Tetra Tech Inc (TTEK) 2007 Q1 法說會逐字稿

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

During the course of the conference call Tetra Tech management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning future events in 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 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 now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack Jack.

Thank you. Good morning and thank you for joining us today. I'm happy to announce our first-quarter results for fiscal year 2007. First-quarter actually produced very good results across all sectors and on all metrics. And a few of the metrics that we track here quarter to quarter as revenue, our revenue on a year-to-year basis was up over 8%; net revenue, primarily labor, 6.6%; operating income up nearly 25%; net income 17.5%; and our backlog which is one of our key metrics is a representation of the strength of our overall business, is up just under 19%.

I would like to note that all of these metrics, all of the financials were generated organically. There were no acquisitions or other contributions in the first quarter.

Our overall client mix, our portfolio mix in the first quarter did change on a year-to-year basis a bit and it primarily reflected our increased focus on the federal market. A year ago in the first quarter we were about 45% and this last first quarter of the year we were about 48%. Overall our state and local business was about level and our commercial work grew slightly.

Probably the noteworthy change in our three segments Infrastructure, Communications and Resource Management, mostly Communications continued to be a bit smaller. It went from 5% of our overall business mix down to 4%. That's a bit of an increase in the revenue within our Resource Management. We did finish our first quarter with net revenues at 244.9, about $245 million for the first-quarter.

The strongest performance we had from our clients on the first quarter in net revenue was in the federal sector and that was primarily with the Department of Defense. And it was really broadly across all sectors of the Department of Defense. We had strong performance in growth in the Army, the Navy, and the Air Force and also the Army Corps of Engineers, both domestically on a lot of different coastal engineering projects. We will cover a few of those rewards we've had a bit later.

State and local business was down just very slightly so about even and growing commercial business. I did mention this last quarter that we were going to renew focus and emphasis on our commercial business and we have done that and we will see results here in these out quarters.

I will note that on the federal business it does represent to our entire organization an overall lower risk, faster payments from our clients which will help cash flow and finally larger and longer contracts. So we really think that it adds a substantial amount of stability to the organization.

Significant wins since the last earnings call we've had about a quarter ago reflected significant wind in our core business. We booked overall more than $300 million in new orders this past quarter, many of them were on the water-related programs. Most of these have been press released but Destin in Florida waterfront improvement program of $20 million; Cincinnati in the state of Ohio at CSO, consolidated sewer overflow program -- we were one of the -- we're the only contractor that won all five service areas, a $20 million program; a new multi-year EPA program for the RCRA and water support programs out in the West at $17 million; and a $15 million additional past quarter for the Navy and Hunter's Point which is the San Francisco Bay waterfront remediation program.

These programs all reflect the emphasis that we started a year ago on water related programs, federal programs. A quarter ago, I announced we were going to renew our focus on commercial work. We have -- it wasn't in the first quarter but we are currently negotiating a large commercial contract with the automotive industry that we are very close to completing. So I think we will see very short turnaround, short term results in the renewed focus on the commercial sector.

The backlog in the first quarter was up 18.6%, nearly 19% on a year-to-year basis and the increase in our backlog on a year-to-year basis was broadly between both Infrastructure which we saw an increase and Resource Management. So it is in our core business and largely associated with water, water programs. There was a slight decline sequentially and that is a seasonal effect. We see that every year at both the federal government and state clients -- do to relatively few awards during the holiday periods.

The first quarter did set a new tone for the company. Recently we announced that subsequent to the first quarter the acquisition of two very small firms, one Vector Colorado, which is primarily an engineering firm about $7 million in revenues, about 50 engineers. And it substantially expanded our mining consulting business, engineering, water resources, water retention and balance of plant work.

This allowed us to have additional resources in mining. It's driven largely by the commodity markets which we see very strong. And give it access to some key clients in the mining industry, very large multinationals, Barrick, Newmont, Phelps Dodge and others.

Second acquisition we had was Soil Testing Engineers that we just announced here this past week; annual revenues of just over $5 million and it's a Gulf Coast, a Louisiana based firm focused on geotechnical engineering. This added additional resources down to the Gulf. We've had substantial wins down in Louisiana, Mississippi and the Gulf Coast, a lot of work that we have to perform with the Army Corps of Engineers and other large federal clients. And this has geographic presence in Baton Rouge, New Orleans and has about 50 technical engineers also down in this geographic area.

