Tetra Tech Inc (TTEK) 2007 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 Dan Batrack, CEO and COO; Sam Box, President; and David King, CFO. They will provide a brief overview of the results and will then open the call up 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 and could cause actual results to differ materially from 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.

Thank you very much and good morning. Welcome to our second-quarter earnings release conference call. Overall we here had a very solid quarter in most all of our financial metrics, but operationally it was a very dynamic quarter for us here at Tetra Tech. And in fact we saw the months of January, February and March to be three different months for us. And before I get to the details of the financials I'd actually like to walk through what we saw during each of those three months.

The first month of January typically is a slow month for us. We're coming out of the holidays; typically we see from most of our clients, particularly the federal sector, smaller task orders and it's a ramping up month for us going into the quarter. That is what we saw this year and overall the month of January our performance was on plan, it was actually a pretty good month for us.

The month of February things actually changed quite a bit for us and there were two specific items that made a big difference in how we saw the quarter progress. The first item we saw was weather. We saw record cold temperatures throughout the Midwest caused our field crews across the Midwest -- Chicago, some of the large communications projects we had in Utah, other areas across the Midwest saw our field activities either be curtailed completely because of weather or to be slowed down and have our production drop rather significantly.

We saw record snowfall up in the New England area, the Northeast part of the United States that not only impacted and shut down a lot of our field activities, the few that we did have planned during the month of February, but also saw such heavy snowfall and such inclement weather that some of our operations even in office work -- we have a significant amount of engineers and office staff actually not able to get to their offices.

This obviously impacted us during the month of February on our overall net revenue which was our labor revenue. And to put this into context, for every day that the Company would be shut down it's between $4 million and $5 million a day on net revenue -- just to put this in context of what just one day for the entire corporation would have an impact. And we were impacted several days for our field activities and office crews throughout the Midwest and Northeast during the month of February.

The second item was -- that we saw was with our largest client, the federal government. The federal government had a federal impasse with a continuing resolution. The continuing resolution through January and February had not been finalized and we saw what -- what we saw was not a ramping up during the month of February in new task orders and new release and definitization of the work that we would perform during the month of February.

We actually saw some of our work slowdown, we saw task orders continue to be very small and to be of very short duration during the month of February. And we even saw some of our large projects that we had with significant staff on it actually shut down until the final authorization of the continuing resolution was finalized in February. We saw Army projects shut down completely, Rocky Mountain arsenal is an example, saw it slow down, and also some of our Navy projects in February. So February was actually a very difficult month for us.

In March, with the continuing resolution having been resolved and having funding be definitized from the different federal agencies, we saw the month of March actually be extremely strong for us. Most of our new orders that came in that drove backlog all came during the tail end of the month of March. With the continuing resolution and the final resolve and that pushed out through the end of the year now and with the funding being actually released we've seen new task orders and we have a presentation slide on this in a few moments. We saw a very strong month of March.

So overall in the face of very difficult weather and a very short term impact during the month of February our overall revenue -- and David King, our CFO, will present more details on this -- but our topline revenue, which includes subcontractors, was still up 8.5% year-over-year. Due to weather and the federal impasse the continuing resolution effect during February left our net revenues on a year-to-year basis essentially flat, at actually a minus 0.6%, but essentially flat year-to-year.

Operating income though across the operation continues to be very strong. Operating income is up over 13% year-to-year, net income up over 16% and, most importantly for us, and I'll speak to this a bit through this conference call, our backlog is at a new record level and a lot of that's coming from our key clients in the federal government.

Our current portfolio mix for the second quarter actually did change a bit. Our federal government on a year-to-year basis is at 45%, that's about a percent down from a year ago. But most notably on a sequential basis, because of the federal slowdown in some of these projects, actually saw more of a reduction. I'll get to that in a moment.

Commercial -- commercial work we've had significant new wins, we've announced a few of these, it's been a focus of this, we've been investing in this area and we've seen the commercial area begin to respond and grow as a percentage of our portfolio. So that's exactly what our intent is and it tended to not only diversify the overall corporation, but also increase our overall margins.

Business mix, Resource Management continues to be by far the largest portion, just under two-thirds of the business, infrastructure just over a third, and communication has been very steady at about 4%, a small portion.

