real-time status on their progress of reports, of their technical performance on their activities, and the cost associated with it. So I think that we can actually deliver more product, more information, quicker information, at a much lower price point by joining the Tetra Tech platform. And we would look for Coffey to join our IT, our accounting, and our other information platforms fully by the end of the year.

Now, we do need to fine-tune exactly what that dollar is. So I would say, Corey, we'll be able to give you more details on that $10 million on perhaps some of the components, and an actually update on what that looks like here, probably on the next call.

Okay, that's really helpful. Thank you. Next question, more broadly, because of Coffey can you just talk about overall exposure to APAC now? And given kind of the volatility in that market, anything we should be thinking about as potentially more at-risk over the next several months?

Well, Asia-Pacific region, no doubt, is under a lot of stress. No doubt about it. We are cognizant of that. But I think that -- again, for those that are not as familiar, on this call, with Coffey, let me -- we did include it in one of the slides on Coffey. 60% of the revenues are for work for international development, and much of that for work that's actually outside that region. So, their single-biggest client in their corporation is actually USAID: United States Agency for International Development. And that's outside of the Asia-Pacific region.

Another one of their largest clients is DFID, which is the UK aid activity. And that's outside that area. And then the work that is done for Australian aid is actually a bit different -- has different economic drivers than the commodity-driven component for Asia-Pacific.

So now that brings you down to about 40% of the business that is much more centric to the Asia-Pacific. And we are quickly moving, and they themselves have moved, to be a bit decoupled with the commodity component. If you did follow Coffey's restructuring and actions that they've taken internally, they've looked to exit the front-end commodity providing high-risk areas where it's not the clients; it's just the marketplace. We are looking to service those clients, and it comes back. But they've looked to shift that work over to municipalities, infrastructure.

And, in fact, many countries are actually looking for infrastructure stimulus programs that will help offset some of the decline on the commodity-based impacts that we've seen. And that's where we are looking to see Coffey perform better. And, in fact, we think that the synergies with Tetra Tech that we can offer the environmental, water, and other specialty engineering services that can strengthen them as both a competitor and the success that they have in that area. So the actual impact of what you'd see is a classic Asia-Pacific exposure to engineering is actually much, much less than you might think at a headline level.

That's very helpful. And then just one last quick one for me which is -- very clear that you are still potentially acquisitive, and you are at the lower end of your range leverage. But how should we be thinking about the potential for larger acquisitions? Will you kind of wait a while to digest Coffey, and mostly look at smaller, more tuck-in kinds of things? Or how are you thinking about that?

I think there is a great opportunity for tuck-ins. I think that we're going to continue to strengthen that area. I think there's some specialty areas that we are looking to invest in. I think in the previous conference call, I talked about the Internet of Things, and actually looking for some of the new fast growth areas where some of the water markets are evolving to. We're looking into that area. I mentioned in my prepared remarks, and I hope it would not be overlooked, that we are looking for Big Data; and some of those that work for large government agencies and ITs that we can provide a full integrated solution, not just evaluating someone else's data, but actually running that information and managing the data sets for them on very large water data sets across both states, regions, and even entire countries. So those would be tuck-ins. But transformational acquisitions -- something larger -- is not off the table.

And I will tell you that the work and the teams that we have down in Coffey, we've already deployed them. But we have plenty of additional resources. As Steve indicated, we have plenty of capital. But more importantly, we have the in-house staff and bandwidth to handle something substantially larger. And if the right opportunity came up that would be right for our customers and right for our investors, you'll see us move forward.

Very helpful, thank you.

Mike Shlisky, Seaport Global.

This is Ryan on for Mike. I guess just on that Big Data question, the opportunities you are seeing there, is that more for revenue opportunities? Or would this be technology that would allow you to better service clients and be more competitive?

Both. Both. I think we have the opportunity to bring tuck-in acquisitions that would add revenue, and would already have an established position that holds contracts and market positions. But I think there is also those that we are looking that would be market-disruptive, and actually something that would bring in an opportunity for us to do things differently for the clients, both where we are working for them now, and even add new clients.

So some of the things we're looking at for Internet of things, we are running a number of pilot programs in some of the drought states that would actually, on a real-time basis, identify melt-off for storm water runoff that would actually change valves and move water into storage facilities that would then recharge. It would actually take areas that where it's not just being recharged; move it into other areas that could be treated; and so that contaminants aren't moving into coastal waters, whether or not that's rivers or estuaries or bays. So that would be technology-driven. A lot of that doesn't exist in the marketplace today, so it's something that we are looking at moving into.

So, Ryan, both: we're looking for someone who comes on and brings an established market position that already exists, and maybe a more mature position on data, and then also something that would be disruptive to what exists today.

Okay great. Then if I could just go back to Coffey for a second, could you update us on the bid environment there? What's the backlog? And as we move into February, is that trending up or down, at this point?

The bid environment is stable. We're going to spend some time with them to get a much better visibility on how that is. Again, I think things look quite, not only stable, but look strong in their international development component, which is more than half of their business. But I will say that the engineering and infrastructure business, even with municipalities and infrastructure activities in Asia-Pacific is very competitive, no doubt about it. So I think we'll need a little bit more time to give you a full detail on that.

Okay, makes sense. Then the last one from me, could you update us on the two ongoing segments' margin expectations and your guidance, i.e., is there really a change from prior guidance there? Are things really progressing as planned?

