Tetra Tech Inc (TTEK) 2002 Q4 法說會逐字稿

Please stand by. Good morning and thank for you joining us. By now you should* have received a copy# of the press release. If you have* not please contact that corporate offices at* 626-351-4664 extension 456 and we will get one to you right away. With us today from management are Li-San Hwang, Chairman and CEO* and James Jaska, President and CFO*. Li-San and Jim will provide a brief overview of results and then we will open it up for questions. As a reminder today’s call is being recorded*. During the course of the conference call Tetra Tech management* may make forward-looking statements within* the meaning of the Private* Securities Litigation Reform Act* of 1995. These include statements concerning* Tetra Tech's fiscal 2002 financial and business prospects. These statements which represent Tetra Tech's expectations or beliefs concerning various future events are based on current expectations that involve a number of risks and uncertainties that would cause actual results to differ materially from those such forward-looking statements. These uncertainties and risks are reported from time to time in Tetra Tech's reports to the Securities and Exchange Commission*, including those described under the heading "risk factors in its form 10Q for the quarter ending June 30th, 2002. Tetra Tech undertakes* no duty to update the forward looking statements*. At* this time I would like to inform you that all participants are in a listen-only mode.* At the request of the company we will open up the conference for question and answers after the presentation*. With that I will now turn the call over to Li-San Hwang. Please go ahead, Dr. Hwang

Dr,. Li-San Hwang: Thank you. Good morning. First I want to just give you a little overview of business at this time and we --this quarter we have very strong cash generation from operation. I will talk about that later and Jim will talk about it in more detail*. Earnings and revenues met expectations.* Water *consulting aspect and also the water design aspect markets very solid (inaudible). And we stabilized basically the communication we expect next year will make some profit, and this year we already turned into profit* and next year we should expect to be better. Significant backlog growth on that debt reduced very significantly. What is most* important is that* I want to point out what we have done, the management has done, is that in a very tough market in the communication turn by so fast not only reduced work and some of the company just go bankrupt and result in (inaudible) connect on money. So under that circumstance we basically managed to resolve those issues, come out with reasonable strong position. I would say pretty strong position for future growth. And we expect in the coming year we should be able to do so. Also, I would like to mention one more thing. That we have very solid operating profit. Overall it's about 10% of all revenue*. And we expect this to be improved* in the coming year. Below the opening lines (inaudible) and Jim will give those in detail how those things come about.

Second page turning to the financial overview, which you already have all those results. And there's some (inaudible) revenue. And operating income. $19.5m. Basically the water market very strong which enhance our profit margin. And why communication markets improving we show growth quarter to quarter, and (inaudible) show some growth. And while there's still some softness but it's much smaller portion of the whole overall activity now. EPS we have 18 cents, and Jim will give some other details how those come about. And we'll beat expectations. Our cash flow is basically about $37m roughly, and -- but more importantly in this year alone, overall cash flow is for operations$95m which is certainly the record in Tetra Tech. And this is going to give us the position for future growth.

Business segment, as you can see, the resource management increase on 44% into roughly about 51%. The communication is roughly reduced by half. Roughly about12. But in fact the current quarter is a little below 12. Infrastructure is about 2% growth in term of the (inaudible). Our growth rate resource management total growth rate is 15.7. Again it's about 3.89%. Infrastructure, total growth is 8.5, again it's minus 11 major part of the reduction is due to some of the design work (inaudible) communication in that group. And we do have some -- geographically we have some weakness and (inaudible) particularly water and this part of activity we are moving to enhance some of the strong aspects of the business*. Communication I mentioned it's really going down a lot. 44%. But if you look at wireless it's really about two-third. That's almost 70% drop in this period of time. Wire line is 20%, but it's not -- the story is that at the last two quarters -- quarter-to quarter comparison they're actually coming back and they make a pretty good profit now. And I expect the next year this part will be -- show some 5% to 10% profit, (inaudible) by the wire line part of business.

If you look at the next page, from quarter to quarter, if you can see, it's kind of coming back, but think about that. If. (inaudible) the communication, it's probably (inaudible) so we overcome that, show some growth now. And we expect the next year should be fully improved. Our (inaudible) which is a private side reduced significantly. Basically it's because of the communication aspects of activity. There are some increase. Increase quite significantly. So overall I would say we are moving toward the areas which I think have more stability in the coming year. Because of the communication going down so we structure the company somewhat about we combine the infrastructure, you know, and communication productivity together, so next year we basically will be (inaudible) in two businesses, one is infrastructure* business, which include* the communication aspects, and the one will be the resource management. Certainly the reason for that is because this business is getting smaller so its (inaudible) part is better this way. And also what we want is see how can communication aspect business apply to other infrastructure aspect allow us to have grow both together. Last year we (inaudible) some good programs. Watershed protection* program, about $94m, and D.O.E., some (inaudible) work, $50m. Some of the water, you know,(inaudible) aspect of the design aspect which was $22m and some local other government some water infrastructure at* 17. So those other areas were substantial future coming years growth.

