Tetra Tech Inc (TTEK) 2005 Q4 法說會逐字稿

Good morning and thank you for joining us. By now you should have received a copy of the press release. If you have not, please contact the corporate offices at area code 626-351-4664 and we will get one to you right away. With us today from management are Li-San Hwang, Chairman; Dan Batrack, CEO; Sam Box, President; and David King, CFO. They will provide a brief overview of the results, and we will then open up the call for questions.

As a reminder, today's call is being recorded. During the course of the conference call, Tetra Tech's 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. Such statements are only predictions and may differ materially from actual future events or results.

Tetra Tech's Form 10-K and 10-Q report for the Securities and Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements. At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation. With that, I would like to turn the call over to Li-San Hwang. Please go ahead, Dr. Hwang.

Thank you, thank you very much. Good morning. My name is Li-San Hwang, the Chairman of Tetra Tech. Before our new CEO is going to give you a detailed presentation of the Q4 and 2005 results, I would like to say a few words.

This year is a very tough year. We have changed operating managers, and we also exited wireless business, wind down two other units, and also divestiture three noncore business units. We look to finance (ph) a very significant contractual losses charges.

However, it is also a year of accomplishment. We have now instituted a new CEO now, and we have a Vice Chairman coming aboard to help us in operations, some of the operating matters, and we have new President, and stringent financial and program control systems. Finally we have improved profit margin and our ROI is one of the highest in Tetra Tech. We reduced the net debt down to only $65 million.

Let me just mention a few aspects, how we select the CEO and how, a little bit about who Dan Batrack is. With this whole selection process we hired a professional organization to help us go through the extensive selection process. We interviewed over 50, well over 50 selected candidates, both compared to the outside and internally, in detailed assessment. We also interviewed ourself, all the operating managers inside. The final Board unanimously elected Dan Batrack to be CEO.

I also would like to mention about who are the other people. Sam will be staying (indiscernible) the President. He will be focused in some very important programs which he has contributed as significantly been in with programs all that, in addition to support Dan's activities, he may be focused more into that area.

David King will be CFO. Al Smith, he is most likely -- he is the Vice Chairman right now; most likely will be a Chairman of the Board when I retire to become Chairman Emeritus in March 2006.

With this arrangement, I am very comfortable that Tetra Tech is in good hands and will continue for future growth and vitality. So I feel very comfortable to do that.

Now, let me mention about Dan; he has been working with Tetra Tech over 25 years. He has done an outstanding job all along the way. When we have issues, he has been -- time to time (ph) he delivered more than we expected. He has a business acumen and a deep understanding of Tetra Tech. He also very successfully led this restructuring effort. In addition, he already put together some of our new growth initiatives and to move forward, which is an area which we have to put some effort on. Dan, now I would like to turn that to you.

Thank you very much, Li-San. I would like to thank Li-San and our Board for this opportunity, and I am personally very excited about Tetra Tech moving forward. I think this is among the most exciting times ever in its history, in the time that I have been here.

I would like to start the presentation with a few words about our strategy, both the strategy that we embarked upon in fiscal year 2005, and that we are going to take on into 2006. The first that we did begin this last year was refocusing Tetra Tech on its core business. This is largely complete now, but it has been a lot of moving parts this last year, and I would like to provide just a comment here on some of the results of the change in the refocus in the business.

Back in 2004, before we embarked upon divesting, discontinuing, and to winding down operations, we finished 2004 with a gross revenue that is an important number for Tetra Tech, because it included a lot of construction projects, but a gross revenue of just over $1.4 billion closing out 2004. That was prior to our exiting these noncore businesses.

2005 was really a year of taking down these businesses, removing the nonprofitable projects, removing much of the unpredictability from our business. We are entering 2006 in accordance with our guidance of a gross revenue of just over $1.2 billion. In aggregate that is a reduction of approximately 15% that's directly associated with, again, the discontinued operations, the wind down, and these divestitures. That is a key point, that this revenue was intended to be brought down and does reflect a leaner, more profitable operation.

