Tetra Tech Inc (TTEK) 2005 Q2 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 Dr. 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 conference 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. The 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 risk factors that could cause actual results to differ materially from the forward-looking statements.

Tetra Tech undertakes no duty to update forward-looking statements. At this time I would like to inform you that all participants are in 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 Dr. Li-San Hwang. Please go ahead, Doctor.

Thank you. Good morning. I am here to report to you what actions we have taken during this period, during this quarter. With these actions, we believe, from now on we are on the way, on the road to recovery. Let me outline the actions taken below.

The first thing we have done is in regard to wireless business. The exit is (ph) under way, and we did the detailed planning, and moved forward. Later on will be a detailed presentation will be given by Sam and other people.

We also eliminated some of the unproductive assets, and this will also be outlined later on. Those include the offices which are not used for offices, and also some of the equipment and things like that, and what is the cost involved.

With respect to all continuing operation units, essentially all the units will be profitable as of the in the quarter (indiscernible). We also performed very effective cash management actions, and this already shows results, good results, during this quarter. We expect that will continue.

Now a look at what we're doing, is my focus in the marketing area, the internal growth, and also develop strategies how to expand our business rather than to try to solve the problems we have exit (ph). Let me go over some of the results, these other results we have done, but -- and I also will outline some of -- in the presentation to talk about what directions (indiscernible) we are going.

Let me go over some of the numbers. The revenue during this quarter is 292.8 million, which is $11.6 million. Among that is about $40 million are tied into (ph) some adjustments; and those adjustments, if not without that, it basically is a flat revenue quarter. So does the net revenue, too; with adjustment that would be about flat.

The income however was very substantial loss, which among that reflect the losses, operating loss of 56.7 million, and also 105.6 million impairment charges. As a result of that, (indiscernible) before the impairment charge, the operating loss is $0.66.

In relate to customer mix, because the reduction of the communication (indiscernible) the commercial part is significantly reduced, by 8 percentage points; and the federal part is significant increased, which is about 10% increase. So we're basically more than 50% of our work is in the federal government side.

Next one is growth rate. In the resource management part it's 1.2%. This is because also we have some adjustments in one of the contracts; without those adjustments actually the revenue growth is about 3.3%. The infrastructure, relatively weak. That means the total revenue growth is -3.3%. The internal growth is 16.1. As you know there is also some adjustment costs that drop. The communication part dropped 29.4% without adjustment; after adjustment actually percentagewise dropped a little more (ph). But basically without adjustment it is 29.4%; roughly about 30% (indiscernible) .

This quarter we have won some nice programs. One is the Navy CLEAN, which is $125 million; about 25 million a year; that is a five-year program. As I understand this contract will be closed before Sunday (ph) because in particular there are some base closure announcements going to come, and that is added to more work in this area.

The DOE nuclear port security, this is contract for 3 years. This we don't need to go over completely (ph). It is basically this will be ours in the next three years, and certainly there is potential addition of work in this area.

Another program is NASA and the supercomputer R&D program, which is we are managers of facility for this R&D supercomputing for the NASA in Ames. This is 50 million; 25 million a year, and that contract is already working on.

(indiscernible) New York Unified School District, that is a $7 million. That is also already working on.

Regarding our backlog, we have turned so far $37 million back to -- wireless backlog to Nextel. Without that, we are about 1 billion 16 million. The lease-off (ph) management, roughly about 3.6. This is on managing alone (ph); over a (ph) year-to-year backlog $3.6 million. By the way if we do not -- if we adjust the wireless or take the wireless out, the year-to-year growth is actually 4.6 million, if you took the wireless write-off of, the backlog off for the past two years. So our basic, our core business is reasonable growth. (ph) Then we have David to talk about financial aspects.

Thank you, Li-San. Again, this quarter communications dominated our loss. We also engaged in a high-level of accounting and review activities, which we will get into a little bit by Sam and Dan. We have also an issue in our infrastructure goodwill; I will talk about it as well. Meanwhile we do not forget about billing collections. Again that will show in the latest slide.

As Li-San mentioned, income loss on operations of $162.3 million reflects a combination of 56.7 million in operating loss and 105.6 million in goodwill charges. I will have a detailed slide next to give you the breakdown.

SG&A costs, it reflects -- the increase reflects some accounting charges particularly in the bad debt and legal reserve. This passed (ph) $7 million in the $50 (ph) million. The $6 million leases we talk about, unproductive assets; and this quarter we got out of a few leases and took some charge for it. And there was $1 million or $2 million in terms of Sarbanes-Oxley, accounting and legal fees that we stand on, on those SG&A costs. We expect the SG&A costs to be about 12 to 13% of net revenue in Q3 and Q4.

Net interest expense, the increase reflects amended interest rates. We expect in Q3 and Q4 the interest rate to be around 3.2 million. We are in the process of finalizing with our banks the amendment for the Q3 and Q4 and probably the following two quarters.

The taxes reflect the loss. We expect Q3-Q4 tax rate to be about 36.4%. The rate in Q2, in Q3 and Q4 it is a little bit different because of the permanent nature of some tax items. We can discuss if you have any specific question off-line on tax rate.