I'd like to actually describe the net revenue changes during the quarter, during the second quarter and where did we actually see the changes. As I walk through the months of January, February and March you may be able to deduce that the federal market -- our federal client was actually affected by, again, the federal budget impasse, inclement weather and on a year-to-year basis we saw for the quarter a 2.4% reduction in our revenues from the federal sector. We do believe that is simply a quarterly event and is not indicative of what we expect on a go-forward basis.

State and local, this is primarily driven by -- one, a little bit of slowdown work from the weather; but two, one project we have in communications, we have a municipal build in the state of Utah and it is going forward. We have been funded and have some very good backlog there, but the go-forward basis is about half of what it was a year ago and so that largely attributes the change in our state and local business. And commercial is up over 3% on a year-to-year basis and we're seeing strength there and this is an area we're going to continue to invest in and think this is a very good market for us.

The areas we feel very positive about are the significant new wins. Since our last earnings call last quarter we've had significant new wins and new contracts with the Air Force, we had a $200 million win with the Army education -- sorry, the Air Force educational training command, new wins with the Army Corps of Engineers and, in fact, one of the largest risk factors we had going into the year was Iraq, how quickly would Iraq potentially ramp down. We have been funded out for some of the programs through the end of the year, so we expect the volatility of that particular component of our business to the diminished significantly.

New wins with the Coast Guard, the Army chemical materials section, the Navy and in the commercial sector all were very strong. Our overall contract pipeline is as strong as we've seen it in some time. And in fact, those that have been tasked and actually authorized are at a new record level.

Now if you have access to the presentation and you can take a look at our backlog slide, you can see that we finished at just about $1.085 billion, up over 15% on a year-to-year basis, and we saw growth in all three sectors that we have. Our Resource Management in gross dollars was up the most which we would expect, it's the largest sector, and it was up at the highest level. We saw broad increases in our infrastructure business across the country in backlog, the backlog was up and infrastructure and communications with significant new funding that will take us out largely through the end of the year, the calendar year, has increased even our communications backlog -- overall increases across the board.

Now it's this backlog that provides us the best insight into the forecast into our guidance for Q3 and Q4 and really gives us confidence that allowed us to put together both our net revenue and our income guidance and I'll speak to that here a bit later in the presentation this morning. All right, at this time I'd like to turn it over to David King, our Chief Financial Officer, to go through the details of some of our financial performance this last quarter.

Thank you, Dan. I echo Dan that this is a solid quarter given market and weather conditions we experienced. Our topline revenue grew 8.5% across all markets; our federal and state local, they both grew double-digits; commercial grew single digits. Our net revenue was flat for the reasons that Dan Richmond earlier. Income from operations grew from $16.2 million to $18.4 million, 13.3% growth and $2.2 million increase. Our operating margin was 7.8% versus 6.8% of last year. Our EPS grew from $0.16 to $0.18; the $0.16 last year had a $0.02 contribution from discontinued operations. On an apples-to-apples basis it was from $0.14 to $0.18.

Next page, please. Our SG&A had a reduction from $30.3 million to $26.8 million. On a percentage to net revenue basis (inaudible) 11.3% versus 12.8%, it included a litigation net settlement of $1 million, pretax number and had an impact on EPS of $0.01.

I want to make a comment here about litigation. Started out a couple years ago we centralized our management of claims and litigation so we could better manage and leverage our legal risk. As a result we continue to actively reduce our risk profile. This quarter we were able to settle and resolve a few more matters than we expected.

On net interest expense we had a significant reduction from $1.9 million to $0.5 million, principally as a result of lower debt. I expect net interest expense to be about $1 million each for Q3 and Q4. Tax as a result of increasing earnings, our effective tax rate for the quarter is 42%, for the whole year I expect to see 42.2% to 42.3% range.

Next page, please. Our receivables growth from $297.7 million to $348.5 million, principally because of revenue growth. As you recall, I mentioned revenue grew [3.5]%; number two, it had to do with we increased our subcontract activity in Iraq. The nature of subcontract activity increased in Iraq -- actually increased our receivables and our payables by approximately the same amount which results in minimal impact on working capital. The net amount of the Iraq increase is about $20 million.

