Tetra Tech Inc (TTEK) 2003 Q4 法說會逐字稿

Good day, everyone, 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 offices at 626-351-4664. Again, that number is 626-351-4664, and we will get that out to you right away.

With us today from management are Dr. Li-San Hwang, Chairman and Chief Executive Officer, James Jaska, President, and David King, Chief Financial Officer. They will provide a brief overview of the results, and then we'll open up the call for your questions.

During the course of today's 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 regarding future events and Tetra Tech financial performance. These statements are only predictions and may differ materially from actual future events or results. Tetra Tech form 10-K and 10-Q reports to the Securities and Exchange Commission (inaudible) identify risk factors that could cause actual results to differ materially from the forward looking statements.

At this time, I would like to inform you all that participants are in a listen only mode. At the request of the company, we will open up the conference for a question and answer session after the presentation. As a reminder, today's conference call is being recorded.

With that, I would like to turn the call over to Dr. Li-San Hwang. Please go ahead, Dr. Hwang.

Thank you very much. Good morning. My name is Li-San Hwang, chairman and CEO of Tetra Tech. I'm very glad to report to you this fourth quarter and the year end results of 2003.

Our agenda is I will give the overview, and Mr. King will give the financial, and I will give also an outlook and a summary, and then we open for questions.

Let me talk a little bit about where our market is to stand in the fourth quarter. Our government market is very strong. Our commercial is improving. And in the infrastructure side, local markets are relatively weak. And on the commercial side, our communication part is rebounding very nicely.

Other infrastructure markets are showing some sign of improvement. We're still a little bit weak.

However, our performance for the fourth quarter, we're very proud of with record revenue and earnings, positive organic growth. We accomplished strong cash generation, allow us to invest in the business. And last but not least, our backlog remains very strong.

Turn to the next page. The net revenue increased by 32.7% overall, from $192 million to $255 million. This is due to the positive organic growth, and also the contribution from the later stage of the EMC acquisition. Our income from operation is up from $15.4 million to $29.1 million, an increase of 89%. And this is because our improving margin from 9.5% to 11.6% overall. Year to year (inaudible) So that both contribute to this increase.

Our earning is from 13 cents to 28 cents, result from the margin improvement and also the gross results from internal growth and the acquisition.

On the next page, you look at our business segment. Overall, our resource management last year was 52%, and infrastructure 36% and at that time, communication was 12% This year, overall resource management 60%. Our infrastructure is 40%. By the way, the communication is about 11%, turned out to be.

Look at our growth rate, our resource management, total growth of 59.2%. As I mentioned, this result from significant contribution from acquisition. However, we are organic growth, we reached double digits which we feel very good about that. That's because our federal work is strong and commercial work's improved.

The infrastructure part, however on the total revenue increased. That's because two reasons. Well, one certainly because communication and also the acquisition of EMC is in the infrastructure.

Organic, however, is minus 2.8%. So as our company is concerned, we have [32.7% to grow] and organics 4.4% growth, which we feel very good about that. We want to improve that in the future.

Our customer mix in the international, is about 2%, and the commercial part is reduced from 47% to 42%. Our federal work from 25%, increase to 40%. State/local has reduced from 26% to 16%. That's because the significant increase in the federal government work from [Foster Wheeler] acquisition.

Comparatively, if we normalize it, it's basically in this area, going to reduce in this (inaudible) from 19.6% to 16%, a reduction of 3.6% in the state/local work. This is our weaknesses.

Looking at some of the key projects wins, We have a project we announced earlier, and this is from US Air Force. I'm sorry. The US [Corps of Engineers.]

That program, we got $37 million. That's also from our southwest division. (inaudible)

There's another one which is a very interesting program, which we just, late yesterday, signed that. We developed a detailed announcement for our customer to approve to announce that, and that is Utah telecommunications Open Infrastructure Agency, and this is a wide communication project. The first phase is [22], but it will be much longer. If you want more detail -- I presume you will -- later on Jim will be giving detail and explain that to you later.