Our second strategy, which falls out of the first, on refocusing on our core business, is we're focusing on improving margin and cash generation. You will see from the financials that we have reported in Q4, we have achieved that; and we expect that to continue to improve.

Finally, one of the key strategies is investment in growth. This is something that needs to take upfront that will show longer-lasting results and show overall a healthier operation as we go forward.

I would like to start with an overview of the revenue from our continuing operations as they were reported both in the fourth quarter and also showing the trailing eight quarters of data. Overall, as you can see, our revenue was flat. What this really reflects is that our internal growth was offset by the reduction in our noncore business, discontinuing of operations or divestiture of businesses. So overall, while it has been flat, it has been masked to a certain extent by the discontinuing operations that we have shed at this time.

The overall operating margins, while our revenue has been flat, from our continuing operations we're beginning to see increases back to our historical levels of operating margin, which is one of our key focuses in the Corporation. We do expect to see this continue to improve through fiscal year 2006.

Obviously, the increase in margin has shown from continuing operations a substantial increase in our earnings per share from ongoing operations. On a aggregate basis, we did report $0.16; but that does show you -- that does reflect the impact that we have had as an advantage or moving forward by shedding these nonoperation, noncontinuing operations. We expect that this will continue to grow in '06 in accordance with our guidance.

The next area, which really reflects Tetra Tech's best performance overall, is on our receivables and overall resulting net debt. The reduction in the net debt. The elimination of our noncore business, specifically construction projects, the high-risk slow-paying accounts that allowed us to reduce our receivables, reduce our overall aged accounts, the days receivable outstanding, and also generate the resulting cash. This has become very, very important for us as we move forward. It is going to allow us to have more cash to redeploy and begin to reevaluate our acquisition strategy in 2006.

Backlog. Backlog from ongoing operations. I did highlight this at the beginning of the presentation. Exiting the noncore businesses, again, through divestiture, which we have completed -- three operating units have gone through divestiture in the fourth quarter. We're still in the process of moving operations down through the wind down process, the winding down that will move into discontinued operations in this first quarter. This flat backlog, and as you see it over these past eight quarters, the reduction is a result of moving out of these businesses, these high-risk businesses. So this was a proactive anticipated process.

Now, we can increase our margins by changing our core businesses. But obviously our future is in the markets. What markets we can take, where we can invest, and where Tetra Tech has a competitive advantage in our core businesses. Right in front of us in the near term, we see an extraordinary opportunity in the core businesses, areas that Tetra Tech has a core competency and is a market leader.

Certainly one of the areas that Tetra Tech has built its business on is in the water business. The combined sewer overflows or CSO is a very large business driven at the municipal level and with regulatory changes. We believe just the portion that Tetra Tech would address is a $20 billion business. It has a 20-year horizon, and it is an area that we are poised to make significant inroads in, in the very near future. And an area we are investing in.

Obviously, BRAC, Base Realignment And Closure process, over the past 10 years Tetra Tech has done more than $700 million worth of business, worth of revenues in this area alone. We think with BRAC 2005 it represents a unique opportunity for Tetra Tech in the immediate future for us. We're already seeing funds be released from Department of Defense into this area.

Finally, there are short-term impacts from Katrina and other natural disasters. But we do think one of Tetra Tech's very beginning core competencies, flood protection, shoreline protection, engineering, coastal engineering programs, is an area that Tetra Tech has unusual strength in. We think this is an area that will be a particular opportunity not just in the next few months, not on an emergency response basis, but actually a shift in the marketplace in funding. With that, I would like to turn it over to David King.

Thank you, Dan. Let's look at the first slide on the financials. As Li-San and Dan referred to earlier, during the quarter we have or are in the process of selling three operating units. There are two in Communications presented here, and one in Resource Management. We accounted for the three units, for accounting purpose, discontinued operations.

