Tetra Tech Inc (TTEK) 2003 Q2 法說會逐字稿

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Good morning and thank you for joining us. By now, you should have received a copy of the press release. If you have not, please contact the corporate headquarters at 626-351-4664 and we will get one to you right away. With us right now is Li-San Hwang, Chairman and CEO, James Jaska and David King.

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 including Tetra Tech's fiscal 2003 financials and business prospects. The statements which represent Tetra Tech's expectations or beliefs concerning future events are based on current expectations that involve a number of risks and uncertainties that could cause the actual results to differ materially from those of such forward-looking statement. These uncertainties and risks are reported from time to time in Tetra Tech's report to the security and exchange commission including those under the heading risk factors in its form 10k fiscal year ended. Tetra Tech takes no duty to update forward-looking statement.

At this time, I would like to remind you that all participants are in a listen-only mode. At the request of the company, we will open the line for questions and answers. At this time, I would like to turn the call over to Dr. Hwang.

Good morning.

My name is Li-San Hwang.

I'm very please today report to you the results of the second quarter of 2003. As you can see on the computer screen, I'm going to present the agenda as following. The overview will be provided by me and the financial details, King and I will give the outlook and summary and then we open for the questions. Jim and Kim and myself will open for questions. Let me go over the business overviews. The earnings forecasted, the market remains strong. Communication market gained attraction. We completed the force ware environmental. [inaudible].

Page 4, financial overview. Net revenue, the comparison for the two years is 192.9 compared to last year 178.1 million. That's 8.3% increase. Federal government is very strong and commercial. [inaudible]. Operating income is increased by 110%. This is -- this year's 21.3 million as compared to 10.2 million last year. This is due to the implementation of the communication activity which are currently in the infrastructure. The earnings per share is 21 cents compared to 10 cents.

Our cash generation is a little weak primarily due to the working capital, roughly about 8 million and, also, during this time, we happened to be, we had to make two tax payments during this period and also an increase in receivables from the beginning of the year affect the cash flow but we do expect next two quarters should be very good. In business segments, we have three business segments and now they have become two because of the communications, as it stands now, is about 9% of our total business. So we combine with infrastructure as a form -- as an infrastructure segment. Currently, the -- the management is to involve 55% of business infrastructure is 45%. And this is a further change after we have total effect of acquisition. This pie chart. [inaudible]. I will discuss that later with regard to impact of their integration. Our growth rate, resource management, the total growth is 21.7. As I mentioned, we are three weeks off because of weather. Our accomplishments, as I mentioned, a little bit weak. Infrastructure part, the total growth is minus 4.6% and organic, 12.6. In the communication part, total gross is 4.4. Communication, because the new contract has not really fully kicked in. [inaudible]. Communication comparison year-to-year, we still have minus 28% reduction. We expect that second quarter should be significant because of the full-fledged work on Nextel will be kicking into it. Our company-wide overall, total increased 18.3, again is minus 6.5 and that certainly will be significant when communication stock to kick in. Our customer mix, as you see, we have private side, 54% before this last year and stay local 21% and federal is 27% and international is 2%. This quarter, private side, 41%, international about the same. Interestingly, state, local, still relatively strong, even in the tough economic involvement which is 23%. Federal is 28. As I mentioned earlier, the federal work increased significantly because, as we fully integrate the sale. Government work is over more than half. In fact, it is going to be close to 60% as we mentioned later on.

Let me mention about what the situation after the acquisition of force willow that we have so far. We have paid 72 million. This is subject to adjustments which I do not expect a change from this number too much compared originally to 80 million. This acquisition appears to be very good for us because not only it enhances our capabilities but customers, we went to talk to them, they feel happy because they feel that these two organizations will significantly enhance the strength in the market and all customers reacted very well. Our back log, overall back log, 266 million overall so we are close to a billion dollars back log and our organic growth. [inaudible].