Another one, Coastal Resource Management from USAID, support the Philippine government to manage their coastal resources activities.

And an Army program for the Industrial/Ecological center, we got $10 million for research and development activities.

We also have from New York some building activities, which is very good to get right now. That's an area of relative weakness, and we're starting to show some strengths, getting some improvements.

And in Seattle, some of the water infrastructure programs in addition.

Our backlog is over $1 billion, which an increase 46% year to year. Our backlog is significant contribution from Foster Wheeler--36.9% at the time we acquired EMC $34 million, 3.4% at the time we acquired (inaudible).

If you look at the overall, next chart, there is continued improvement during this period of time. So we feel very happy because not just one shot. If you look at it, it was gradual improvement, organic growth from minus 13%, which is the first quarter '03, to minus 6% and minus 3 and to positive 4.4%, and I hope that will continue.

I believe that's going to be the case.

The total revenue, same thing, we significantly improve. That's combined with organic and also acquisition.

Those are what I have to say. Basically, it's quarter to quarter. I do want to summarize one chart here for the year. Our gross revenue improved by 17.2%, from $966 million to 1.132 billion. Our net revenue is from $741 million to $861 million. And our diluted earning is from 58 cents to 90 cents.

Now I'm going to have David King to continue the financial.

David King Thank you, Li-San. Let's go to the financial highlights for the fourth quarter.

This is a solid quarter for us. We have met both external and internal financial matrix. Our diluted EPS, as Li-San mentioned earlier, was 28 cents. We met the forecast. Our net revenue was $255 million. Our guidance as $240 to $250. Our DSR was about 85 days, a five-day improvement over the same period last year. It's a good quarter for us also for cash.

We generated about $43 million in cash from operations, which exceeded our plan both for the quarter and on a full-year basis which I'll address a little bit later on.

Income statements -- income operations grew from $15.4 million to $29.1 million, an 89% increase. And, as Li-San mentioned earlier, our operating margin also improved from 9.5% to 11.6%. Our SG&A cost--it's a reduction from $23.4 million to $21.6 million. (inaudible) We are a bigger company today than last year-- better cost absorption due to the growth and the (inaudible).

On a percentage basis, we decreased from 12.1% to 8.5% of net revenue. As a result, we have experienced significant rate savings, and as indicated in our investor report you all have, what I want to point out here on this report is we have segment operating margin and profit information.

We typically allocate our corporate budget based on the budget rate at the beginning of the year. As Foster Wheeler came on board in late second quarter, our base for allocation was bigger, and therefore higher absorption of our cost at corporate. We typically put them out at the end of each quarter and reflect them in other profit categories.

As you can tell, in the third quarter, we captured about $1 million dollars in rate savings. In the fourth quarter, with the combination of Foster Wheeler, [William Peculiar], and EMC, we were able to save close to $3 million in rate savings.

On the overall basis, the margin is correct. If we were to re-allocate the rate savings back to our operating segments, the profit margin will increase approximately by 1% each.

Let me talk a little bit about net interest expense. The increase reflects two things.

One is the two acquisitions for '03. Also, last year, fourth quarter, we have received some interest refund from IRS due to our income tax claims strategy.

Tax, we grew a little bit from [8.7% to 10.9%], primarily due to a higher net income. Our effective tax rates will stay at 40% -- was 40%, and we expect the rate to say the same for '04.

Balance sheets, we -- our cash balance reduced by 28%, from $46 million to about $33 million, and we continue to use cash to pay down debt. Accounts receivable grew from $254 million to about $332 million-- a 30% increase. Again, we are a bigger company with the addition of Foster Wheeler and EMC.

However, our account receivable basin creased less than our gross revenue base, reflecting our better management of cash, as we indicated earlier on the DSR improvement. Accounts payable grew from $60 million to $93 million, again reflect the addition of two companies we bought. Our payable down from 25 days to 22 days on a year to year basis. We need to continue to work on connecting our payment terms with subcontracting strategies and continue to work on those things.

