Tetra Tech Inc (TTEK) 2004 Q3 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 corporate offices at 626-351-4664, and we will get one out to you right away. With us today from management are 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 will then open up the call for 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 concerning future events and Tetra Tech's future financial performance. These statements are only predictions and may differ materially from actual future events -- events or results. Tetra Tech's Form 10-K and 10-Q reports to the Securities and Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements.

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 a question-and-answer session after the presentation. As a reminder, today's conference is being recorded. With that, I would like to turn the call over to Li-San Hwang. Please go ahead, Dr. Hwang.

Thank you. Good morning. I'm happy to report to you our third-quarter results. Basically, I will give the overview, and David King is going to give the financial. Then we -- I will talk also about the outlook and summary and then open for the questions.

Our third-quarter core growth revenue actually grew quite a lot, and it's about 19.8%. This was because we do get a lot of backlogs and business overall in terms of the [inaudible - highly accented language] have been very good. The net revenue is about 13.5% growth, and we met [inaudible - highly accented language] the guidelines. Income, however, has come down. That's because some of the infrastructure -- some of the infrastructure and communication activities within the infrastructure grew. And we -- as we have discussed sometime earlier in the -- a few weeks ago. And our earnings per share follow that income of operation.

In regard to our customer mix, basically the state/local have a significant reduction, from 20% to 18, which is the net cost for the infrastructure, civil infrastructure part of the problem we face. However, in the federal part, we've been strong. That's reflected in the resource management performance. In terms of overall growth rate, the organic, the resource management side we have not acquired companies over the total gross is equivalent [inaudible - highly accented language] gross 3.2%. That's in regard to net revenue. However, in the gross revenue, it turned out to be 7.3%.

Our infrastructure is 31%, and organic 1.8%. The [inaudible - highly accented language] 31% is because of acquisitions we have during this period. That's acquisition revenue. And -- however, when the gross revenue is concerned, infrastructure the total gross is 31.2%, and the organic 11.4%. As a company as a whole, I mentioned earlier, the total revenue growth is much higher at 18. -- 19.8, and the organic growth 8.3, and why the net revenue is 13.5, as I mentioned earlier, and the organic part 2.6 as a company.

Now, I do want to mention, the reason why I mentioned on the gross revenue growth, we are -- have -- right now we are really planning to give more subcontract out in terms of [inaudible - highly accented language] dealing with the -- our major communication projects, rather than we staff up, so that results in higher gross revenue gross instead of the net revenue gross. In terms of business segment, the resource management is about 57%, and the infrastructure is 43%. The reason why infrastructure is a higher percentage compared to last -- last year is because -- one is because of acquisition, and also because [inaudible - highly accented language] higher gross in terms of the organic growth also.

We are winning a lot of contracts this year, and as I mentioned even in the previous quarter, we have won significant contracts, and this quarter we also [inaudible - highly accented language] contracts. I mentioned about UXO contract, which is a part -- part of the work we do for Iraq and some other locations, and we have also [inaudible - highly accented language] support. Another aspect we won that was fairly good is that we're winning some DOE high-level nuclear waste management projects, which is in Savannah River, which is $33 million, and [inaudible - highly accented language] also. Those are much less competitive, and we are doing well for that. Then you have [inaudible - highly accented language] the Army environmental program where [inaudible - highly accented language] Genoa plant relocation was to be announced earlier, about 27 million. So this quarter we have very significant wins, also.

In regard to our backlog, has been -- start to inching up pretty good. Backlog is up 14.7% year-to-year, and quarter-to-quarter is 9.9%, from 1,049 to 1,153, which is about 10% -- a 10% increase. So we -- with this backlog, we certainly expect that in the future, you know, work is pretty good.

Now I want to turn to David to talk about financial details.

Thank you, Li-San. I will start with income statement analysis. Our income from operations was reduced by about 32%, and mainly, as we mentioned earlier, due to weakness in our infrastructure group, civil infrastructure and wire communication. Our SG&A costs increased about 7%. If you put that in perspective, actually our revenue base grew about 20%, and -- and also relatively speaking, the percentage decreased from about -- compared to net -- our formerly net revenue, about 10.5% to 9.9%. And despite the fact we are a bigger company, and going through some major initiatives at the company level, including our ERP Oracle implementation. It also shows that some of our corporate initiatives -- savings initiatives are bearing fruit.

