Tetra Tech Inc (TTEK) 2004 Q4 法說會逐字稿

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 offices at 626-351-4664, and we will get one to you right away. With us today from management are Li-San Hwang, Chairman and CEO, Sam Box, President, David King, CFO, and Dan Batrack, COO. They will provide a brief overview of the results and will then open up the call for questions. During the course of the conference call, Tetra Tech 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 or results. Tetra Tech's form 10-K and 10-Q reports to the Securities and Exchange Commission identify certain risks that could call 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 questions and answers after the presentation. With that, I would now like to turn the call over to Li-San Hwang. Please go ahead Dr. Hwang.

Thank you. Good morning. My name is Li-San Hwang. It is very difficult for me to report to you such a bad result, poor results. However, I do believe the worst is over. We expect to have better results in 2005.

Go the to the next page. Financial overview, in the fourth quarter, gross revenue is about 15% increase. And the overall business [inaudible] has gone pretty good. On net revenue, it increased a little less. It is still within the guidelines. However, our income substantially below. And that detail will be explained later on in a very detailed manner. As a primary, due to the civil infrastructure, the communication problem, and certainly there are some SG&A and management issues. Let me just mention a few of the general issues, the problems, and David will outline some of the very detailed issues later on.

What happened is we have accept some unfavorable contract, both the contracts terms and condition, the low work productivity due to downsizing, because when you try to downsize, some people are not working efficiently and don't contribute to the issue. Certain units perform because they don't have work, they essentially did very low, not enough -- it dipped too low, and as a result some of the construction-related work wind up with losing money and then we have to establish contingencies, so forth. In general, we react, as as a company, we react slow, including myself, which is to hesitate to delay the senior management change to change the situation and speed up the change in process faster. However, we do implement a correcting measure not too long ago. We appointed a new president and chief operating officer, we replaced three operating unit manager, we established the reserves, and in various projects and increased some of the reserves and the write-offs. We are still in project oversight, increase the project management, project review quarterly and this is where some of the risks changed immensely. And part of the duties of the CFO to be attentive to the program, if there is a problem, we can report it and correct it immediately. Improve bid proposal process. More discipline and -- to determine whether some of the projects we should not be -- bid on. And we are in the process also to implement the ERP process, and first set of the company is already started on line.

Our customer mix appeared to be, you know, the federal government part is increased significantly, and not only the absolute acquisition, but organically grow about 8.3%, so that part of the work is stable and grow, and also there are no problems. And to stay local, some quarterly reviews as shown here, and commercial review significantly. And those areas are, some weakness showed up. Internal growth rate, the resource management, overall it is slow, but mostly a result of the state local part of the results management activity. The federal government part of the result management grew 8.3% as mentioned earlier. The infrastructure, the overall -- all points growing but mostly the result of acquisition. Without acquisition, we have organic minus three -- or 5.8% reduction. Communications 30.8% reduction. This is the primarily due to the significant write-offs and the reserve for the work, particularly some contract we have, and downsizing, all those result in this reduction.

In the business segment, we now report three segment, to provide more visibility in the communication side, because of the problems we faced, and also give investors more understanding of what are those -- what has been going on, what corrective measures would he have done, and I will mention a little bit later on. This year even though we have managed poorly in contract, in terms of costs, and result in bad, poor earnings, however we win a lot of work, and those work, mostly those projects key wins are federal government, most of them, and we wone that water resource project which is a joint venture $2 billion project, we are part of that and that is related to [inaudible] the water program. DOE nationwide environmental program, which is by $800 million, just announced. And Louisville environmental program, 300 million, and those are in this quarter. And the cost engineer, and USO program, the Air Force next, which is relatively new terms that tie to the what -- maybe just recently, some of this -- this is a long-term program. And we are estimating our portion should be 40, but actually it depends upon how we will be able to market it and it could be further increase. Lockheed just recently gave us a monumental program which we've [inaudible]. Totally this quarter alone is there are 2.4 billion contract come in. And this year, added together, Q1, Q2, Q3, totaled another 2.6, so a total of 5.5 billion. And those are only the key ones. Some other ones are not included. I believe probably we are the most winning contract -- the company in the -- in similar type activities, and we particularly in the larger revenue companies, I think that they do not have so much of the wins. And what we have to do now is how to get those contracts funded, to be able to be working on and be careful to making some money from them.

Our backlog is good. And right now 1075, 2.8% year to year. This is in some ways unfair comparison because of lack of work which we have, last year it was just before the -- year before, you know, the announcement that we have $60 million come in, and now they're changing, and we still have that project, but they're changing fundings, and in one, two, months each time, so it is not a big job to come in, so this is otherwise we would have much larger backlog. So does the wireless contract. We had the final negotiation of some new ones which we had not included last year during that time. We had a big contract come in. But now we have negotiated but yet has not included. That otherwise we would have a 3, 400 -- 1.1 billion, about. This is a good key win backlog, I believe with effort, we should have a better -- the revenue, in the coming year.

Now, I will turn to David to talk about some detailed financial analysis.

Thank you, Li-San. Before I begin, I want to echo Li-San, this is a sober moment for the Tetra Tech management. And we are embarrassed by it. We are doing our very best to get out of this difficult time as quickly as possible.

On the income statement, our SG&A costs increased 38%. Mainly, number one, due to growth and there are some severance charge in our corporate restructuring effort. We spend more money on ERP and Sarbanes-Oxley compliance. And on the year to year basis, they are about the same at 10%. I do see trend -- I believe this is the fourth quarter event. And I do see trend going down in the future quarters for SG&A costs. Income from -- loss from operation, I will fully explain this in the next slide. The interest expenses we maintained relatively stable interest expenses, despite acquisition. One point is we have significant amount that is fixed, about $2 million in our senior notes. Income tax, tax rate about 41.4%, and we will talk about FY '05 forecast rate for tax at the end. And it is due to -- the other one is income tax due to lower taxable income.