This is a planned variance. My starting point here is pre-tax income and loss. Again, let me just recap this, we have an operating loss of 56.7 million. We have a goodwill of 105.6, with total operating loss of 162.3. We also have an interest charge of 2.8; and give you a pre-tax charge of 165.1. I talked earlier about communication, particularly wireless, dominates the majority of this operating loss.

I will put it in two full (ph) buckets. Number one is the consolidation. This is the ongoing consolidation effort in the civil and wired communications business area. The severance charge, leases, the equipment write-down. Severance is about 1 million; leases about 6 million; equipment write-down is about 2 million; all-in is about 9 million. We expect the wired communications effort has completed and (indiscernible) infrastructure consolidation will continue into Q3 and Q4; and Sam will talk about that later.

The resource management, we have one unit. This a different than the unit that incurred loss in Q4 last year. This is a unit, it's a third-tier subsidiary of ours; and it is the one, only one subsidiary of ours. It started out a couple years ago in the environmental remediation. Later, last two years they got into some construction management.

Just want to (ph) review efforts. We have look at all their (ph) jobs, receivables, assets, and looked at some of the claims they have and some of the legal issues they have. We together took a charge of around $9 million on the unit.

Next group is the civil infrastructure. The first item is the goodwill impairment; I will talk about it in a little bit more detail on the next slide.

The next two or three lines is a revenue reduction. It is a combination of some units not achieving the revenue plan and also some planned reduction of revenue in this area; it accounts for about $4 million. It is also involving some job, detailed job review (ph), DAT (ph) review; account for about $3 million. And some legal issues and G&A costs, about $2 million. All together about 9 million.

Let me skip a little bit to the wired before I come back to the wireless. The wired business area is an area that we are putting intense effort to wind down and get back to our core competency. In the process, to complete this effort this quarter, we took a $1.9 million charge in writing down inventory and equipment. There was one charge that completed but with a cost higher than what we expected; we took some charge on that. All together, this area is $5 million.

In the wireless, I believe I mentioned we made a decision to exit this area. We have turned back a substantial portion of our workload. We also in the process assessed our costs to date, including cost to go, (ph) including contingencies; recorded a loss of approximately $38 (ph) million. Because of reduction of the workload, we also made adjustments to our contract value add costs, and recalculated our percentage complete, and recorded a revenue adjustment that Li-San mentioned of about $30 million in this area.

We believe the cost to complete the remaining workload is adequately provided for. In addition, we have built in our (technical difficulty) about $4 (ph) million of closeout costs as we wind down this business area. They will be reflected in our forecast in the future.

Next slide, balance sheet. Our receivable reflects a combination of strong collection efforts and, to a lesser extent, increased bad debt reserves. Unbilled, receivable reduction reflects a combination of our revenue adjustment and loss reserve. Also improved billing; we have during the quarter received $26 million from our wireless customers.

Payables, this is the area that's been our focus as part of our cash management, focus on pay when pay (ph), and will be our focus on an ongoing basis.

Our net debt reflects our strong cash generation. Our debt on the Senior Notes at the end of the quarter was about 106 million. Effectively at this level we have no bank debt. Or another way to put it is, in one year with our cash from operation we paid off our most recent acquisition.

Again, we talk about cash a lot, and despite the difficulty in this quarter, we have made a very strong effort to manage our cash flow. Our cash balance at the end of Q2 was about 79 million. Cash from operations, again, a record quarter at 53 million. We expect about 25 million and more for the entire year, for FY '05.

We continue to manage our capital expenditure. The Q2 is about 2.2 million. Then DSR, through the reduction of wireless business and our cash collection effort, we ended at 84 days. We expect this year and in the future to be in the 80s.

Goodwill, let me just spend quickly a minute or two on goodwill. We have $112 million in our civil infrastructure subsegment; and we have $63 million in our systems support and security subsegment. Total of 175 million. The basis of evaluation of goodwill impairment is based on the entire segment of 175.

Routinely we will do impairment in July 1 every year. Or if there are indications to warrant earlier testing, which is what we're doing this quarter. We ran through the FAS 142 evaluation involving a two-step process, based on a series of objective metrics, marketing metrics and some business assumptions. The results provided that we will impair our goodwill for about 106 million. Effectively, we have written down over 90% of our civil infrastructure goodwill.

Now I will turn the podium to Dan Batrack.

Thank you very much, David. I will provide a brief operational update of our second-quarter actions and the focus of our operations in the third and fourth quarter. During the second quarter, we took significant actions to exit the wireless business. Specifically we took an action to transition over 50% our largest wireless contract back to the client; and that single contract represents primarily most of the business that we have in that particular sector.

This has allowed us to take significant actions to adjust our staff and offices for performing the remaining work. So we've seen a significant downsizing and, as David and Dr. Hwang have stated, recognized a substantial write-down in projected revenues and profits on this particular program.

In addition to the wireless work, we largely did complete civil construction projects during the second quarter. We eliminated inventory and equipment. We recognized a pretty substantial number of office closings. We have closed six office locations with over 70,000 square feet of office space that we were committed to multiyear leases; so we have eliminated those, which has streamlined the operations significantly. We also took significant actions to close out nonprofitable projects either through negotiating exits, which also were accounted for in the financials that David presented just a moment ago.