Our net interest expenses are relatively the same, and we also have a -- out of that net interest expense a very large component, about $2 million. They are very -- they are fixed in nature. And that's basically our fixed interest for our note, senior note. Our tax rate maintained at 40%, reduced taxes due to reduced taxable income. Our cash, relatively stable, actually, to our revenue growth.

Receivable and unbilled receivable, they are increased due to a couple things. One is our AMTI and EMC acquisitions, the corresponding increase in receivable from those two units. Unbilled increase was due to some of the milestone impact from wire -- from our our major wire -- wired project. Our wireless project. Our payable increase was also -- also due to larger revenue base, whereas we -- we -- we are managing our subcontract to pay when paid term. Our net debt increased by about 23, 24%, primarily due to our acquisition of AMTI.

Our cash flow, depreciation and amortization reflect increase in the -- in the -- in connection with the acquisition. Cash from operation was about 12 million negative for this quarter, primarily due to some of the receivable impact from our major wireless project, as well as we were funding, as you recall, our [inaudible] acquisition by injecting working capital, and that contributed about 10 million, also. And I'll get to that a little bit more on the cash flow -- let me get to it now. The cash from operation negative this quarter has a lot to do with our AMTI infusion of working capital. We also have a net income -- let me just go through the -- the -- the primary driver for the cash.

Net income is about 9 million, our AMTI infusion is about 11 million. We also are experiencing growth, which has contributed about 12 million use of cash. Our DSR increased by about 3 days, also contributed to use of cash about by 12 million. Our payable increase, which decreased the cash used by about 14 million, and therefore we are at about 12 million.

Cumulatively year to day, we are at about 22 million. We foresee in our Q4 collection effort will yield about $25 to $30 million. And at year end, we are seeing it about $5 to $10 million positive on the cash from operations.

Our -- I basically covered the cash, capital and DSR already. Next slide, if you can. Just a slide to talk about segment operating results. If you look at our resource management, our margins from income from operation are pretty stable, from about 12.3% to 11.1%, due to -- the slight decrease was due to some weak commercial market. Our infrastructure income from operation is about 9.9% from 1.6%, and -- and decrease was primarily due to our communication, particularly wire communication and infrastructure, civil infrastructure businesses.

Our DSR in the resource management continue to be very impressive, around 70 days, and slight increase, 72 days, although still very impressive. Our infrastructure side, the improvement was due to our federal security work, partially offset by our wired business and wireless business.

Okay. Li-San, I will turn the podium back to you.

Thank you, David. Look at our outlook and the summary. On net revenue, should be in the range of 260 to 285 million, diluted. The EPS is currently estimated to be 24 cents. That certainly will be -- depend upon the -- the -- the actions we are taking or are still taking in the process and right now in the infrastructure side work, we're really doing some -- some -- some work to reduce some of the office and reduce some people, and also the communications side, we have -- we're doing -- there is still work in progress. And those -- when we end this process, certainly -- you know -- introduce a little bit of uncertainties result from those changes and -- which we try to actively engaging in.

In the summary, I do want to mention about that we have very significant increase in backlog, as I mentioned about earlier, but more importantly, also, we are winning a really large share of the -- very large shares of the contracts, our contract -- contractor backlog is very significant increase, and even though we did not keep track of it, but each quarter we are winning a very significant number of large programs that certainly will have future impact to our backlog. With this [inaudible - highly accented language] action we're taking in address our -- address some of the organization related to the weak business area, how to focus into new areas, and strengthen some of of the activities, and I do believe this will lay a foundation for a stronger fiscal '05.

Now open for questions.

The question-and-answer session will begin now. Please be aware that there will be a 30-second pause in our webcast to allow for buffering. At that time, audio participants are invited to submit their questions. Please remember to mute the audio function on your computer before you speak. If you are using a speakerphone, please pick up the handset before pressing any numbers. At this time, we invite you to press star, 1 on your touchtone telephone if you would like to ask a question. When your line is open, we ask that you please state your company name before stating your question. We'll take our first question from Richard Eastman.

Yes, good morning. Just a couple things. David, could you just walk back through a couple of these cash flow numbers? The cash flow from operations for the year is expected to be a positive 5 to 10?

Yes.

Okay. And so with CapEx, we're looking at free cash flow being negative by maybe 10 million. Does the number grow any from there with some of the severance payments or anything?

We don't think so.