The next page, what we tried to do here is we provide to you the variance from our plant and I will put them in four buckets or four categories. And I will go through each one of them slowly. The first category is our ongoing downsizing efforts in our civil infrastructure, in our communication areas. First, we have a severance cost at corporate for about a million dollars. We abandoned some leases and we are still in the process doing that. Current quarter charge is about a million. We liquidated our equipment. It is about a million dollars. We exited a few jobs in three two or three offices we are closing down, about $2 million. Total in downsizing effort or consolidation effort is about 5 or $6 million charge for the quarter. And this is very much a planned effort and it is ongoing.

In the resource management area, we have an unpleasant surprise, a big one. We had a construction management construction job in the New York City, about $20 million. We identified there was some, in the fourth quarter, we had to rework some subcontractor job and we mismanaged this job, as well so we had some cost overrun. All together, it is close to four, by plan variance, is about $4.4 million. The next category is civil infrastructure. We did not achieve our revenue plan by about 10 million in net revenue. And we did not align costs to the reduced revenue. As a result, almost all of it slowed down and impact our margins by $8 million. And we also have increased legal and insurance costs in the civil infrastructure area all together about $2 million. In total, across the board, civil infrastructure charge is about $10 million.

And next one is our communication area. To start with, I want to talk about our wireless business, and I want to put it in a way that first, late in the summer of FY '03, we signed a contract both to build 300 sites in the West Coast for major carrier. I call them contract number one. It is about 300 site about, 20 $30 million project. We are now 100% complete. In the fourth quarter, we identified some cost overruns. And so we took a charge about $2 million. Full year middle of FY '04 we amended a contract, we signed up additional sites to build about, 1500 site, this is what I call contract number two. We are today about 40% complete. We have found some during the amendment process we did not catch all the milestone issue and cause interpretation of the amendment process and the cost impact on the amendment process on the contract number two is about $2 million. Also, since this is a fixed price contract, and less than 50% complete, we have decided not to book the profit until later stage of the project, to be conservative, and so we did not book profit to date, about $3 million for this job.

Also, during the time that is between contract number one and contract number two, we worked -- we signed up a group of small projects for about $8 or $9 million. And the contract was sign up not in good terms or clear scope. And we also are in the process of negotiating our next year's workload with this carrier. And we believe it is to our best interest to negotiate the best term possible and put this whole issues behind us. Therefore, we took a charge of 4 million. All together, in this particular project, this particular customers, we took an $11 million charge this quarter.

The next item is we had an international receivable that is about a million. It was disputed. We went to court, and we won the judgment in our favor. It is again, it is a major carrier in that country but due to the test of time and distance, we decided to write this off, but we will continue our collection effort. And that cost us a million dollars in charge this quarter.

My last category is the wire business. This is the business area we are putting a great deal of intense efforts. To further wind down the capacity. We had a smaller group of operating units with an aggregation of several misguided, mismanaged construction jobs, Li-San referred to earlier, that we should not have been in. Together, this result in a loss for almost $6 million. We also -- in an effort to wind down and to look at it more critically, we liquidated some of the inventory and equipment for about a million.

And the last category, our Utopia project, we did not achieve our revenue plan, and caused a variance of about $2 million. All together, $9 million. So this is all together, we -- all the variance this quarter lay out in this page, and we welcome any question regarding it.

Let me go to the balance sheet, please. We have an excellent quarter in Q4 with our collection effort. Our cash position is very, very strong. $48 million versus $32 million at the end of the same quarter last year. Our receivable combined increased about 11%. Our revenue base in fact increased about 15%. And we continue to improve our collection effort, and we will talk about the DSR later on. Our payables increased pretty much due to the growth, because additional entities that we acquired. Our net debt reflects a small increase due to acquisitions. Our depreciation and amortization remains the same. Reflects some equipment write-off in our communications business. And we have a very, very strong, if not record quarter of cash collection. We have cash generated from operations, about $40 million in Q4. We have a significant receipt from the wireless project during the quarter. And in fact, we even liquidated some of the balance, the receivable balance due in the quarter, for that particular job.

Our capital expenditures increased by about $5 million, principally due to our ERP implementation, and also some asset upgrades at a union level getting ready for the ERP implementation. DSR continued to be a very good story and it is about 86.3 days, increasing essentially from our Q3, and we expect to continue to improve in the next few quarters. I will turn the podium back, actually to our new president Sam Box.

Okay, thank you, David and good to be with you all this morning. And I will start my conversation here with a little bit of my own background and I believe it is applicable to my new role here as president of Tetra Tech.

I have over 35 years of experience in the engineering construction industry. And during that time, I have held several senior executive level positions both in business development as well as operational responsibility for business units. 30 of -- nearly 30 of those years I have been involved in two large publicly traded companies. So I have the publicly traded background. About 18 years, I spent with Morrison Knudson and in several different senior executive positions ending as president of the environmental division of that company and actually originated the environment division in 1984 in Morrison Knudson. In 1983 I moved on to Foster Wheeler to strengthen and grow the environmental company and we were successful in doing that. Also, during my 10 years at Foster Wheeler, I was asked to take on the CEO responsibilities of the U.S. engineering construction business unit in that company. So I had about a billion dollars of operating responsibility inside Foster Wheeler. Joined Tetra Tech in March of 2003, with the acquisition of Foster Wheeler Environmental. And now, that is the largest business unit inside Tetra Tech.

Just a couple of comments here on some immediate action items that I have been focused on, and the first is, as Li-San mentioned earlier we had taken some contracts with unfavorable terms and contracts so the action item there is we have established a new department called the Corporate Contracts and Legal department to report to me, and focus on establishing policies and procedures that are standardized across the company. This group will also be providing senior level legal advice to the operating units as well as assist in developing the risk mitigation strategies. And equally important is the audit process of this new department in ensuring that our operating units are complying with our corporate procedures and policies. Operating hand in hand with that activity is the bid review process, and David just reported on several contracts where we had to take write-downs, and as a result of that, I've established a fixed price contracts review process for any project that's over $3 million that will require either my review or Dan Batrack's, chief operating officer, review and hopefully both of us at the same time during those reviews. What we intend to accomplish here is to develop a separate and independent evaluation of the bid and proposal reasonableness of these various projects, and attempt to get more consistency in our performance at the bid stage of the project.