The balance of payable increase had to do with our better payable management. Our net debt decreased from $52.8 million to $11.6 million as a result of strong cash generation. I expect to see increases in Q3 due to the acquisition of Delaney. Our debt-to-equity ratio and debt capital ratio are both under 9% as of the end of the second quarter. Cash flow from operations, we had a reduction from $30.69 million to $22 million. It is the result of two or three things.

One is our revenue growth which has an impact of about $10 million. The second major factor is our tax position. In 2006 we didn't owe much taxes because of our result in 2005, so that helped the cash from operations of last year. We however, normally in our business in Q1 you use a lot of cash; in Q2 you start to generate cash and our goal always has been to breakeven in Q2. Of the $22 million, we are $4 million positive year-to-date.

CapEx, we still see $10 million to $15 million for 2007 as planned. DSOs increased from 72.4 days to 80.1 days; it was to a very large extent increased due to our subcontract activity in Iraq -- I attribute about five days to it and the rest, two or three days, had to do with our ERP implementation which has a temporary effect on our DSO. The (inaudible) for DSO and net debt at 80 days I expect to reduce by a couple days in the second half of the year and finish the year in the mid to high 70s and net debt at $11.6 million I expect to finish the year at about $10 million to $20 million.

On the credit line refinancing update, last quarter, if you recall, as an effort to streamline our debt and capital structure we prepaid our senior notes and said we would reduce our credit line which we completed -- successfully completed this quarter. Our capacity today is $300 million, we were able to increase it without increasing the number of banks. Our pricing is over 50 basis points better than our [Ultra O Deal], covenants -- they are reduced from 4 to 2 plus more generous terms on acquisitions among others. It's a five-year term expiring 2012. Our debt and capital structure now is simple and cost-efficient and provides us the flexibility needed for growth in the coming years. Now I'll give it back to Dan.

Thank you very much, David. I'd like to say just a few words about some of the key areas in the marketplace that we're investing and really remind all of our investors and shareholders where our focus is. We're focused on the water, mining Geotek, alternative energy and continue to look for IT support and opportunities. These areas, particularly water which is the dominant portion of our portfolio in business mix in an area that we're a market leader, we're looking to continue to invest, and in all of these areas we're going to invest internally and look for new acquisitions.

Several of these areas are higher growth areas for Tetra Tech where we see less competition and have higher margins so we believe that this will continue to contribute to a higher margin base for our overall business. One of the areas that we did complete an acquisition -- in fact it was the beginning of the third quarter, so it had no contribution.

I'd like to clarify this -- well, it's been -- about a month ago this was no contribution -- revenue, backlog, profit, anything in Q2. It was a third-quarter event, but I would like to welcome The Delaney Group and particularly the founder and leader of the Group, Tim Delaney. I welcome him and all of his staff to Tetra Tech. This was an acquisition that we completed in early April, so it's a third quarter. We will have them for most of the third quarter into our results they'll contribute and certainly all of fourth quarter and on a forward basis.

The purpose of The Delaney Group was really to add a strategic focus and to allow us to fulfill a wind energy strategy. Alternative energy is one of the areas that we're looking to invest in, it's an area that we've been in for a number of years. It's an area where there's high demand and the demand outstrips availability of resources in the marketplace. The Delaney does allow us to be a full-service provider from the upfront feasibility studies, initial valuations all the way through the tail end and operation maintenance.

Now the financial metrics that Delaney will contribute to the Company on an annual basis for a full 12 months is approximately $60 million with $40 million unmet revenue. We'd expect approximately half of that to contribute to our $40 million net revenue to contribute to our fiscal year '07 results over the next two quarters.

For fiscal year '07 the earnings will be approximately $0.02, so it is accretive to our earnings this year. I think that is something that we've made very clear and have communicated consistently that we're looking for acquisitions to be accretive on their initial year with the Corporation. In backlog -- and you'll see this added to our backlog at the end of the third quarter -- is approximately $40 million. They come with backlog, earnings and revenue contributions.

With the contribution of Delaney I'd like to provide guidance both for the third quarter and for the entire year for fiscal year '07. Net revenue -- net revenue, a range of $245 million to $260 million for the third quarter. This number is up from the second quarter, up materially, and will show growth on a year-to-year basis. And the confidence for this number we believe is embedded directly in the backlog that we have now and the new wins that we've been awarded here just this past quarter.