Our backlogs increased overall year to year to about 13%. Quarter to quarter is about 2.3%#. Both water and homeland *security aspects start to come up even though homeland security come slowly but it does come up, hopefully when the law pass we'll enhance that part of the business. And I would say overall this year we basically stabilized communications*. We realized some of the infrastructure activities, and we (inaudible) some more resource -- resource management part of business. I think overall we were positioned for growth in the future. Jim?

Thank you, Li-San,. Good morning. Let's turn to page 14, and I'll provide a few highlights and then drill down to the information in detail. Li-San pointed out we had a very strong quarter with respect to our cash generation which was a *little over $37m generated from operating activities. And I'll talk a little more detail in follow on slides. A lot of that cash generation was attributed to -- focused on collection and turnaround in our invoicing, thereby reducing our day sales by almost four days from Q3. So a lot of good focused effort on the collection and receivable side by the entire team at the company. And as Li-San pointed out, exceeded expectations with the delivery of 18 cents earnings per share. Going to page 15, let me focus on the fourth quarter income statement. Margins improved sequentially. Gross margin about little over 21%. And I think it's reflected in two aspects, one it's really on a near-term basis as our communication business reduces that mixed change which Li-San talked about. Obviously historically high operating profits in that business as that portion of the business becomes less significant percentage of our overall revenue, it's being reflected in the operating margins. And I think from the long term, if you look at a long-term margin rate out into the future, I think one would go back to our historical rates for averaging purposes.

The effective tax rate is about --slightly over 41% for Q4, and just as guidance, we're forecasting a 40% in fiscal year '03. From an SG&A cost standpoint, our SG&A is up on a comparable basis. And the drivers for that are really threefold. We increased self-funded insurance reserves, and that’s* reflected in our SG&A cost. In addition, some of the strategic tax initiatives which we talked about previously, and I'll talk about more detail in -- later in my presentation, those expenditures are reflected in our SG&A. And the final driver of cost increase in the SG&A on a comparable basis is added resources from acquisition. The other point on the income statement I'd like talk about is the sequential change in our interest income of about $2.7m, with a 6.6 offset in our interest – in our income# tax expense. And I -- and the drivers of both of these changes, especially in our income tax expense, is really increase reserve levels on our tax receivables. So we actually increased our reserves on our tax receivables. The timing of this is really a true up of our amended filings for the multiple years in which we obtained and sought -- sought income tax R&E credit, which we talked about previously on these conference calls. We reflected that true opt in Q4, and that's what you're seeing in this change sequentially in our income tax expense.

Turning to page 16, strong -- change in our cash position reflected in our year-end balance sheet,$46m comparable to 16 last year. Again, a continued focus on cash generation from our A.R., our collection activity, and solid service to our client. Our day sales and receivables, D.S.R., is about slightly over 90 days, down almost four days from Q3 sequentially. If you break that out, all units improved their receivable position as reflected D.S.R., resource management is about 70 days. Our infrastructure business is slightly over 100 days. And our communication business is a little over 120 days. And again, I think some good changes in not only* our A.R. but our working capital position in these businesses. Our net debt reflecting the cash position is sequentially down from Q3 from $98m on a net basis in Q3 to slightly over $65m in Q4. So again, a real focus this year on the balance sheet.

Going to page 17, operating activities generated approximately $37m in cash in Q4, again as -- a very strong continued relationship in cash generation as we've seen in Q3 and Q2. For the year, nearly $100m of cash from operations. We're very, very pleased with the activity and focus of our business management team on cash management, and that's comparable to a $44m in '01,more than doubling that effort. And we really focused on that this year. We manage our capital expenditures and apply in allocating the resources to our growth areas and focusing* those resources where there's a yield, a yield in customer* position and market capture. Our capital expenditures* were about $2.1m down about 46% from Q4 last year. Primarily reflected by the focus and reduced* emphasis in our communications business.

On page 18, I'd like to give a brief update on our FAS 142 adoption, and how we are making the transition from fiscal year* '02 to '03. At the end of fiscal year '02, we completed* the year under the application of FAS 121, and I mentioned* that in our previous conference call and that --that completion was at the end of fiscal year, as I mentioned*, and effective September 30th, we've now adopted FAS 142. I want to be very clear, there is no impairment under* 121 at the end of our fiscal year '02. Now we’ve now* adopted 142. There is no impairment in our resource management* business, and in course with the procedures and the* methodology under 142, we're now performing our valuation* models. The impairment analysis on* both, the infrastructure segment, and, again, combining both our old infrastructure and our communications* business in an aggregated basis along the structures* that Li-San spoke about, the management corporate* structure that he spoke about earlier in his presentation*.

