Tetra Tech Inc (TTEK) 2005 Q1 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 events or results. Tetra Tech's form 10-K and 10-Q reports to the Securities and Exchange Commission identifies certain risk factors that could cause actual results to differ materially from these forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements. At this time I would like to inform you that all the participants are in a listen-only mode.

At the request of the Company, we will open the conference up for question and answers after the presentation. With that, I would now like to turn the conference over to Li-San Hwang. Please go ahead, Dr. Hwang.

Thank you. Good morning. I'm here to report to you our first quarter results. With me is Mr. King, Dan Batrack, Sam Box. They will be discuss the proper part of business. Now, this quarter, our revenue increased slightly, 3.3 percent. This is also account for the reduction, roughly about $10 million because of restructure. Otherwise it would have been another 3 percent also. Revenue -- net revenue is about -- is 243 million, which is in line with our guidelines. -- (indiscernible) a little bit of our guidelines.

Income from operations, 15.8 million as compared to 23.9, which is a 33.9 percent reduction. Most of it we have discussed earlier in the previous meetings. Infrastructure and communication profit, write down was anticipated. Our EPS is $0.14 as compared to $0.23 which is in line with our guideline. And those are the results is affected also because of some minor cleanups still going on in the communication part. And we also expect a little bit more this coming quarter as a result of the effect of earning by each quarter around 1 to $0.02. And that would be under into account.

Customers, if you look at the percentage year to year, it has not changed. International, 2 percent. Say, local roughly about 16, 17 percent. And federal slightly increased around 1 percent, commercial is about the same. So in the three years in terms of the all-over revenue distribution is about similar. Our growth rate in the resource management is about basically flat. Which is actually because some of the programs we have anticipated to come in on time, we (indiscernible) we weren't, but the money did not come on time. So that should be helping in the future.

The infrastructure side, overall, the total revenue gross, about 3. 3 percent. That's because the acquisitions. And, organically, is reduced by about 14.6 percent. Among that is half of that is planned reduction. Actually, close to 10 percent planned reduction. Communication about stabilized. Roughly about, flat basically. And we probably(ph) anticipate to see a little bit increase as I will explain later on in the wire side. Because of utopia, that's the business will continue to increase. As a company, overall, we went up a little bit, but organically we just about 5 percent. (indiscernible) segment is concerned is about, fairly close to about stable, 10 percent communication, (indiscernible) projected about 30 percent. And, resource management is about 60 percent.

Now, let me outline some of our neutron(ph) action which certainly were affects overall our results. And I tried to explain here, roughly give you a little more clear idea what is our focus is in terms of operation, financial and (indiscernible), we talk about what we would plan to expand our business since we can mostly offer a restructure, although this part is getting close to finalized. In the resource management, as you know is about 60 percent of our total business. Our margin is about 10 percent. We're doing a little bit of cutting in the area, improve efficiency and we've been doing that by the time fourth quarter our margin goal is about 11 percent. We have increased a little bit in that area. We anticipate a little better result in the resource management.

Infrastructure have two parts. A (indiscernible) infrastructure right now is fairly low, roughly about 20 percent of our revenue is about 1.4 percent profit. And, Dan will outline what action he's taken, so we're expecting that, basically, is streamline and reduce some unproductive people and he will talk about in detail over there. We expect that by the time the fourth quarter we should have a 7 -- 7, 8 percent type of operating margin. The systems are doing very well. In fact first quarter results have been about 15. So we expect 12 percent variable in the fourth quarter if not a little bit more. So, we'll put in a lot of effort to see if we can expand that part of business. The business is relatively growing. And also the business is relatively easy to manage, because most of the money is -- cost reimbursable(ph) type of a program.

Regarding communication side, wired, wired the part is really basically amounted to what is shifting from one type project to the other. Basically we're building up the utopia part of project. The utopia project this last quarter is 2.5 million roughly. And we expect the current quarter, based on the current work we're doing is about we're expecting 5 percent. Not 5 percent. Double that. 5 million. And the next quarter 10. And a quarter from then, the fourth quarter should be in the 15 million range. And profits very good. Also payments good, too. So we're expecting by then should have the overall in the wired should be 12 to 13 percent type of range. So that should be significant, too.

However, in the wireless side, our revenue is roughly about 5 percent, our margin right now is very low. We are not booking any profit last quarter and also we anticipate this quarter. That's probably the most part effect of all projections. We all (indiscernible) some money as a serve for anticipating (indiscernible) potential issues because of spring and the [next time a merge](ph) or something like that. We do hope that that will not be materialized as a fact or not be bad. And as a result of that, we think we can (indiscernible) be able to book in a 4 percent profit margin at that time. That's probably the most uncertain part of our activities. And, we certainly put a lot of effort to minimize that impact.

(indiscernible) We are also made a plan to aggressively to expand our market, improve the marketing activities. And Sam (indiscernible) will talk more in detail later on. David?

Thank you, Li-San. I'll go over the financial first (indiscernible) income statement. During our first quarter we worked to fix our problem areas. Our income (indiscernible) from operation was 15.8 from the same quarter last year 23.9 million. During the quarter, we align our doing business capacity with the reduced revenue base in our civil infrastructure business. We also exited some of the civil construction in our wireless business -- in our wire business. These adjustment are our plant, and Dan Batrack will discuss in more detail later on.