Okay.

It's all factored in here.

And then, also, I -- I guess I lost track just a little bit of the Nextel situation. We had not a dispute, but we were working through some of the payments terms. Was it -- was there going to be a fairly sizable collection, you know, before year-end there?

Yeah, we -- we are seeing increase of collection relative to our revenue base increase.

Okay. Is -- is there a one-time payment, though, or something?

We are talking about that.

Okay.

Actually, maybe I can add it.

Sure.

Actually, 3 days after close of last -- last quarter, we got 10.4 million,. Actually, the money comes in at end of the month. However, our -- the dates closed is -- is end of the week, so 3 days later we receive that, which cannot be put in, so -- so [inaudible - highly accented language] 3 days earlier we'll have much better [inaudible - highly accented language] this quarter earning, cash flow [inaudible - highly accented language].

Is -- is the projection on -- on that -- that upsized and elongated Nextel business, is the DSR on that still expected to be, you know, 90 days or less?

It's going to be higher. It's going be to about 120 to 140 days on DSR.

Okay. Okay. And then just a last question, has to do with we're -- given what's going on in the communication segment of your business, we're looking for gross revenue to grow at a faster pace, because we're subbing out some of that business.

That's correct.

And are we getting -- you -- you may want -- not want to comment on this, but what kind of margin are we getting on that submarket -- subcontracted work? Is it double digit, or -- ?

Yeah, it will be single digit.

Single digit on the subcontracted piece?

Right.

Okay. Okay, great. Thank you.

We'll take our next question from Debra Coy with Schwab Capital Markets.

Thank you. Good morning, guys. A couple of questions. My primary one is I'm -- I'm trying to read between the lines here, Li-San, that you've kept in the guidance for 4Q unchanged, but certainly you're sounding a cautionary note in terms of uncertainty regarding market conditions and timing on your operational changes. Can you just give us a little more color on what you're seeing in these businesses, both in terms of how the markets are shaping up? I mean, I see the state and local revenues actually sequentially picked up a little in the quarter. What is your view on -- on what's taking place in those two markets?

We are -- Yeah. We are making some -- so I called -- yesterday we called prune, which it -- now it's chainsaw.

Yeah.

Anytime we do that, make some major changes there are implications to that. I'm -- just want to mention there that -- it is uncertainty because of that, so I want to be sure that -- that -- that people are aware of that issue, but certainly we are making very aggressive changes, close offices, reduce people, and that -- anytime when you do that, there is a -- a feedback possibilities. And so we -- it will have some -- some issues tie into that. That's why --

Are you suggesting that you're getting a little more aggressive since the last conference call?

Not more aggressive, but we, you know -- it's more than normal things we do. For them we will combine offices, and -- and anytime you do that, you know, it -- we're dealing with people, so -- and that could have some -- some -- some things we cannot project elsewhere, but I'm just -- put something here so that in case something went up. We will keep you informed probably, you know -- if those things are happening.

Okay. Well, then I guess we'll have to see how that plays out. But my only other related thing would be, then, do you expect this to, perhaps, continue on in terms of impact into '05, or do you expect either way to get this cleaned up in Q4?

That -- that is the reason we want to be sure that '05 is done.

Okay.

That's why '05 should be a -- I would say, a fairly good year for us.

Okay. Understood. And, David, can you say what the --what the operating margin would have turned out to be, then, in the infrastructure segment, excluding these charges, or not charges, but extra expenses, because you didn't break them out?

If you can repeat that question one more time, Deborah.

What the margin would have been in the infrastructure segment, include -- excluding the expenses related to these two businesses that you're closing offices in?

Okay. It will be about 7 to 8%.

Okay. That helps.

Uh-huh.

And my last two quick questions. One is what is the status on UTOPIA, and the other is, if you could talk through what's in -- what new is in the backlog increase, because I know that you have won some things that actually haven't gone into backlog yet, including UTOPIA, to my knowledge.

Jim, you want to answer that?

Sure. Deborah, with respect to UTOPIA, we -- we are expecting that the funding be completed by the end of July. We have been issued a task order to proceed, so we have the contract in place, authorization of task orders, the -- it's our understanding that all the documentation and -- and agreements have been completed by all parties. And we expect a -- a -- a complete -- a continuous production process to begin immediately.

So have you booked any of this yet?

No.

No. Okay. So that will come when you actually get funding released?