In addition, we have shut down and are in the process of winding down two more units, one in Communications, one in Resource Management. For technical reasons these two are not accounted for as discontinued operations during the quarter. The right three columns, you can see their respective revenue and backlog impact. These are what I call net (ph) revenue and workload and we have done (ph). In FY '06, I see our revenue base much more core and much less multi (ph).

Next slide please. Our revenue has experienced some reduction, and that was principally because we exited our noncore business. The same reason applies to the net revenue reduction. However, it is particularly the acceleration of Communication exit driving a large part of that reduction. On EPS, we made guidance of in the $0.15 to $0.17; we were at $0.16. As Dan referred earlier, on a continuing operation basis we are $0.22.

Income statement. As Dan referred earlier, our operating margin has improved to high single digit, to almost 8%. During the quarter, we were also able to exit some business that took some charges, which were offset by operating strength in our core business.

SG&A, as we reflect, we continue to manage costs and despite the fact that we incur additional cost in the Sarbanes-Oxley, we are at the end of Sarbanes-Oxley exercise. Again, as we continue to manage our costs, we will also reallocate resources to invest in growth.

Our interest costs, you can tell that they reflect minimal borrowings, despite the higher rate during our menem (ph) process last few quarters. Our tax expense was reduced by our divestitures. Our tax rate this quarter is somewhat complicated by divestitures which create some book and tax differences and impact our tax rate.

We have a very good balance sheet story. You can tell from our receivables base, we improved business mix, and we managed -- we continue to focus on D&A (ph) collection. On deal (ph) you can also clearly tell the impact of noncore and Communication business. We also have much better contract terms compared with last year. You can tell from our balance sheet that we have significantly improved some of our billing and acceptance costs. It is clearly showing that the contract term is much better and stronger than before. This is pretty much a result of effort that we put in place to improve our processes.

On the total revenue basis today, I believe that we have very strong receivables base and much better matched and aligned with our revenue base. For example, our seaway (ph) infrastructure business is about 22% of revenue; on a receivable base they are about 21% of our receivable base. Resource Management, about the same alignment. Communication and other noncore businesses are no longer a, what I call, dragging (ph) factor to our asset turn (ph).

Our net debt, Li-San has referred to earlier. It just continued to show the strength of our cash generation. I see this favorable trend to continue in FY '06.

Cash flow, we have generated from operations 32 million in Q4, and our goal was 10 million. We generated for the whole year 48 million. We anticipate 40 to 50 million in FY '06. If there is any lesson I learned in the last three years at Tetra Tech from Li-San, it is that cash is king. I still get it.

Capital expenditure is also a good story. We will continue to control, and we no longer have those asset inefficient business in our portfolio, so we do not need to spend a lot of money on CapEx. DSR shows it's a record efficiency; and I see FY '06 we should stay in the low 70s. I will give the podium back to Dan.

Great, thank you, David. I would like to provide a few words on our view of the overall business environment. Simply put, we see that as very strong going into 2006. Maybe most importantly, we see as very strong in the areas that we have our core businesses, and we are well positioned to take some growth and some movement into.

First of all, we have seen for our infrastructure business, some of our environmental support programs at the state and local funding is strong. We see that it is up. We have actually seen that turnaround, and we are seeing strength in our infrastructure business. So that has been a very strong sign for us. Also, commercial spending for all of our programs is up, which is also a good strong indicator.

I did mention a bit earlier that BRAC is providing some very strong opportunities for us. We have seen some initial funding in some of the advanced studies for BRAC. We are seeing it in two areas. During the previous BRAC rounds, Tetra Tech was very fortunate and was very successful on the environmental side. This time we're seeing not only the closure portion but also the realignment, which is giving us new opportunities on the infrastructure side.

Obviously, the water market is really the core of Tetra Tech. Due to new regulations, demographics with folks moving into new areas that are requiring new construction, I did mention earlier the combined sewer overflows, storm water programs. And a new approach that the regulations are requiring, integrated watershed management programs, which really allow the infrastructure to take advantage of the science and the upfront resource management programs that we have already on hand.