Our SG&A cost increased slightly from 23.9 to 25.2, due to some of the medical insurance, ERP, and Sarbanes-Oxley spent. The near term, meaning that in the next year or two, we expect the percentage to be around 10 percent up and down a little. Longer term we believe the trend will be about 9 percent as we gain efficiency in our back office operation. And the Sarbanes-Oxley will be spent -- spend will be less.

The interest expense didn't change much. A significant portion of it, about $2 million had to do with our fixed -- senior note. Fixed amount on a senior note. We expect interest to be about -- interest expense to be about 10 percent higher in the next two or three quarters, due to our newly amended terms. And the terms will be -- go back to normal probably in the third or fourth quarter down. Also coupling with the less borrowing in the future. Our tax reflects our lower taxable income.

Balance sheets. Our receivable base increase was relatively in line with our revenue and DSR base. A couple of reasons for slightly higher increase. One is we have our A&T acquisition, which accountable about $50 million of increase in our receivable base. The balance was due to our wireless project, which we expect to reverse and liquidate some of the receivable balance in Q2. Our accounts payable, we experienced some significant year-end vendor payments. Partially had to do with the discount we took. We invoke 1 percent discount on some of the payments. And others had to do with our leg of discipline. And we will do a better job in Q2 managing both our receivable and payable. Net debt increase from 109 to 154 million. And it reflects our acquisitions, particularly A&T.

Cash flow, we have a slight reduction on (indiscernible) and amortization. It is basically we have some write-off in accent in terms of equipment costs and things. Our cash was a disappointment this quarter. It was pretty much affected by three principal areas. One is, in our A&T acquisition, which was a stock acquisition, we made a decision to elect internal revenue code 338 H 10 election allowing us to step up the bases and treat acquisition as an asset purchase. The tax savings in the next 10, 15 years is about 12 million. The cost today is about 6. The net present value is $6 million. Economically a pretty straightforward deal. We decided to do it during the quarter and exhaust us with a $4 million in cash.

We had a timing -- we missed a large government payment in the neighborhood of $6 million, which arrived about a week later in our coffer. We also, as I mentioned earlier, about $10 million of subcontracted payments should have been better managed, which we were due in Q2. And we expect this quarter, the Q2 cash flow to be in the neighborhood of 15 million. Positive, yes. Our Cap Expenditure, we continue to control our spend. And we expect the CapEx to be the in the neighborhood of 16 instead of 20 as we recently budgeted.

Our DSR increased by about three days. There are two reasons. One is, the government payment that we did not get until a week later. Also, our wireless customer did not -- we also because the wireless customer did not pay us due to the calendar year-end shutdown. Second, operations margin, the resource management we continued to maintain a healthy margin. The margin is slightly lower, as you recall in Q4, we had a large job in the resource managing area. As we execute and complete this job, we did not book any profit at all. We just work off the reserve on this job. In the infrastructure area, pretty much due to the (indiscernible) infrastructure weaknesses Li-San talked about earlier. We had a healthy system support and security work and make up to have a 5.4 percent margin.

Our communication was due to -- we talked about two areas. One is the exit cost in the wire business as we planned. And also, we continue to be conservative and monitor and track costs in our wireless job. And I have a page for it later on.

Our DSR in the resource management, a couple of reasons, one, increased by about 6days also. We experience about $5 million increase in our commercial work, in the resource management area. Which is slightly longer payment term than the government cycle. And also, as I mentioned earlier, there was a timing of a large government payment in the neighborhood of $6 million. Our infrastructure reduce principally due to the system support in the security work. And we expect that area to continue to do better in the DSR. In the communication, it was pretty much impacted by our wireless customers. As I mentioned earlier, we expect to recover about over $20 million this quarter ,and we will liquidate some of the balance, probably by about 5 to $10 million this quarter, meaning Q2.

I like to give an update about our wireless business. We signed the amendment and extension with improved terms and conditions. This new amendment -- (inaudible) the previous amendment. And our current project is trending about the 55 percent complete. And we have met our customers (inaudible) expectations for three quarters in a row. Our costs continue to be challenging. We have some pressure in our subcontractor cost. Although, given the market in consolidated, I think the build is slowing down. Hopefully, we can alleviate some of this cost pressure from (indiscernible) in the next few quarters. I believe I mentioned earlier, we continue to defer profit and to increase our reserve. In the meantime, managing our costs very aggressively. We now have about less than 5 percent of our total portfolio in the wireless business. And it has lower risk profile than before.

Now I'll turn the microphone to Dan.

Thank you, David. We've made significant progress in our operations during this first quarter and during January. As we reported before, our focus has been on the building and civil infrastructure area and in the communications area. First, in the building and civil infrastructure, we have made some adjustments and reductions in the operating unit management, the individual line managers. And in staff or reductions. Those reductions have been primarily focused in two geographic areas. We had weakness in both our workload and utilization and it primarily focused in the northeast and southeast. These reductions were simply made to increase the efficiency, utilization and actually is going to help in our execution of the projects in overall profitability in the coming quarters as forecasted.