As I mentioned overall, all systems are in progress. We do, as I mentioned, three weeks off for the revenue, which is about 10 million dollars. we mentioned some other new contracts that we have. Happens to be force ware is a large recipient of the U.S. Air Force and this is our second award also by 1.1 billion. So we will have basically two contractual mechanisms for secure more work in this area. By the way, the first contract we have, we already have about. [inaudible].

Nextel Wireless, network enhanced our activity and currently, we have 50 some sites we are working on, and 540 sites that we are working on, I'm sorry, and it could be much further increased. Each site, somewhere from 60 to 100,000 dollars sites. And the work late last month, an announcement today simply because we factor the Nextel and ask them to announce ours after they announce their earnings. Additionally, we have some infrastructure work which is tied into U.S. Corps of Engineers trans-Atlantic division, which is involved probably in the Iraq.

EPA counter terrorism, support work we have 8 million and we have some work performing for the design aspect for the Afghanistan also. And that's another 3 million dollars with Army Core of Engineer work. Our back log, as I mentioned earlier, we increased significantly from 999 million, which is almost one year and more than a year off overall net revenue. We have overall an increase of 48% year to year, 8.6% increase with our acquisition of force ware. Looking at overall, our business and we have tried to focus more in areas which we believe we strengthened and we have better position and also the market involvement. So in the federal side, we very much want to work in the nuclear aspect, water improvement and also homeland security or national security aspect. The state, local side, we want more involvement in the water and security which helps trading and we want to get. [inaudible] which basically involves in study-related areas and tied to design and conservation of the water area in particular. Because of economic situation, we will try to utilize our relationships to some of the long-term customers. [inaudible]. I also am pleased to mention here, we have vice admiral U.S. Navy join our board.

Also you see in the computer screen, he is a vice president of the Midwest research institute, former vice president of Georgia Tech and former NASA and two-time astronauts. He led the challenger investigation, as you know, because of the tram did I at the time. The current board make-up is 8 board members, 6 outside and two company executives.

I want to turn the financial details to David.

Thank you, Li-San.

Before I get into the details, let me provide the highlights. First, our EPS of 21 cents this quarter more than double on the year-to-year basis. Our net revenue up is 193 million. It's about 8% improvement over the same period last year. Our DSR is about 93.3 days on the year-to-year basis, it's a significant improvement, also quarter-to-quarter basis. I will get into that a little bit later. Also, beginning of this year, we adopted FAS 142 which I will also spend some time later. Let me get into some of the income statement numbers. First, our gross margin improved by about 2 percentage points compared with the same period last year.

In this quarter, we were able to better manage our cost and our communication business margin went back to normal, or about 10%. The second major contributor is our SG&A cost and rates. They were down about 2 percentage points or 2 million dollars about the same period last year also due to our cost management effort. Third, the amortization reflect the 142 adoption which eliminated to well amortization. The effective tax rate is about 40% in line with our fiscal '03 plan. Our cash position reflects acquisitions, that is forced will acquisition. We funded part of the acquisition cost with our own cash as well as we funded the post acquisition working capital needs which total over 20 million dollars. Our DSR of 93.3 days was down about 11% on a year-to-year basis and about 2 or 3 days improvement over the -- sequentially. And these reductions reflect high percentage of federal work and customer mix. The intangible assets and equity reflect the good will write down and I will provide detailed steps involved in a few minutes.

Our net debt is about 150 million dollars and up about 81 million sequentially due to acquisitions and principally because of the borrowing for the acquisition as was additional funding for the acquisition cost and working capital for the fourth wheeler. As Li-San mentioned in the next couple of quarters, we will work hard to integrate Foster wheeler and improve our receivable management. Cash used in operation, we used about 7 million dollars during this quarter, probably two or three reasons. One is, as we mentioned, we funded the working capital needs of Foster Wheeler and we have some growth in our receivable due to Foster Wheeler coming in and getting on board.