Finally, natural disasters. This is not only domestically here, in the United States, but also internationally. Play to our strengths, shoreline protection, floodplain management, and coastal engineering. Those are areas that we believe are not short-term benefits but long-term benefits for the Corporation.

With respect to guidance, obviously we have distributed guidance here, issued it. This guidance does reflect a leaner, more profitable organization. We feel very good about that across the entire Company. We do believe that it is also more predictable.

I would make one note to keep in mind here below this. Built into the guidance is assuming an effective tax rate of 43% for 2006. This is partially a result of stock option expensing.

Finally, in summary, going into 2006 Tetra Tech has a very, very strong foundation, as David has just presented in detail to support an excellent balance sheet. Certainly, the cash generation will allow us to look into the acquisition field again that we haven't -- that we didn't explore at all in 2005.

Higher profitability, more predictability, and finally -- and this is really one of the key items -- extraordinary core business opportunities that are right in front of us. I am not so sure that I have seen this many opportunities for Tetra Tech in the areas that we are positioned with clients, with military bases, and with core service areas in water. I am not quite sure when I can't recall that. So we expect to see big things in our immediate future. With that, I would like to turn it back to the moderator and to open it up for questions.

(OPERATOR INSTRUCTIONS) John Quealy.

A couple quick questions here. In terms of finishing up the realignment, can you give us an indication of first-half, back-half '06, when you think all these activities should be mostly done?

Yes, this is Dan Batrack. I believe that this calendar year we should largely complete the winding down of the remaining operations. So we expect that the impact of continued divestiture, ultimately these winding down operations, will be converted once they meet the accounting definitions into discontinued operations. But we expect that to be a Q1 and possibly a nominal movement into Q2. But this calendar year we expect that to be concluded.

Great. Dan, moving to the organic growth rate, can you give us an indication of what you feel is a decent expectation for fiscal '06 for organic growth, both out of Resource Management and the infrastructure business?

Overall, our focus for fiscal year '06 has not been growth. That is an area that we are investing in now. It's an area that we're going to put a priority on. But certainly the investment does take some time to see direct results. We can make much quicker turnaround with a focus on invoices to generate cash. We can generate operating margin by the way we're running the projects right now.

We are moving substantial investment of our discretionary dollars into the marketing, into strategic initiatives. But we are looking for overall a nominal growth during '06. Certainly, we feel that some of it will be offset by the first quarter, where we will have the winding down and closing out of operations. So we do think on a long-term basis, through a combination of internal growth and acquisitions, our goal is up to 15%. But we do believe that that is longer at the end of '06 and on into the future.

Great, my last question, mergers and acquisitions. Looks like you may be getting the appetite back. Can you comment on any specific sectors that look attractive, or how you're going about that strategic plan?

We're looking in the core business. We're not necessarily looking to diversify back into construction. We're going to stay away from that. Can certainly assure you of that. But we are looking at two items. One, in our core business, we see that we are an attractive partner for many of the larger candidates out there. We know that certainly in the water business and other sectors, they are looking for the right partners through the acquisition process.

We also are looking for larger than smaller. We certainly went through the '90s at a rate of better than one a quarter for many, many, many years. That process of integration has been best with the larger units. Less volatility, more reliable backlog, better-established management, and better overall synergies. So we would say we would look for a core business and larger rather than smaller.

Great, thank you.

(OPERATOR INSTRUCTIONS) Richard Eastman.

Robert Baird. Dave, could you just address, in the quarter the Resource Management margin? I think pro forma restated came in at 6.8%, which feels quite low. What kind of restructuring and maybe where is embedded in that number?

Thank you, Rick. We had two units within Resource Management that were a substantial impact on Q4. One, we actually accomplished a divestiture. It was our group that was performing reconstruction; so it was associated with historical losses, including a police station and others historically. So we completed the divestiture in Q4. That was a Resource Management segment unit that has been completely removed from the Company.