The biggest progress will be made has been in the communications area and the wire side. One of our focuses was and one of our goals was to actually exit the civil construction arena. It has been a single area that represented the biggest financial challenges. Which was really big loses on projects. We made large progress, again, during the first quarter and even through January and we've largely completed most of our biggest civil construction projects. This has allowed us to move pretty well through exiting this market as we've been exiting and completing these projects, we have reduced staff that have been on the projects, have not otherwise utilized staff, so, you can see on the presentation material we produced, a little over 230 staff.

As we've completed these local projects that we've had, where we've had offices tech support these project, we've closed out the offices. Overall 7 offices closed out. As we've been closing the equipment that we've owned or had capitalized, we've been liquidating, we've taken off our book. We've taken just over $2 million worth of capital equipment off our books. We are still completing some of this work. We expect it all to be fully completed this quarter. And, again, we're largely complete as of this date.

In the wireless, David King provided a good overview of our largest wireless client project. We have seen adjustment in the workload and we're focusing on overhead. That's adjusting our internal resources which are staffing, offices, and other overhead and a particular focus on subcontracting. Whether or not we have opportunities in adjusting subcontract, the amounts that we're subcontracting, whether we can perform it cheaper. That's one of the primary focuses to make sure that we have our overhead and our cost model appropriate with the new pricing.

Overall, I think we've made excellent progress in implementing plans that we had outlined during our last call. And we're on track to complete these as originally scheduled here during the second quarter. Sam?

Thanks, Dan. Good morning, everyone. This has been an active quarter for Dan and I as we have executed the recovery plan. And I just want to continue on with a couple of key points with regards to actions to date. First, we have completed the strengthening of our corporate contracts group. This group is now modified to work process and procedures. They are all in place. And the operating units are now managing to the new process.

With regards to bid reviews, we have now fully implemented the bid review process for fixed price contracts over $3 million. That must be reviewed by either Dan, or myself or both. We also include representation from the chief financial officer's personnel in those reviews. We have, in fact, reviewed several projects during Q1.

Another important factor for all of us is project management training. And what we've done there is we have taken a program out of one of our operating units and are now applying that company-wide. It is an on-line training program. And at my last check, we had nearly 700 of the Tetra Tech associates who have signed up to complete this course in the next six months. Good response from the operating units on project management training.

We also simplified our authorization matrix for the Company. The simplification wasn't to give people more control at a lower level, it was to provide a simplified plan that everyone could manage too, so that we're effectively managing the overall corporation. Another important element, we have completed the transition of our reorganization to where the operating unit controllers now report directly to the chief financial officer's office. I think that was a needed change, and appropriate, as we continue our control of corporate governance.

Moving on to new wins, we have four listed here. These are representative for the Air Force Apseed(ph) program under our work contract. We were awarded a $36 million design build project for a new barracks facility in Iraq, who are continuing to receive new assignments in Iraq through the quarter and looking forward to the rest of this year. At McClellan Airplane Force Base in Sacramento, California, we were awarded an environmental management contract, a sizable project of $24 million.

In the infrastructure area, good progress there in Harrisonburg, Virginia for an infrastructure development project. This is really to provide planning and engineering support to a $100 million redevelopment project in Harrisonburg, Virginia. Looking at our UXO and chemical weapons marketplace, we received an assignment in Japan to support the Japanese government for recovery of Japanese chemical weapons that were disposed off at the end of World War II in a port in Japan. I think this is a great example of how we are now applying our unexplited(ph) ordinance capabilities and chemical weapons management to the international market.

In addition to these projects, and there are several other new awards also, we continue to receive a significant amount of new work under our IDIQ contracts for major government agencies that really compose the remainder of our new business for the quarter. Looking at our backlog, as you look from Q4 to Q1 for this last period, we had our normal downturn in backlog. If you look at this chart, you go year on year the past three years we've never been more than flat and generally down for the quarter. This is another representation of the normal process related to predominately to seasonality, as well as in our wireless business, due a major merger, they are now consolidating their buildout plans, and have been slow to give new assignments there. We expect an uptick on that in Q2 and the other quarters.

Looking at the market opportunities, I've just picked four subjects here to talk about. First of all the water market. A very strong base for Tetra Tech overall, and now, with some significant international growth potential. In the last quarter we announced a major USAID contract with them that was won by a join venture between Tetra Tech and a company called IRG, who is a major USAID supplier of services. We now have another opportunity in Afghanistan, a multihundred million dollar opportunity. We're taking that same joint venture for that project, and look forward to success there.

In the Department of Energy, which is a major growth market potential for Tetra Tech, I focused here on really our second line of defense program. And this is really a program that is being managed by the National Nuclear Security Agency, or NSSA, under DOE. And, it's a design build radio active detection system that is going to be applied to ports, airports and border crossings around the world. We have completed assignments in Rodderdam and in Greece. And the reason for Greece was for the Olympics. We completed that work just prior to the Olympics. And have also now been given some additional work post Olympic type period. We are going to be receiving new assignments that have been identified in Sri Lanka, and Antwerp and Turkey.

Looking at the systems support and security market, Li-San already mentioned about the growth potential in this market, and we are going to be applying the full asset value of AMTI/EMC in this marketplace. And in EPA, significant recompete programs in 2005. For these programs, Tetra Tech is an incumbent on several. We look forward to winning our incumbency positions, as well as taking advantage of other people's losses in these programs as we move forward.