Thirdly, this a quarter we have two scheduled estimated tax payments which total to over 10 million dollars during the quarter. Our cap expenditure is about over 2 million dollars which is what we expected. The receivable and payable increases reflect the addition of Foster Wheeler. And I want to spend some time on wells for the quarter. We adopted 142 at the beginning of fiscal '03, 142 eliminated first the local well amortization. We went to a two-step process to evaluate the well by operating segment as of October 30, 2002. This is independent evaluation and the result was that we had no impairment in our resource management segment. We had no impairment in our infrastructure segment. We had about 100% impairment in our communication business which was about 150 million dollars, which is the write down we take this quarter.

This impairment is treated as the cumulative effect of the accounting change and excluded from EPS calculation. I wish to emphasize this is a below-the-line adjust. It does not impact our cash position or operating capacity. Again, our EPS is 20 -- 21 cents this quarter, one cent above our forecast. Li-San, will you provide the summary?

Let me go over some of the summary.

If you think about as a global, looking at Tetra Tech, looking in the future, I think in the next couple of quarters or next year, because if you look at overall, we have two segments, the communications improvement, particularly some of the large improvements we look at and that will give us enhanced organic growth. Earlier, I mentioned about organic growth will come back and that will increase organic growth and that will affect our total growth. We have a pretty bad situation in last year, earlier, so our profit margin, we are profitable so over 10% profit. And also look at the total goals, Foster Wheeler, they are coming -- with total growth, and earning part.

More importantly, we have overall stability, more stable because we have more federal business and as you see the back log, we will have a relatively stable business as compared to earlier communication productivity. So, based on those and also I want to mention about what's our business, go to page 20, where we stand in terms of the overall composition of our business. We have a customer mix, as I mentioned earlier of private 47, local 23. Federal is 28. International is 2. That will be next two quarters for this year. Private will be 40. Federal government, 40 also. State, local probably will go down to 19. It is not the business going down. It's just percentage going down because of the integration of Foster Wheeler. International is about 1%. Our business mix will be 45. Resource management -- 55 resource management, infrastructure. Now that will be 60% after integration, 60% infrastructure. Based on all these changes and all realistic estimates, we go through the process of planning and our net revenue for the coming quarter will be 245 to 250. EPS about 25 cents. For the year, on net reef knew, will be 840 to 870. And EPS will be over 90 to 92.

In summary, I think we have, based on the current effort, stabilized some of the businesses and enhanced the communication activities and we also have some larger programs, our back log will increase and we're pretty confident to meet our guidance. I will open it up for questions.

Thank you. The first question...

Operator?

Yes..

Would you manage the Q & A?

Yes, sir. The question and answer session will be again now. Please be aware there will be a 30-second cause in our web cast to allow for burg. At this time, our audio participants will be allowed to submit their questions. If you are using a speaker phone, please pick up the hand set before pressing any numbers. If you would like to ask a question, press star-1 on your touch tone phones. The first question comes from Jeff Beach.

Stifala Nicholas. Can you expand on the area of kmup kaigs? I think it's been rolled into infrastructure but to the extent you can still identify those operations, do they show sequential improvement in this second quarter, going forward and can you talk about how fast you will ramp up on this Nextel operation?

In terms of the sequential, you know, we were 25 million previous quarter. Now, this quarter, actually, second quarter, we will be at 18 million. Now, we are just in the process to ramp up that. Currently, we got about 545. We are very actively working on that. Not fully, but at least very significantly operating that. We have on our side Seattle area. [inaudible] and we handle essentially all the west coast at the moment. Also the number of sites continuously increase. So we fully expect this 45 million will be more than 45 million by the time we finish.

And the other question, can you talk about the integration of Foster Wheel sneer you talked about the integration of the management system. Will this fully integrated by the end of the third quarter, in June, and is it continuing to be as profitable as it was last year?