The second is we are going through a very aggressive wind down, which we hope to move into a discontinued operation here in first quarter, of a construction remediation group that really focused on pure construction work. Very similar to the unit we just divested; and it had a substantial impact. We believe it will not have a material impact on Q1. So we will see that come back in Q1. But Q4 was from Resource Management sort of the worst of it that we expected to see in that sector.

Can you just give a sense of -- like I am presuming that you are talking about restructuring dollars or charges flowing through that Resource Management op profit line. Can you just give a sense? Was it 3, 4, $5 million? What would a number look like that would not repeat in the first?

It was about approximately 4 to $5 million, and it was not all in restructuring with respect to discontinued ops. Some of it was discontinued operations; some of it was in wind down. (multiple speakers) reflected in continuing operations due to accounting treatment of the operation.

Here is the number I am trying to get at; I'm not trying to complicate this. But if the discontinued ops, that is not in that 6.8% op margin that is reflected in your spreadsheet? So I am just trying to get a sense of what is included in that number. Was it half of that then, maybe? Was it 3 million?

It was closer to 3 to $4 million, that is correct. That was concluded included in the continuing operations, Rick.

Yes, okay. That is for the piece that will be discontinued in the first quarter.

That's correct.

Another question I have, the Communications business now will be merged into infrastructure. Could you give us a relative size? Then also I am going to again assume that this margin that you showed from continuing operations in Communications probably that is not a real margin in the sense that there is probably some backing off of the charges or reserves. Is that a clear question? Relative size of the Communications business going forward, and the margin at 18.5% I would presume is not sustainable, that that is probably more of a 10% margin business going forward.

The overall on a gross basis, it is about -- it is less than 5% of our overall revenue base. It will be, as you said, consolidated into -- our intent is to consolidate it into infrastructure. We think on an ongoing basis actually a little better than 10%, probably up around the 12% margin.

Okay, great. Just a last question. I know this is difficult to get at as well, but the backlog number I would have thought just seasonally would have improved fourth quarter over third. Did it do that when you strip out the noise from the businesses that are winding down?

We actually have looked at that. We believe there was a slight increase. We believe it was a couple percent; but it was offset by the wind down operations that we're continuing to remove backlog from.

Okay, I will kind of go with that. But the federal side of the business did show a little seasonal bump in the backlog?

It did, yes.

Okay, very good. Thank you.

(OPERATOR INSTRUCTIONS) Cory Greendale.

First, actually just following up on that last line of questioning, just to put a finer point on it, could you just give some sense of the kind of full-year margins, just going by Resource Management infrastructure, you would expect in '06?

Our full-year margin will be in the very high single digits, over 9%.

You're saying for the overall Company?

Right.

Can you break that out by Resource Management and infrastructure?

The Resource Management will be on the high end of single digits; and infrastructure will be similar, a little bit less, maybe 8% or 9%.

8% or 9%? Okay. The way I am looking at it is, I think during your comments, Dan, you said something in talking about the EPS that it shows improvement, which is expected to continue in '06. The way I look at it, I just kind of assume that you get kind of the midpoint of the range this next quarter; and then assume that you get kind of flattish EPS in the September quarter of '06. It looks like you are just going to kind of be flat Q1, Q2, Q3. Is that actually what you are anticipating, or -- given your comments about the growth really being in '07 not '06 -- or am I kind of reading that wrong?

On an EPS basis, we do expect a quarter-to-quarter sequential quarter increase through the year. Typically our lowest EPS quarter is our first quarter, where we have the effects of the holidays. Second quarter certainly some of the seasonality of weather; and then things pick up in the spring and summer, with our highest quarter in the fourth quarter. So we expect that as far as a ramp up, a normal year.

Is there any reason to think that Q4 would not be up year-over-year from the $0.22 from continuing ops that you reported this year?

We do have a lower revenue base on a year-to-year basis. We will be taking out some revenue here in the first quarter as part of the winding down. But we do expect it to be in line with the guidance that we have provided.