Our DSR is an excellent story. We improved it by five days. A couple reasons. One is that we have -- we are partially impacted by the business shift towards federal market. We continue to have a high level management attention in terms of DSR. Net debt, we increased from $65 million to $85 million, 32% increase. Reflect our acquisition of two, Foster Wheeler and EMC. And we expect to pay off these acquisitions in FY '034.

A couple points on cash flow. The delta between depreciation and amortization reflects our good will elimination of about [$1 million.] Cash as a whole, again, is improvement from $37 million to $42 million, improved working capital management, and we generated $66 million for the year.

As I mentioned earlier, just in terms of cash generations, we have exceeded our plan for this quarter and for the whole year. Our CAPEX grew a little bit, due to a large revenue base and also slightly smaller communication business which require higher CAPEX spending.

Now, Li-San, I would turn this microphone back to you.

Thank you.

Let me look at the coming year and the coming quarter for the coming year. On net revenue will be $220 million to $230 million for the first quarter. Our earnings will be 22 to 24 cents, in that range. For the year, we should do $950 million to $1.06 billion. And our earning will be $1.09 cents to $1.14.

This assumes a market model similar to where it stands now. No additional acquisitions is included in this number, and the tax rates is assumed 40%.

Now, what this year we plan to do, this coming year. We want to strengthen infrastructure part of the business. That's relatively weak in the current situation because of state/local businesses do impact some. But we certainly want to put a little more effort to strengthen that. And want to improve by further enhance the margin by reducing DSR also.

So we're very hopeful we are to do that I think next year because of the -- we think we can improve the margin 1% to 2%, hundred percent point.

And hopefully can reduce a few days of DSR.

We want to invest in the growth part of market continuously, as part of that federal outsourcing aspect, which we started EMC, and that's an area we want to improve, put some more additional effort in that.

And homeland security related, we do have some interesting programs in that whole area too. And certainly our part of the water, water resource aspects of the activity in this area.

In summary, I think the company-- I'm very happy about the return to organic growth, and seem to be that growth is getting to be very strong. And we have very solid backlog, and we're strong cash generation which allow us to further investment. And I believe we're going to have a very strong and solid continued growth in this year.

Going back to Q&A.

(Operator’s instructions) Our first question will come from Jeff Beach.

Good morning. Great quarter. I have two questions. One, can you -- you're talking about or seeing an upturn in your private or commercial markets. Can you expand a little bit on the opportunities you're seeing in communications as well as kind of outlined a couple of the other markets that you have good exposure to where this recovering economy will help your business?

And then, second, on this federal outsourcing and the military programs coming up, can you cite a couple of opportunities that you see out here over the next year or two that you're pursuing.

Jim, why don't you answer that.

Sure, Li-San. Thanks for the question, Jeff. Let me start off on the comment on the drivers for our forecasted improvement in commercial.

And I'll start off with specifically on the communications. What we're seeing in the marketplace is actually two trends. One, wireless communication firms solidifying their network coverage, and then capital investment on those networks.

So actually generated from cash from operations, and it's evidenced in our Nextel contract that we announced earlier this year as well as other providers of wireless services. So we see a trend in not only improving the network coverage, improving the network capacity as we -- as the providers go through G-2, G-3 technology. On the wireless communication -- and I'll talk this time to talk a little bit about Utopia, while I have the microphone, Li-San.

What we're seeing on the wire line is a further strengthening and rebuild of the network. That's a continuation. We're also seeing some new network concepts coming forward. And as Li-San pointed out earlier in his presentation, Jeff, we are very pleased to be awarded and signed the Utopia contract.

Let me talk a little bit about what that is. Actually, it's an initiative, and it's a public/private partnership to bring fiber to the home and construct a high speed wire line network, fiber optic network in the state of Utah. 18 cities have joined together to form a cooperative. Roughly 750,000 homes that are in this network.