So we think they are both very nice additions to our resources. I would want to note this is not representative of our acquisition strategy. These were simply excellent additions of resources, access to clients and some additional geographic presence we didn't have.

With this I'd like to turn it over to David King, our Chief Financial Officer, to give us a bit more details on the quarter's financials.

Thank you, Dan. This is a good revenue backlog quarter of a good revenue and backlog growth. We also have a lower overall operational risk all wind down and exit efforts -- we're nearly complete. And we had minimal surprises in our earnings. During the quarter we experienced a favorable legal development, I will talk about it. Cash generation continued to be very strong and we used part of it to pay down our senior notes.

Revenue grew from $341.2 to $369.2 million, at 8.2% growth. As Dan referred earlier, they came strong DoD in the federal programs across the board domestically and internationally.

Net revenue grew 6.6% from $229.8 million to $244.9 million at the high end of our guidance. Income from operations from 17.1 to $21.4 million reflecting operating margin of 8.7%. EPS ended at $0.16 at the high end of our guidance grew 16.2%.

SG&A decreased by 15.4%. It reflected the litigation reserve reversal that we had. And also in terms of net revenue percentage it was 9.4% versus the same quarter last year, 11.9%. Some due to the timing of spend and some because of the better control of what we spend. For the full year we expect to be around 10%.

Net interest dropped 66.4% from $2.2 million to $700,000. Pretty much we had lower debt and also we -- the cash balance we had during the quarter generated significant interest income during the quarter. Tax was 6.9 million. It reflects the higher earnings. Our tax rate for the first quarter was 42.5%.

Balance sheet. As I mentioned earlier, we continued to have strong activity in Iraq which involved high levels of contracting and impacts the timing of and the amount of our receivable and payable profile and this increase pretty much reflects equally between the AR and AP of 30-some million dollars and that is pretty much due to a timing of Iraq [activities].

Our net debt dropped from $87 million to $28 million, almost a 68% drop. As I mentioned, we paid off early our senior notes amounting to about $73 million. Our debt capital ratio at the quarter end is about 14%.

The cash flow from operations, first quarter as you know typically is cash deficit for us; however, I want to point out that this quarter our payments for our bonus and taxes and other type of payments were significantly larger than the same quarter the previous year. Nevertheless, we were able to show double-digit improvement. And for the Q2, I expect to see $15 million to $20 million cash flow from operations; for the full year, $45 million to $55 million.

CapEx from $2.9 million to $2.1 million, a 26% drop. It pretty much is because of timing of spend. For the whole year I expect that to be $10 million to $15 million.

DSO increased about three days from 72.1 to 75.6. And our target range it had to do with timing of our Iraq activities pretty much. A trendline for DSO and net debt, expect our DSO to continue to be around and below 75 days. I expect I think 76 days on the high end is what we have and I believe we're going to end the year below 75 days. Net debt I expect the net debt to be -- we will be net debt free to mid to late second half year of the year this year.

We actually revisited our debt and capital structure in late second half of last year and pretty much really to look at our strategic growth objectives particularly to get ourself ready for acquisition in the coming quarters and years. And what we did is as I mentioned in the first quarter of '07, decided to prepay our senior notes, the balance was about $73 million, the prepayment fee and amortized fee is about $3.1 million and $1.1 million respectively. Therefore, we took accounting charge of about $4.2 million.

At this time we are in the process of refinancing our credit line from $150 million to $300 million. We will in the process we will have more favorable pricings and better covenants. And the target completion is in mid to late March. Again this is a strategic effort to right size and right type the debt structure and to provide us with the flexibility we needed in the coming quarters and coming years.

Thank you. Back to you.

Great, thank you very much, David. I'd like to say a few words about our outlook and our focus here for the coming quarter and the remainder of the year. We are very focused on investing in key growth market areas. Tetra Tech, our largest market area is the water market. This is an area that we have a competitive advantage in much of the market and an area that we've been very heavily internally focused on. We're going to continue to focus on that area. We're going to continue to invest internally and we're going to look for opportunities that add additional resources, additional capabilities, a geographic presence to continue to grow this area.

It is a growing market. It's growing in about 7% and the margins are about 7% to 10%. Most of the clients are federal clients, state and local, but it does give us a stable base. It's an area where we have the largest presence and we'll continue to be a focus and we'll continue to be dominant player in this area.