Now in Q3 in Q4, for the reminder of our assist fiscal year, our focus is going to be on continued cost-cutting, and particular focus on bid and project reviews. First of all, we are going to focus on staff and overhead reduction; but that is largely going to be associated with reducing the staff and overhead as we complete these less profitable contracts and projects that we have. We do expect that we have identified these, and we will take these to closure over the next two quarters.

We are going to continue with additional lease consolidation. That has primarily been completed, but we do have one or two more locations that we think we have some additional opportunities. So we do expect that to be complete over the next two .

Quarters probably one of the key items that we are truly emphasizing both in the second quarter and as we go forward is an increased frequency and scoped of the monthly and quarterly reviews of all of our construction projects and our firm fixed-price contracts. Both the scope and frequency are going to be increased substantially, so that we don't have any type of variance that we have obviously recognized this quarter, and so that we can eliminate those in the future.

Finally, bid reviews as we go forward, we have implemented here two quarters ago fixed-price contract review for any fixed-price programs over $3 million. We're going to continue the competence review of these types of bids, and maybe more importantly we have made a decision not to enter into certain types of fixed-price contracts for certain construction type programs. So regardless of the value we have elected not to go back into these areas, even with the review.

With that I will turn it over to Sam for corporate initiatives.

Okay, Dan; thank you and good morning. I would summarize here first of all that this has been a difficult six months, but one that we have worked through, and I would say now let's look to the future. And with that I'd make one clear statement. We are focused on organic growth. That is important to us here in the future.

Looking at each of our operating segments, resource management, remains to be a very strong segment for the Corporation. We have identified and are resolving, as Dan said, operational issues in the one poor performing unit that we have had in Q2. We're continuing to strengthen our focus on client alignment as we move forward with the development of our business, with our existing clients and new clients.

A key focus area for growth for us here is in the international water development area, as well as other than tangential businesses to our existing business base. I would use an example of that is the second line of defense work that we have grown out of our existing DOE work.

In the civil infrastructure area, it was mentioned that we have strength in this area, both from an operational standpoint as well as financially. With the consolidation and we believe with what we see as a recovery in 2006 of the state and local markets, that we will see additional development of this business sector and returns of margins also.

Systems support and security, we have reported on this regularly (ph). That is a strong strong base of business for us. We continue to believe that, and it is growing for us as we speak. We are going to be strengthening the sales and marketing activity in that area to grow it, as it is a focus area for us.

In the communications, you have heard a lot about the exit of the wireless business. We're continuing on with the wired sector. It is performing very well now in all operational units. We will continue to focus on opportunities of Utopia-like projects with regard to fiber to the premise.

I think you're all interested in how we see the marketplace in the future. This next graphic describes that with regards to operating margin forecast. First of all, looking at resource management, in Q3, we will still have a little bit lower than anticipated -- or not lower than anticipated but lower than normal -- margins there due to the carry on of one low-margin project that has been mentioned already. But moving on into Q4 and Q6, we would see ourselves returning to the 10, 10-plus percentage margin in this business.

In the infrastructure area, we still are dealing with a sluggish market as well as the consolidation. We are forecasting 4 to 5% margins for Q3 and Q4. But in '06 we see a return of that business and the recovery from the consolidation, and put is in a 7 to 9% range on margins for civil infrastructure.

Systems support and security has been performing extremely well and we see a continuation of the performance in the 12% range.

For communications, as you know, in Q1 and Q2 we have had a recovery program there. The results for Q3 and Q4 show the effects of that recovery. They are performing very well in the 9 to 10% range; and we expect that that will continue on in 2006 at about 10%.

In the wireless area, I think we have said enough about that. I will move on with just a couple of my own closing comments here. We did make a strategic decision to exit the wireless business, and that came as a result of conversations with you all and our own internal focus.

We have performed a deep scrub on our operating units which is reflective of the charges that we're taking. And we have put in place and strengthened our work process inside the Corporation. I truly do believe that by taking these charges and dealing with the strong balance sheet that we still have, that we will in fact meet these goals for 2006. With that I will turn it back to Dr. Hwang.

Thank you, Sam. Looking back, let me give you some guidance and a summary. Look at the business segments now (ph). In the resource management, we have 63% from 57; that is up last (indiscernible) to be up 63%. Also the infrastructure is roughly about the same. And the communications, as you know, significantly reduced; that is because the wireless (indiscernible). We are expecting this. It is probably around 5% if we do not exit, we continue on wired work, which Sam pointed out earlier.

For Q3, we expect the revenue somewhere at 235 to 245 million; and we will make about $0.12 to $0.14. In Q4, 240 to 250; we expect to be $0.16 to $0.18, which is a little more recovery from Q3. We expect next year there should be further recovery and improvement.

In summary, I would say we basically accomplished or largely accomplished all the business restructuring efforts, and our concentration of our time will be devoted more in the growth of the business and getting to the areas which we believe will be long-term growth for us. So after this is done, we certainly will enhance our financial performance, as David pointed out earlier, some of that earlier. We expect all of units aside from the wireless part which will tie into the restructuring, some small costs are associated with that, and be profitable.