Jeff, maybe I can comment on that. There is a couple of significant activities that we're looking at as we bring Foster Wheeler into our family. Number 1, we are looking at continuous business systems not OEM throughout the Foster Wheeler family but also in a larger context. That activity will most likely take us to the end of the year as we align our system. Part of that also is tied to government rates and our bid rate and we have to make sure that we are fully integrated before the year on our bid rate as we no-bid some key contracts. Overall, I think the path that we are taking is a very smooth but a very detailed process of evaluating the business, the performance of the business and the cost of delivery of service and I would expect that that would be ready to go in '04.

Is there any change in the profitability looking at the quarter, you know, just ended for Foster Wheeler, looking ahead, you know, versus what they did last year?

You know, just as we have seen in our other transactions with large companies that -- this business is not their core business. It is going to take a while to bring them on poor in terms of cost and delivery and really leveraging that capability within the other units in the company. I would suspect we would see continued improvement in the profitability of that business as we have seen in the other transactions we've made with -- from large corporations.

All right. Thanks.

And our next question will come from Deborah Coy. Again, please state your affiliation and your question.

Thanks, good morning, guys, Schwab capital market. Just following up on the acquisition, Dade, you said it was about 20 million in working capital that you spent out of your cash for Foster Wheeler specifically?

We spent close to 10 million dollars of working capital.

Close to 10 million dollars in working capital. So my question is, excluding Foster Wheeler, what would have been cash flow from operations in the quarter? Sound like it might have been slightly positive and -- positive and what's your guidance for the year? You said previously you were looking at cash flow operations to be similar this year to last, perhaps a little less with working capital requirement but basically similar. Obviously, you know, you are running behind plan in 2q. What's the outlook for the rest of the year?

We expect to -- there are a couple of pieces. One is that we expect to generate about 50 million plus in the next two quarters. Our initial forecast or our representation included some tax refunds that we were expecting this fiscal year, but due to some timing issue, we will probably realize that next year. So for the year, FY '03, we are looking at 50 million 5.

So basically you had two tax payments of 10 million you said. So you are kind of a negative delta more than 10 million on tax payments. Do you expect any additional costs from Foster Wheeler on your working capital requirements going forward or have you gotten them more independent by now?

Well, let me dissect by two pieces. The tax payments was the scheduled estimated tax payment that occurred for corporate -- one? January and one in March. That's typical.

Right, okay.

And if you threw that, we would be positive income from cash operations.

Okay.

further, we do not foresee any further funding of Foster Wheeler in terms of working capital for the rest of the year.

Sot primary shortfall of what you had earlier expected in the, call it 80 to 90 million reap versus 50 is primarily tax related?

Tax-related principally. I should emphasize we had some refunds with the government and -- and that refund, instead of this year, will be deferred to next year.

Also, I would say that we expect the next two quarters to grow and that required some funding in that. And the Foster Wheeler side, I do want to mention about that, about 10 million operating. You know, we paid the original 80 million and, at the time, their balance sheet reflects a net -- we pay 80 million. That turns out to be, we pay 72 because they have not paid, I will say, their subcontractors. So we had to take that part of the slack. Cost us about 10 million dollars.

Okay.

So in some way, that should be operating cash flow turned out to be a negative operating cash flow. We do benefit from the financial side because we will to pay 72 instead of 80.

Deborah, this is Jim. I would just further Li-San's point here. When we acquired the units from publicly traded large corporations, the cash is excluded from the net asset value. In this case, Foster Wheeler had a higher subcontract base than we have seen in other units.

Right.

therefore, we had infused cash until we get it back into a steady state. We believe that, A, the receivables are good, that we are working with them on the timing of the in-flows and outflows and as we have seen with other units with high concentration of government work, we believe this is going to be a cash-positive position going forward.

All right. I mean I guess that's what I was trying to get at because there is a surprise notice quarter. What you are saying is that the Foster Wheeler does not inherently, going forward, have capital working requirements that are going to be pressure points?

No. It happens to me, about 10 million dollars really exchange to financial, we would pay financial cash flow less.

Okay.

But, really, it is net, the total cash flow was neutral.