And these 18 cities, including Salt Lake, have -- are seeking funding to bring this new network, the next generation fiber optic network into reality and that is fiber to the home.

We believe it's an interesting concept. We're very, very pleased that we can provide network service as well as program management services and that we won a competition in the marketplace and the customer complex recognizes our strength.

And I think that's going to -- we'll see, but I believe that will be a model for other communities, as they look at investing in this infrastructure this fiber optic infrastructure.

With respect to other opportunities in the commercial market, what we're seeing is companies increasing their capital investments, especially in the areas of product and line process line yields. Tetra Tech has that capability of not only supporting environmental management systems in commercial operations, but also providing the engineering to look at line optimization. And as capital infusion continues in the commercial marketplaces, I think we're well positioned to capture some of that work.

Oh, on the outsourcing. Let me just talk a little bit about the federal outsourcing. Couple of things.

Actually, Tetra Tech has been a long-term provider, to the federal government, deral government my net worcnifen Imhoff; Analyst and professional services. The roots of Tetra Tech have been involved in supporting the mission.

And what we're seeing in the marketplace is an expansion of using outsource services, not only in support missions, which we are very, very well positioned in, in environmental management, water resource management, plant support, but now with the acquisition of EMC, we're can looking at line mission support for critical programs within the department of defense as well as out in the commercial applications. Our focus is department of defense.

In addition, with Foster Wheeler we plan to target additional DOE support as we look to their mission and provide our expertise in those missions. Long term, we see government and industry looking to outsourcing to improve the efficiency effectiveness of their staffs and their mission.

All right. Thanks, Jim.

Seth with Sidoti has a question today.

Good morning. I have a question on the guidance. Can you talk about what type of assumptions are baked into, you know, differentiating between $1.09 and $1.14?

In other words, how much of a rebound in your noncommunications private sector work is assumed in that guidance? And what would it take to get to the higher end of that guidance?

You want to answer that?

Sure. This is Jim Jaska.

Seth Tutler Hi, Jim.

Let me talk about actually what's the high side driver is several factors. One, accelerated growth and buildout in the Utopia program.

We've been very conservative in the revenue base on Utopia. As that customer goes through its funding requirements and we then see task orders coming out and the timing of those task orders, given the magnitude of this build.

And just a comment. We're seeing -- and Utopia has announced that this network, over a three-year period, is about a $500 million network, of which the infrastructure -- so the nonhardware portion, the infrastructure, the fiber optics and the nodes as well as the head-in equipment is about somewhere between $200 million and $300 million. The timing of that over the 3 year period drives some of that variance that we're reflected in here.

In addition, the investment in infrastructure, infrastructure, water infrastructure, waste water infrastructure, through its construction at the state and local level, has a significant impact to that high side number. We have been, as Li-San pointed out in his comments on the forecast, been conservative with respect to our infrastructure. That's water system construction and programs for the infrastructure segment, as well as the waste water.

If further investment is infused especially from the federal government side, we would expect more high side results.

Let me add two more things, why this number is realistic. One, because acquisition, we only use up about half of the profit, and next year will be fully in place. And another thing is, we also have some good news in the Nextel side, and there were significant increases in spending in terms of the coming year.

So we would expect our original projections will be significant increases that will carry out up to 2005. So all those will add to those numbers.

Okay. Thanks.

So I guess just to follow up on that. What type of rebound in your noncommunications, private sector work is baked into the guidance? Is it kind of a slow or moderate rebound?

I guess, if we see an acceleration, can we assume the high end is certainly achievable?

You're right. We are very conservative in that because right now just kind of reached bottom. We're hoping to start to show some strength. If those things are really materialize, certainly we'll be able to achieve the high end.

And you're seeing a pickup right now, you said, or at least an improvement in that work, is that right?

Appears to be.

Okay. And also, just touching on the operating margin for the infrastructure segment, it looks like it's fallen sequentially quite a bit. Can you add some color to what's behind that?