EPS on a diluted basis, $0.19 to $0.21, and you'll see that up from the original guidance on a basis that we provided at the beginning of the year for annual. Annual puts that we've narrowed our range a bit, $9.75 million to $10.15 million to $1.015 billion net revenue. With annual guidance we will have moved up from last quarter -- last quarter we had communicated 71 to 76 with the addition of Delaney, strength across our operations, we're moving both the lower and the upper end up $0.02 to $0.73 to $0.78.

Just a note, as always our guidance includes no anticipated contribution from acquisitions. That does not mean we're not looking for acquisitions -- it just means that we haven't front loaded either earnings, revenue or backlog into either our guidance or anticipated to be a contribution at this time. It also does include all stock option expensing, this is an all-in number. We expect no change in our tax rate either for those that are modeling our forecast.

In summary I'd like to really thank all of the performers here at Tetra Tech. We really had solid second-quarter results across the board. We've completed the Delaney acquisition at the beginning of the third quarter and really all of the work was done through the second quarter. So it was a great addition and continues to show that we now can actually bring on firms. I'd like to thank David and our financial team here for giving us the ability and flexibility to move forward on any of the acquisitions with the increased credit facility. Really we have no liquidity issues at all that would prevent us from going to almost any size acquisition.

And most importantly we look here -- and I've said this on previous calls -- the most important metric for myself, the management team and really all of the employees is our backlog, how much do we have in the bank that's been authorized and we've been requested to complete that work? And it's at a new record high and with a 15% year-to-year increase we feel very good about that.

And finally, we're going to continue to be focused on our core markets. We want to be a leader in water, we're looking for other associated markets to grow in and to be a leader in and that's where we're focused, both internal investments and through additional acquisitive growth that will add more resources and capability and geographic presence that we don't even have today. And with that I'd like to open up the call to questions.

(OPERATOR INSTRUCTIONS). Chris Bamman, Morgan Joseph.

Good morning. Just a couple of quick questions. Now does the raising guidance by $0.02, is that solely because of The Delaney Group acquisition?

Not completely, it's a material contributor but not completely.

Okay. And then just looking at your -- getting involved in alternative energy, what is it about wind power that really is attractive to you as opposed to other alternative energies?

I think we've talked a bit more detail in previous calls about different components of alternative energy. The two areas that we define where we're investing in are nuclear and wind energy. Wind energy is not the only one we're focused on; we have a presence in nuclear energy because of a large requirement for water, water supply and finer water treatment and discharge. So we believe that siting -- and one item that both nuclear and wind have in common -- upfront evaluation of the site from a soil standpoint; environmental permitting is a very large issue, both with wind energy and nuclear energy; and engineering and final permitting.

So the areas that we're interested in are the consulting portion, the engineering portion, the permitting portion. And finally, such a large demand in both of these areas, both in nuclear and in wind and alternative energy in general that they're looking for turnkey solutions because time is very important. So Delaney does give us a turnkey capability to provide our clients with a one stop solution across the board. That's why we're focused on wind.

Okay. And was there anything else in the numbers I guess other than that settlement that maybe we should be aware of?

No, just a dampening effect from a lower utilization. And I know I spoke a bit about it, but I want to make it very clear that when you have staff that are not utilized because of weather and they can't get to project sites or projects shut down because task orders haven't been released, you're going to see and we saw an impact on our net revenue, which you saw which put us at a flat year-to-year basis, but it also has an impact on your margin. If you don't furlough all of these staff, so it does increase your cost of goods sold, essentially your indirect labor cost. But no, no other charges or contributions at all.

Okay, that's it for me. Thank you very much.

Corey Greendale, First Analysis.

Good morning. On the revenue side, I think Dan, in your comments you had said a figure of kind of $4 million or $5 million net revenue, a day from being shutdown. Did you say how many days we should be thinking about that you were shutdown?

Let me clarify that statement. What I intended to say and I hope I was -- obviously I wasn't clear, that if the entire corporation were shut down for a day, that would be 7,500 staff, we'd have impact of -- I think if you do the calculation you can do it as we do it, between $4 million to $5 million a day. A portion of the staff were shut down. Some of the largest offices that we have across the country are located in New England.