All right, all right, fair enough. A question on margins. It sounds like, as you said earlier, that it will take a little while to get the Foster Wheeler group up to your normal operating margin. So, my question; on the resource side, should we expect this sort of ten-ish rate going forward and do you still expect to see a fourth quarter bounce related to timing or truing up of government accounts on the resource side?

Jim?

I think especially with Foster Wheeler, we see similar trends,, Deborah when we see higher percentage of government work. I think the delusion from Foster Wheeler is, on an earnings standpoint, not that great. We would have higher margin resources in management, within our range but on the owe lend of our -- low end of our range.

So 10 to 11, call it?

Yes.

and you had quite an uptick on infrastructure. Was that due to the profit the and communications or are you seeing some positive mix in your other infrastructure business as well?

I think mostly the communication, because we had enough communication quarter year to year. We had some minuses, write-offs during that time.

Right..

and this time, we are positive over 10% margin.

So for the overall infrastructure group, the 11 1/2% is sustainable going forward?

Yeah, we should be -- we should reflect that.

Okay, great. Thanks a lot.

There are no questions in the cue at this time. Again, please press star-1 on your touch tone telephone if you would like to ask a question. And we'll take our next question from John Rogers. Again, please state your affiliation and ask your question.

D.A. Davidson. Good morning. The just so I'm clear on Foster Wheeler, it looks like it's about 170 million analyzed run rate in revenue? Is that correct.

Yes. Annual run rate on the revenue is about 60, maybe 40, 45 for the quarter.

Are the margins in this business closer to 10%?

If we totally clean up, we expect to be 8 to 10% net revenue.

And then on your ket -- on your debt, the short-term debt, is it your plan to term that out or -- on the current portion?

I'm sorry. Term that out meaning?

Meaning convert over to a long-term debtor just try to pay it down out of cash flow quickly?

As we mentioned earlier, in the next couple quarters, we will try to work hard in integrating and realizing some benefit from Foster Wheeler synergy and further improve our management and we use the cash to pay down the short-term debt. We hope to be cleaned up of that debt part within this year.

Okay, great. And one other question on the income statement, I noticed in the segment results,, there was, looks like, about 1.3 or 1.4 million dollars in elimination and other. What was that?

This is our typical intercompany elimination into entity work, if you will.

Right.

But it was a positive number and it was just higher than it has been in the past? I didn't know whether it was a sales of an asset.

It is consistent with prior quarters, you know. This quarter is about 1.5 or 1.6. Same thing last year.

No, but the operating profit, not the revenue. If you can get back to me if you don't have it there, that's fine.

we'll get back to you.

I was just curious. And then the last thing is, it sounds like the federal government work is fairly optimistic. You mentioned that the commercial business was a little bit slower. Do you see any signs of that turning?

I would say, right now, follow the economy on that. I hope the economy will start to turn and that number will reflect, you know. But we have concentrated right now on some specific industry which is growing pretty well. We are hoping to get back that part, you know, strengthen that pot, such as the pharmaceutical and other aspects of that work is pretty strong.

Maybe I can comment. John, this is Jim Jaska. On that elimination, what it is the reduction on our SG&A spending that you can see in our cost base reduced op a year-to-year basis and actually then now allocated to our business unit and reflected in the rate. So it comes forward as bottom line performance. The government rate and the timing of that.

Okay. So it's cost that you previously incurred and then it's being reverse -- reversed out, is that right? It's a timing against our billing rate.

Okay.

Okay. So we are under-spending, we reduced the gos in our SG&A cost.

Okay. Great. Thank you.

I will now go to Richard Eastman. Again, please state your affiliation and your question.

Robert W. Baird. Li-San, can I try one more time on this Foster Wheeler environmental. Originally we were going to pay 80 million, ended up paying 72 million but we are financing some of the working capital?