Our DSR we are driving hard, are going to be in the 80s. As I also mentioned earlier we are going to really focus in the water and systems support and the security in this area, which we see as a long-term growth for the Tetra Tech. Now we will go back to questions and answers.

(OPERATOR INSTRUCTIONS) From Adams Harkness, John Quealy.

(technical difficulty) Moving forward, Sam you talked it about qualitatively, can you give us a quantitative range by sector or business line, if you could?

I'm sorry, John. We missed the first part of your discussion. Can you repeat the question?

Sure. Sam, you talked about, qualitatively, organic growth initiatives. I was wondering if you qualitatively lay down some expectations by business segment or unit for us, in the back half of the year here.

I don't have any -- you want quantitative? Right?

That's right. It looks like your guidance is basically flat on the top line. I just wanted to get a better understanding of, by business segment, how each of those contribute to that overall outlook.

I think if you, just looking at the operating margin numbers here, we will continue strongly with resource management and recovering in Q3 and Q4 from the one poor performing unit. Looking forward to 2006 and getting back to our 10% margin range for that operating unit.

The civil infrastructure area is -- obviously the growth there is going to be driven by the improvement of the state and local market; and seeing the results of the reduced overhead and operational consolidation that we have taken on in that sector; and eliminating, with the return of the market, eliminating some of the competition and improving the growth potential there.

Systems support and security as we said is very strong and we consider to see that continue strong and as a growth area for us. I think we have talked enough about the wired and wireless here. I don't know if that answers your question, John, but is a summary of where we are at.

Certainly makes sense for the back half of '05. I was trying to get a better indication of what you were thinking of for '06. What an expectation could be for the business for top-line organic growth in '06. That was really my main point there.

I think if you looked at organic growth, in looking at resource management, still the low single digits or mid single digits for research management. If we can perform as we are expecting to perform in the international market, that is upside potential for us.

Civil infrastructure in 2006, clearly by the consolidation that we are doing, and if we get an improved market as we expect, and we have upside there on organic growth also. Systems support and security, that is a focus areas for our growth, and in 2006. We are seeing the growth today; we should see something in the 10% area for systems support and security.

Two more questions if I could. First on the cash flow side of things, David, if I heard you correctly, you are looking for 25 million in operating cash flow for the full year. My math says year-to-date you are about 10 million positive operating cash flow. Can you just give us an indication in the back half of the year what the breakout is going to be per quarter? Because I still think you need about 23 million in cash for some of these onetime type nonrecurring charges?

Right. I see in Q3 we will -- most of the cash flow is going to come in in Q4. Actually I did mention that we expect to be over 25 million. But I see Q3 there are some jobs that, for example, our wireless job will bee -- we are performing the job but there will be costs will be incurred in Q3 and Q4, and that is what the number you were talking about. There will be probably a reduction in Q3 and Q4. But we also expect to make money in some other areas. So I expect Q3 to be pretty (ph) on the low side but most of the money coming from Q4.

Okay, great. The last question, in terms of growth initiatives, you spoke on the international side on water. But can you give us a little more detail whether that is new business for you folks internationally, or potential for acquisitions there? Thanks very much.

John, no, it's not new business and it does not involve acquisitions. The business growth there is we have focused on particular contracts and clients that take us abroad. One of the specific contracts that we have recently won -- it was announced in last quarter -- was a US AID contract and we are already seen the dividends of that win in assignments on an international basis for our water sector.

So we are not focused on acquisitions to do that. It is using our clients and our contracts that we have won and can win in the future to make that extension.

Also I can't add a little. The base closures (indiscernible) announced and the business is going to come, and we have had a lot of contracts already in place. If this thing, money spent, we should get a better share of in that area. So that should be -- we expect some growth in that.

By the way I mentioned earlier the resource management backlog actually is about 3.86% increase actually. So certainly that would contribute part of the growth for the next year too.

Great, thank you.

Debra Coy, Stanford WRG.

A couple of follow-up questions. Can you just give a little better sense in looking forward? Sam, I think you helped us out on the organic growth. Certainly organic growth has been a concern. Can you give a little color on what you see as the initiatives that Tetra Tech can take to refocus on organic growth?

Obviously partly you're going to get some demand back, particularly in the civil infrastructure market. But are you seeing that there has been a lack of focus, a lack of marketing effort, given all the changes that the Company has been through in the past year, and that there is some room for improvement on your own internal efforts that can improve growth?

The answer to that is unequivocally yes. Obviously the effort that has gone on here in the past six months since Dan and I came into the organization, we have obviously been diverted significantly with regards to taking care of problems and aligning the Corporation for the future. So we now are in a situation where we will be able to place much more energy to the future and development of new business.

I would say that, put a little more specificity here, we have an opportunity, I still believe, in resource management, to really maximize the potential of an already well operating unit in developing new business and getting ourselves better aligned overall inside that operating segment with our clients and the development of business. So while we are doing very well there, I think that we have even more potential.