We have almost a 200 man office in Manhattan, we have a 150 man office in Boston, we have approximately a 100 man office -- actually let me clarify -- a 100 person office located in upstate New York. These are all very large offices for us. But we have not done a direct calculation per office, but we do know on an aggregate basis we were about 3 percentage points down on utilization for the Company for the quarter that we didn't see in previous years.

But you don't have just a ballpark guess as to what the revenue hit was just from the weather portion of that?

No, no, we didn't parse that out.

Okay. The second question I had, the backlog growth, I think you've discussed, should be a relatively good indicator of growth more in the federal segment than in the overall business. Is it reasonable to think that with the budget issues behind you and the weather issues behind you that going forward we should see those two percentage growth numbers kind of converge, backlog growth and federal growth?

We will, although I will state, and we've said this before, our internal target for net revenue growth organically is about 7 to 8%. And so while we're extremely pleased that a 15% -- and we run year-on-year increases in our backlog in the teams here for many quarters now we do believe they'll converge. And while it's our intent to keep that backlog growing at that type of number, we do expect our organic growth to be about 7 to 8%.

Okay. And then a couple of calls ago you had said something about -- discussed state and local infrastructure bonds that had been approved in the election. When do you expect to start seeing funding coming through from those?

We'd expect the solicitations to be coming out almost any time. We saw those were mostly passed in the November election. We normally see -- our previous experience is you start seeing the solicitations or these requests for proposals somewhere between 6 to 9 months later. We are right around 6 months.

We have seen in California some early solicitations. In fact, we are patiently waiting for the decision on some of these that came out early, but we expect the solicitations not only from California but other states to start coming out of this third quarter. That would put it in sort of the 6 to 9-month historical time range that we have experienced before.

Great, thank you.

Debra Coy, Janney Montgomery.

Good morning, Dan. Good morning, everyone. Dan, just to follow up on the organic growth question, you said you are heading towards 7 to 8%, and yet when you look at the revenue guidance for the remainder of the year considering that we have I guess around $20 million in net revenue contribution from Delaney, seems like it will be a little bit below that unless we're at the very, very top end up your guidance.

Can you talk about just in the relatively near-term what we are looking at, based on your best crystal ball in terms of organic growth over the next couple of quarters?

I think if you -- and I am sure you have run these numbers -- it actually models out to around 5%. So I think that the numbers we'll be looking at -- and if you take a look at the net revenue once you have pulled Delaney out, you're looking at about 5 or just over 5%. But our overall goal, and I think Corey's question on the previous individuals where are we looking at the long run for the backlog and the organic growth to meet converge. I think that would move the 5% up a little bit to a 7, 8% and it will move the long-term backlog numbers on a sustainable basis down a bit. I would say for the next two quarters, you would be looking around 5%.

Okay. I guess what I am trying to understand is how that flows through, because given -- as you said, given the much larger backlog growth that we have seen for several quarters, kind of how does the timing work in leaving aside delays related to continuing resolutions and the like? Why is it that we are seeing 15% backlog growth and 5% organic revenue growth?

Okay, that is a very good question and it is one that we have looked at very close here. The overall backlog growth includes not only net revenue but also includes total revenue, which is subcontractors. In fact, this last quarter we had even with -- if you take a look at this, we had net revenue that was flat, but we had total revenue which includes subcontractors up 8.5%. So if you take a look at our overall growth, we're up 8.5%, backlog is up 15. If we were short our net revenue by say -- let's say we're 5% and things had gone very well, we're at 5%, 5 would have been on top of the 8.5%, that would have put us up and put the numbers very close together.

So then I guess the broader question is, is it possible to look at a backlog number that's based on net revenue expectations as a more realistic indicator and how should we think about that? I think everyone has focused, of course, on net revenue, but yet we're looking at a backlog that's gross revenue. And as you said, we just had a big delta between the two in this most recent quarter. Is there any way to look at backlog on a net revenue basis?

We look at that internally, but those numbers do move around.

Sure.

As workloads shift we may make an election to sort of the make/buy decision. Generally speaking we are very competitive internally, so we want to make it internally. We prefer to self perform. But based on schedule requirements by clients and priorities to get items completed quickly, we can add subcontractors. And so even our own forecasts can move that a bit from self performance labor to subcontract depending on the requirements of the project and clients.