One of the things I am excited about here is that Dan and David and I have been working very closely here in the last four to five weeks since the announcement of our positions to really apply more rigger across all of the corporation, as we move forward. And I will tell that you my own personal execution philosophy is that everyone in our company understanding their responsibility and accountability for their activities. One of the things I think that, it is a short period of time but I believe we have already accomplished a lot in reducing overhead and taking some effective actions. I would also -- I also am very pleased with Li-San's decision to also incorporate a chief operating officer position in addition to the president's position, that allows us to spend a lot more detail time at the operating unit level and the project level, and with that, I will turn it over to Dan to talk about his role.

Good morning. I would like to provide a little bit of background on myself. I've been with Tetra Tech with just a little over 24 years now, I've been in operations from the first day I started here at Tetra Tech. I've been in the operations and profit and loss line manager positions my entire career here at Tetra Tech. I originally started as a staff engineer and worked up to a project manager, working with client, running individual projects. I moved up to running -- managing individual offices, and I had a stint of about five years running an international operation in the Middle East for Tetra Tech with some of the largest projects we had back in the middle '80s. For the last five years I've actually been running the original Tetra Tech operating unit which is the second largest behind the recent acquisition of Foster Wheeler, but the second largest in the corporation an the most profitable. And along with that, I have taken responsibility of managing the day to day operations of about half of the overall resource management company. There is about $300 million a year. And one of the items that we pioneered many years ago and have really taken to an accelerated fashion is the water resource business, which has really become one of the key growth areas in the corporation. One area we've had some great success. In general, I've been a very hands-on manager, in some folks have call me a corporate troubleshooter for a number of year, but very details on projects, service line, and operation.

Now, the chief operating officer's position is really -- is action. It is day to day operations of the company. And the current focus is going after the areas where we've -- where we've had some big losses and have not taken enough aggressive pursuit, and really that's in many of the communications areas, and civil infrastructure operating units, in selective areas where we had some pretty significant losses. And that's where my focus has been for the last just over 30 days and will continue to be until we bring to conclusion those loss contracts. We also have had a -- an overlarge, overhead structure and we're bringing that down right now. David has addressed many of those items with offices coming down, staff changes and the future focus is going to be implementing corrective actions. One hallmark of Tetra Tech under Dr. Hwang for many years was the metaphor of pruning a tree as the Tetra Tech business and I think that -- Tetra Tech has been using a bit of a scalpel in the pruning process and maybe it is time for a chain saw here in the short term and we have already started on the process and it is not taking down any part of the good viable business, but it is really reinvesting in the portions that are profitable, but taking quicker actions than usual. And finally just day to day operations as we move forward.

I want to mention to you that in the short term the two people on the job, has been very, very good employees, very responsible to their presence and they're all excited to try to correct the situation and move forward. I do want to mention about Dan. He has been with me a long time. And when we have problems in Kuwait, we had some big projects in Kuwait, he is the one who ran that. With the position, with some groups that are not doing well, he was the one that was there. And some projects, he was there. Now, this time, there are bigger problem, and I hope that he will be able to handle it just as well and move forward for Tetra Tech.

Now, let me talk a little bit about of the outlook. This would be the determining -- the coming year, this 2005 results, in the resource management, we expect continued good performance, because of strong, very strong backlog, and a lot of winning contracts, and we will have leadership in the area, such that will work hard in the whole area. The solid market position. Because some of the areas where the leader -- the leadership position. And attitude (ph) and lower risk customers because of more significant part of the federal government, and also contract which is a lot of contracts associated with our costs with the contracts. So I expect this part is doing well, and therefore, I think the 61% of Tetra Tech, assuming it is about a billion (ph) dollars that we are going to perform, it is 610 million dollars worth in that area. Profit margin roughly about 10 to 11 which you will probably be a little bit surprised because we used to be a little bit higher but now it is a little lower in terms of the margin, and number one, we want to be a little bit more careful, conservative. On the other hand, this part of the group, when we get a client, you know, some other programs, that come in, it is more in the federal government, which is the bigger programs, so they have much better return on investments, and corrections are much easier, and however, the margin is relatively low, and so this is about 10 to 11%, that's what we expect to have this coming year.

And in the infrastructure part of the business, basically I have two areas. One is called system support and security-related area, which we talked some time earlier. This business is doing very well. Essentially all the federal government and we do win some of the interesting program, and continue to do very well. And there are about 10% of our business right now. And we expect to be somewhere in the 8 to 9% type of profits. Profit margins.

The civil infrastructure essentially is a headache. It used to be the problem of -- it used to be the highest of margin and that area, well it made a very significant decision, and the cost cutting in the past and reflect in the business side a little bit, and margin will be improved, but improved probably not as fast as we would like to see, because some of the -- some of the office space that we just can't get rid of there very easily, we do try to close it down and it takes a little bit time to take this position of those, and the overall margin is down. And we also have leadership change. We know we are going to be much better than last year. But I think we have not -- I don't think we can get back to the old situation for a while. And that's about 21% of business. I expect it to be -- instead it used to be 13%, somewhere in the 8 to 9% range of profit margin before we get back to the higher rate. Communications, unfortunately, we saw in the unit -- probably you will feel very upset because very large losses occurred margins significant minus, however I do believe this coming year the margins should be good. And we're about 8%. What we have done is basically the work is here already -- essentially all the work is assigned, and some of the bare contracts are reserved and the new contracts are -- they are good when we signed and this time we have reviewed not only myself involved in the review, even our board members are all involved. So everyone is very focused on those. So I do expect it -- you know, we also have the contracts, they are very selective and basically already won. So I expect this group to have about 10% type of profit margin. And overall, this will constitute roughly, if you calculate it, somewhere in the 90 to 96, in that range of profit range. And will constitute for the forward projection.

So we believe the first quarter will be somewhere in the 240, 230 to $240 million range in terms of net revenues. EPS is about 13 to 15. This is because this time relatively people are still taking vacations and holiday and all that, so it is tradition over the relative period but we do expect that we should be much better situation than what we are now. In regard to the full year, we expect to have 1.- 1 billion, our earnings should be 76 to 83 cents. This is assumes that we have 40.8 tax rate, and also the share count operating about 58 million (ph).