Okay. Then I actually had just one quick question about the acquisitions, knowing that you're not being too specific yet. But given kind of the parameters, would that be paid for with the debt, do you think, as opposed to using stock at these levels?

We would consider either, depending on the stock.

Okay. Just one last one. David, can you give us an update on the ERP system rollout?

Our ERP system is again on budget, on schedule, and this is a big year for the ERP implementation. By the end of this year, we expect 70% to 80% of revenue in units will be on the ERP system.

Okay, thank you.

Richard Rossi.

Morgan Joseph. A few things. One, in terms of your SG&A and the SOX impact, could you give us again a little history as to how that progressed through fiscal '05, and whether you think it will be flattish in '06?

The first year of SOX is the most intensive. We expect in FY '06 the effort on SOX will be half of the effort and cost compared with the first year.

So you expect it to be down as much as 50%?

On the SOX cost.

Is that including the internal cost that you may be absorbing by adding people, etc? Or just the accounting cost itself? The outside accounting cost?

They are internal costs and they are outside costs. As you know, outside costs including the audit cost and other consulting cost. I foresee that outside cost will be substantially reduced. Internal cost, we still have a lot of compliance work to do and documentation work to do. So that reduction will be not as large.

But you expect that to be down also though?

Yes.

Okay, all right. Good, thank you. I am a little confuse; maybe I misunderstood. But according to the handout, the diluted earnings guidance is before 123R. Is that correct? I thought I caught you saying in your comments that it included that impact.

The earlier statement is correct. We have excluded the impact of stock expensing and 123R in our guidance.

I presume you're also looking at those programs now. If I were to look in the Qs and see what it has been running, should I assume that that is about the impact? Or do you anticipate that because of changing programs there may be a meaningful change in the impact going forward?

The impact, accounting impact, book impact on the 123R should be between $0.08 or $0.09 to $0.10.

Okay. All right. Moving on to operations, obviously, the Gulf Coast market, the activity there is going to be considerable. It is going -- there's a lot of money to be spent. It will pull a lot of capacity in the industry into that market, and you certainly will have opportunities there. Have you seen, however, any indication that, because of all of that, that in areas outside of those directly affected by the hurricane, the opportunities, the programs going forward are being pushed back any, reduced any, because of the limitation of funds as much as anything?

That is an area we have been very sensitive to. It was an area we were sensitive to during the war effort also, looking for diversion of funds from our standard programs. We have not seen anything material. We have seen some variability and we have not been able to trace it back directly toward reduction of funds to be reallocated to FEMA and the other recovery efforts. But to date we have seen, if anything, a very nominal impact.

Okay, and just one other thing. Again I may have missed this. DSRs, you are looking at low 70s going forward. But I didn't catch the cash generation number. Forecast.

It is 40 to 50 million for FY '06.

Okay, good. Thank you. That's it for me.

Debra Coy.

Just to follow-up on the growth outlook, Dan, you said nominal growth for fiscal '06. But you also said that some of the near-term bidding opportunities that you are seeing are as strong as any you have ever seen in Tetra Tech's history. Can you tell me sort of what your bidding strategy is at this point in the turnaround transition? Are you being cautious on what you're bidding? Or as your sort of streamlining units, are you bidding fairly aggressively? Because it does seem that the organic growth in your core end markets should be more than nominal in fiscal '06 overall.

Well, I would like to preface a response with the number one priority of this team and myself is to make sure we hit every guidance that we provide. That is a very top priority; and we want to make sure that we are not outside that objective. So I want to make sure that I preface it with that.

With respect to being aggressive, we think we're well positioned. We're not being aggressive with respect to pricing. We're not being aggressive with respect to moving outside our core areas. We do believe that many of these programs from our experience we could have a win.

We are midway through the first quarter, and we believe that many of these large programs that if we're successful in certainly take a quarter or two quarters to begin to ramp up. So even with large wins and successes, both on projects that we are rebidding in our core business and new programs, it would be new wins; it would be new contract capacities, but we are being judicious in our conversion of those to revenue.