We've looked at any impairment relative our credit* facility, our bank syndicate is on board with the changes* that -- and the adoption of this methodology. And there* is no impact should there -- on any Goodwill impairment* on our credit facility upon adoption. In addition,* we looked at other surety and security bonding requirements*, and that has the same output as our credit facility* of no impact. Out in fiscal year '03, and we’ll talk* about that later in our presentation, with respect to our* outlook, about 16 cents is the contribution to Goodwill amortization or the elimination of Goodwill amortization on our income statement.

Let me talk little bit about income taxes on page 20. As I mentioned previously, we have implemented a comprehensive strategy* to evaluate *our tax strategy across *the company. And one of the major outputs of that evaluation *is quantifying and determining the level of qualified research credits. And that's -- obviously, that’s a technical term within the tax community, but essentially we're looking at business in our mix which is very, very similar to activities that -- of other engineering firms that qualifies for research and evaluation* under the I.R.S. codes. In addition, there were other tax strategies involved in the deferral of some unbilled* receivables from a tax standpoint in certain entities*. And you see that reflected in the liabilities section* of our balance sheet in at year-end. But the consequence* and the affectivity* of that effort yields effective* tax rate or tax rate at the end of fiscal year 2002 of about 40%. Now, other tax -- other tax impacts we have* -- obviously a lower R&D credit at the end of our fiscal* year '02 than previous years. And, frankly, we see a* variation of tax credits year to year. These are independent* studies that are conducted on our business mix on an annualized basis. Really what that’s driven is by qualified research expenditures*, primarily* based on wages. And it evaluates the contract terms* and, as our business mix change, the qualified credits* change. And that's what you're seeing in the change from year to year in our income tax expense line. In addition, our growth has an impact on the qualified research* and development expenditures and the credit. And where we see changes in our business growth, i.e., in communication*, that does have the effect of -- effect on the* qualified credit which we reflected in Q4.

Page 21,I'd like to talk a little bit about metro com’s status. As you recall, fiscal year 2001 resulted in the special charge* of $38.3m. And we created an account --(inaudible) account reserve at 100% of the valued level at that time. We have reached settlement with the estate effective* August 2002, and that yield a gross amount of$9.2m. The net settlement to the company after reduction *of our unpaid invoices, immobilization costs as well as other settlement costs is netted to $6m. In addition, what we have taken this quarter, our additional reserves and write-downs of $7m in our communication business focusing on ensuring reserve levels are adequate on some of our clients that have filed for bankruptcy in a similar fashion as metro com. Obviously, that’s not the entire customer mix. We evaluated our customer* mix and we adjusted reserve (inaudible) took charges in Q4 to reflect that current business activity. With that, I'll turn the microphone back over to Li-San who can provide outlook and summary.

Based on what this year the operation and the overall business and (inaudible) continue to be really try to enhance our water part of business and based on all the information available, this business probably be least affected by economic turndowns and, you know, we see some growth in the overall business in this area. (inaudible) we talk a little about it, and we are putting together that group and try to extend that part of activities and we mentioned earlier. Homeland security, we do have some other projects. Sometime they don't even want us to announce that, because of some sensitivity involved in those projects. And we see the projects -- what we (inaudible) as improving, but I do expect that when the law pass (inaudible) that situation.

Internationally, we certainly want to enhance the collect more money come in and reduce the D.S.R., particularly when communication part* of business reduces certainly the (inaudible) that will enhance our situation. And basically, we want to have more cash available if we future acquisition* can be us used all cash instead of stocks. We certainly also look at some (inaudible) acquisitions which will be in the target market area. And we want to move --still move into the more -- some of the growth areas allows to continue grow from now on. Looking at overall for this coming year, we expect some growth in the revenue growth. And also the E.P.S. growth will be something like 88 cents to 92 cents range. And this coming quarter certainly is -- our present quarter certainly is our weakest quarter particularly in probably comparison to the last year that communication was still strong. Overall is relatively weak. But we do expect that that quarter to quarter will pick up as time goes on. So we project around 16 cents. Those are basic assumptions. The (wholly inaudible) improvement, I think certainly we expect a better situation and I hope (wholly inaudible). Those numbers are contemplated without new acquisitions, and if that’s new acquisition we certainly anticipate possible upward. Our effective tax rate is based on 40%. And so that lower than that.