In summary, this certainly was a very turbulent year. We made very significant management changes. And we are still working on financial contract operations control. And also those three activities are all work very closely together to make some of this happen. We expect it to be 2005 should be a better year. Thank you.

Thank you. Now we will open for questions and answers.

Thank you. The question-and-answer session will begin now. Please be aware that there will be a 30-second pause in our web cast to allow for buffering. At this 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 speaker phone, mese pick up the handset before pressing any numbers. If you would like to ask a question, press star one on your touch-tone phone. The first question comes from Corey Greendale. Please state your affiliation and your question.

Hi, First analysis. The question is, first of call, I foe you talked pretty extensively about what you've done to implement different better processes in these couple of areas and look for the bad contracts. Can you talk about how extensively you've sort of scrubbed for bad contracts? Have you looked beyond these couple of trouble areas? And how confident are you that you have found all of the -- all of the problem contracts at this point?

Yeah, this is Sam Box. Over the past several weeks, both Dan and I and David and his team and the chief financial officer has gone over each business unit in detail, and we believe that we have turned over the rocks and found the issues and the problems and have accounted for them. And we've done similar actions in analyzing our 2005 performance since then, being certain that the forecast for 2005 are reasonable.

Okay. So is it fair to say that the issues that are listed in the -- in the presentation as nonrecurring, you're comfortable that we're not going to see kind of analogous, similar issues in ensuing quarters either?

I believe so. And we put a tremendous effort to do whatever we can, and that's so it is also, it is -- you know, both Dan and Sam, so they're newcomer, they want to be sure that no more things are left over in their watch.

Okay. And in the backlog, as far as the -- the fact that it was down a bit sequentially, was there anything that had been in the backlog as of the last quarter that you pulled out of the backlog because the proposed contract terms wouldn't have been economical?

In regard to the backlog in that everything we -- whatever left over, for those bad contracts, only count on whatever is left over. But most of it reserved, those money, to handle to finish those projects. So we believe all those backlog, at least right now, all the jobs are -- will be profitable. If they're not profitable, we have -- we have reserved. Our reserve increased additional $5 million in the process, you can see our reserve number has been increased. So those things that we have not -- that are not profitable, we have reserved.

Okay. Thanks. I will circle back around .

We will now hear from Jeff Beech, again please state your affiliation and your question.

Question Stifel Nicolaus & Company. I have two questions. First you can discuss the current trends in pricing and estimated profit margins in some of your different segments, and then tell us what has to happen over the next year or two years to create better pricing and profit margins in those same business segments.

It is one of the -- in the outlook, we discuss the soft management, the infrastructure, the margins, those margins are -- as I discussed earlier, for the resource management, I don't think it will be increased a lot if we more market and federal government contracts, however those margins which I described will be more stable, and I feel that those jobs in internal return of investments is very good, in terms of the profit margin is relatively lower. But it will be much more stable. And maybe we can increase a little bit. But I think the increase will be not very significant.

The real increase should be system support -- the activity which is 10%, I don't think it will increase a lot. Probably will be 8 to 9%, in that range, which I don't think will be a tremendous increase. But the civil infrastructure related, the margins should be significant as time goes on because we are getting rid of the office space, and we are dealing -- if economists are to come back somewhat, and -- if the economy are to come back somewhat, and for that, we should be looking for double digit type of margin. This year, we are accepting that because of the lease of those other issues on the other side, which have improved their -- the market, but -- so allow them to be able to stand on their foot and move forward. Communication to be honest with you, could be pretty good, the internal margin, because we're changing our mode of operation. We are mostly the part of the -- the installation part of the part, so we are not handling the part that -- we are now handling the part we are good at, so I feel the current contract we negotiated is somewhere in somewhere in the 6 to 10% range in term of the overall gross margin. So the more the subcontract goes on, the more the margin will increase because of the subcontract we did not count as the revenue. So I do expect that some improvement possibility. But that we feel it will be probably sometime third quarter, fourth quarter, maybe next year.

Okay.

After that, yeah.

And my second question is, on the annual guidance that you've provided for the year, starting off with a low first quarter, it appears that even by the second half of the year, with a lot of the restructuring, downsizing, you know problem contract, out of the way, it still looks like your earnings are going to be running from what I can see or guess 10 or 15% below numbers that you would have looked at two -- you know, a year ago in a better environment. Where is the -- where is the drag, you know, looking out into the second half of next year, coming versus what I would consider a normal quarter?

I think the number a number of things contribute to that. You know, we failed to meet projections so many times we just want to be sure that that would not happen again. I think people probably have been a little bit conservative. And also, operating groups are much more careful also, because they also have not delivered and they suffered also. So because it is certainly, it is about the present situation on that. So they are certainly operating the business more -- more carefully, and tried to not say anything -- anything beyond what they can really do. And so those are certainly contributing issues. And we also consider those civil infantry (ph) of those is that is an environment we have been talking about six month, six months, too many times. That probably, we have to be careful on that, what we do in six months, whether we improve or not. So those are the considerations. And then you want to add something? Okay. Those are the leaders, why not improve. And also, another thing is that we sort of have a lot of backlog. We just want to be also sure that those backlogs will translate into the work, which is another thing which we -- we're a little bit more conservative for that.

Just to be sure, though; there any specific market segment that you think will still be dragging overall results in the second half of the year you're just starting?

If I would say all my feeling, the only thing which I feel still worries me a little bit is probably more than any other is the infrastructure. All the rest I feel pretty confident, probably even the communication part, we cut enough, and we left it with essentially basically two programs. And if a customer wants to give us more money, we say give us it yearly instead so we are are very, very careful on that, so I don't believe -- we thought management would be good, system, support, those are in place, should be good. Communication should be good. The civil infrastructure, such as -- it requires a little more effort but now we got two good people to put a real eye on that, on the the contracts, and that issue should be stabilized and move forward.

Thank you Li-San.

Thank you.

Our next question comes from Matthew McKay.