And now I'll turn it back to Li-San for his final comments on guidance and summary comments.

In regard to this coming quarter, the revenues of 235 to 245 range. The EPS is 15 to 17. Slightly less than what originally expected, because I mentioned earlier we are not booking any profit in the wireless aspect for this current quarter. And just to prepare in case -- if issues may come up. So we're conservative for that. And we have a few other things in the wire side also. And in regard to disposition, some of the leases which also contributes up, so those other things affected. But we do expect the third quarter, fourth quarter, those should not be a major issue for us. So our projection, based on what I discussed earlier, should be a reasonable one insofar as carry on to the full year is concerned.

For full year would be 1.1 billion to 1.1 billion and 76 to 83, the variations are a result from those -- how fast we can recover that. We do expect the third quarter, fourth quarter we should be operating to a normal situation with a normal profit margin.

In summary of our presentation, I think this was a quarter of recovery. We put a lot of effort, try to clean up as much as we can. And also reserve the moneys needed to complete some other things. (Indiscernible) infrastructure communication part of business. And now what we need is how to position for growth, water, security, that aspect which Sam has given some of the directions we're going to push for. Thank you. Questions and answers.

The question-and-answer session will begin now. [Operator instructions] And we'll take our first question from Jeff Beach.

Yes, good morning. During this first quarter, you've been doing a lot of restructuring. You've set up some reserves. Are you incurring a meaningful amount of, what I'll call nonrecurring expenses involved in restructuring outside the reserves that continue to drag down your results? Or is this just weak profitability in revenues in some of the operations that are dragging it down so much?

This is Dan Batrack. Many of the expenses that we had or costs that we incurred are nonrecurring. I would say that the single largest area continues to be during this first quarter, was the wired group within the communications operation. We were closing out the civil construction project, and we continued to take -- continue to take losses on individual projects. As we've completed these our efforts to complete have changed as we fully well expected. Also liquidation of equipment. As we've completed the projects we've taken the equipment and we've terminated leases, we've sold the equipment to get it off our books and we've closed offices and staff.

While the reduction of the staff, as you saw in the presentation, was a little over 230, nonrecurring would be severance cost and other separation costs associated with those staff. Equipment reduction or elimination. We incurred reasonably significant cost associated with that process. Both inventory, materials and equipment that we don't expect to be reoccurring, and offices that were solely associated with that civil construction business.

And just as a follow-up, if so much of these costs are nonrecurring, I'm surprised the second quarter earnings outlook isn't better than the first quarter. And are we really looking at third and fourth quarter combination are your typical seasonal? And by that time, are a lot of these nonrecurring items running off, and it is the combination of two that make the second half so much stronger?

One of the key things for this quarter we have, I noted earlier, both in the wired, which we have some weakness. We had to get off, and that can cost us. Significant. And which was not planned earlier. And that's number one. Number two is the wire. Wireless side, we're not trying to book any profit. And those are the two major reasons.

And so we expect this quarter, we're finishing those aspects, which is a major part of our (indiscernible) should we come back to the normal situation in terms of the margins, (indiscernible) third quarter and fourth quarter. Civil engineering part, civil infrastructure part which margins still lower than we traditional expected. So if you look at the margin (indiscernible) in the near term action for the changes of margin will explain why this is there. Third quarter, fourth quarter will be much better.

Thanks.

Again, that is star one if you would like to ask a question. We'll take our next question from John Quealy. Please state your company name and your question.

Adams Harkness, good morning. Can we talk a little bit about organic growth as we move through the coming year. It's been sluggish Q4 and Q1. Can we talk about what expectations are sequentially Q2 as we get into the seasonally strong back half of the year?

I would say organic growth. (indiscernible) in that part. Resource Management, we should expect some growth in that, probably 2, 3 percent, in that range, in that area. The (indiscernible) infrastructure, I do not expect much growth in that. Probably flat. Comparison is probably reasonable, but is probably more or less flat. System support services, (indiscernible) should be pretty good, because, in particular, we're going to get significant work in some of the second line defense all that. We should have significant improve in that aspect. And insofar as wired, we also have significant increase, so we should be -- because some cuts already going be gone this quarter. (indiscernible) will see is from the improvement.

What it amounts to is, in some ways this internal growth is the really tie into one. We have planned reduction going on on one side to cut it down. And then we have to -- to make up the difference, in addition, we have to go up. So, I would not expect it to be a large go up, but (indiscernible) taken care of all the anticipated reduction cut. So we're looking for probably, 2, 3, 4 percent type of growth, overall.

Okay. Should we see that improve each quarter or is that just a blended rate for the year?

I would say improve each quarter. And also probably occur not this quarter. The next quarter we start to. This quarter we still have some cuts to occur. So next quarter on, I will start -- and those cuts will be gone. Essentially, the minus part will disappear. Right now all the process, all affected by the minuses.

Okay. The second question I have, with regard to the federal budget, I know in the past you folks really haven't given much thought or concern over year-to-year fluctuations in funding, depending on department budgets, whether it is DOD or DOE. Can you talk a little bit about your outlook this year? There is quite a bit of debate out there on the relative strength of the defense budget as it gets released over the next couple of weeks. Can you talk about your -- can you comment there or talk about your outlook there? Thanks.