In summary, I do want to mention that we downside communicate but still be able to -- you know, be able to make profit as we promised that we want 5% to 10% margin. We expect to be able to do so in the coming year. Simply, I think this moment wire is very strong, is that start to show profit improvement. But more important, I think this year what we be able to do is under such a communication essentially down slide (inaudible) and we be able to --with all the effort of the whole company's effort to be able to stabilize and also the company overall. A flat revenue ready for the growth coming year. We have very strong cash flow and (inaudible). And this is certainly we're in better position to be able to utilize those resources to continue forward of growth. We do expect next year should be a better year for us. Thank you. Any questions?

The question is answer session will begin now. There will be a 30-second pause in our web cast to allow for buffering. At this time, the participants are invited to submit their questions. Please remember to mute the audio function on your computer if before you speak. If you're using a speaker phone, please pick up handset before pressing any numbers. If you would like to ask a question, press star one on your touch tone telephone. We’ll pause for a few moments. Our first question comes from Debra Coy from Schwab Capital Markets

Yes, good morning, guys. A couple of questions. One, I'm still a little confused on the interest expense line, Jim. Can you explain how the debt payments work with this long-term debt that you have outstanding?

Sure. The main driver in that interest expense line is attributed to the interest income recognized on the amended return on this change in accounting method. Okay?

Okay

Let me walk through just a little bit to clarify that.

What the interest income and expense was then?.

Yeah. In 1996 we filed for change in the accounting method. Okay? As I mentioned on some unbilled receivables, in some of our entity, not all of them within the company, and so we worked with the service through the evaluation. It's a standard strategy implemented industry. And we received approval from the IRS on this change of accounting method, and then this fiscal year we quantified the amended return, and that interest income was recognized in August and September of this year. So reflected in our Q4. That's what you’re seeing.

Oh, okay. Okay. So your actual interest expense was about, as usual, it was all the additional income that was the off set.

Let me just drill down even further to help --

If you could just break out interest expense versus income that would take care of it

Income $2.7m, interest expense $2.2m.

Thank you. In terms of the outlook on '03,,it sounds like from the guidance that you're giving, you’re not including any acquisition assumptions in that. Is that correct?

That’s correct.

Okay. And Li-San, just to confirm, did you say that the internal growth in the resource management business in the quarter was 3.9%? Is that what I heard?

That's correct.

Okay. What I'm trying to get a sense of is we assume that the communications business remains stable and you get some modest growth there, we've had some delays in homeland security spending from the federal government, certainly with at budget delay. Municipal budgets are weak. But obviously, the water side is strong. Can you give a sense of your comfort level given your current backlog growth and so on, what you think the internal growth rates are in the resource and the combined infrastructure communications businesses for '03? Where do you think the general growth rates are looking like in those two key businesses?

Our plan is adopt the acquisition is about 5%to 6% type of growth.

Okay.

Okay. Be aware that we do have a few – about $20M to $30m already acquired.

Right

$32m already acquired (inaudible).

Okay.

And we expect communication will show some growth and infrastructure will probably be flat, and maybe little bit of growth, but flat. And because there are some strong in the infrastructure but some weakness in some areas, too. And we expect to be self-managed to be good year, too.

Okay. That's helpful. And last question, I’ll get back in line, what do you think is the sustainable margin level in the resource business? Obviously, it was dramatically higher than usual this quarter in this 17-plus percent range. Margins had been sort of declining toward the 10-ish percent range. What sort of margins on the operating level should we be looking at for resource management next year?

In some ways it’s (inaudible) some of the water programs so forth. We would expect would be higher, the margin, but not higher reflective of 17, but I would say somewhere 14, 15, in that range.

Oh, really? Okay.

And communication I mentioned about 5 to 10. Infrastructure probably 10.

Okay. That's helpful.

Deborah, just one comment. I think what you saw in Q4 is a contract-type mix change. We have a resource management business at least in the task orders reflecting the back half of the year a higher percentage of fixed unit lump sum contracts as our homeland business, as more E.P.A. business comes in, little more cost reimbursable. You’ll see as Li-San pointed out a little more historical rate.

Okay. All right. Thanks.

Our next question comes from John B. Rogers with D.A. Davidson Brokers.

Good morning. Jim, just on the metrocom receivables and your -- the other write-downs of receivables, as I understand it, you collected $7m on the receivable that you previously written down for metro com? And wrote down an additional $6m for a net gain of $1m? Is that right?

No.

Okay.

I'm glad you asked the question. If it wasn’t clear, let me walk through that in some further detail. The gross amount of the settlements is $9.2m.

Okay.

We had some additional costs and some unpaid invoices that we netted against the $9.2m. We had costs for demobilization in which we had an obligation to perform and demobilize. After the bankruptcy, reflected in the cost space, and as well as settlement costs to --that we expended to achieve our $9.4m settlement. Okay?