Hello, guys. It is at Jeffreys. I guess over the next few quarters if you could just focus on, you know, what we should focus on the restructuring and potential charges and if you can just sort of break it down maybe by the customer contract restructuring, office leases, you know, with the consolidation of office, severance, legal, any other, and also any potential pieces of revenue that go away as you go through these contract renegotiations?

This is David King.

We believe we are -- as we talked earlier, we are in the process of finalizing our downsizing and consolidating effort. We do believe we have work to do in Q1. And then we have less work to do in Q2. What we believe the second half will -- by the time we've entered the second half, we do not need to focus on those things anymore. And the first quarter, particularly due to some certain accounting rules, we have still some leases to deal with. And the rule is so tight that you can't really take charge unless you abandon the facilities. And we -- in terms of contract work and things, I think we scrubbed them pretty hard in the last few weeks, and we believe we have a little bit in Q1, but not much in Q2.

Okay. Is there any way you can quantify Q1 and potentially Q2 and also is it safe to say that, you know, in three to five months you will be finished closing offices?

First, they -- all the forecasts of consolidation and downsizing are reflected in our annual and total year guidance. And in terms of quantify them, I believe Q1, we are looking at in the neighborhood of $2 million. And in Q2, maybe around $1 million.

Okay. And again, like you will be done closing offices in four to five months?

Yes.

Okay. Then can you just sort of focusing on Utopia and, you know, what you expect the revenue contribution to be in the December and the March quarter?

This is Dan Batrack. Utopia, we have seen a slower ramp up. It has not been attributable to anything on the Tetra Tech side. We have had some easement hold ups with respect to permits to get us under way. Overall Q1 we have moved down our forecast that is build into the guidance to approximately $3 million for Q1 for Utopia and we expect that to just about double for Q2 up to about $6 million. On an annualized basis for fiscal year '05, we have been funded and are authorized about $45 million, we have only expended about $2 million of that, so we have all of that funded that does need to be expended this next year, but for the overall fiscal year '05, we have about a $40 million revenue target. So we've added about 10%, a little over 10% conservatism into the authorized level, and it will ramp up then more significantly in Q3, and Q4.

Okay. That's helpful. And just one clarification. I'm assuming that the contract you announced today with the Department of Energy was included in your guidance?

You want to answer that one?

Yeah, Matt, it is an IDIQ contract. It was considered in our guidance but generally, those long-term contracts take about six to nine months to ramp up, so it won't have an appreciable effect in '05. It is mainly an '06 contract. Because it is a five-year contract with a large value.

Okay. Great. Thanks, guys.

We will now hear from Richard Eastman.

Yes, a couple of things. Could you just give us a revenue number, a net revenue number for both the communications and infrastructure business for the year ended fiscal '04? Do we have some base? And I'm going to ask, you know, what kind of growth off of that base you would expect, by those two segments?

All right. The first question is net revenue number for the communication. For FY '04, it is about 100 million.

Do you know what? I may actually will have that. I think you might have given that on that --

Yeah, that --

On that detailed piece but could you just talk to which of those two piece does you expect growth in either of those two pieces in fiscal '04 -- or '05?

You mean the wireless?

Well, I'm looking at both the 315 infrastructure number and the $96 million communications number. Which of those two pieces would see growth in '05?

The communication business will remain relatively the same. And the -- our -- our infrastructure business will increase by about 20%.

20% off of the 315 number?

Yes. Yes.

Okay. And then let me -- the head count number throws me off a little bit at 7934. Where does that number stand today? Versus the end of September?

Rick, this is Mike. It is about the same. Most of the actions were taken as of September 30. And that is a significant head count reduction. You might notice in Q4 of roughly about 400 full-time employees, plus some part-time employees. Which correlates to a severance cost on the order of $3 million for Q4. But the head count is down. Primarily in infrastructure.

How do I see that number? I don't -- I see the full-time equivalent number down more like 200.

Yeah, that's right. That's actually a mix of both full-time and part-time people, so you are looking at a little different number. But any way you slice it, it is down a couple hundred people in Q4.

Okay. And then in the first quarter, when I look at the revenue guidance at 230 to 240, it would suggest to me doing some quick math that your organic growth would drop -- would be down about 7 maybe 11%. Is that reasonable math? And is that seasonality? Or just, you know, the bottoming?

This is normally, in overall -- see, last year, we have a very good year comparatively first quarter. And so this quarter, we expect that because of the downside and going downward and possibly new -- the fourth quarter, so we expect to be lower than the previous quarter.

Okay. Should I look at that organic decline as perhaps a bottom and we should start to improve?

You are right. Organic is going to be tough (ph) for the fourth quarter to the second quarter.

Okay. And then could you just talk to, David, perhaps you could just give aus feel for how the cash flow, free cash flow lays out this year, in fiscal '05? I presume in the first quarter it will be a negative number?

Yes, let me clarify for you what I just said on the infrastructure growth. The gross revenue will be about about 20%, but the net revenue will be single digit, high sing the digits.

Because I mean your guidance is a billion, what, 88, and we finished the year at a billion 9, and we're talking 70 million increment? So that's resource management, commas flat, infrastructure would be up --

I think that the part which is really up is the system security part support. That part will be significant growth. They've been growing roughly about 20, 25% above actually. They've been doing very well for us. And we expect it will have significant growth this year, too: So the civil infrastructure is the positive -- this are some issues there so, a as the infrastructure fell, the combination of that should be grow because of the cost of the -- because of the system -- the security part of the business.

Okay.

On the cash flow, we are forecasting for the full year, from operations, between 50 and $60 million.

Okay. And in the second half, most of that comes in the second half, as usual?

Yes.

And then just maybe -- maybe one last question, if I look at the EPS guidance, and I look at the segment break down, I mean it would still appear to me that you're projecting pretty much flat or no profit out of the infrastructure segment of the business for all of fiscal '05.

You're right, because we have -- basically, the resource management part of the business would be similar to this year, maybe a little improvement. The systems that grew (indiscernible) overall profits improve, because it is just growing anyways. The civil infrastructure, we do not expect it to have a good profit. As I mentioned earlier, the 8 to 9%. In the first quarter, probably not even -- it is lower than that, and later on will probably is higher. I mentioned about coming together. So we basically, in terms of the more compared to last -- it is about 94, somewhere around $94 million operating profit.