Yeah, okay. Here is the situation. Normally, for certain type business, they happen to be from the day we negotiated which is at the time that we offered some net asset value, turned out to be they hold -- they delayed payment of some subcontract. So as soon as we took it over, because of the subcontract, as a result of that, net asset value increased. But we have to pay now all the subcontract payments to fulfill the schedule. So we got it. We have to pay that money. So we paid that money yet on purchase costs reduced by about 8 million dollars. So in net, it's p the same. But we also operating cash. So it's cheaper some way.

So if -- their subcontractors, we would have paid 80 million and that would have showed up under the operating cash flow?

Right. If we paid their subcontract, we would not need to put that 8 million in with you but we would have paid 80 million instead of 72.

Let me further what Li-San just said. When we look at the net asset value and the purchase price, the liability was higher attributed to the subcontractors. 8 million dollars, the value was 8 million dollars lower, reduced the price by 8 million. The cash was removed and so we had to infuse cash to make the payments on those subcontractors.

I understand. And then also, and this may have been on your slides, but it would be helpful in the future if you made your slides available before the call, because at least on my system, the slides don't keep up with the dialogue. Let me just ask you. You may have given this number, but could you give the organic growth number by segment? Research management and infrastructure? It may or may not be in the slides. I don't know.

it's not in the slide. Okay. Page 6.

Okay.

You have to wait 30 seconds for something -- or something. You got it?

I'll find it. I'll find it. I have to go back. And the Foster Wheeler net revenue in the quarter that you recognized was how much?

10 million.

10 million..

because roughly about every week is 3 million. Every week, we got, you know, final acquisition done by March 7, three weeks left. We include the three weeks after we acquired, yes.

Okay. Very good. Thank you.

.

Good morning. Could you guys talk specifically about what you are seeing in the private sector business, excluding communications? I mean, obviously it's been weak but can you get more specific on where it's weak, if you see any strength anywhere?

Sure. Let me start off with where we have seen some weakness. I'm going to classify it on a timing basis. When we look at our mining business, our mining business for quarter 2, and usually in this period, but primarily quarter 2 is a little bit soft, as well as some of our support to a large petro chemical company as they go through their merger consolidation, they are kind of storing out who is in charge and then what are the projects that will be assigned to it. That has nothing, I might say, to our contract base or actually the back log. It is more the timing of that. But that is offset by some strength both in our pharmaceutical business, supporting those clients as well as some aero space, the companies that we provide both environmentally as well as infrastructure service. Our communication business, as I think doctor Hwang pointed out is gaping some traction. We are continuing to see commercial development in certain locations, primarily in the northeast, being soft, continuing to be soft and that's reflected in our commercial numbers.

And New York area probably.

Okay, great. Can you talk a little bit more specifically about cost control and SG&A? David mentioned earlier that's about flat sequentially?

Yes. We continue to focus on 10% SG&A cost for the company as a whole. [inaudible]. That's what Jim was trying it do was mention only about try to integrate all the business systems and back office and synergies and we have achieved, with -- without Foster Wheeler about 10% this quarter so we intend to target that range for rest of the year.

Do you want add some more?

I can add a little bit. We have an estimate going on to look at the cost of service and support our generated revenue. In other words, the cost of our back office and, to that extent, we are in the process of getting shared service arrangement in place and implementing that in some of our businesses right now. Coupled with larger purchasing arrangement on big expense items such as travel and other items. So, we're going to continue to make that a major effort as we complete '03 and prepare for '04.

Another benefit to us because the Foster Wheeler come in, we have a larger base to allocate that part of SG&A.

Okay, great. Thank you.

Mark Braun has your next question. Please state your affiliation.

Good morning. First Analysis. Just a clarification. The 50 million goal for cash flow, is that just another goal for the second half? Is that the goal for the full year implying, you know, you need kind of 60 million for the second half?

We would try very hard to target all-year basis to be around 50 million dollars.

Okay, okay. And then just the -- do I understand correctly that the tax refunds that you are expecting, were those a 10 million dollars item that are now going to be part of '04?

At least over 20 million dollars.