We have about talked about water and moving abroad with our clients and placing more focus on that. That is going to be an energy-consuming activity for us in the future. As well as in the systems support and security area, I believe that we can even gain more value out of that segment by, again, maximizing the potential of our two primary operating units in that sector with AMTI and EMC.

But also equally importantly in the systems support and security area, and just the whole national security or homeland security program, is getting better alignment overall inside the corporate mission (ph) to get all the activities that are going on in resource management, as well as in the systems support and security area to really maximize the potential of that marketplace.

Okay. That helps. Then just a quick clarification on the water side. You are talking about following existing U.S. clients, primarily government clients, overseas. You are not talking about going and sitting on contracts in countries with foreign clients? Is that correct?

It's correct. That is exactly correct. We are doing some work in China right now, but the predominance of the work will be moving abroad with our existing client basis, which will typically be government clients like US AID and others, and doing that under good strong government contract conditions.

Okay. Just turning, David, to refocus again on the cash flow outlook, again just to clarify. Your 25 million outlook for the year does exclude -- or does include I should say, all the restructuring charges which you have laid out here in your presentation as being about 56 million total for the year.

Yes.

So we could conceivably say that the existing business excluding restructuring charges should be generating on the order of about 75, $80 million of cash.

Some of the -- I think that to a large extent that is correct. But I want to also revisit what John and you just asked. (indiscernible) to go cash expenditure will be spending over an extended period time. It will not all be --

It is not all restructuring? Okay, fair point. But largely -- because to me the critical thing to try and understand is what is the cash-generating potential of this business, looking ahead into 2006? I can remember the peak of when you were generating 90, 95 million in cash two or three years ago. It's been much tougher over the last couple of years as to whether you think can get back to those levels of cash generation on your business as it is going to be structured going forward.

I expect on a normalized basis in '06, we will be looking at 50 to $70 million range.

Okay, fair enough. Perhaps this also speaks a little bit to the organic growth outlook. Can you give some color on what you're seeing in terms of additional bidding opportunities in the pipeline in addition to the ones that have mentioned that you have recently won?

And related to that, as the Company becomes increasingly levered to federal spending, I think is a lot of concerns about pressure under current budget situation and this administration, about whether we will see reductions particularly in environmental-related budgets and generally budget pressure overall.

Can you speak to what you see as the funding outlook for your key programs that you're involved with? And number two, kind of what you see in the pipeline for additional bidding opportunities, both government and private?

On the government sector, Deborah, I will call it the remedial space in the government sector. I would be remiss if I didn't say we haven't seen some effects of the cost of war; however it has not been significant. We do you have a lot of program in the pipeline, both in the Department of Defense as well as looking forward to the Department of Energy, and a significant amount of programs right now that are in the rebid phase. We were an incumbent for EPA.

So a lot of activity and bidding activity going on. As Li-San mentioned, there will be a new round of base realignment and closures, and that will automatically funnel work back into the environmental remediation sector of our business. The water side of our business has been very positive, and the funding for it in the space that we are in, and in the water side of our business -- I'm not talking about the government side -- has been very positive also.

Across various agencies, not just EPA?

Right, right. So we are strong there. Also, in the area of systems support and security, we continue to see the strength there in that funding sector. So I think I would say overall, in our base sectors we haven't been significantly impacted by funding. But where we have been impacted, if you took some of our Department of Defense programs, where it is clear -- while it is not advertised as such -- there has been some rechanneling of money directed towards the cost of war, we have been able to capitalize on that by participating in that market.

So our participation in areas like Iraq and Afghanistan have offset some of that reductions and is performing well for us. We see the reconstruction work in Iraq continuing, especially under our potential business under our Air Force work contract that we have received a significant amount of business already and look forward to new funding under that program.

Okay, thank you. That's helpful. I will get back in line.

From Robert Baird, Richard Eastman.

A couple of questions. I just want to understand in terms of the accounts receivable adjustment in the quarter, it was 33 million. I think 3 million went against the resource management revenue. Of the 30 million balance, how much was infrastructure? How much was comm?

Can you repeat your question one more time?

33 million was taken as accounts receivable adjustment in the quarter; 3 million was against resource management revenue; and how much of the 30 -- how does the 30 million balance split out between infrastructure and comm?

The communication is about 30. Oh, net revenue? Communication is about 20.

Then 10 in infrastructure?

Yes.

That's fine. The systems and support business, how big is that right now on an annual basis? What was the growth rate in the quarter?

Rick, it is about 10% -- it's actually right at 10% of net revenue right now. So it is about a $200 million business plus, and it is growing in the high single digits.

Okay. 200 million in net revenue annually is systems support and security? It's got to be half of that.

(multiple speakers) Oh, 120, I am sorry.

(multiple speakers) separated out; there is some embedded in the other areas.

If you just took the subsector of systems support and security that we are reporting under infrastructure, it would be about 110, 120 million.

And the growth rate is in the high single digits?

Yes.

I have a question on -- are most of your headcount reductions, the large portion of headcount reductions, were they accounted for at the end of March?

Yes, they were. Most of the reductions were accounted for at the close of March.