In that time when the business comes down and margin go down faster, and that's one of the problems that because you've got depreciation, some other things, and you always a little bit late to restructure your people.

So margin normally suffers even worse. As time goes on, if we do turn around, then normally the margin improves normally faster than revenue improve. That's because you got less people to do more jobs. Just like our economy, so as productivity improves, they not hiring so many people until really getting strong. Similar type of situations happen.

If we do improve further, our margin will pick up, and we'll see going back to 10%, 13% range in the future.

So aside from communications and the infrastructure segment, you're saying the weakness in the business is just causing the margin -- I guess --

That's correct.

-- utilization rates are down and that's what's driving this.

If I may add to the points that Li-San made. We saw that there's always a lag when revenue is down. And when you look at facility infrastructure and other costs that are fixed into the business there's a lag period to make the adjustments, and I think that's what you're also seeing in addition to what Li-San's talking about.

Okay. So moving into Q1 and then for '04, what can we expect? What type of number can we model in going forward?

I would say 1 or 2 points margin improvement.

Okay. For the full year?

For the full year. 200%.

So about a 7.5% operating margin?

Operating margin, yeah.

Okay. Great. Thank you.

We'll go to Schwab Capital Markets. Debra Coy (ph).

Yes, good morning. A couple of follow-up questions. Actually, on the most recent question, to kind of bring the circle around on this operating margin and infrastructure, by understanding from what David said earlier is that partly we would get some margin back if we reallocate the SG&A that came in through that other income line, because of EMC? Or does -- I'm a little confused David, frankly, on that $3 Million.

It would seem to me that, if that's related to EMC and Foster Wheeler, all of that would get allocated back to resource and not to infrastructure. You said about a point each.

Right. What we have tried to do here, as I mentioned earlier, is we have been consistently treating them as such. So we want to capture them in this line. And if we were to reallocate, we would each pick up by one percentage point.

So it would impact the infrastructure segment too?

Yes.

Okay.

By the way, Debra, EMC is in infrastructure.

EMC is in infrastructure, and Foster Wheeler is in resource?

Right.

Okay. That helps me.

Precise number, 6.7. And another one is 14.9.

Okay. That actually helps a lot. But then just to follow up on the prior question, I had assumed that we should be looking at infrastructure margins more in the 9 to 10% range.

Did you just say, Li-San, that we should be looking at 7 to 8 for '04?

The reason why is that, number one, we don't know whether they're going to be fully coming back yet, and that's number one.

Number two, it's always delay factors too – because of the depreciation. If we have not get into full speed, then a little bit less. Until we got full speed coming back, then we can get to 10%, 13% type of range.

But right now we're still cautious, assuming somewhere in the 8% range.

Okay. So then that leads into my other question, which is what are you really seeing in the state and local--by my calculation added up to only about $42 million in revenues in the quarter, on net revenues, and that's obviously down sequentially and from last year.

My view on that segment is they typically do lag significantly coming off a recession because they're still working off last year's tax numbers. So I would think we might see state and local getting worse before it gets better.

And then the second part of that question is what are you doing in terms of -- Jim mentioned that you have a little bit of a lag effect, but I know you've always been pretty severe in cutting costs to meet market conditions. Are you having to hold internal infrastructure in place waiting for that segment to come back, or kind of how are you looking at the importance of that over the next 2, 3, 4 quarters as we go through this economic transition?

Okay. David, why don't you answer that.

I will answer the first part. We are experiencing in general a reduction in the state and local business. We are looking at $42 million for this quarter. Both sequentially, and from the prior year, they are down between 10% to 15%. And we are experiencing that lag right now, and that's why we are more conservative in our Q1 and Q2 on the state and local area.

Last quarter, we are roughly at $46 million.

Right.

And the same quarter the prior year was about $15 million.