Okay, that's helpful.

So it is -- it is not something we would look to provide more detail in dividing up the backlog.

In terms of giving yourself the flexibility, understood. And then taking a quick look at margins, the operating margin in the infrastructure segment at the low sevens is certainly below the target that we've been heading towards. Can you talk a little bit about where the impact would have been relative to the utilization rates and kind of what we should look at for the -- shall we say, the targeted margin in the infrastructure business which I thought should be closer to 8 rather than the low 7.

We agree with you. We think that we would have hoped for and expected and did forecast a higher margin on the work from our infrastructure business, but DOD was not impacted by the continuing resolution. And so our overall business wasn't impacted in Resource Management. Most of that work resides in Resource Management, so we didn't see the impact as much in the Resource Management group.

The non-DOD, the civil groups which was NASA and the Federal Aviation Administration, FAA, who are our most acute impacts with respect to slowdown of funding and those are infrastructure projects. And so where we had staff idle for late January, February and even early March from a continuing resolution, that is the center point. That would have been the eye of our impact on the continuing resolution and it showed up in -- not only in net revenue, but also showed up in margin.

So heading back toward 8% is reasonable?

Yes.

Okay. And then just finally, also Corey kind of asked this question earlier, but is it possible for you to tell us about the shift in the utilization rate? In other words, just kind of trying to get a sense of the revenue impacts of these various delays and shutdowns? Do you have a number that tells what utilization -- employee utilization was in the first quarter relative to where it would've been or where it normally is? Any sort of metric like that?

We do have those numbers. As an overall corporation we target 67 to 68%. On a complete aggregated basis historically we've had numbers at 67% to 68% during Q2. I'm looking at the last two fiscal years, '06 and '05, we were down at just below 65% as a company. So we had an impact of 2 to 3 points for the quarter below what we had seen historically. So that's on an aggregated basis, that would impact both the CR, continuing resolution and weather which is a material number.

Sure, it is. That does explain it. And my final question is can you talk through the -- this is for David I guess -- the terms of the Delaney acquisition as much as you can in terms of how you're -- I know you had not disclosed the purchase terms, but as much as you can tell us in terms of how you're financing it and so on? You did mention an increase in debt, just in terms of trying to understand how that impacts the balance sheet?

We try to avoid discussing in public about purchase terms. But we will refer you to the Q to be filed later on. And the acquisition was financed by debt.

Okay.

And so we actually -- the cash (inaudible) was all financed by debt and we do have some deferred payments and some earnout provisions to be paid later on.

And more details will come on the Q?

Yes.

Okay. Thanks, David.

Noelle Dilts, Stifel Nicolaus.

Good morning. I was hoping you could discuss a little bit what you're seeing in terms of pricing trends in your backlog. I think that last quarter you said pricing in the backlog was stable. I was wondering if there's been any change there.

No, we've seen it stable and we've not seen any additional pressure that would be reflected in our margin or any other area. So, no, we've not seen a change there.

Okay, thanks.

Matthew McKay, Jefferies & Co.

So just looking at the employee headcount, that seems to have declined again sequentially and has been trending downward. And so just given that you guys are predominantly services and as you have highlighted that revenue is really driven off of the work done by employees, I'm just trying to -- I'd love to understand what your expectations are for hiring, employee headcount going forward and just why the employee headcount has kind of been trending on the downside?

First of all, just for clarification the headcount that we provide in our release with our investors' report, that's an average number over the quarter. We do do the best we can when we don't have work to adjust our workforce to the workload. And that workload may be long-term which would be funded which would be a long-term trend or it could be short-term and we do the best we can. And so there is some impact on what we moved on during the quarter.

We do have -- we're looking to higher. We're looking to increase that number. If you go to Tetra Tech's Web page and if there are any good engineers, project managers, scientists that are participating on this phone call please go there and contact our HR department in our local areas because we have about 350 posts out right now of new positions above our current head level that we'd like to add today if we could.

And to the extent that we don't have those staff on, we still are completing the work through use of subcontractors or timing of our rescheduling. But we are looking to increase that number.

Are you doing anything special, either referral -- paying some referrals or -- basically to try and accelerate or improve your ability to hire people?