So when I look at your Q3 net revenue projection of -- call it -- let me pick the midpoint, is 240. Okay? If I annualized that number, if we look at it on a headcount basis, and we say net revenue per hour per headcount, I am getting like the 960 million in revenue. Net revenue. Is there any reason that that wouldn't be a good proxy for '06 if we are using roughly the same headcount going forward?

I think you're right.

On that basis, the first half of '06, just by definition we have to absorb the headcount reductions. We're basically going to -- if we end up the year at maybe 3% organic growth, the first half is still going to be impacted by the headcount reductions. Is that fair?

The first half of '06?

Yes. I mean, through March, we are going to -- year-over-year we are going to have fewer bodies and we are going to have less net revenue per body. So the first half is going to the affected by the fewer people; and the second half we should start to grow.

On a year-to-year basis that would be correct. On a year-to-year basis we will have a reduction in headcount up through the second quarter. However, much of the headcount was on unprofitable work. So we will see a reduction in net revenue per head; but we will see a corresponding increase in the income, as we have eliminated those heads but we're now performing work in a more profitable manner.

So profits clearly up; but we may struggle to show net revenue growth until the second half of next year. Year-over-year net revenue growth?

Yes, that's correct.

Okay. Can you tell us how big the wireline business is, just on an annual basis from right here? Are we talking about are we in the 40 or $50 million range annually? Wireline?

5%, by the way, we (indiscernible) during this quarter we have tried to do is subcontract more out; and we just perform the management. So we expect net revenue will probably be about 5%. 5% of 1 billion, so --

So about $50 million?

In terms of the total gross revenue probably in the 70 to 100 million, which is mostly subcontracted out. (indiscernible)

Sorry, just one more question on the wireless business. It is still kind of not clear to me. We have turned half? We have this arrangement where we turned half of the business back to Nextel. Is that -- what happens to this phase IV April contract that was supposed to come into the mix? Is that what we turned back, or is it part of that?

This is Dan Batrack. We had a total of approximately the mid 800s sites or what we call rings that we were currently under contract to perform. It was currently under contract and it had been awarded to us, and we took a responsibility for it in previous quarters.

The arrangement was that we took just over half of that amount of work and transitioned it; and we are at the completion, we are at the tail end of transitioning over 400 of those sites back. We have committed to, and we had been previously obligated under contract, to perform the works on the remaining areas, just under 400 sites.

We will take (ph) completion. We have not taken in Q2 and we do not intend to take in future quarters any new rings our new additional sites under this contract.

So that contract that we're talking about that was supposed to kick in in April, we just are not -- that is -- we declined it?

We took a very small number of sites in the 10 to 20 range, and we stopped.

Okay. So the amount of business that we have left to bill, I know we have got 400 sites left to wind down over the next 12 months or six? How much net revenue is that? Is that $50 million of net revenue?

It's closer to $20 million of net revenue over the next 18 to 20 months.

Okay, all right. 18 to 20 months? Any of that both revenue and profits or whatever, breakeven or whatever, all that is going to go against the charge anyway? So is that --?

That is correct.

There will be no more profit on that contract.

And no more revenue recognition, correct?

There will be some revenue -- as I mentioned earlier, we adjusted our contract values so there will be remaining workload that we can book revenue on.

So we booked the revenue, but we will book no profit.

Right.

Great, thank you.

Cory Greendale from First Analysis.

Just a couple questions. First of all, by my calculation, it looks like the net revenue from state and local markets, that has been kind of stable over the past several quarters. This quarter it looks like it came down some 8 million sequentially. Were there any of these contract kind of write-off issues going through there? Or was that kind of internally down 8 million? Can you just talk about that market in particular?

As I mentioned in my earlier slides, it's about 6 to $7 million is a planned reduction, in one or two are missing their (ph) plans. The other $3 million has to do with EAT (ph) adjustment, revenue adjustment. That is part of our project review.

So if they are looking through the kind of underlying strength at state and local market, are you seeing weakening there or is that nothing really changed?

Actually we saw two trends. In civil infrastructure, the market weakened year-to-year, and that is partially the result of our consolidation, our planned consolidation in that business. In the resource management business, we saw growth in the state and local business; and that is directly related to an increase in water-related consulting activity for those states.

Okay. Looking at the backlog overall, you gave this 4.6% growth comparison pulling wireless out of both quarters. You haven't said what the backlog did sequentially, if you pull wireless out of the past quarter (technical difficulty).

It's right here. Sequentially if we took wireless out, there's (ph) 4.6% growth overall.

Okay. Sam, it's been -- I think you implemented this kind of bid review process a couple quarters ago. Can you just talk about how that process has gone, how it's been helpful? Are you catching bids that might have gone out in the past that didn't go out as a result of the process? Or making changes to bids as a result?

All the above. I think it's been very successful. People are beginning to understand the importance of that. I would will just give you an antidote (sic). We were reviewing one project that a unit was proposing to bid, and as we moved through the bid review it became evident that the information that was available was not satisfactory, based on the questions and the responses. And that particular (ph) business unit decided to no-bid the work.

That is what we're looking for, is people to focus on the quality of the scope of the product that they are bidding on and their understanding of that scope, and ability to price it; and if they can't to pull away from it. So we have good evidence of that.