Okay. Say that last part. You said 94 what?

Yeah, is what -- well, let me put a range, which is somewhere in the 91 to maybe $98 or something in that range. Net profit. But you can multiply out from actually a billion dollars to what you can go through that part.

Oh, operating profit. Okay, I understand. And just the last one. And maybe I will address this to Dan. I'm really struggling on this Nextel business. When I, I think David did a decent just kind of going back over but when you look at $22 million of charges against literally that business, plus -- you know, I look at the DSO at 170 days, I look at the charges against that business, I look at the fact that you're still setting up an accounts receivable reserve against forward business, I'm not understanding why we're in that business. And you haven't made any money at that business, and now, do we have -- it sounds like we signed an extension on it as well.

Okay. Let me just mention about that. You are right. And we all feel that business probably is the best to exit it out. At this time. But on the other hand, that part of the business is a new contract we have, is pretty good. And they are very anxious for us to do the new part. But the thing we ran off really has come off of the first contract we have not, actually we did very poorly in terms of the contract term condition, the reason why this -- we normally did most of the work, the first phase part of the work study, and leasing planning ons this this aspect and we did not really get into the installation part. This time we accepted the whole thing and we did not subcontract out and some of the contract terms was not very good, and we wound up with losses along the way. And -- but the new contract, all those things are specified. We also specify the maximum, each site. Maximum cost. And that's something we don't want, higher than we expect, we estimate, we can take back to them, so this final new contract, we work out two, three time, so I expect it to be pretty good. And the question is the following. We ask ourselves, is that because of the bad contract before, should we abandon someone gave us to a better contract? And that's the issue. So we either have very tough negotiation when -- and in fact, we told them this is my terms, without it, we are not going to do -- we are not going to do it. So -- but if we stop now, we have to finish it, because the costs to us will be probably much higher.

Okay. All right. Thank you.

It is a -- really it is a dollar and cents decision.

Okay. Thank you.

Our next question comes from Min Cho. Please state your affiliation and your question.

Hi, this is Min Cho, Friedman Billings Ramsey. Just a couple of miscellaneous questions left. For your wireless expense, the expense you took on the wireless division this quarter did that include the $5 million that was being disputed by Nextel?

Yes.

It does. For the full 5 million?

Yes.

Okay. Can you tell me how much -- how much of Nextel is in your accounts receivable?

In total, it is about $60 million.

60 million?

60.

Okay.

And most of it in the bill, probably $10 million in the bill, receivables, and what the plan -- what Li-San just mentioned is that we include in our receivables, our subcontractor payment. Which is on a pay by pay term and we did not need to reserve our working capital on the subcontractor portion of the receivable. And that probably is about 60% of the receivable.

So in terms of the -- on the point of view, it looks pretty bad, in terms of cash outstanding actually it is not bad. So that is part, you know, optically, it looks very, very bad. Because the -- including the subcontracts but the subcontracts are paid off. And so we do not have to have substantial their part of the money.

Two other comments we want to add to that is yes, would he did incur a serious learning curve in the last 18 months. And that learning curve is somewhat flattened to date, and hopefully on a to go basis. And so -- and we also try to manage the site and work off volumes -- instead of as I mentioned in the contract number two, we have 1500 sites. This new work plan that we are negotiating right now is one-third of their size. So we ought to try to make it more manageable, a project level for us to execute. And also, the point I made -- I mentioned earlier about we have received substantial amount of money in the fourth quarter, over $32 million -- in the neighborhood of $32 million in the fourth quarter on this project. And we expect next year we will continue to track it and we will try to have a result on the cash side.

Okay. And that's $13 million on project number two? Or from Nextel in general?

13, I'm sorry?

You said you received 32 million in the fourth quarter?

Yeah. That's project number two.

For project number two?

And project number one, no more project number one. It was a mostly project number two. And there was a list of smaller projects that we did. We wrote off some and we received some.

And what was the -- I'm sorry?

Go ahead.

In your wireless business, what was the international project?

It was a project that we did in Brazil a few years back. And we worked for Ericsson in Brazil. And it amounted about a million bucks (ph) was disputed. We went to court. We won a judgment. And it is a matter of enforcing the judgment and we don't have any operation on the ground at this point, and because, as I mentioned, because of the time and distance involved, we really want our operating unit people to focus on the execution of the core job today, so we have decided to write them off, and in the meantime, we will continue to pursue those collections.

Okay. Can we get an update on your ERP system? When do you expect that to be completed?

We have completed our first wave of conversion with two units, and we plan to have about seven to eight units conversion in April. And the whole conversion and implementation, the roll out cycle is probably in the next 18 months. And we are on schedule and we are on budget.

By the way, I would get back to Nick's question, this is the first time -- I went to negotiate the contract myself, personally involved, and with them together at Nextel's headquarter, and -- which had not been done in 20 years of doing that so my own reputation is at stake so I -- our boss has similar feeling, like you, because we do have problems after problem, and we fear that this contract, with this contract, it minimized the liability for the second contract. Also, because if we don't take it, the -- because they upgrade the second contract also, as a result, if we accept the third contract. So I just want to mention to you, that we pay attention to this job.

Okay. Also, now, related to Sarbanes-Oxley costs, can you tell me what you're expecting the total costs to be for external, I guess external audits and external services in the calendar year '04?

It is about 203 premium dollars in total costs, and mo -- probably 50/50, one, internal and external. And we see the number continue proportionally higher for external costs and less internal costs, because we -- the compliance is heavily focused on the first year.

Okay. And you guys are on target in terms of timing to get all that -- all the audits complete?

Yes.

We will be in full compliance at the end of this FY '05.

Okay. By FY '05. Okay. And then my last question has to do with update on Iraq. You mentioned your backlog, that the Iraq contracts, you know, were negatively affecting backlogs, they were kind of being let out a lot slower, can you just give us an update in general in what you're doing in Iraq and you know, how much of that 60 million is in your backlog?