The three areas that we're going to begin to invest more heavily in will be focused both internally and externally. We're going to look to add additional capabilities in critical mass, in the mining and geotechnical area which will support much of the Gulf Coast and coastal areas of the United States and actually international opportunities; alternative energy, we've had some very good moves internally in Tetra Tech. Both mining and geotech and alternative energy are about $30 million to $35 million current businesses for us.

And finally our system support and security which includes IT and Homeland Security support is a little over $100 million a year business. It has the highest margins in the corporation and we see very good opportunities in this area. All three of these areas, mining geotechnical, alternative energy and system support and security are faster growing markets and for our overall margin, are at higher margin [ranges]. They are between 10 to 12 and in the case of IT support activities, even with the federal clients they are in the low teens, up to 12% or 13%.

So these are areas that we will be continuing to invest in internally, but we're going to be looking for adding critical mass through larger acquisitions.

Our guidance for the second quarter, second quarter revenue $240 million to $250 million with diluted EPS at $0.16 to $0.18. The revenue as you can see compared to our revenue from the first quarter is relatively similar. And that reflects what we anticipate to be a declining presence in Iraq. So that would be the offset for not as large of an increase in the second quarter.

Our overall fiscal year 2007, that revenue remains unchanged therefore our guidance at [975] to [1025]. However, with the new wins, the additional work that we did perform in Iraq through the first quarter and expect to go through the second quarter and actually continue out through a good portion of the remaining year did allow us to narrow our guidance. We increased the bottom end from $0.70 to $0.71 with the $0.71 to $0.76 as a guidance for the year. As a note, this does not include any contributions from future acquisitions.

In summary, we had a really good first quarter. Solid, consistent and on plan with the guidance that we provided to the street. We completed a couple of tuck-in acquisitions so we have started that process. They were small, they were added capability and they were definitely a contribution to the corporation.

We had David King talked a bit about our capital structure. I would not under focus or under appreciate what that means. Our changing out our senior notes, eliminating the covenants that we're in the process of that were moved with the senior notes, an increase in the capital structure and necessary for us to take the moves that are part of our plans that we anticipate completing here this fiscal year.

And finally the management. This management is focused on current opportunities to strategically grow the company and there is no doubt that that includes acquisitions. We are current reviewing opportunities for a strategic fit, for evaluations and finally for integration where we're focused on.

And with that I'd like to open it up for questions.

(OPERATOR INSTRUCTIONS) Jeff Beach.

Yes, good morning and nice quarter. Your backlog being up 18% last quarter was up pretty strong; your guidance for the current revenues for this year are up in the area -- net revenues up in the area of 6% or so. Are we looking now and building toward accelerating growth as you go into fiscal 2008?

We are. Our goal that we highlighted to coming into the fiscal year, in fact started even a quarter before that was to target 15% top- and bottom-line growth rate. The focus was to achieve that through a combination of internal growth, organic growth and acquisitive growth. And you are right, the 6%, 7% -- we were 6.6% this last quarter -- we are very close to having achieved on a sequential basis the organic growth.

The backlog increase, there is a difference between the backlog increase and our revenue increase. The backlog is increasing at a faster pace. First of all there's not a direct correlation between the backlog and the revenue increase. But there is a component of much of it has been added in the federal sector and they are a bit larger contracts and a bit longer contracts. So it does add more stability and it will actually be realized over a little bit longer period of time.

All right, thanks.

Corey Greendale.

Good morning. First question, I'm guessing you kind of told us what you can, but can you add any more commentary on that large auto industry contract that you mentioned?

It is with one of the -- we're finalizing the negotiations and obtaining approval for disclosure of that. And we will release it when we actually sign it. I would just state that it's one of the majors. So that is all. And it is associated with water programs. So it is in our core business.

Okay. Second question is you looked through those growth areas in the PowerPoint presentation. Some of the things -- that stuff consists of kind of the bulk of the business. The few things that aren't down there like I didn't see Communications on there. Should we be thinking that those are going to be deemphasized or possibly exited or is it just those are going to remain what they are and you're just investing more in these other areas?

I would say they're going to remain what they are and we're investing more heavily our resources both with staff, marketing support and some acquisitive opportunities in the areas listed. Communications continues to be profitable, continues to have a low receivable and continues to contribute to the company. However, it is contributing at a lower relative rate than some of these other higher growth and higher margin areas. So I guess you would say we will deemphasize them. There won't be a focus for us to grow.