John, this is Sam Box. I would say that from a defense standing point -- spending standpoint and funding standpoint for DOD and DOE, obviously their budgets are about flat. Even DOE is up a little bit. I think what we're seeing here in the end of the fourth quarter, and through the first quarter, is, is a slowing of funding because of the administration and the election and the new appointees.

But overall, we're always concerned about the cost of war. But so far the funding has held fairly steady. And I expect that to continue as we continue to try it maintain the economy of the domestic U.S. while we're trying to also attend to the international incidents.

Another thing is probably, not the overall defense the part that affects us or not. It's really which aspects of the work we have. If anything, tie into security (indiscernible) governments pretty good, and (indiscernible) tie into the Iraq or Afghanistan pretty good. In fact, if we push harder, we could get more than we wanted. And some of that we have not. So, for secure reasons we accept only once of each year. Will be secure for us.

Okay. My last question, maybe for Sam, in terms of the restructuring, can you comment on how the activities are proceeding according to your expectations. And then secondly, with all of this increase in the internal control structure and things you've talked about today, will this help you folks come into compliance with Sarbanes-Oxley as we get to the end of the fiscal year?

With regards to the restructuring, I would say it has gone even better than I expected and Dan expected. We have had good receptivity by the operating units and understanding what needed to be done. And them, taking their role and achieving those goals. So, that's been very positive.

On the Sarbanes-Oxley side and the implementation of our contract review process, our good review process. And I would say, more importantly, the solid line financial reporting of the operating controllers all just strengthen our position with Sarbanes-Oxley and our ability to pass that test later this year.

This is David King. We are on schedule with Sarbanes-Oxley. We have substantially completed our Phase I documentation. And we're going through walk through and testing right now. And, so, I do believe we will be in compliance by year end, our fiscal year end.

Great. Thanks very much.

We'll take our next question from Min Cho.

Good morning. Friedman, Billings, Ramsey. A couple quick questions for you. First of all, the DSRs in the communication business, obviously, has improved year-over-year. But, sequentially it looks like it increased about 13 days. Is that still a Nextel issue or something you're seeing in your wire lines business? If you could just give a little more clarity on that.

On a comp basis, the workload is higher. And also, we suffer a little bit on the -- our wireless customers, calendar year-end. And so, as I mentioned earlier, we expect to recover some and liquidate some this quarter and the future quarters gradually.

Okay. Also talking about Nextel, the new amendment for this last contract, I believe the last time we talked, the contract was about $60 million for 500 to 600 sites. I was wondering if you could tell me what those numbers are now? And, also, if the decrease was due to Tetra Tech managing down? What they wanted to take on from Nextel? Or if it has to do with uncertainty regarding the Nextel, Sprint PCS merger?

Yes. This new amendment does have a range of 3 to 600 sites. And we do not expect Nextel and Sprint merger to impact our first quarter work flow -- first year work flow. And they are in the process of assessing their bill plan and their technology platform. And we believe, as we move toward the end of this year, they will have a better understanding about whose side will dominate and what technology platform will dominate.

As we move to the next phase of their bill plan, they are (inaudible) opportunity will be available to us. For example, the modification of the technology and existing sites. Once they determine what kind of site they -- what kind of technology they will use. So, yes, it's still in their range of sites.

Okay. Final question is about your margin goals per segment. Looks like the current goals that you stated today are mostly in line with what you've stated at the end of last quarter, last year. Except the security business, I believe we're looking for 8 to 9 percent margins and now that increase to 12 percent. Can you talk about what it is this, the new business you're expecting to get, the higher margin business or if you could just give a little more detail around that?

The actual results come out 15. That should have increased to 15. In some ways we're a little more conservative with 12 percent type of margin. And on (indiscernible) do pretty good. And we just hope that that will continue that kind of margin. But we want to be a little bit conservative to that. That's why we put 12.

Okay. I actually have one more question. Now that most of this cleanup is behind you, can you kind of talk about your outlook for acquisition?

In regard to acquisitions, we have not really concentrated as much. We do have a few in mind. But because of this -- all this is going on, we're not active to do that. But we expect that will come back about a quarter of (indiscernible).

Great. Thank you. And good luck.

We'll take our next question from Debra Coy.

Yes, good morning, all. A couple of questions. Following up on the issue of the underlying organic growth rate, Li San, you mentioned that you're looking overall, something of the neighborhood of maybe, 2 or 3 percent for the year. That would be impacted by some of the additional cuts as you restructure the business. Can you talk about kind of what you're seeing as the broader underlying growth rate. Certainly this is a company before the last economic downturn, even excluding communication was organic growth in the more 5 to 8, in some quarters even more towards 10 percent kind of range.

So, in a period of at least moderate economic recovery, it's kind of discouraging to hear that you're looking at an organic growth rate so low. Can you give a sense of, if you look at the water business more broadly, and even your traditional environmental business and the traditional infrastructure business, are you seeing some recovery in the growth rate that we can take this restructuring process out of the overall mix?

Let me mention about the -- this reduction (indiscernible) is so-called the restructure. Has impact us roughly about $40 million. Actually, in fact, it's caused about 10 overall revenue reduction. With accounts for roughly about 4 percent of all growth, internal product growth. And in addition, we put a lot of effort in the restructuring part and tha doesn't hurt us in the development of business.