Okay.

James M. Jaska And so that differential, that -- the $6m is reflected in our income statement. We also then through the income statement took expense for additional reserves and write-downs totaling $7m.

Okay.

So it's the reverse.

Sorry

Of the output. Thanks for the clarification --the question.

Okay. Is where does that flow through the income statement? All around the communications?

In terms of -- in terms of what unit?

Yeah. I mean the million dollar --

Sure. It would go primarily in the G&A expense line.

So the G&A is probably slightly overstated by $1m.

It's reflected as a bad debt expense in our G&A.

Right. Okay. Okay. So in other words, the expense level in G&A should come down the run rate.

Absolutely. Yes.

Great. The second question I had was just on the Goodwill. In your slide, you indicated no impairment expected on resource management, which I guess sort of begs the question, what sort of impairment potential are we looking at on the infrastructure and communications side?

What we are doing right now is in accordance with the procedures doing the valuation, both the economic valuation and the forward forecasting under the discounted cash flow models. We have, in accordance with the procedures, about -- not about, six months to reflect that in our financial statement. What we're looking at is about $230m of Goodwill attributed to the combined infrastructure and communications segments, the new infrastructure segment for us. So it's both the old infrastructure as well as communications infrastructure, about 230 --

Okay.

And so what we're doing is we are determining the fair value with -- in -- with a standard methodologies and we will reflect that in --, within the six months reporting period by the requirements.

Okay. So that's when we'll -- or I guess when you'll first do the full-on test of all that Goodwill will be over the next two quarters.

That's exactly right.

And I'm sorry to drag this out, but do you look at them on an individual basis or as a combined unit?

Well, I think -- I mean, it is a combined unit that we look at it.

Okay. So now it's just one combined unit rather than the two separate pieces

Yes. Well, there's two -- actually, there's two reportable units, right?

Right, but just one between --

Okay I just want to make sure the combined unit is not the enterprise level.

Right no. The combined unit is infrastructure and communications. Is that right?

Yes. I just want to clarify that.

Thank you. I appreciate it.

Next we'll take a question from Kevin Wink from Polonus (ph) Capital Management.

Hi. Good morning. I have a couple of questions. Given how strong the cash flow generation was in the last year, how much does that affect the acquisition activity that you might do in the coming year given that you have a better financial position than a lot of people might have anticipated? And then further on acquisitions what are the trends and pricings and attractiveness of deals at this point?

There will be a slow down. The reason slowdown is certain people will -- emphasize a lot of top line growth so we are very careful to assess acquisition, to really try to enhance all growth in the certain areas. So we would expect there will be probably, you know, some acquisition will occur but it will not be a lot of them. Regard to valuation, appear to be about the same, certainly some areas will be a little bit higher. Security will be higher. But in general, about -- not much higher. And certainly want probably more towards the cash side rather than stock side. So that's about in general status of acquisition.

Maybe I could just comment. Strategically, we have looked to acquisition, not only on a technical capability side to service new and existing clients, but also a geographic perspective. And we have a very, very good geographic footprint. So now what we are looking at are, again, strategic tuck-ins and targeted growth market expansion. And that's really the areas -- again, in our quarter competencies and our core businesses and we'll be selective as we (inaudible) some.

Okay. Jim, a follow-up question on another topic. As you're still evaluating the potential Goodwill impairment charges, you mentioned you have talked to your lenders and they are on the same page with you on what is appropriate to do. But as part of that, are there going to be any covenant changes or term changes in the current lending package?

Well, we're amending the covenants. Primarily in the area of -- in the area of net worth covenant primarily. More towards a tangible net worth instead of a total net worth. But we are in the process of mending the covenants for adoption under 142.

Are they going to get their pound of flesh for being cooperative in terms of higher costs for the credit line?

No, our pricing grid is not changing. Our pricing grid is not changing.

And then one final question. Given what everybody knows in terms of the municipal and state budget issues currently, what are your assumptions as to how you’re affected in the -- over the coming year in the outlook that you've given us today? I mean, do you -- have you assumed some deterioration or some push-outs in state municipal business, or -- or, you know, is it pretty much the same as what your projections might have been six or 12 months ago?

No, you know, on our state and municipal business, again, we are different in some respects than our peer companies in terms of our really a targeted essential service infrastructure strategy i.e., .primarily waste water systems that have more economic drivers. And as Li-San pointed out in his discussion, we obviously have seen some change, but not a dramatic change in those markets where -- where we have reflected change in our out-- our outlook is in some of the regional development work, and that's already reflected in our '02 performance, and we are going to be cautious in that business segment in the '03 plan.

All right, great. Thanks for your help.