Okay. And on the Communications segment, I know it is a minor part of the business but last quarter the net revenue was closer to $12 million, this quarter its closer to $9 million which -- is one of those two more reflective of the run rate we should be expecting going forward?

(technical difficulty) to talk on an annual basis about $40 million. So somewhere in the middle. It was around 10 to 11. The reason the first-quarter Communications revenue was down was we didn't start our largest single project, Utopia Municipal buildout until November. We didn't receive notice to proceed and the second phase of that program didn't start until then. So we lost about one-third of the quarter on that one program.

Okay. And looking at the margins by segment is there any reason to think that the numbers that you talked about when you reported last quarter -- have those changed at all or are those still reasonable for each segment?

They are reasonable. We will be on with those forecasts.

Great. Thanks and good job on the quarter.

Richard Paget.

Good morning. I wonder if you could talk a little bit about the public funding environment maybe break it up between state and local and then federal? I know last conference call you guys had talked about some bonding measures that came through. But given the political change, I wondered what you guys are seeing in your end markets?

Well, the state and local, we're continuing to see strength. We haven't seen a reduction in the expenditures nor the opportunities of the state and local markets.

The bonds, the bonds were passed this last election. We felt that it would be six months to one year before they were converted from passing as part of a bond measure to the point that they were then allocated to specific projects and that they actually hit the street. So we would expect that toward the end of this fiscal year which should be late summer we'd actually see those opportunities and they would begin to convert from measures that were passed to actual funding.

So we haven't seen anything has changed on that front. Certainly a focus has been the continuing resolution if you want to talk -- include the government, the federal government. Obviously many of you may be aware there was a consensus and in fact passing of a continuing resolution by the House, it's moving to the Senate and so we see that moving on. In fact many of our programs have increased funding in the continuing resolution that did pass through the House. So we see that being stable funded and looking bright moving into the year.

Okay. So in the first quarter that state and local slight decline year-over-year, that is just temporary?

Very temporary and that was also -- very temporary.

Was that just things being delayed or was a couple projects just the way they fell in the quarter?

It was just where they fell in the quarter at 1%. And in the state and local, the Utopia project that I mentioned in Communications that didn't begin until later in the quarter, that is a municipal project. So that fell into that category.

Okay, thanks. That's it for me.

Richard Eastman.

Just a couple of questions. One is, Dan, I noticed the headcount consequentially declined. Is that just a FTE calculation issue? Or did your headcount actually go down by 190 from Q4 to Q1?

That was temporary labors on projects that took place. We normally will see a reduction in the winter months. We use them in the summer for field projects, for construction projects and as we move into the winter months, we take them off our headcount.

Okay. And the, David, can you just give us a sense of what the difference in the cost of capital is? I think your senior notes were at like 7.25%. What is the long-term debt that you refinanced it into? What is the long-term debt at -- about 6? What is the right number there?

I cannot predict LIBOR or the federal fund rate but it will be 50 basis point improvement.

So that whole 52 million or 53 million, that will float?

Yes, it will float, yes. And also it is a flexible; we can prepay any time we want.

Okay. And then lastly, Dan, we had circled back to maybe six or twelve months ago, as you started to sharpen your focus on acquisitions and that element of growth kind of reentered the discussions, there was commentary at that time about international prospects. And I'm curious is that still on the table or is that -- are we looking more domestically at this point?

No, it is on the table. It is on the table. It wasn't going to be the first acquisition and certainly these first two we call them -- if you have the PowerPoint slides, we refer to them as a tuck-in acquisition. These are traditional resources. But it is an opportunity. It is an area that we are looking at and if we have the right strategic fit and we can integrate it and if it is the right price, we would move on it. There are some that we are aware of and certainly our investors and analyst shouldn't be surprised if we in fact made an acquisition that included an international component.

But really our focus is on these acquisitions. We're going to be to follow the money. Where do the clients have funding? Where are they going actually turn it into expenditures? And where is it going to be accretive on margins?

And it's not necessarily follow the federal money, it's follow commercial as well?

Absolutely, multinationals have been and are a large component of our commercial base. And certainly the mining companies that I mentioned are all multinationals that we're doing work for. Certainly by adding Vector Colorado, we've expanded that and they will take us overseas.