That's what we recently tried to put together some efforts, tried to -- one side we clean some of the things on the other side to extend that. So, I would say right now, if we have that 4 percent -- without effect of the time we spent on this in the reduction or restructure effort, probably be 1 or 2 percent. So, I would see in a normal situation, we probably can get back to something like a middle finger digit type of thing. But this year we shouldn't be affected by both of those. I think if we can get back to 2 to 3 percent -- I feel it will be more prudent to say that.

And more than that, we may not be able to accomplish that. I think the key issue right now, we want to get that -- get back to profitability versus other than the growth rate. (indiscernible) But we do put some effort now, and particularly, Sam is going to take that effort and charge ahead and try to asses that and try to grow that (indiscernible). And also we are starting to audit some of the, from auditing the areas which have the long-term, the long term growth area. And all of those effort certainly affect overall gross. And, we're even more selective, too. And that's why I state in a normal situation (indiscernible) would be higher than 2 (indiscernible) but this is a not a normal situation.

Sure. I understand. I just wanted to get a sense of more the underlying trends that would drive the business over the longer-term. Secondly, along the lines of being selective, I mean it's, it's certainly getting tiresome for us, and I'm sure for you, to have to keep talking about this troublesome, unnamed wireless customer. And it's hard to -- it's hard to believe, David, that there isn't going to be any impact from the pending merger. I mean, this contract has just been trouble after trouble.

And I'm wondering about your commitment to this business, whether there is -- whether this -- we're going to have to continue to drag through on this thing for quarter after quarter. Whether you can really feel comfortable that it's going to get back on track. I guess, what I'm wondering is, frankly, why we're in this business at all. Given the size relative to your broader portfolio, it seems far more trouble than it is worth.

I do want to answer that in regard to the wireless. No doubt about it, we signed the contract. It was a tough contract. Unfortunately, the contract is in such a way we can't -- I don't want it, cut it off. And that contract has a Nextel system, they learned that it's probably their problems. They put the contract in such a fashion that we just can't even just walk away, just say, to [expletive] with it, take it. And we still have to live with that. And so, really, in some ways, we want to think we can get back to a better situation to see whether we can sell this part or that. But it is not an easy solution. If it would have been easy, would have done long time ago.

And right now we try to contain the situation on that. And we try to expand some, like why, I feel that we have a much better chance to -- in that business area. The customer is good. And also the contract is good. But this one, somehow we just cannot just walk away. And we're stuck in some ways.

Could you sell it?

The best we can do is to minimize less, I hate to even talk about it. We all sick to talk about that, and that's a problem. We have no choice, to let you know. This is our problem. And we just cannot get out easily. We're shrinking the part of business. But in a town associated with shrinking, it is called restructuring. It is always a little bit more surprise than we thought. That's why we're prudent to even not take any profit.

We have a pretty significant goal for this, so, in the event something went wrong, we have some money to cover that. And that probably costs us -- why our profit margin or profit -- the earnings per share not increase in this quarter, last quarter. As much as we originally anticipated.

Okay. And then on the wireless side, are we pretty much down to just the utopia contract? There is nothing else of real significance there? I mean on the wired side?

This is Dan Batrack. On the wired side, utopia is certainly the largest contract that we have. But we do have new contracts in our western utility unit in Chicago that is performing very well.

In our cable business, is our copper business, and Canada is strong and right on target with original projections. And actually, the domestic area outside utopia, our primary investment as a growth market in this business is fiber to the home. And we're negotiating a couple new contracts. They do look like they are profitable, it's a growing area. And there is large funding from the client base. So, it is not just utopia, although it is the single dominant contract.

Okay. So that business, you're comfortable with it.

That one, in all contrast, is very good, actually . We clean up some of old stuff, new ones we get the good receivables and also good profit. And to be honest, when we got wireless, I want mention one more time, Debra, we hate to talk about it. But I'm going to mention, we put a lot of attention to it. And, every time we talk it's almost the same problems, the receivables and the profit. But we are very careful, at least to the point there are no surprises, hopefully now going to happen. That's why we put all the reserves.

If I can add a few more comments, Debra, I think in telephone strategy, especially short-term strategy, is to manage it down, in terms of work flow, in terms of exposures, in terms of our accounting exposures. So, hopefully we will try to mitigate as much exposure or risk in the future.

Otherwise we would have much better results.

It is just unfortunate, because it is taking up a lot of management time in addition to costs and results. A final, just small question. The mix, in terms of how you count the mix on your customers has shifted this quarter, reduced what you're counting as government -- as federal government and increased what you're counting as private sector. Can you just explain that quickly? You used to be bout 48 percent. And now you're calling it 41, 42. Maybe Mike can explain that to me later.

Do you want to add to that?

It is actually because of some of the reclass of revenue due to the earlier prior period restatements, Debra. And some adjustment in revenue there. There was also an increase in commercial work. The first actual increase that we've seen in four quarters. So, commercial was coming back a little bit.

Okay. I'll talk to you about that offline, Mike, because it looks like a big change to me. Okay. Thanks, guys.