So that's -- and then in terms of the cost side, I presume you're taking some costs out where you can, but you're having to keep in place some of your cost structure for when a recovery turns around. So that's why we're talking about having a lagging margin in the sector for the next several quarters?

To be honest, particularly in the rent aspect. We got some land we just cannot get rid of, sublease out, all that. The space part costs quite a bit. Just cannot cut it. Jim, maybe you can answer.

Debra, let me just comment specifically on what we see.

What I have communicated to shareholders in the past really has not changed in the state and local market. In other words, prioritization of dollars.

We see that water still is a high priority. Water reuse is a high priority. Water treatment, especially in brackish waters and deep south is a high priority. And waste water reuse is a high priority. What we see -- and I think the main driver of those deltas, we have a small transportation practice. That transportation practice has reduced in its funding efforts, and its profile. And that's the main driver from those deltas.

Let me talk a little bit about the lag on the cost side. I agree, Li-San is right with the fixed cost base on facilities. As we reduce staff, there are separation costs that were reflected in our numbers, in our expense, and we expect that to be normalized. I also want to point out we see sequential trends. Q1, in some cases, in some years have a lower margin, indirect cost base.

And I just want to say within that trend for the year, that 8% to 10% is within our expectations and plan.

Okay. Understood.

And then lastly, so then coming back to the communications side -- and I guess ironically we're going to wish that we had this segment broken out again because it appears to me that the communications part is showing rapid revenue growth and also improving margins so that your communication margin is actually going to be above the rest of the infrastructure group.

And looking a little more closely at that, can you give us sort of a recap of where you are on Nextel in terms of how much business you've done so far?

You had talked about some of the overall contract funding levels you expect from them, kind of where we stand on that. And then just to understand a little bit better on this new Utopia contract.

When you mentioned earlier, Jim, the infrastructure side was potentially 200 to 300 million, I mean, is that the contract that you've won that you might ramp up to that sort of revenues yourself, or would that be bid out to other providers as well?

Let me start off with the last one. That $200 million to $300 million number is the estimated cost of the fiber optic network should Utopia obtain funding and build out that footprint in the 18 cities.

Right.

And, actually, we're very optimistic with that prognosis of them obtaining that funding, but we are --

Obtaining from who?

-- conservative in our estimates for Q4 '04.

According to your earlier slide, you booked $22 million into backlog so far, right?

Actually, we booked nothing.

Okay.

Let me go back to the way we book backlog. What we are attempting to present here is what the task order value could be in the initial phases of that buildout in one city within the 18-city network. Okay?

So potentially, it's 19 -- 18 times 22 is your potential? I'm not saying that--

You can't extrapolate. It's different-sized cities, Debra.

All I'm trying to get at, Jim is what you think the potential is. I understand you haven't gotten funding yet, you haven't gotten the contracts yet, but I'm trying to understand what the potential is.

Let's just go through the metrics. We know that it's a three-year build. We have always been conservative in booking backlog. That's the capacity, $270 million of capacity. On a 3 year build, on that 18 cities.

We have been very conservative on task orders, and we expect the first task order to be, once funding is obtained by Utopia, to be around $22 million. And the schedule of that is in '04.

Okay. All right.

Mid to late '04.

I understand. My only last question then -- and I'll get back in line because I've taken more than my time -- is what's the source of funding they need to get? Where do they get the funding from?

They're getting [sureties,] bonding, revenue bonding.

Okay. Got it.

And let me talk a little bit about Nextel because what was the other part of your question?

Yes.

We previously announced that we're looking at around 800 sites, 700 to 800 sites in the western region. Li-San mentioned that the firm is looking to additional capacity to us.

We have not assumed any of that in our '04 plan, and in our reviews with that customer, they are pleased with our progress to date on their schedule.

Okay. Fair enough. Thank you.

John Quealy with Adams Harkness and Hill.

Good morning. Can you comment a little bit about the competitive pressures out there across business lines? Have they gotten any better or worse for that matter?