They were over 20 million?

That's right. That's what the net receivables is all about.

And then on the -- on that, could you just comment at all on your view of prospects for additional near-term work orders under the Air Force contract?

Yeah, we kept a lot of that as time goes on. So it is a continued effort. We have license to go and catch the fish, actually so with the new contract, we have more people to get it on and search for that. So we expect to increase in that.

I would also like to comment. I think if you look at our per form mans overtime, our ability to capture task orders on that contract capacity, not OEM with the Air Force but with other DOD installation, services like the Navy and the army, it's been very good. And I think the ability to utilize two contrasting vehicles says something to me with respect to the Air Force. One, the Air Force has confidence in, let's call it, the front end study and other technical element. The Air Force also has confidence in Tetra Tech on implementing the full life cycle of a project from beginning to end. So we're going to implement a process not only with the Air Force but also on the Navy as most of the customers, most of the bases and capturing work, especially as the government looks at its operation, its current condition of bases and installation throughout the world.

By the way, before we didn't talk about this contract back log but we are a 4 or 5 billion dollars in contract back log. So we have that kind of mechanism to go out.

Okay, okay. And then lastly, could you just talk a little bit about your state and local government work, you know, your revenue have there is still quite strong. I guess, two questions. One, you know, did, by chance, you know, I guess Foster Wheeler is mostly federal but did they happen to contribute anything to state and local in the quarter; and second, what kinds of signals are you getting from that customer base?

They contribute essentially to state and local. All come without Foster Wheeler. We increased about 2% overall. We still are hopeful that that part is still really good because even though the overall budget, we do have -- reasons why we skip it is because we have water programs, some educational program appear to be still in negotiation.

Okay. Thank you.

And we'll now go to the Labia’s willow.

Black Rock.

You may have answered this. I'm having trouble hearing some of the calls. Can you tell me the timing of the 45 million in Nextel? How many quarters do you expect that to be spread over and when will we start to see the results of that?

We actually started late last month. So we gradually will build up on that. So they assign us over 500 sites. So we are beginning some of the seats and do some calculations on that and gradually, we will build up to that. So we do expect our business in that area should be significantly increased. But difficult to precisely predict depending upon how fast they give it to us and how fast it will be brought. This project is a little different from before because they give us a little more time to implement among that. So actually, it's better for us because we don't need to ramp up too fast and that gave us a little bit time.

Is this a year, two years? Can you give any sort of maybe broader parameters? Can you also speak to whether the margin there is sort of in line with your previous thoughts, you know, that you only do work in this area if it's 10% plus, 10 to 12%?

It's about -- the contract is about 18 months.

Okay.

And we are hoping to get it on the balance side, more depending upon the requirement, depending on the funding they have and they report earnings appear to be very good so we are hopeful to have more sites and in terms of margins, it is not as good as before, you know, like 15 or 18%. I think it will be anywhere from 10 to 14%.

Okay, great.

And then could you also just speak to -- not to beat this Foster Wheeler to death, but how much do you see this 8 to 10% margin this quarter on the -- you know, on the 10 million in revenue and can you speak -- maybe David, if you can speak to what will determine when you come -- whether you come closer to 8 or maybe 10%. As last thing, David, can you talk about the progress you made in terms of maybe some of the costs take in Terps of system integration and consolidation and some of the opportunities just overall? I know the SG&A was down nicely year over year. How does that look going forward?

I would defer your first question to Jim and then I will answer the second question.

Thank you.

Let me just comment on the margin. The contribution for this quarter, as Li-San points out, is minimal. That business, the Foster Wheeler business is a high concentration of government, cost reimbursable business. I think the ranges on a forward basis are in line with what Li-San pointed out earlier, the 8 to 10% operating margin range.