What we have been doing is recording costs.

Right, sure. Okay. Understood. And then I guess the easier way to ask the question is, besides UTOPIA, what other recent significant wins are not yet in this significant increase in backlog that you just reported?

We have --

Major stuff, not little stuff.

Yeah. What -- what -- what some of the programs have been, we've had increased funding of task orders in our Iraqi work. In addition, our water businesses, at the state level for water planning, is -- has increased the backlog sequentially. We have had the projects with respect to study of the Geneva Steel in place, which has been fast-tracked through the process, as well as sequential growth in some of our geotech capabilities out in the -- out in some of the resource management businesses.

And also the 2 nuclear projects, nuclear waste management projects. That's been fully funded.

Okay. All right. That helps. Thanks a lot.

We'll go next to Jon Rogers with D.A. Davidson.

Good morning. Just following up on the margin question. The office closing costs for restructuring charges that were in the infrastructure segment, were there any of those charges in the resource management segment?

No. And I also want to add, office closing also involve, and more specific as Li-San mentioned earlier, both in the civil infrastructure area and the wired communication business area.

Okay. But without those charges, the margins would have been in the range of 7 to 8% there?

Correct.

Okay. But on the resource management, 11% margins, or 11.3% margins that you've booked, is that a fair run-rate going forward in that business? Because it seems as if that's a little bit lower than where it's been.

Yes -- in the resource management will also have a little bit in the -- in the -- the commercial part business, and that show a little bit weak in that, that's been hurting our -- our margin a little bit.

Okay. Okay. And then the other question is, was most of the backlog growth, is that -- primarily is that organic growth then, especially since the beginning of the year?

Okay. That's what we are saying. In the year-to-year comparison, we -- we mention about the total is 14.7, and organic -- the one that acquired is just about half. However, quarter-to-quarter, for last quarter compared to this quarter, is 9.9% growth. Which we have no acquisition last quarter.

Okay. And then the last thing is just in terms of acquisitions over the near term, any comments there, in terms of what you expect to -- to do? I assume there's something --

You know, those -- this is a difficult things that we don't know, but we are always talking to a number of companies, and we -- we cannot really say we -- we have it until we actually have it.

Sure.

The reason is that -- it's -- it's like a marriage, you know, until you marry, you never really know, you don't know.

Okay. But Li-San, there's nothing in your fourth quarter numbers for acquisitions?

Nothing's in it.

Okay. Great. Thank you.

We'll go next to Min Cho with Friedman, Billings, Ramsey.

Good morning. First, another clarification on backlog. So basically it sounds like backlog should continue to increase the next quarter versus this quarter, and also do you expect to have UTOPIA included? And if so, are you still looking at the 60 to 90 million range.

We -- we believe that next quarter the backlog should be further increased, and -- because of some major programs that we have, and UTOPIA certainly would be adding some backlog into it. And many other programs will also happen. Inaudible - highly accented language] program which we mentioned about the 39 million, we have not included anything in, and right now, that's in the process -- finalized.

Okay. And then, also, on the last conference call, you kind of gave us a baseline EPS guidance for 2005. I believe it was about 115 to 120. Do you have any additional comments or clarity on that guidance or, you know, not guidance, but on that is outlook?

Outlook we mention over there, it should be reasonable, and certainly will be more accurate as time goes on, but we did mention about the 115 to 120, that's correct.

Okay. And I know that you guys continue to work on improving your costs, and SG&A as a percentage of revenue obviously increased this quarter. Going forward, you know, through -- for next quarter and throughout 2005, should we expect the SG&A as a percentage of revenue, of net revenue, to continue to decrease, or kind of stay at this type of absolute run-rate?

I -- I will see gradual decrease over time, because this -- this is a sizable number for us, and we won't see a quick decrease, if you will

In absolute terms, or in -- as a percentage of revenue? Both?

Inaudible - highly accented language] what really amount to is that SG&A, the -- in terms of money-wise is increased, but the fact if we can get to the -- the so-called internal growth improve, that -- our spending is not -- you know, similar to internal. If your internal growth -- say we grow 10%, if we can get to that, right now, we -- in terms -- is the 8.3% so far as SG&A is concerned. [inaudible - highly accented language] as the gross revenue is concerned, because we allocate to all the gross revenue, also, the SG&A. If we do that, so -- however, the SG&A growth, we are expecting probably less than 5%, so that should have overall percentage-wise some savings.