We'll take our next question from Richard Eastman.

I wanted to explore the second quarter revenue guidance, when we do the math and take into account AMT, it looks like organic growth will be down in the 8 -- 4 to 8 percent range. And I'm a little curious that seasonally and sequentially revenue decrease -- thus decreases, what's accounting for that?

Principally, Rick, we've had a, I think Dan mentioned a reduction of about 400 -- a little more than 400 people. You multiply that times -- actually, it's a little more than $100,000 of revenue per year per each head, that's about a $40 million reduction in revenue, or $10 million per quarter. So I think we were 235 to 245. We would have been about $10 million higher than that, had we not made those personnel reductions.

Well, I understand some of that's intentional. But, I guess, to hit your revenue guidance for the year, then, you are going to have to show 5 or 6 percent organic growth in the back half of the year on the same employee base. The question maybe is the same. That you need to see an acceleration in the revenue here in the second half of the year. Is that what you're planning?

Rick, this is Sam Box, I think that that is a normal process for us also. Our real seasonality impact -- positive impact comes in Q3 and Q4. And starts slightly towards the end of Q2. So I think we will see a major uptick there in our fieldwork and activities. That is a normal process for us.

Another thing, the minus signs, the cancellation part -- goes away. The intentional runoff in the revenue? All the reserve, all the issues which tie into restructuring it will go away or pass off this quarter. This quarter will still quite a bit of transactions taken off.

But irrespective of the head count -- and Mike, I understand your math. But you need more billings in the second half. And I guess my comment might be, does utopia partially offset this planned reduction, and then we see growth on the federal side? I mean, that's kind of the way we're --.

I think -- growth overall -- I think we've also had growth, Rick, in our state and local business, which is the first quarter here. And so hopefully we're going to see that continue to grow. And, as I mentioned before, we probably have reduced -- it's been mentioned we reduced or workforce. We expect to grow that workforce back also in the back half of this year as we see the seasonality, positive impacts kick in. And more revenue opportunity.

And then can I just circle over to the Nextel business for a minute. Can you just tell us after this renegotiation we have fewer sites. What kind of revenue is in the backlog right now? And how does that flow out of backlog in Q2, 3 and 4?

We have about 60 to $70 million in the backlog still. And each quarter we will be working off about 15 to 20 million. The next three or four quarters.

Okay. And why do we -- why are we continuing to build the reserve if we are currently comfortable with this renegotiated contract? I mean, what contingencies are you worried about?

We are building reserve for existing amendment, not the new amendment. And so we have not actually started work on a new amendment.

Actually, started really in place as of April.

Perhaps just -- every amendment, we treat them like one contract for accounting purpose. So what we're talking about is actually existing workload.

Is this 60 to to 70 million account for the residual on the previous amendment and the new one?

Just the existing one.

So the new amendment, the new 300 sites.

Yes.

Have that in backlog?

Officially will come in -- (indiscernible) started will be April 1.

(indiscernible) April on.

That's when it will come into backlog?

Pricing of that also will change at that time.

Is that also at about 100,000 a site or --

it is substantially higher than $100,000 a site. And our existing contracts also substantially higher than 100,000 a site. The new amendment we just signed there in general about 10 percent higher than the existing amendment.

Okay. David, what did you mean when you said earlier that you expect to collect about 20 million from Nextel in the second quarter. And then you followed that up with a comment that you also expected to liquidate some receivable as well. What are you talking about there? Are you talking about writing off a receivable or turn it -- the 20 million turns into cash.

Liquidate means, liquidate or reduce accounts receivable balance.

By the 20 million you collect.

Right. So, for example, what I meant is, we have a plan to work off about 15 million of gross revenue. We'll be receiving about 20 plus million. So, you basically can reduce your receivable by about 5 to 10.

Okay. And then just one last question. I think one of the slides talks about recompeting on some EPA programs in '05. Confident that you'll rewin these or maybe take some share. But what size of contract are we talking about? Is it unusually large that comes up for rebid?

They are large contracts, Rick, but they are not -- they are multiyear just as they were in their original form. All the government contracts have been reduced somewhat in size. But they will still be in the order of 100 million or in that range. Depending on the particular contract. But they will be long-term IDIQ type contract assignments similar to the work that we already have.

Okay. So they'd be follow-on.

Yes, exactly.

We'll take our next question from Matthew McKay.

Good morning, everyone. Just sort of looking at the margin expectations in your guidance for a moment here, I guess first of all, it would be helpful if you could quantify the charges, the nonrecurring charges you took this quarter, just so I get a little better sense for what the true margin can be?

We have taken out this quarter --

$5 million (ph).

Reserve. And additional reserve in exiting cost in what Dan talked earlier about, leases and equipment, people, and we do not believe these are recurring costs.

Okay. So total it is 5 million nonrecurring for this quarter.

Yes. And I believe I mentioned earlier we still have a little bit to go in Q2. In the neighborhood of probably about 2 or $3 million.

That's (indiscernible) $2 million of [2, $0.03](ph). And, that's why. We have not expected third quarter, fourth quarter (indiscernible).

Okay. That's helpful. I know you guys don't really break it out this way, but if, looking at by types of services, if you could just sort of help me -- really explain what the mix of maybe engineering services, higher margin engineering services were, versus lower margin program management services were in the quarter, in relation to a year ago? And how you expect that mix to sort of evolve as we move through the year here?