I see. Okay, very good. Thank you.

[Mark Segel].

Good morning. Just a question on Infrastructure, operating margin, sort of volatility in the past just going forward. Should they sort of solidify somewhere in the 7% to 8% range?

That is correct. That is what we had indicated earlier and we would expect that to be the case, yes.

Okay, great. And also then on the sales mix, you noted that federal government was up a little bit while the private sector trended down a little bit. Just wondering do you think going forward is that a stabilizing trend or is that just temporary in the quarter?

Well, the federal continue to be strong, the commercial sector. The commercial sector was a bit misrepresented in the year-to-year comparisons. A year ago we had a pretty fair amount of wind down operations that we didn't replace that were commercial noncore construction projects that represented relatively large revenues and noncore business -- so just work that we were exiting.

If you take that out as we'd indicated here, we are about 5% increase in commercial. And we are -- made that even more of a focus here recently. I think the contributions on the margins that the commercial sector will bring will be helpful to our overall business mix.

Okay great. Thanks very much.

Debra Coy.

Good morning, guys. Just to follow up on the prior question. Leaving aside the potential for acquisitions, can you talk a little bit more about that shift back toward commercial and the timing you mentioned a new auto industry contract and so on? If we look at the business as it is now and just purely organic growth, would we see the mix changing substantively by the end of the fiscal year or will it be a much smaller more gradual change?

I think that our experience is that from the time that we begin to invest and emphasize a focus, it is measured in quarters, not in months. So I would believe that we are out two or three quarters for seeing a material change. You will begin to see it two quarters out in commercial. And certainly by the end of the fiscal year Q4 and beginning at the end of the calendar year, you'll see a more material shift into commercial.

So the investment, from the time of the investment and the focus to the time that you will see material change is a couple, two, three quarters.

Okay. And then talking again about the markets, the discussion of the security market, obviously, is one that has been around for a while for you and you've grown that to about 100 million. It has kind of topped out. The acquisition environment got a lot more competitive and we're now talking about coastal engineering; the discussion of mining and automotive are a bit newer.

What do you as the opportunities there in terms of what the real potential growth is, and how big could those be? In other words, could the $100 million to $300 million acquisition be in the mining area versus the water area? How substantive are you seeing those markets down the road as part of your overall business mix, say looking two to three years out?

Let me talk about one of them you mentioned, the system support security IT sector. We've grown to over $100 million. The reason we didn't move more aggressively in that sector was the multiples. We are -- we were and are looking for critical mass. We believe that that number is probably up around the $300 million plus number as a business area to contribute.

The multiples have subsided actually pretty materially here over the past one quarter -- the three to six months we've actually seen it begin to come down into --.

Reasonable territory.

I wanted to be cautious about using the word reasonable, but certainly much more reasonable. There are numbers that can be acquired to Tetra Tech and still be accretive and give us a critical mass in a very high growing market that we believe has sustainability to it, so it's long markets and higher margins.

Okay. But I do think the reason the multiples have come down in that sector is because of the perception of slowing federal spending growth. But relative to water, you still would see that as a higher growth markets?

Yes.

And on the mining and general -- mining, coastal and general commercial support that you are moving into, how competitive do you see the acquisition environment in those markets?

Less so, less competitive than the security end IT markets. We believe that there is fewer key players. Tetra Tech is more of a strategic player. We have a large presence from our engineering and water markets. There are -- they're generally smaller firms they are not $1 billion, $2 billion firms such as in the IT sector or that size. But they are certainly in the $100 million to $300 million; there are many in that size.

Okay. And then my final question is we keep talking about this every quarter and you referred to it as winding down. As best you can, can you lay out what you see with the Iraq work throughout the remainder of the fiscal year in terms of how much it was in this first quarter and kind of the trendline as best you can tell at this point?

When we came out with guidance for 2007, we had anticipated our work to continue through the first and second quarter, and our forecast had essentially not included contribution from the second half of the year. The first-quarter revenues were on a gross basis a total of about $30 million. We are seeing that decline here through the second quarter. We have received [task] quarters and an indication from our clients that we will be there beyond the end of the second quarter. But we would expect that it would continue to ramp down through the year.

So we would expect maybe one-third reduction during the second quarter, and then we will see it continue to ramp down through the remainder of the fiscal year.

Okay, that is helpful. Thanks a lot.