We are. We have obviously internal referral programs and with the network of -- if you talk about total heads the numbers that you see on this headcount are a full-time equivalent number. But our total headcount is close to 7,500 so you can imagine our network is extensive through our existing engineers and employees. We also have a recruiting program because a lot of the folks we're bringing on are more junior in nature, these are folks that are entry-level engineers, chemists, scientists, geologists.

And so we have a campus program where we're very active at over 50 campuses, and that's universities, across the United States. Our goal is to be associated directly with really the top tier technical universities in the country and those include sort of the founding location of Tetra Tech where we deal with the President directly at Caltech, places like UCLA, MIT and certainly I don't want to go on the list because those will -- I'm sure I would forgot some, but really the very best of the universities across the country we're looking at partnering to bring in a junior staff.

And the other location that we're looking and we saw the addition of resources is through acquisitions. And it's one way for us to make the biggest single move in the shortest amount of time by bringing on firms. And while they bring on work with them, no doubt, and as you can see that in the accretion in revenue and earnings, they do add more resources that we can use for our work also.

Okay. When you look at the pipeline of business that's been won and what you expect to win over the next year or two, do you have any goals for what headcount should be by the end of this year or next year?

Yes, higher.

Care to quantify?

It should follow net revenue growth. Net revenue for us is primarily labor. We do have -- I just mentioned several hundred and open requisitions. So we'd see it follow net revenue growth. So somewhere between 5 and 10%, that type of range.

Okay, great. Thanks a lot, guys.

(OPERATOR INSTRUCTIONS). Joshua Sharf, William Smith & Co.

Good morning, fellows. I've got a question for you also about wind power. We saw a company in Wisconsin start having second thoughts about running a wind power project because of the -- this is a power company -- because of the ROE that was being permitted. Do you all have a sense of what the target ROEs these companies are looking for and whether or not the states are going to let them see that, whether or not this is going to -- whether or not they'll be able to garner enough interest on the part of power companies?

Well, we understand that it's a very dynamic market. That currently the improvement in the turbine efficiency and output per wind tower are significant and so this is changing even now. We do know that earlier, and I would say even earlier in this year and previous years, tax credits were a significant contributor. So it's not strictly a return on output of energy. So it is a bit more complicated.

We do know that our key clients have programs and projects that are backed up and that are going through the permitting and evaluation right now. And while every one of them are not going to ultimately come to construction and completion, there's a much larger number that are just under evaluation. So we see this certainly out in some distance in the future very strong.

Okay. And then also, what do you see as being the integration cost for The Delaney Group and then how long do you see that going on?

Certainly integration costs more than $1 million, there are some costs that simply embed into our operations, we don't call those out. But there are costs of our systems, our platforms, management, all of the items that you'd expect with integration. But it's all been consolidated into our forecast and guidance.

Okay. And then just to clarify on the interest expense. David, you had said that you expected it to be roughly $1 million per quarter for the last two quarters?

That's correct.

Okay. Thank you.

Francesca McCann, Stanford Group.

Good morning. Just a couple of quick questions. So, overall the litigation settlement was about $0.02 EPS on the quarter, is that correct?

No, I mentioned earlier the net settlement on the pre-tax level is $1 million, the net impact on EPS is $0.01.

$0.01, okay. And then, any other details on the GM contracts that were announced a couple months ago?

I would very much like to provide a lot of detail because it's a very good contract, it's an excellent client and we've had a long relationship with them prior to today and we really expect to be a favored contractor for them far into the future. General Motors has a very clear requirement that none of the financial aspects of their subcontracts, including total value or any financial aspects, are to be disclosed or we will no longer be working with GM.

And it's not that this is some onerous requirement; we're just very cognizant of the requests and the requirements of our clients. And in this particular case their wish is not to disclose financial on -- and I believe this is not unique to Tetra Tech. This is their vendors in general. So for those reasons we'd not look to disclose any specific financial information on the GM contract.

Okay, perfect. Thank you.

Thank you very much, Francesca.

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

Thank you all very much. I appreciate your participation and questions. And am looking forward to a very strong third quarter, fourth quarter and, again, would like to welcome The Delaney Group onto Tetra Tech. And we look forward to talking to you all next quarter. 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.