Okay. This is Sam Box. All the Iraq work, the majority of the Iraq work is coming through the FW department there. We will receive the $65 million task order last September and since that time, with budget controls, by the government, they are no longer handing out the larger size contracts for re-upping and they're just extending our contract on a month to say three-months basis. And so the work is stable. And as we get extensions, that extension goes in the backlog. But we didn't see another, you know, $65 million pop. What we're also doing under the Air Force AFCE contract, we're also working in Iraq on the reconstruction of the Ministry of Trade buildings, as well as we are performing work to develop 11 new clinics in Iraq, and that work is also in backlog right now, and will extend out into the second and the third quarter of next year. We're also still continuing to actively bid additional work under our Air Force contract, and that work will move into backlog as we are successful in winning that work.

Okay. And if the political situation does not improve in Iraq, I mean is any of this work at risk or the timing of this work at risk? It seems like even with the situation that you guys continue to be, you know, working steadily over there.

We are -- we are working steadily -- you know, we have two types of contracts, the Captured Enemy Ammunition program through the core of engineers, which is the -- corps of engineers which is the UXO work we're doing, and that work, of course there is still a lot of UXO around, and has to be cared for, so we see that work continuing on, on a fairly steady basis, and then the remainder of the work is -- I will call it infrastructure reconstruction activities, that you know, will continue on, I believe, for some period of time.

All right. Thank you.

Our next question will come from Debra Coy. Again, please state your affiliation and your question.

With the Washington Research Group. Hi, guys. Li-San. Can you maybe take a step back and tell us how you're looking at internal growth for next year? There is a lot of moving parts, you know, some revenues are obviously coming out on the infrastructure side as you're shutting down businesses. You mentioned that infrastructure should be up somewhere in the neighborhood of high single digits or David said high single digits for infrastructure, communications relatively flat, resource management doing well. If you look at the revenue guidance, and take kind of the midpoint of the range, it only looks like about 4 to 5% top line growth that you're forecasting for '05. Is internal growth in your core businesses higher than that? But there is a drag as you continue to close down and take out some revenues from downsizing? Can you just talk about how you're looking at the internal growth in your core businesses?

I think internal growth, the resource management looks good, the reason why we are still getting more from the federal government part of the program, which we have been doing very well. Certainly, that is going to be affected by the program, the problems we -- the infrastructure, I'm talking about civil infrastructure part.

Right. Yeah, you -- You said that. Uh-huh.

And I would say it is going downward overall. So the infrastructure itself together, which are showing that look choppy and be together and have some growth because the other part is growing, 20-some percent growth. And that is the -- so I would say infrastructure, we're going to have some growth, not because of civil infrastructure, is is because of the security part, which happened to be classified into this group. Communication actually, we put 8%, which is coming down. I believe that part probably will have better growth because in some ways, flat, but with -- we have not really totally considered this new contract into -- into this program. The new contract, we just signed --

Sot new contract with Nextel is not in your guidance for next year?

We put in not as much as -- to consider the new contract. So we could have some growth in the communications side, in those two programs. And but right now, we put 8% here. What we basically overall, if you go through the whole thing, it would be about 3, 4% growth overall, and assuming we don't have any acquisitions. So that's what we -- we do, and particularly, you know, in the (indiscernible), all those thing, that part of revenue is not going to come back, unless we win some additional programs. But (indiscernible) the both covered infrastructure and some communication before. So we willing be -- I will say in terms of ourselves, if we can meet this plan and build some confidence, I would say that probably the best we say -- rather than claim higher growth, wind up where we cannot deliver.

Sure. Certainly, what it sounds like is we add all this up together, that we have issues in several of these businesses, if you're talking about sort of organic 3 to 4% growth, you know, some margin improvement, as we do recovery, but still presumably some risk from some of these large contracts, I mean really what it sounds like is that Tetra Tech has to a certain extent turned into more of an engineering-type company, with slower growth, lower margins, and higher project volatility. Is that an unfair assessment?

Well, you can say that, but I would say, if you really seriously look at, you know, the outlook chart, resource management part should be pretty good. The infrastructure, which is 70% of the business is very good. And the infrastructure 21% is I mentioned it is -- you know he we have some (indiscernible). Communication, I would say we should feel pretty good next year, if we do not deliver that -- that we're going to have a real serious problem with ourselves. But I am more confident that, too, should deliver better than I expected.

So would you consider further divestitures or closures for the -- from these businesses if they do not turn around in the next few months?

Well it is probably the infrastructure part, I do not expect it to -- much in the other area.

Okay.

Civil infrastructure.

Right, well that's -- I mean that's clearly what is a drag on the overall company. If that this was a pure resource management and security company, I think the numbers and the valuation would probably be a little different.

Yeah.

Then finally, my final question is actually then taking a look at I guess perhaps one of the surprises to me here, was this construction management job problem in New York that does come under the resource management segment. I cannot recall having had a problem like that in that sector before. Can you tell us a little bit more about what happened there?

Yes, Debra, this is David King. We have a unit in Boston that focuses on -- our environmental remediation in the past for assurity company. So they are in a way in the study, the engineering side of the business, and they stand -- in the past, construction management, management of construction. In a smaller scale. This is a -- initially plan, a 10 to 15% fixed price job, building a police station in New York City, for the municipality of New York. And what happened then is we enter into a contract with our subcontractor, that did not work out. And also, there was some commodity that we tried to procure, and during this period of time, that commodity price went way up, and also involving some design flaws in the beginning. So nothing sort of happened right on this job, and this is probably the last one we will do. And we are taking aggressive action in trying to finish the job and get out of that business.

This is -- this is Sam and Dan is going to eliminate all of the groups which, you know, they have more work, expanded this year -- (indiscernible) they can't do design, they can't do everything. So we are going to limit all of those things, which they are not good at, particularly engineers getting the construction, but it is a disaster because engineer have a tendency always listen to the customer, and the construction normally -- construction people always tell customer no. So that's a difference. So this is something that we made it very clear that's the first priority to deal with this issue and we made all the reserve to some of those projects.