Last year we enter into a number of construction contracts which were lower margin, high revenue throughput. And we saw that revenue. We actually had to reserve or writeoff a lot of that revenue in Q3, 4 and 1. And, so, this year our mix has shifted towards the north, where the new jobs that we're winning are higher margin, IDIQ, cost plus. More engineering, science or research oriented contracts. And we have eliminated quite a few, probably on the order of, oh, $15 million a quarter or so construction contracts out of our backlog and out of our revenue run rate.

Okay. That's helpful. So really, so the gross margin you'd expect to sort of get back to maybe over sort of 20 percent?

Yes. Probably so.

Okay. Helpful. And then just going back to an actual earlier question, you know, the federal revenue growth looks like it just slowed significantly from almost 30 percent last quarter to basically flat. Is that just a combination of the Navy repeat and this reclassification, or is there something more in there?

Sort of a combination of things as the Navy recompetes as we mentioned earlier. I think it has to do with some election effects that we have encountered in the third and fourth quarter time frame and on into the first quarter. And I expect that now with the new appointments in the various departments, that we'll start to see that money flow again.

Okay. And then I guess just lastly, again, I know you don't disclose this, but just sort of talking about the pipeline, is the pipeline stronger than it was last quarter or about the same? How would you characterize it?

I would characterize it as stronger.

Okay. And that is just -- I guess just sort of follow up on that, with all the focus on reducing the head count, going through the restructuring, have you really had the time to invest on the business development side? Or has something else come up in the environment?

That's a great question. I would say in the last quarter we've obviously spent a lot of energy in the recovery mode between Dan and I, and really are going to be putting a full-court press on the business development side right now. But in some of our other major operating units -- we have to remember the whole company wasn't broke. Those groups have continued on full force with their own marketing efforts, and continuing to draw synergies between the operating units so that we're maximizing the potential effect attack overall to our marketplace.

Okay. So is it fair to say that you've been hiring people on the business development side and will continue to do so?

Yes, we have.

Great. Thanks a lot, guy.

We'll take our next question from Richard Rossi.

Good morning, everybody. You've covered most of my questions. But I do have a couple. You mentioned the SG&A costs were influenced by Sarbanes cost as one factor. Could you quantify that?

I'll plan for Sarbanes-Oxley spend about 3 million give or take a year. It has a lot to do with timing also at the end of the quarter. Most of the company in our size will be spending about $5 million, in the neighborhood of $5 million. So, roughly about $750,000 a quarter on the Sarbanes-Oxley spend.

Okay. Is there any relief on that side once you get past compliance, this first round?

I think most of it is going to be the first-time cost. If you look at life cycle, I believe the second year will be one-third of the cost.

Okay.

And that on a industry(ph) level, probably a million, give or take a year.

Okay. And sort of the same question with ERP spending.

Yes, ERP, our total [trans span](ph) on ERP is in the neighborhood much 20 million. And our first year, we spent about, about close to 8 to $9 million. First year I did mostly capitalized. About 80 percent capitalized. In the future year we maybe spend about four a year. Probably the next two to three years. FYO2 is the year two. And year two, year three and part of year four. Most of the spends, probably 80 percent will be expensed.

Okay. Other subject, how much Iraq work is in your backlog?

Right now I would say -- I'm going to give you a round number here. About $50 million.

All right. And does that include the win that you mentioned in your comments?

Actually, it is a combination of the win. Partially the win. Another contract that we're winding down now. And our captured enemy ammunition work.

Okay. And finally, having to do more with the future than last quarter, the weather out west seems to be more volatile this year than normal. And I know this is a seasonally low quarter, generally. But are you being more impacted this year by weather conditions in the western states?

I don't think so. Not much. If it is, we haven't really had too much complaint on that issue.

Okay. Well, that's good. All right. Thanks very much.

And our final question comes from Jeff Beach.

I just wanted to ask, the last two larger acquisitions you made of EMC and AMTI were looked at as being pretty high growth potential companies. Are you realizing real strong growth? And if you could, could you give us an idea how much growth is coming out of those companies?

Actually, somewhere in the 15 percent range we expected this year. And margins have been very good, actually better than we expected. We thought, at the time, the margin probably be somewhere in the 8, 9. But turn out to go over 10. So that's really good business. We also have some of the internal develops (indiscernible) also doing very well. So, that was a good acquisition. And we expect to further grow.

All right. Thanks.

This will conclude the question-and-answer session. I will now turn the conference backs over to Li-San Hwang. Please, go ahead. This will conclude the question-and-answer session.

I want to thank you all again. Certainly this was a relatively tough undertaking. And the one thing we want to mention to you are we pretty much conclude that part activity. The tough part. And still some mop-up that needs to be done. And we're expecting (indiscernible) this quarter some effect, and next quarter we expect to be pretty good.

Will be start to come back to a relatively normal situation. And we certainly, we do not forget about future expansion of our business. That's why we are putting some effort now in the concentrating the expand of business rather than try to limit some of the aspects. Our focus will be basically more in the water related aspect, the (indiscernible) aspects . Which we feel to have strong growth potential in the future. Thank you for your support.