Next we'll take a question from Richard C. Eastman with Robert W. Baird & Co., Inc..

Yes, good morning. Jim and Li-San could you just give us the percentage in the quarter, the percentage of the communications business which is now wireless versus wire line?

In terms of a breakout?

Yeah, just percentage of dollars reported that’s not wireless.

We have that.

The $23m number?

It's almost --

one/third, two/third.

One-third is wireless.

Okay going back to the receivables adjustments that you made in the quarter, you essentially netted $1m charge or increase in your reserve. Is that reflected in the operating profit of the communications business?

Yes.

Okay, so that business when you look at the operating profit, communications actually made about$1.2m in the quarter.

There's some suppression.

Something like that.

Yes.

Okay. Secondly on the infrastructure business, can you possibly just break that down a little bit? Because, within that segment, you've got you know, the state and local. You've got this communications site work which is maybe cost you $5m in this quarter. And then you've got the in-building. I mean, that's kind of what’s lumped into that segment. And the whole businesses down 11%. The whole segment?

Roughly 5% is due to the normal communication design activity.

So the balance of that business is still down 6?

Let's -- let's step back just one little bit.

Yeah.

Li-San, there was a fourth element, Rick, we wanted to include from a comparison standpoint. You had the three business sub-segments, right?

Okay.

As Li-San pointed out, there was a significant amount of revenue in '01 attributed to communication infrastructure design.

Yes. .

Okay? And on a quarterly basis, it's about a$5m revenue delta.

Understand.

Okay? So that is a change on a year-to-year basis in that infrastructure market. When we look at the remaining call it sub-segments, the majority I would say over -- about two-thirds of that business. I'm just in round sounds here because we don't segment down to level, but is water and water infrastructure design services.

Okay.

Okay? And the remaining portion, let's say it’s one-third our building systems. And that means design systems. That means for educational facilities, for commercial facilities, for communication network facilities in building communications systems. That’s probably the best breakdown delineation.

Okay. And that business must be organically down.

It is organically down in some areas. And --where we see a real strong market is in that smart infrastructure, so that in building communication systems.

Okay.

And I'll tell you from my point of view, especially in beefing up our homeland security perspective from a nation, smart infrastructure, smart buildings will be a critical component of that in the out years. Right now we're doing it a lot of -- a lot of people and a lot of labor. Infrastructure has to get smarter in the future.

Okay. And then just a couple more things. On the deferred tax adjustment that you mentioned here earlier, that is in the fourth quarter here from a working capital standpoint benefits our cash flow by about$15m? Operating cash flow?

No, no, no. It was -- no, it's just working capital. Not cash flow. I guess I don't have that cash flow contribution.

Yeah, I don't have that either. That's why I was trying to ask that question. But that adjustment was taken here, and it's a short-term --

It is.

Current asset but a long-term liability. Correct?

Correct.

I'll work on that. Two more things. Sorry. The 16 cents guidance for the first quarter includes the 4 cents from FAS? 142? Correct?

Well, we've included that in there. If you straight line it, it would be a 4-cent differential. But we also have an offset because under the new accounting methods, we have other Goodwill attributed to the valuation of intangibles such as backlog customers and other kinds of aspects that's essentially offsetting a dollar-for-dollar reduction, Goodwill amortization. We traded, and I think the accounting community has talked about this in many, many forms. We've actually traded off one form of Goodwill amortization for another one. So it’s netted in our '03 forecast.

Because those are shorter (inaudible) in terms of overall. Rather than 15 or 20 years, it's become one year or five years.

So what we're doing here on the three acquisitions that were made in '02, we are reflecting that Goodwill of -- I mean, the amortization of Goodwill --let's call it attributed to backlog to offset the other amortization. But it's not a dollar-for dollar 4-cent Goodwill reduction.

Okay. All right.

That's in the process of changing.

Okay. And then just lastly, Li-San, can you just comment on proposition 50 in California? Does Tetra Tech benefit from that?

We passed that so hopefully with can get some more money from that.

Okay. All right. Thanks.

Our next question comes from Andréa O’Connor with Strong Capital Management (ph).

Andréa O’Connor: Good morning Li-San. Good morning, Jim.

Good morning.

Andréa O’Connor: Wanted to know what percent utilization or billabilty of Tetra Tech’s professionals did you realize in the fourth quarter?

We run on average, and it really is a -- there’s a variation in the utilization factors, but roughly around -- it runs between 65% and 70% in our fourth quarter we were 69%.

Andréa O’Connor: Okay. So 69% in the fourth quarter, and that would be up from 65%?

Well, it ranges. It really -- it does change throughout the quarters. Mainly because, as we look at different holidays, all that indirect labor is reflected through that utilization factor. Right? But on average, our business runs between 65% and 69 in total. So if you aggregate it our U factors for the business.