Resource managing part, we've been very strong. Competitive pressure is not high for us. And in the private side, probably has some competition because of the work reduction. State/local, a similar situation more competitive pressure because of the, when work is reduced, everybody want to come in. I think overall we've been pretty good because economic situation really haven't improved that much, and results have been very significant improvement. So we are really ahead of the game overall.

Great. And going back to the communications side of the business, specifically the wire line, excluding the Utopia, can you characterize what the mood is out there for spending, any changes that you've seen thus far in the quarter?

RBOK segment is a very small segment of our business. We are primarily fiber optic, but we do some RBOK work. It's really a nonexpansion mood. It's more of a maintenance mood. And actually, it's been that way for the last several years.

And so we see really no change on the RBOK side from our mix. Let me also add one point to Li-San's comment on the competitive landscape. What we see -- and that's true in our commercial markets as well as our federal market -- is a trend on best value procurement as opposed to cost shootouts.

In that, technical differentiation is very important in the weightings. I was at a review yesterday in which we were number one technically, number two on a price side, and actually, the customer reversed its decision and said it's important to get best value for the dollars we're spending.

And I think that's true at the federal government side as well as what we're seeing on the state and local and commercial side.

Great. Last question. In terms of the federal government wrapping up appropriations and budgets, any surprises or changes that you've seen thus far? Is it pretty much as expected on the federal dollar side for all your businesses?

No surprise in that area.

Great. Thanks very much.

We'll hear from Tom Conklin with Robert W. Baird.

Actually, Rick Eastman. Could you comment on the technological backlog as it exists today.

I can. Essentially, we have, in terms of book business, about $80 million to $100 million of backlog.

Is the wireless piece of your business had much success, or are you aggressively marketing to a broader customer base?

We are -- the wireless piece?

Yes.

We are doing -- I'll tell you a couple of things. One, we have always been recognized in the wireless market, especially the providers of a pretty wide base.

And so as build plans come out of those wireless providers, I think we have always been in the forefront of a go-to contractor for buildouts. So that is business as usual, Rick.

Okay.

What we are looking at from a strategy standpoint is widening that customer base, leveraging especially our federal government relationships, and looking to apply expertise in that buildout to federal government network systems. That is really a future strategy that we're looking at, and we are working that right now.

Let me also comment a little bit on that backlog number. I was a little high on the backlog number. It's about $50 million, and I was really referring to the capacity of work that has not been built into that backlog number.

Normally, when we they give us it to work on. They're talking to us quite a bit more. But it normally has a delay factor.

So you're suggesting there could be another $50 million to $100 million of business potentially?

Yes.

Let me ask you. Has the split been as you build that business out and provided the service, has the split been 50/50 subcontract and in-house? Or how is that played out?

The current buildout with Nextel is slightly more than 50% subcontracting strategy.

We are serving more as a program manager and reducing our self performance.

And then just the last question is on the operating profit within infrastructure -- and hopefully you didn't answer this -- but the communications business, is that generating an OP margin on net revenue north of 10%?

No. Actually, below that. We're still below that in terms of the margin is concerned. But we expect that to be going up too because we do have those write-offs too. We've really cleaned up quite a bit l of stuff.

You'll see where we normally should depreciate, but because they're no use, we write off some of that.

The experience has been about 8% for the quarter.

In the communications area?

Yeah.

So the distribution, if you're delivering 5.5%, the distribution around that number isn't all that great. The noncommunications business might be running in the 3%, 4% or something like that?

Yeah.

Okay. And, again, both those numbers, you do have some restructuring severance, some of that going on here?

Definitely. All of this is -- I want to mention too that this year we cleaned up quite a bit. We cleaned up the people, which is -- I hate to say that -- but all those require some money to do that.

In addition, we clean up some of the equipment. Now, if things need to come back and we should have a more lean, mean situation. So we expect to improve the margins a little bit faster.

Rick, on the job cost, the job costs, if we don't apply those special charges, is still within the band widths we've talked about before.