None of the poor performing projects that we have talked about here or that we have taken charges for in Q2 are result of any bids that were submitted since we have instituted the new process, both on bid reviews as well as our overall contract review process that we put in place. So I believe that we have significantly strengthened, and in fact these programs are working to eliminate or minimize any potential future of these kinds of programs.

Just one last quick one, for David, actually. You mentioned the bad debt being up. Can you quantify that at all? I assume by definition that relates to contracts you haven't written off. Can you just talk about why bad debt is up and what in particular that relates to?

Together with Sam and Dan, we look at -- we do the project review. We look at not only the project EAC (ph), but also we will look at the billings and collection activities, to make sure we scrub everything comprehensively. As a result, we took a charge out -- the bad debt area is about $5 million, together, in this quarter. There are some in the contract adjustment; there are some in the G&A costs, as I mentioned earlier.

Are there particular -- so it's not commercial customer bankruptcies or something like that?

It's comprehensive across all segments.

All right, thank you.

From Jeffries & Co., Matthew McKay.

First of all, I guess just going back in the communications side, something that has not been talked about yet. What are your expectations over the next couple quarters on Utopia and how that project has been going so far?

On the projects side, (ph) both our first-quarter forecast was about $3 million; we had the revenue and profit margins anticipated. Second quarter we estimated 5 to 6 million, about doubling; we hit that right on the mark. We did anticipate a forecast of about 10 million on Q3 and 4; we believe we will be very close to that. Looks like both the funding and the build is going right on schedule.

Good to hear that. I guess just to make sure I got the wireless side here. It looks like the communications segment overall you're expecting to run about 16 million per quarter in 3 and 4Q. Is that correct?

Yes.

Given that with Nextel you have got 400 sites that once you are done over the next 18 to 20 months, that is assuming it's going to run at -- sort of go down a little bit. How should we think about '06 on a quarterly basis? Can you continue to run 16 million per quarter, relatively flat, or is it going to decline a little bit? You also mentioned that you were going after some other wireline business, so where is the growth coming there?

The wireless side of the business, on the Nextel, in 2006 will wind down from the front to the back of the year. So we will see a degradation of revenue in '06 for the wireless side of the business. On the wire side of the business, the Utopia project -- assuming that this continues on well today, as well as they get there their additional funding -- that program should continue to also move forward about level.

Then any new work we can pick up for Utopia-like projects, which we don't have anything in the forecast right now that is specific, but we're looking for additional opportunities like for fiber to the premise, for communities to continue on.

Just another note. We have entered into new contracts with Verizon as one of the first geographic areas. We have an $8 million contract we entered into earlier in the second quarter. It is just starting up now. And we have new regions that we have been asked to participate in. So that is another fiber to the home program that we expect to be growing quickly over the next few quarters.

Great. Just how much in accounts receivable is there for Nextel at this point? Given that you have gone through a lot of renegotiations with them, is that pretty much locked down in terms of the timing of those collections? Is there any risk to them going away or having to take additional provisions?

First we have, as I reported earlier, we have received $26 million in Q2. We're progressing with our plan to continue to work that down. Also as part of this contract value adjustment and loss reserve, we have adjusted our billed and unbilled receivables. At the end of Q2 we are under $25 million both billed and unbilled receivables. We just received $2 million earlier this week, so it is actually down, trending toward 20 million.

Okay, so it sounds like you have pretty much sorted out the collection procedures and anything that was being negotiated in the current contract on the collection side.

Yes, as far as the process, as I mentioned in the variance page analysis, we also included in some of the scenarios in our contingencies (indiscernible) some of those events, if something may happen against us.

Okay, great. Just this is more I think for Sam a question. Have you completed -- I know you have been running around a lot in the past six months to various parts of the country reviewing all the operations. Are you pretty much complete on that review process? How much more do you have to do?

That is a great question. We have as a result of the efforts over the last six months done, together with the finance side of the house and the operations side of the house working together. we have done a very deep scrub of each operating unit and their projects.

We believe that we in fact have gotten to the bottom of the issues and have appropriately taken the charges and actions necessary both from personnel standpoint, a work process standpoint, and status out of the ongoing work as a result of these charges that we're experiencing here on this call today.

Okay, good. Now that it sounds like you are kind of at the tail end of the review process, and actually changing the controls systems, office closings, getting out of contracts, nonprofitable contracts, I think you said before you had about another few offices to close. It seems like --just looking, I think you have got quite a few offices in the country. It seems like there is potential for even more office closings beyond just a few in the near-term future.

What we're doing from an overall real estate maxima (ph) standpoint is we are looking at each of our regional areas where we have multiple offices, and are attempting to consolidate those as leases become -- wind down; and incorporate our operating units into common spaces where we can reduce the overall cost of operations. So that is a continuing effort that will be ongoing year-on-year for us, as we move through these lease completions.

Okay. Just some of the other. Is there a potential as you sort of actually work through some of the other, either change in systems or renegotiation of contracts, is there any -- what is the risk that there are some other skeletons that sort of come out here?

We believe we have reserved, as a result of our deep scrub here, we believe we have reserved for the skeletons that you are referencing. I would add one additional comment also, that we are implementing a significant training program inside the Company, and the audit process that is moving forward that we believe will improve, continue to improve the operational effectiveness of our bidding process on our projects as well as the performance of the work and the results.