Okay. Okay, great. Thank you.

We'll go next to John Flanigan, First Analysis Corporation.

Good morning, guys. Sitting in for Corey Greendale. I'd like to follow up on the resource management margin question. Did you indicate whether you expect it to stay a little bit below the year-ago period in the September quarter and for fiscal '05? At the below-12% level?

We should be -- should be somewhere between 11 to 12.

Okay.

Yeah. That's -- so somewhere in that range.

For both September and '05?

September '05?

For both September quarter and '05?

Yes. I -- I would say the fourth quarter would be somewhat a little higher than this, and because normally the fourth quarter we have a little better -- better margin in general, but, however, we also mention about the economy's a little bit weak, but overall, we should improve somewhat. Next year, I hope we should be increase some -- some, it's better than 11% overall.

Thank you. We saw news recently of the House veterans' legislation with a HUD spending bill that would apparently come out of the EPA budget in fiscal '05. I understand that there's going to be a lot of negotiation over this, but do you think that Tetra Tech has any revenue exposed if the EPA budget gets hit on this for environmental work?

Okay. Why don't you --

Yeah, maybe I can answer that. Certainly EPA is a large customer, and to the extent that that budget would be affected, we could be affected. However, having said that, the bill that you just referred to is a long way off, and most of the critics agree that the bill in its current form will not pass. So I would caution you to watch the bill develop over time. Generally these things play out over a long period of time, and we're not concerned for our '05 estimates. It does not change our outlook.

Thank you. And, finally, on the new DOE projects, can you give us a sense of when you expect those -- the revenue from that to begin to appear, and what percentage would be outsourced?

They are working on now. It's already working on.

Oh, it's already flowing on the income statement?

Yeah.

Okay. And what percentage is outsourced? I'm talking about the new DOE projects.

No, no, I understand. I think the outsource level is equivalent to our -- our consulting and environmental business, which ranges between 25 and 35%.

Okay. 25 and 35%?

25 to 30%.

Got it. That's all for me. Thank you.

Once again, it is star, 1 if you would like to ask a question. Again, that is star, 1 for questions. We'll go to Ben Sun, Adams, Harkness & Hill.

Good morning. This is Ben Sun calling in for John Quealy. First question, going forward into Q4, could you comment a little bit on the organic growth expectations?

We should be at least similar -- similar type of growth and -- because we see some -- some backlog increase and we expect a similar type of growth, which is into gross revenue somewhere in the 8 to 10%, and in term of net revenues about -- lower single-digits type of growth.

Okay. And then could you comment on the status of the Oracle implementation?

Yes, we will go live with our first wave of companies or subsidiaries, about 3 of them, in October 1.

October 1. Great, great. And, also, a minor question. It looks like the DSR for the infrastructure has picked up a little bit from second quarter. Going forward, is there any comment on that?

Infrastructure actually is -- is pretty much on the wireless communication business.

Okay. So that means it will probably go to 130. Is that what you mentioned earlier?

Actually, what we presented earlier was to show you on the quarter-to-quarter basis, it -- it went down.

But --

Sequentially, are you asking?

Yeah.

Okay. Sequentially, increase had to do with the wireless business.

Okay. Okay. So are you --

It should expect to come down somewhat, because we are -- we are addressing that very aggressively on that issue, so we're sending, you know, faster, so it should be a little better than this quarter.

Okay. That's good. That's good to know. And one, maybe, just last general question. On the competitive landscape, is there any change there? And, also, in terms of new market, is -- does management currently have some new potential target area to talk about?

Basically, we've been focused in the new market side, more in the water-related aspects, water resource management aspects, and also the homeland security, which are dealing -- most of the focus in the port -- port facilities in -- in relation to the -- the -- the seaport and airport-related activities, so we putting more effort in that area, we're winning some of the projects, and also at the same time, we -- we -- we're looking to the, you know -- the company is talking to, which, you know, possibilities on that.

Great. That's all I have. Thanks a lot.

Thank you.

And there are no further questions. At this time, I would like to turn the call back over to Dr. Hwang for any additional or closing remarks.

The only thing I want to -- is thank you for your patience, and we appreciate your support, and certainly we're making a lot of change, a lot of efforts to try to correct our business, and with a good backlog, we believe that the coming -- coming year should be a good one. Thank you very much.

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