Okay, fair enough. So I guess the bigger picture question, which you somewhat addressed, but when we look back the good old days of Tetra Tech, back when the core resources division used to have organic growth in the high single digits and sometimes higher, is that the sort of thing that Tetra Tech can get back to? You quoted a long-term 15% organic or 15% growth rate including acquisitions. Maybe you could give us kind of what you would foresee as a breakdown of organic growth versus acquisition growth to get to that 15% target.

I did have the pleasure of being here through those days; and I think that is exactly where we want to get back to. Of the 15%, we would see a 5% to 7%, maybe even higher, organic growth number. If we are looking at about half of that 15% internal, organic, probably the other half would be through acquisitive growth.

Okay, that helps. My other question is, can you talk about the federal budget outlook? Certainly the Bush administration has been making an effort to cut budgets? We're seeing the DOE environmental budget continue to come down. EPA is on the flattish slide. The DOD budget is obviously hung up this year in the appropriations process. What are you seeing coming out of your federal programs?

Well we have seen the offset (ph) of some of the programs being reduced with special funding for areas like Iraq, (multiple speakers) Tetra Tech had substantial revenues. With Katrina, we have approximately 200 to 250 people on the program. So while we are anticipating there may be some reduction in potential core, our core business through the federal sector, one, we haven't seen it; and two, we have seen it rediverted to areas of special opportunity that we have been successful.

Just one other note. We have seen that while the overall federal funding is going down, areas such as water, water quality, and some of the programs that we are heavily based on don't appear to be at the front end of that cutting process.

No, that's true. And BRAC, of course is an exception as well. I guess my final question, Dan, along those lines, you mentioned BRAC as a large $12 billion opportunity. Can you give a sense -- and it is hard to break these numbers out of the huge DOD budget -- can you give a sense of what you see as the potential, say, two-year opportunity on BRAC? It is a big round of closures.

We think that we haven't become so detailed to focus on it in the next one to two years. But we do believe over the next 10 years it is approximately a $6 billion environmental program, a $6 billion infrastructure program. We have in the past seen a fair amount of variability in how quickly they ramp it up. That is why I'd be cautious to provide specific revenue forecasts over the next 12 to 24 months.

But we have seen funding through the Army Corps of Engineers with respect to the Army; and some from the Air Force on early funding for environmental studies. We have been funded under those authorizations.

Okay, but what you are saying is, of that 12 billion, it is fairly back-end loaded in the last five years?

I think it is bell shaped. It is bell shaped, so I would not say (multiple speakers).

In the middle period?

Yes.

Okay, that helps. Thank you.

John Rogers.

D.A. Davidson. First question I have is just relative to the numbers in the spreadsheet. What was depreciation in the quarter?

The Company as a whole, it is slightly less than -- it is between 1.5 and $2 million.

Okay, so it looks like there's a $12 million number in here.

The full year?

For the fourth quarter. But David, what does that number look like going forward?

10.

$10 million annually?

Yes, for FY '06.

Okay, great.

Because we have exited a lot of the heavy equipment kind of business in the communications and construction, as we stated earlier.

Okay, okay. And then, I guess slightly a bigger picture; could you talk a little bit about what you see is Tetra Tech's mix of business? Two years out from now, what is the thought on primary customers or market sectors that you expect to be divided up among however you want to do it?

We think that the mix will be similar to what we have now, just scaled up.

Okay. So the split between homeland security, water, some of those -- is it similar to what you're seeing now?

We are seeing homeland security as an area of opportunity, but certainly for Tetra Tech and I think much of the industry, we have not seen the explosive growth in the actual funding. We are seeing it be a robust growth, but certainly not to make it disproportionate with our other core businesses in resource management such as water or BRAC. So we're seeing sort of equal opportunities across those sectors.

Okay, which would suggest the acquisitional opportunities would be spread within those sectors as well?