Francesca McCann.

Good morning, good quarter. Most of my questions have been answered. I guess my last question; I know there has been quite a bit of talk about the commercial segment. But quite specifically, what other opportunities are you seeing there? You talked about the large automotive opportunity that we are looking at; either more in that arena or what other specifics can we kind of be looking for there?

A big area that has -- an areas that has been high growth, relatively little competition and lots of demand is alternative energy. We've been doing citing engineering and support work for alternative energy. It's been nuclear, nuclear commercial, some of the early citing and permitting work for commercial utilities, and also for the wind energy market has been a big driver.

The requirement for capacity and for electrical generation is very high, and the resources out there to support the upfront permitting, planning and citing work is a very high demand. So all of those we'd expect to be drivers in the commercial. So alternative energy is one that we see strength in.

I think you'd mentioned the automotive, which we've seen some strength in. Another is mining, and I mentioned some of the large mining. Even at a pullback of some of the highs on the commodity markets of some of the metals, we are primarily focused gold, nickel, copper, are our primary drivers. But even at the reduced commodity pricing levels, they are still far above the economic go-forward values for these mining locations.

Okay. And in terms of competition for these alternative energy projects in particular, how do you see that?

A lot of the work that we have is sole source negotiation. What they are looking for currently is speed, resources and capability, and certainty of can you be on the job tomorrow and can you get it done. So the demand for these moving forward now, I don't want to overstate it that it's more valuable than any price point, but it's being driven by do you have the resources and can you get it done now? So we are not seeing a competitive environment being particularly stiff.

Okay. Great, thank you. I think all my other questions have been answered.

John Rogers.

Good morning. I was just curious on the backlog levels that you reported for the quarter, on average are you seeing better pricing on those contracts from what you are realizing now, or is it the same or lower? And I know it includes a lot more federal work.

Well, because of the large component of federal that was driving the backlog, we've seen it similar. A lot of the work, we have seen an increase in our cost reimbursable and time and materials types contracts with the federal government, which is a hallmark of the federal government. So as far as pricing, we're not seeing pressures, but we're not seeing large opportunities for margin improvement on the federal side.

Okay. What about on the --?

Commercial generally isn't showing up on backlog. Commercial work is generally smaller and it's a much faster burn. And we will see a much faster expenditure cycle.

Okay. And just back on acquisitions for a second. In terms of you talked a little bit about pricing, but just in terms of availability of opportunities, are you seeing more now. And what is sort of the ideal range for you? I know you can't always get ideal, but in terms of size.

Well, it's a two-part question. First, availability. We are seeing more availability. Our former chairman had a very articulate and very public view that you should [self-fund] us at the top. That when the market was strong and that revenues were high and profits were high rather than individual upselling that is when they should come to the market. We have seen it abate a bit with respect to the growth and so these are coming to market. So we have not seen any static or even reduction of opportunities. We've seen more.

And size?

And the size, we are looking for larger than smaller. So I wouldn't, again I want to emphasize that these first two are not indicative of the size or the type of as far as just simply the size of where we're going to be focusing on. Our overall goal if you were going to hit 7%, 7 to 8% which would be the half of our total growth strategy, it would put it at about $100 million a year. And preferably we would like to do that in one or maybe two transactions.

Okay, great. Thank you.

James Ragan.

Good morning. You addressed it a little bit just with respect to the mining and alternative energy opportunities, but I was hoping that maybe you could talk some more about contracts that you do have specific work that you are doing or if you can even actually talk about what the actual contracts are?

And then a follow-up to that with respect to the market -- or the revenue contribution you see from those areas now, does that include -- did you include the addition of the acquisitions that were made this month?

Let me work that backwards. The contribution of revenue for the two small acquisitions obviously were not included in the first quarter. They were closed here in the second quarter. So they were completed between close of the first quarter and this conference call.

Right.

They are included in the revenue forecast for our guidance but certainly it is a range. And if you take the combined $10 million, $12 million revenue between the two of them and divide it over the quarters, it's very, very small impact.

As far as specific projects that we're working on, we have press released in the past some of our major clients. Last year our largest client was Alcoa on the commercial side that we were performing activities from. And it is really the Fortune 100 firms that are driving these revenues.

Okay. And just can you get any flavor on specific tasks that you are performing?