It's still progressing as planned. In fact, I will reiterate a comment on the update of the guidance page that if Coffey had not taken place, we would have left our guidance unchanged. I do want to note that I'm aware that we outperformed our Q1. We were at the high end of our guidance. We were -- and so if you look at it in detail, we were up a few cents. But given the uncertainties just in oil and gas, we would've left our guidance unchanged and we still would've been within the range. So, the increase, both from revenue and the $0.05 on top and bottom on EPS, is attributable to the contribution from Coffey.

And so, otherwise, I would say our business outlook remains generally unchanged from entering the year. And we feel pretty good about our business.

Great. I'll turn it back. Thanks, guys.

Noelle Dilts, Stifel.

I know we've spoken about Coffey and accretion quite a bit. But I just wanted to circle back to that one more time. And I have two I guess slightly more detailed questions.

So, if you take the $0.05 that you are guiding to this year, annualize it, you are looking at about $0.08. And then if you took the $10 million and said it was entirely incremental, you know you are getting to about $0.20 of accretion next year. So first would be -- first question would be if you can give us just a little bit more detail on how much of that will be incremental next year.

And then my second question is I think Coffey was going through, as you talked about, some restructuring. Have you included the costs of that restructuring in the assumed accretion this year, so some of that will be rolling off next year? If you can just expand on those two points, that would be great.

Well, I'll take a first shot at that, and then I'll let Steve get to the detailed answers on some of the other financial components of it. But you are right. If you say $0.05 this year, you take a look at next year at another $0.10. You end up at $0.15. If you do it on annualized, you get to $0.18. So I would say $0.18, if you want to round it up to $0.20, is probably about right. That's right. So, we do think that that is sort of the range of which it will be contributing. Although I want to be very clear: we're not providing 2017 guidance yet. But that is the right calculation.

Now, with respect to contribution, we did -- if you look carefully, we did increase the EPS guidance on a GAAP basis, up by $0.05 on the top and bottom. But we did not increase our cash component. Because the cash that's going to be generated, you would say would be the $0.05, plus the intangible amortization because it's a non-cash charge. So now you're up to roughly $0.09, because that was a 4% incremental increase. So let's call it $0.09 or $0.10. It's $9 million or $10 million.

That amount of cash we'll be getting in, plus the rest of the operating income that will be contributing, will offset the charges that we take on a cash basis. So we think that overall on a net basis, the cash contribution will be relatively neutral, because the cash generated from Coffey will offset the charges and the amount that we are going to spend as part of both the transaction cost and the integration costs that we'll be implementing.

So, if that's -- I hope that answers the questions with respect to the movement on contribution this year, and how that translates into cash and other components.

Steve, anything to add?

Yes, I think the synergies are really in a couple different big buckets. One is you know like what Dan talked about earlier: public company costs, IT, back office, and office colocation. So we're going through that right now. And I think when we complete this quarter, and complete a lot of that analysis -- and at the end of this next year, we'll be able to provide a lot more clarity as to what those specific amounts look like.

Okay, great. My second question -- I was just hoping, given the strength that you talked about in waste management and environmental, you could just update us on -- I know that business is relatively small now -- but how you're thinking about the growth potential of that business, and if it can be a substantial driver as we move through this year and into next.

Well, I think that the -- I'll start with solid waste. Solid waste, I think, will be a significant driver in our overall growth. But I don't think it's going to be significant in 2016 or early 2017. Because our single biggest driver in solid waste that can actually move the needle for the Company is primarily in some of the large coal residual, or as they refer to it as combusted coal residuals. That is regulatory-driven process.

It is quite a large market. And we expect it to be at around $20 million or more for initial implementation. But the timing of the implementation is with that large of a cost to be incurred, all of the utilities and power generators are taking their appropriate time to evaluate alternatives; do feasibility studies for the solutions that are selected; and then move into design, and make sure that it's done the most cost-effectively.

So if it's a bell curve as to when the largest the largest dollars will be spent; it's back-end loaded. And so I expect, in 2016, it will be mostly consulting evaluation, alternative analysis. You'll start doing a selection of solutions in 2017. And the real dollars, with respect to financial impacts, will be once it hits full design and permitting and actual implementation. But I think that's later in 2017.

So, solid waste will be a contributor. It is a regulatory mandated. There's timelines -- we know who has to do it. We know where the coal plants are. And we think we can be the utility and energy providers' lowest and best option for compliance, and actually -- but I think that is out a little bit.

Now on the environmental side, actually things are going quite well. The difficulty with the oil and gas, the low prices, actually is good for some industries. So you have low fuel prices, low inputs for the different products they serve. So we are doing quite a bit of work on the environmental side for upgrades of plants, for environmental compliance, for air, water, and actually soil. And that would mean double lining and different protection.

And then, of course, when you build something new, quite often you are closing something old down. And that's actually a legacy assessment cleanup, and that work has been strong. So, I think there are some silver linings on this lower oil prices. And a lot of it is manifesting itself in US industrial clients, which is commercial, and that's actually been quite good for us.

So I think that's going to continue on a more steady state, and kind of on an up. And solid waste will contribute meaningfully, but probably a little bit later in 2017 and out; although it is contributing now, but it's on such a small base.

Right, okay, thanks.

This will conclude the Q&A session.

I will now turn the conference back over to Dan Batrack to conclude.

Great. Well, thank you very much, operator Thea. And thank you all for your questions and interest in Tetra Tech. I very much appreciate your support. And again, I expect and hope some of the Coffey new additions are listening to this call. And I want to welcome every one of them, and look for a great integration with the company. And I look forward to speaking with every one of you next quarter. Have a great day, and goodbye.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.