That is correct, yes.

Okay. Okay, great, thank you. Li-San, appreciate all of your work there.

Thank you. Thank you very much.

Matthew McKay.

Good morning, guys. First of all, congratulations, Dan, and also Li-San, you must be feeling comfortable now that you're willing to past the reins here.

Yes. Well, you know, we do have good people now, and they all are effective. So I feel very comfortable, so I am going to have time to fixing my own schedule.

Good, good. Well, enjoy your retirement when you get there. I just wanted to -- just going back to the guidance a little bit. And on the clarification, if I just simply straight-line the low of Q1 guidance, net revenue 215, I come out to 860 million for the full year. And given the low end of your full-year guidance is 850 and your previous comment that you expected growth sequentially throughout the year, is there something in there, a potential recompete or something, that you're worried about?

No. No, certainly I think if you straight-line Q1, we do see a ramp-up sequentially during the year, and I think that is well within the annual guidance we have provided for net revenue.

I guess the question then is just why go as low as 850 on the low end? Why not go to 875 or just show some modest growth?

Well, certainly we wanted to provide ourselves some window as we go forward, and we have found sequentially we will have some ramp-up. We actually did -- we did this time model and provide on an aggregate basis a little bit lower Q4 in the plan.

This is David King. I think the Q4, the current quarter that we are reporting now has a reduced revenue base, number one. And number two is, I think using a straight line to forecast our revenue is (indiscernible) seasonality. So every quarter there is some increase in our revenue base.

Yes, I was just kind of trying to use the most conservative approach, just trying to highlight the Q1 guidance relative to the full-year guidance. There just seems to be a little bit of a disconnect in there.

Right.

Have you guys made a decision on the wireline business? It sounds like you are leaning towards retaining that piece of the business?

The wireline business, on a collective basis we have downsized it dramatically. It has gone from a high point of probably the mid-20s on a percent basis of our overall business to less than 5%. It is all very profitable. It is all located with just a few clients that are paying very quickly. It has very favorable margins that are providing a great contribution, and actually does have some applicability to some of the homeland security and the systems support activities we're doing.

So we will move it into infrastructure, and it is actually contributing and we're being very selective on our clientele and where we're going with that. But so far, very solid.

This is David King. Let me qualify one thing. One of the analysts earlier mentioned that we will be merging our wire communication into our infrastructure. I think we need to meet some technical definition and criteria; and operationally, it is our plan intent to manage them together.

Okay.

Are there any more questions?

Jeff Beach.

Long-term average or let's say most years, you have generated an operating profit margin in the low to mid teens, and your guidance for the current year is for 9% plus. Is the market in 2006 offering a double-digit margin and you're still getting your businesses in line, reducing costs, doing things that are preventing you from reaching that margin? Or is that where the market is right now relative to the late '90s all the way through 2002?

Well, there's certainly two effects. A part of our lower guidance is a result of the continuing winding down of select operations through Q1, and certainly at the latest at the beginning of Q2. But it's a very near-term process that has been built into the guidance. I don't know about the mid teens in the near-term, but certainly double-digit and low double-digit margins certainly are in place in the marketplace. But certainly additional pressures probably would question the mid to upper teens that you were saying, that you were referring to.

All right, thanks.

Next question? Well, if there are no other questions, I would like to provide a closeout of this quarter's call. First of all, I would like to personally thank Li-San for nearly 40 years of leadership with Tetra Tech. He has done a job that is unparallel not only in Tetra Tech but the entire industry, and has taken Tetra Tech to a leadership role in the industry, one of the largest firms in its entire sector, and still the envy of almost all of our competitors out there on an operational basis.

I would also like to thank and provide appreciation to all of the investors for staying with us this last year. I know that had to be very, very difficult. It was a difficult time through this restructuring to come out with predictability, and that is what we are intending to provide from this point forward. So again, I would like to thank all of you for staying with us and for giving us support not only today but into the future.

With that, I would like to close this call. Thank you very much.

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