Dr. Li-San Hwang, That's why the fourth quarter weakness occurred because too many people take vacation holidays all that. As a result, very tough to beat 69. Usually much lower.

Fourth quarter is our higher utilization period. Did I answer or confuse you on that answer? Okay.

We lost the previous caller. We have a follow-up question from John Rogers.

Thank you very much. Go ahead.

: You can hear me?

Yes, we can.

John B. Rogers;: Thank you. Can you give us a sense of what backlog is or what the gross in backlog was by segment?

Let me just -- of the $715m of -- 716 that we reflected in our Q4, about 57% of that, 60% is resource management. And about 37% is our infrastructure services that just the pure infrastructure services. We look at our communications infrastructure, it's about 6%.

Okay. And, Jim, is that changed a lot or --

You know, it has. Only in the communications segment. So as a percentage -- our resource management has always been a significant portion of our backlog. Somewhere between 55 and 70% of the backlog depending on the contract mix. The remaining has been between our classic infrastructure services and our communication infrastructure, but as the dependency and the reduction communication has occurred throughout the year, that percentage of communication is reduced as a percent of the total.

Okay. And in terms of your receivables, do they break down along the lines of your business pretty well?

Yes.

Okay.

I think really along the lines of the D.S.O.'s. If you think about a commercial business, and it's really not so much the business segments. It's really the customer type. And I don't want to confuse things, but obviously, commercial clients are a little slower pay than our government clients.

Okay.

Profitability is higher in commercial business than it is in government business.

Communication.

So I think you see that kind of trend in our AR base.

But at this point, there aren't significant hopefully receivable risks out there anymore.

Well, we constantly evaluate our receivable base for risk. That's a constants process. And we adjust our reserve levels commensurate with that risk and we apply the reserves as risks change.

Okay.

Now if you look at a reserve level as percentage of AR’s throughout the year, it's -- we started off the year at approximately 2.8% of the AR base. And at the end of the year, we -- the -- it’s slightly over 5%, about 5.4% as a percentage of A.R and again, that's looking at some of the items I talked about relative to reserves on communication bankruptcies and other business risks that we see in the marketplace.

Okay. And that increase is primarily communication

Primarily.

Okay. Great. Thank you.

You're welcome.

Our next question will come from Jeff Beach (ph) with Stifel Nicolaus and Company, Inc. . .

Jeff Beach (ph) : Good morning. Two questions. A little bit more on the backlog. The backlog is up about 13% year over year. I thought Li-San, you said it was up quarter to quarter 2-point -- maybe I misheard that, 2.3?

2.3, Jeff. That's right.

Jeff Beach (ph): And the difference is acquisitions?

No, we have no acquisition for this quarter.

No, none in -- not sequentially.

Jeff Beach (ph): No, I'm talking about versus fourth quarter year ago you were up 13% and is -- how much of that organic and how much of that is acquisitions? Do you have rough idea?

Let me see here. Let me pull it out here, Jeff. It's -- yeah. I think we have two things going on. One change in backlog in our communication business and then additional backlog from acquired -- some acquired companies, and I think we're looking at acquired backlog of about 56 to 6m on a year to year basis.

Jeff Beach (ph): And can you also give us a sense if you would strip out communications, just again maybe it's a guess, but if you were stripping out communications including some communications work out of the infrastructure, what’s the rest of the -- you know, non-communication business out?

Yeah, we have that. The non-communication business --

Jeff Beach (ph): Backlog.

We have to back off the -- doing that right now. It's 578 last year versus 679 in '02.

Jeff Beach (ph): Right. One other question, and that's about the outlook for your operating profit margin in infrastructure looking out at 2003 versus this year. It’s ,I’ll say continuing to deteriorate. What are the dynamics that are occurring there, and are we looking out past 2003 at a recovery and infrastructure margins to something higher?

We do not expect to (inaudible) next year. We expect something like 10% next year. Should be some improvement compared to this year. And particularly if we can get some areas resolved so that -- which is weak (inaudible) hopefully be able to improve further. We're contemplating about 10% also.

Jeff Beach (ph): But what the -- what is causing a continued drag in the infrastructure as you try to shore up the communications aspect in the communications segment? What's happening in the infrastructure that continues to drag it?

Let me just be really clear. Remember, there was about $20m of communication design business in our infrastructure business. Right?

Jeff Beach (ph): Yes.

Okay? And as we reconciled those projects and we wind down that business, there was cost in '02 that has an impact on that operating margin in '02. Okay?

Jeff Beach (ph): Yes. .