We are working on nuclear power relicensing which is commercial programs. We're working those for Florida Power and Light and new starts, Duke Energy. Those are the major utilities.

Okay, great. And then finally just I may have missed it but with respect to the debt that was refunded, I know the 50 basis point improvement in the spread -- can you just say what the LIBOR spread is on that? Or will be?

We are in the process of finalizing that but it will be [grids] like what we had before. On a grids to grid basis we will be 50 to 75 basis point improvement.

Okay, thank you.

Matthew McKay.

Good morning, guys. Just noticed that the Resource Management revenue segment has been -- that growth continues to accelerate. I'm just wondering where you see that growth rate plateauing?

Well, Matt, our goal is that there won't be a plateau.

Great, I'm going to model in 50%.

The Resource Management continues to grow. It has been the primary emphasis -- it was the driver of the company earlier. We had to get strength in that sector. Most of the federal work we do is in the Resource Management sector. But I do expect that more contribution is going to come from Infrastructure. They had a very good quarter. You can see that the margins are up, I expect them to maintain there and continue to improve.

And the backlog, there was a material contribution from our Infrastructure and backlog. And if you take a look at some of the new wins, go back to the list that I provided, many of them were Infrastructure projects. So I feel much better about a more balanced contribution between Infrastructure and Resource Management. It doesn't mean that we want to deemphasize Resource Management. I expect it to continue where it has been and in fact we're going to continue to invest in those areas.

Mining will be Resource Management, largely, a lot of water studies, citing, permitting. Water is much of it is Resource Management. So I expect it to be strong. And I'd like to continue and certainly the challenge to our team is to keep it where it is at and to make it to better. But we want to have that contributed by increased performance in Infrastructure.

We have an excellent group of companies, an excellent leader who's leading that entire division. And morale is high, margins are up and the backlog in that sector is the highest we've seen in some time. So I don't mean to detract from where we're going in Resource Management. As I said I expect it to continue to be strong. But I think part of our strategy that is working very well is in the Infrastructure business.

Is Iraq, is that predominantly classified as Infrastructure or Resource Management?

Resource Management and that has been a contributor that's helped Resource Management. In fact it has skewed to a certain extent some of the growth in Resource Management.

Okay, that is helpful. And then when you are looking at potential acquisitions, the systems support and security space in particular -- when you are evaluating potential companies to acquire, what type of a customer base most interests you? Are you looking for access to DHS? Is it sort of more DoD, state and local, commercial? What is the most attractive to you?

Well, the first two you said are exactly where we are focused on. The Department of Defense and DHS. We are very attracted and we find it attractive at the Department of Defense. We know the customer, we have large clients and similar type service work and it simply expands us vertically with these clients into some of these long-term IT support functions.

The Department of Homeland Security is a market that we don't have much presence in now and it is the fastest growing of the federal budgets. So we think that there is some great opportunity there and it is very fragmented and I think there is some good opportunities there. So that would be something that would be completely accretive to our client mix and certainly revenues and margins.

Okay, that is helpful. Just finally, with the credit facility increasing to $300 million, I'm just curious how exactly you came up with the $300 million figure? What the logic was? Looking at your EBITDA for '07, it probably is around $100 million, so is just simply three times that or is there a little bit more thought process behind it?

We during the year actually we have completed some strategic business study. And also we pretty much want to connect our growth and our line and our debt structure connect that with our strategies in the coming three to five years. And so every time we do this kind of deal it is a five-year deal. So you look out for three to five years and you get what do you need?

The second point is, Dan mentioned a little bit earlier, the pricing out there is a little bit better but not as reasonable as we wanted them to see. So we want to have some factor in there to get up to the kind of level we need to get ready to aim and shoot.

Okay. And I'm assuming any acquisition that you make would be funded debt and cash. There wouldn't be any equity?

There may be different method of acquisition and maybe some acquisition would involve some equity. So we also consider that as well.

Okay, that is helpful. Thanks a lot, guys.

This will conclude the Q&A session. I will now turn the conference back over to Dan Batrack to conclude.

Great, thank you very much. I thank you all for attending and listening in and participating. We had a good quarter. We feel as a management team everything is proceeding in accordance with our guidance and in fact by narrowing our range on earnings, our confidence level continues to increase quarter to quarter. And as we have to new material events that would come up the next quarter, we will make sure to release them and let you know very public.

And with that, thank you very much and I will talk to you in the quarter.

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