Okay, great. Just sort of a final focus, over on the credit agreement, I think you probably tripped a few financial covenants with this quarter. Where -- just if you hit some of the high points of what changes are being made on the credit agreement side.

Yes, we have been in active discussion with our banks, and most of these banks have been with us for a long time, and they are pretty much lenders in our space, and they understand our fluctuations from time to time. All have indicated their willingness and also schedule to meet in terms of making the amendment process. We are in the final stage of completing the amendment process; expect that to be completed in the next two weeks.

Okay. Your guidance is I think 3.2 million in interest expense over the next two quarters. Is there any chance that that interest line actually goes up as we finalize this credit agreement?

We are pretty much at the stage that we can't give you that forecast right now, that is why no forecast was given.

Okay, great. Thanks, guys.

Min Cho from FBR.

Most of my questions have been answered; but just a specific question related to the contract with Verizon. Can you tell us what market that is with or what market that is in?

The Pacific Northwest. Oregon.

Okay. What type of margins can we assume for the project management role for the fiber to the premise type of rollouts? Because it seems that the construction costs are going to continue to increase as demand from the RBOCs for fiber deployments continues to increase. Are you writing your contracts in such a way that you're not really impacted that much by increase of construction cost, just leaving that at the subcontractor level? Or can you just talk about the margins and what you are seeing in the construction cost going forward?

What we have done before entering into these remaining contracts is we have locked up our subcontract base at fixed-price. So any escalation of risk is being borne by the subcontracts who have been locked on through the period of the contracts we are performing. The margins we have forecasted just over double digits, 10 to 12%; and we recognize those on (indiscernible) contracts we have in place, and believe we have assurances and commitments from subcontractors that are actually underwritten. Either (ph) maturities or some other mechanism. So that we are not leaving ourselves exposed to that particular area.

Okay, thank you.

From D.A. Davidson, John Rogers.

You have talked a lot about what has happened in the past quarter, and into '06. But is it just too early to talk about some of your new areas of growth that you may be looking at over the next couple of years? Obviously you have got your hands full with what you are doing right now. But in the past, you have been pretty good at identifying opportunities a couple years in advance. I was just curious about what you were thinking about.

Overall, if you look at overall we are moving toward more in the water area, which is we are strong (ph) and actually quite a bit of opportunity currently under bid. In the other area, it is more in the security area, which actually there's a lot of programs. Some of them we mentioned earlier (indiscernible) million that we have done.

In some other groups they are doing some of the biological-related work and some areas dealing with the monitoring of port-port (ph) security. And all of those have significant expansion possibilities. In fact we are bidding on some of these, negotiating some add-ons, all this kind of thin.

So our concentration at this time is going to be mostly in that area. Certainly the other areas related to the infrastructure we see a lot of programs going on, bidding on. And as time goes on we feel that the market conditions improve (indiscernible) will stabilize that. But mostly our major concentrated growth is as I mentioned earlier.

To get into those areas, can you grow it internally? Or would you have to go out and start looking at acquisitions again?

Mostly right now we are (ph) concentrated to expand internally; and we do look at acquisitions. But I think that right now our concentration is how to get internal parts strengthened first. So we are also developing the marketing activities, trying to push more into that whole area.

Thank you.

Richard Eastman with Robert Baird.

Sorry, I have to circle back to this cash flow question. David, the 25 million operating cash flow that you're projecting includes how much of the 56 million total cash cost of the charges? On your variance analysis table, you have total cash -- out of 165 million in charges, 56 million is cash. Require cash. If you are saying 25 million is your forecast for this year, how much of the 56 million are you absorbing?

The remaining, the balance of the year I am seeing, out of the 22 million, around give or take 10 million will be absorbed for the year.

So if I take the 25 million, in that number you're absorbing the 33.6 that says to date; plus another 10 million; so that is 43.6 in restructuring cash out; plus 25 million. And I'm going to end up at 68 million would be my operating cash flow for the year?

You are to a large extent correct. Most of the 33, $34 million has been absorbed, and to most extent -- there is some that has to do with prior year, but most occurred this year. So you are to a large extent correct.

What is this? I don't get the headings on this. It says cash to date. Does to date mean as of March 30 that you have already expended 33.6 million for restructuring? Is that what that is telling me?

Yes. We have already spent those money, either in the prior period or some of the charge was taken (indiscernible) already reflected in that number.

Okay. Then it will take another 10 of the to-goal (ph) amount by year-end; which leaves a carryover of just call it roughly 13 million that you would have to absorb in '06.

Yes. For example, like these charges they are more accounting charges than cash charge; and we will continue to expire those leases and in some cases sublease those spaces. So it is still a future cost.

That's fine, that answers it. Thank you.

This will conclude the Q&A session. I will now turn the conference back over to Dr. Li-San Hwang to conclude. Please go ahead, sir.

Certainly this time a lot of numbers. If you feel that we have not answered you in detail, you can certainly contact with Mike and we will supply that detail to you. I now conclude the meeting here. Thank you very much for attending.

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