Thank you.

We have a question from Corey Greendale with First Analysis.

Good morning. I had to hop off for a second. If I ask something that's been answered already, I apologize. I know the fiscal 2004 guidance doesn't include anything from acquisitions. But I was wondering if you talk about your pipeline for acquisitions and outlook at this point?

We continue to look at them, and actually the numbers are pretty much similar to before. We do have intention, if we do, we would like to get a little bit bigger, and also bigger companies, in addition in the government outsourcing aspects part of the business.

So we try to, basically, our strategy is to do acquisitions, But on the other hand, the infrastructure, we really try to see whether we can improve our performance and reduce the write-off some of the because of the like office too much and we're seeking write-off or continued depreciation we're waiting for the business to come back.

So all those are decisions we have to do, and that's why a little bit choppy in terms of how the margin is concerned because it's a kind of decision whether we should write off now or still keep there until things get more clear. So that's the situation.

And then for your fiscal 2004 guidance, you had a sense of what you'd expect in terms of cash from operations and CAPEX?

We expect to be about $40 million to $50 million cash generated from operations. Because we have some growth in FY '04 and growth takes money.

I do want to mention we're going to have a positive cash flow. That's normally the quarter we have to pay off bonuses and other things.

And also, if internal growth significantly improves, they're also going to affect it, because each time grow a million, it certainly requires $200,000 some dollars to support that growth.

And on a CAPEX basis, we're still targeting between 1% and 2% CAPEX percentage of revenue.

When you say you expect to pay off the acquisitions at Foster Wheeler and EMC during the year, could you just put some brackets around that. How much of the year-end debt balances do you attribute to those at this point?

Year-end balance of [252] (inaudible)

When you say you're going to pay those off, I'm just trying to get a sense of how much debt is related to those at this point.

I think the amount to be paid out to equalize us at the end of last year was marginal. I see that. I can give you a call later on, but I see probably in the neighborhood of $10 million.

That's fine. Thank you.

I do want to mention one thing because, you know, if you look at cash, $85 million on debt and last year we were [$65 million.] But we bought $100 million of company in total cash. So in essence, really, that's $80 million of reduction. In debt.

Thank you.

Let's go to Alex Rygiel of Ramsey.

I just wanted to clarify something on Utopia. You initially said it could be $500 million over three years. Then you stated the infrastructure value could be $200 million to $300 million over three years. What is the value Tetra Tech could receive for the three-year period for Utopia?

This is Jim Jaska. We are the primary provider of the program management services and the buildout of the infrastructure.

So the $200 million to $300 million would be our gross revenue value, or our contract value, of which a portion would go to a subcontract as we build out that network.

The remaining cost would be associated with the equipment and hardware for routing as well as data processing that's outside of our scope of work.

That's helpful. And how much would you anticipate subcontracting out? Would it be a similar rate, like with your Nextel agreement?

Actually, we hope to self-perform a good portion, but I would expect roughly a similar rate that we're were reflected in our Nextel bid.

And with regards to Verizon in particular, I think it's well-known that there's a request for proposal out there on the street about their initiative to take fiber all the way to the premise.

Can you comment on your relationship today with Verizon, and whether or not you're partaking in that RFP process?

I don't want to comment on our bid strategies and our procurement activity, but let me just talk about both on the wireless side and the wired side we are a provider of capabilities to Verizon.

As their builds unfold, we'll look at the regions that make sense and whether it makes sense for us to supply resources to to the Verizon build.

Great. Thank you very much.

And that is all the time that we have for questions today. Dr. Hwang, I would like to turn the call back to you for any additional or closing remarks.

The thing I do want to mention, thank you all very much for the confidence that you give to us. And I believe that we're looking ahead of this year and should probably be able to enjoy a better year than even last year.

So we're very happy to be able to get to this position. Thank you for all the support. Thank you.

Again, thank you all for joining us today. That does conclude today's presentation.