On the cost, I think we touched on that a all bit. One is what we call share service of, if you will, back office services. We look at our accounting, our I P I F team and how did -- how can we share the back end to support function and try to consolidate either nationally or regionally p that's one big evident going on. The other thing, if we look at, can we look -- implement a company-wide accounting system and, further, take on the workload and that seems to work as well. Thirdly, this company has not yet buying the 1 billion dollars. By that, I mean we have many subsidiaries buying airlines, consolidation on their own. And now we're going to buy a 1 billion dollars company. We have some substantial effort going and this ongoing.

Thank you. We'll now take a follow-up question from Jeff Beach.

Yes, can you elaborate a little bit more on some of the end markets in your state and local business in particular, the water ways water, outlook for business and then some of the other markets you served in state and local like schools and other markets?

Sure, Jeff. I will take that one. We see a very strong business in state water resource planning. That continues to follow some of the federal water shed management requirements and initiatives that EPA has initiated. That, we will expect to flow all the way down to infrastructure improvement as state plan for protection of water quality as well as state plans for allocations of water quantity on water shed gets translated right down to infrastructure. So that whole water initiative continues to be a high priority within both the federal government and state governments and even in as Li-San points out, the economic times that we are in right now. In addition, we have looked at and have entered a position into the education market, primarily K through 12, that needed very significant throughout the United States. It's a priority not OEM on the local level but all the way to the federal level. We are positioned well in the northeast and the Atlantic region. We have targets of expansion in Florida, Texas and California. We plan to do that through our existing network of offices, but, obviously, that's a high priority. We have world-class capability in K through 12 educational facility design. The other markets, water waste water system follow that watershed planning initiative, especially as we look at advance requirements, treatment and re-use. So that continues to be a strong market. We are not a major player in transportation. But what we do see in the market in transportation is spotty pr form mans. High priority projects in certain areas that are meeting the funding levels within government decision making and others that are obviously being delayed. That is -- we are not a major player in that and, so, we don't reflect -- we don't have the a significant impact attributed to those spending patterns. All in all, I suspect that our state and local markets are focused on special resources, essential services and a higher priority of planning.

Can you just spend a minute on what's the weakest market you are involved in? I think, as I mentioned, we are a small player in the transportation market. I would say, in terms of our practice, it is de minimis. In fact, it is probably -- well not probably. It's less than 1% of our base. And so we -- but I would classify that from a state and local marketplace as, at this point in time, our softest in the market. Thanks.

And we'll take another follow-up question from Deborah Coy.

Yes, thanks. I think you answered this mostly but just to clarify on the Nextel contract, is it a 45 million dollars maximum because Li-San, you mentioned the sites and that would imply an average less than the 60,000. How does it work?

There is -- this happened to be the 500-some site they assigned that we estimated.

So the 45 is the sites that you have already assigned. So if you get more sites assigned, the size of the contract could go up?

That's right. The size of the contract will go up.

Okay. That's what I wanted to clarify. A n my OEM other follow-up question is, you have mentioned in the past that the new Foster Wheeler group had been looking at bidding on some quite large potential contracts. Can you give us an update there?

Deborah, this is Jim. We expect on at least the one Hartford job that that client is going to make the decision within our quarter 3 period. The other --.

and Jim, I'm sorry, the size of that? Potentially?

That's a very large contract. And that still needs to be defined through negotiations but a very large -- it's equivalent to running a portion of that facility. So it's a very large M & I contract.

Right.

And so that, we expect the customer -- and we're one of three prospective contractors that are chasing and trying to secure that contract. The other one is another DOE contract on the east coast and that would be within this fiscal year by September end.

Okay. Thanks.

This will conclude the Q & A session. I will now turn the conference over to Li-San Hwang to conclude.

Based on our discussions, I can summarize the following. In the coming six months, we expect to be because of what's going on and the strong back log and communications improvement, Foster Wheeler coming in, so we are pretty confident that we will beat the guidance and thank you for your support and we appreciate the support you gave to us during this time. Thank you.

Ladies and gentlemen, this concludes our conference for today. Thank you all for your participating and have a nice day. All parties may now disconnect. O -CF1 O