Jamming we believe that's behind us, Jeff. And really focused that business on that water, water infrastructure marketplace into the future. In addition, we also see, and I think it's -- as I mentioned, a minor portion of that business segment some of that building development work primarily in New York which is a little slow relative to our cost base. That business again is a smaller percentage, but it is there. The primarily --primary driver is in terms of dynamics is the communication wind down.

Jeff Beach (ph): And looking out past 2003, are we looking at 10% margins, or are we looking at returns 12 to 13% type?

Well, I mean some of that, there are some economics that are driving that business. But if we look historically and go back through many, many years of performance, that business runs between 11% and 13%.

Jeff Beach (ph): Okay.

I mean, and so you see some movements as economic drivers move that rate, but I'd say let's step back and look at that business over a longer point -- over a longer point and a longer perspective. And those are the ranges think we've seen that business operate.

Jeff Beach (ph): Okay. Thanks.

You're welcome.

Our final question will come from Debra Coy from Schwab Capital Market.

Yes, thanks. Couple of quick follow-ups. One, on the Goodwill amortization and looking at the review of the impairment, is there any reason why you’re taking the full six months to complete that since it’s been under discussion for a while? In other words, why didn't you go ahead and do that in the current quarter?

Well, first of all, what we're doing right now is the affectivity is beginning this year. And what we’re doing frankly, Debra, is looking at those economics in the marketplace, especially when we look at the out yearing that communication business. And so we've engaged valuation experts, outside of the company, to help us. -- we're looking at economic models, and we will, I think, really go through that process in a prudent way and announce it.

Okay.

It might be sooner than six months. We’re working at that right now. And we're working as -- you know, in a very prudent expeditious fashion.

Could be three months. Six months maximum.

Right. I understand that. So it's still not clear whether we should expect to see that announcement in1Q or 2Q, one or the other?

To be honest with you, I'm not prepared at this point to specify which quarter. We're working -- we're trying to do it right. And we're trying to do it in a very prudent way. And what I don't want is to have to do it again out into the future after this first valuation.

I couldn't agree more.

And also, we have the (inaudible).

Right. Okay. Understood. Given your strong cash flow generation and given the current price of the stock, has -- I know you've been looking at reinvesting in growths, but have you given any consideration to a stock buyback?

We have get bank approved if we want to. We present to the board. (inaudible) watch how the stock behaves. If we start really behave lower we can be (inaudible)recast. But at this moment perhaps not approved for that.

In addition what we have done, Deborah, with respect to our credit facilities and our loan agreements, we have an agreement in principle with respect to the banks to create vascular limit to the magnitude. We're still working through some of those details that those changes would be reflected in a modified amended branch agreement.

Okay. Understood. Last, very last question, I think there's been a lot of question about the spending outlook at the state and local level. And I know, Jim, you said that that business has been holding up, as you have focused on critical services,. Li-San, you said you’re looking for a growth rate next year in the 5% to 6% range overall. Can you just give us some quick thoughts on where you think that money is coming from? In other words, how are states and low localities and current budget environment able to pay for continued investment in water and waste water infrastructure?

I think, Deborah, as you -- your practice and you see it, there's really three funding mechanisms. One is federal government grants. And we see that in our TMDL practice and our service line. When we develop watershed plans that will then flow down to infrastructure, we have all seen the economic studies that E.P.A. has developed in terms of multi-hundreds of billions of dollars of infrastructure requirements. Federal government component will be a part of that. In addition, as we all know that usage costs are going up, and I think this commodity has an economic component, and that is -- that will have a rate element to it also. The third area is outside financing of this infrastructure. We've seen some models on public private partnerships on infrastructure. And I think that's going to be a third vehicle for funding this future need.

Okay. Thanks.

Another thing could be also added to it because this whole aspect what we talking about the TMDL all that affect our infrastructure development. It's really in the infancy. So even though maybe slow down somewhat but still compared year to year significant growth. And that part we expect a fairly significant growth this coming year.

Okay. Thanks, guys.

And this will conclude the Q&A session. I will now turn the conference back over to Li-San Hwang to continue.

Yeah, I want to summarize what I have presented earlier and this year we certainly have a tough year and I would say we -- this is behind us. And we basically got communication issues, really have our (inaudible) crashed but at least right now start to slow down and we start to turn up again. So that -- I would say a very -- in some ways, you know, people may not -- you know, may not appreciate that, but our people been working very hard to do that. And when you downsize about half or three-quarter of the people, it’s very tough. I think we be able to did that. Looks like we turn on that. And even under that situation, overall, the company still being able to maintain flat growth and good profit and very good cash flow. And all those are really prepare for our future growth. And you would expect next year should be overall better performance. Thank you very much.

And that concludes today's conference. Thank you everyone for your participation. You may now disconnect.