So what you're saying is that this is not in any way a classic remediation job. This came out of one of the remediation units, that were really doing a civil infrastructure job?

This is Dan Batrack. The resource management project was one project. It was a plastic construction project. A complete civil construction high-rise concrete steel, rebar, it was only one of two projects in all of resource management that fit that profile, which is a construction project that is on a firm fixed price low bid basis.

Right.

The second project is in its final approximately 45 days closeout and is on track with its original estimates, and so close out, no rework, no claim, no exposure.

Okay.

The first thing we did is -- posed to an earlier question to Sam; there any more surprises out here and that's the first thing we did. Not only for resource management but across the company, the civil construction projects, just were devastating -- particularly in the fourth quarter but if you go back and look at the lower guidance in Q3, Q2 and even looking at the first signs of it earlier, these are the root causes for a lot of these -- these issue issues.

And the entire management theme for the year will be get back to your core competency. And try to get back into it.

Yes, I agree. My final question actually really speaks to that. Do you feel -- I guess this is for both Sam and Dan particularly, do you feel that you have a -- I know you've made some change, do you feel that you do have the unit managements in place that you need at this point? Or do you think you are going to have to make more changes?

I would say -- this is Sam. We're working through that process. I think that we have made some aggressive changes already. And that we are reasonably confident. I think that in my years of experience, you know, we're all under continued observation, as to performance, and how we're performing, and how our market sectors might be changing, our capabilities of response, so I would never say it is ever over, because it is always changing, but I think that we've gone a long ways thus far. And I would add one more thing, Debra, to your comment earlier, the question earlier, this bid review process that we're applying is targeted to eliminate just what your concern was. And I can tell you that since we've already begun here over this first month, one business unit was going to pursue a job, and decided not to pursue it because it determined it was outside their competence. Because of the bid review process. So I think we're on track with that. And people accepting it. And reacting appropriately.

Okay. That's helpful. And then I know this call has gone on long, but one -- one very final big picture question, like I said earlier, I mean we certainly have had a very disappointing year, you know, really a couple of years, for Tetra Tech, and the expectation of very consistent growth has clearly been dashed, and I understand that '05 is kind of a rebuilding year. I guess what I'm wondering is, is Li-San or Sam, kind of what you see as the vision for the company going forward, in terms of the potential for top line and earnings growth, you know, kind of how do you see your core competencies, if you will, you know, generating earnings growth for this company going forward? I mean can this be a 15% earnings growth company again? Or are we kind of settling into a lower level?

If you don't mind, you know, what we talk about this issue, but however, we are concentrating this year, just a couple few days ago at the board meeting, right now we are going to concentrate in very short terms to get the problem issued resolved and then we are going to be really put the market focus, because we do win a lot of program, an that's the next -- the next issue which we are -- after this thing goes through, a couple months later, we will start to address those, that part of the issue. And hopefully we can get back to a good growth time, and so -- so if you ask me, call me probably in a couple months from now, I can have better answers, I don't want to really create (ph) something which we have not. We have to put some efforts yet. At least until we have the management change situation.

Right.

And totally doing that right now.

Okay. I understand so suffice it to say we won't be expecting any acquisitions in the near term?

I cannot say that, but more concentration right now is in the correct the problem.

All right. Thank you.

Our final question comes from John Keely. Please state your affiliation and your question.

Hi, Adams, Harkness & Hill. Good morning. A couple of detailed question first on the accounts receivable line. You can talk about the amount of write-offs you took in accounts receivable? Was it the $11 million number we're seeing in the provision in the cash flow?

Yes. Yes, that's correct.

Okay. So you took $11 million charge on AR. Can you talk about by group? Communications, resource infrastructure, how that that comprised? I don't need exact number, just sort of percentages or just a feel for it.

Two-thirds, if not 70% came from communication as a whole. And a little bit came from research management. And some -- the smaller portion came from civil infrastructure.

Okay. And David, you mentioned earlier on the call, a million dollar receivable out of Brazil. That seemed to be fairly old, that you finally wrote off, as you try to recoup some of those moneys. We know some of the Nextel terms are longer terms. Or they had been in the past. Can you talk about the relative aging of the AR right now? Whether it is comparison to last year, or just a constant number for us? How old are the receivables in there? And what's the process been as some of these changes have gone on and how you've scrubbed those numbers?

The Nextel job, we are basically building sale towers in the west region, and those jobs side by side have about 12 to 16 month cycle. And so we have to incur certain costs to carry the work. Initially, our earlier contracts was not friendly and we worked from over 250 days, down to 250 days, we are in good progress to get to 200 days. With all that said, please be reminded, our subcontractor costs are in the receivables. And this is a two-thirds subcontracting model. Meaning in our revenue profile, one-third is our own costs and the other two thirds is subcontractor costs. So if you look at working capital or as a management point of view, two-thirds are -- what we are liable for the costs, but we have not yet paid, on an ongoing basis. So our goal in FY '05 is to work that to under 200 days and net on a subcontracts basis it should be under 100 days.

Okay. And in terms of procedures you've done or your comfort level with the backlog -- or excuse me, the AR quality, I mean do you envision further write-offs in that balance? Do you think that is a pretty good balance here as we start off fiscal '05?

I believe we scrubbed everything we have on the balance sheet, and as -- have a relatively clean slate moving forward with this job.

And one follow-up. In terms of the deferred wireless profit, I think you mentioned a $3 million number earlier in the call. Is that expected to turn around and hit the profit line in '05?

We, as I mentioned earlier, we did that first because the experiences we have, the issues we involve, and we want to be conservative, and our plan is to make sure we track this project, given our cost experiences, and our plan is to amortize that over probably the remaining balance of the project, probably in the next 12 to 18 months.

Okay. Great. Thanks very much.

This will conclude the question-and-answer session. I will now turn the conference back over to Li-San Hwang to conclude.

I want to summarize again with regard to this presentation, and this is a tough year for us. And I believe that our management changes will show results immediately. And what we are present here, there is something we believe we can work on, and we certainly expect that hopefully it to be a better year than what we have at present. Thank you very much for your support.

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