Tetra Tech Inc (TTEK) 2007 Q4 法說會逐字稿

Good morning and thank you for joining us. By now you should have received a copy of this 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 up the call for questions.

During the course of the conference call Tetra Tech management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning future events and Tetra Tech's future financial performance. 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 up the conference 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 and welcome to our fourth-quarter and fiscal year 2007 earnings release conference call. I'm very pleased to announce that we had a very strong fourth quarter and an excellent 2007 overall. First of all, as a review of our 2007 results, all of our segments exceeded their financial goals both for the quarter and for the year with our revenue up approximately 10% and our earnings per share for the year up nearly 25%, excellent performance.

Second, we improved our operational risk profile with better contracts, better terms and pricing, that resulted in an increase in our operating margin up to 8.5%, an 18% increase in our operating margin from the year prior. We finished the fourth quarter with nearly 9% operating margin across our collective groups. We also won several new programs; we had 14 different programs that we won with clients in amounts greater than $25 million for each of those programs and that drove our backlog up by 20% year-on-year which was already on a record pace a year ago.

And finally as a summary, we initiated and completed two large acquisitions this last year and five smaller acquisitions that we refer to as tuck-in acquisitions which provide Tetra Tech access to new clients and additional resources. And of those acquisitions four of them were in the last 90 days, three of the small tuck-ins at the end of the fourth quarter and one of them we closed on the first day of this new first quarter of fiscal year 2008.

We finished fiscal year 2007 with our business segments representing two-thirds of our workforce and our revenues in the Resource Management segment -- that's where scientists, geologists, technical professionals reside -- and approximately one-third of our staffing and revenues in our infrastructure business. Our overall customers remained relatively stable from prior years, although we did see growth and strength in our state and local markets which really were a big driver for us in both the quarter and year.

I'd like to say a few words in summary on our fourth quarter, wins with new contracts that we have been awarded since our last conference call a quarter ago. We've had four new awards in excess of $100 million. Those are with our largest clients, with the Army Corps of Engineers, the U.S. Army itself at Rocky Mountain Arsenal, FAA and the Navy. Most of these contract awards are not represented in our backlog. These are large programs that are task order driven, they're multi-year programs that give us more visibility into the future. And as in past quarters they'll be converted into backlog itself.

I will note, though, for the fourth quarter we had $478 million in new orders, that's the second-largest order quarter we've had in the past two years -- more than two years, only eclipsed by the third quarter. The last two quarters consecutively have been our biggest quarters in Tetra Tech's history.

These new orders, the new contract wins really drive one item for us, backlog. In the fourth quarter our backlog continues to be our best leading indicator of any of the metrics that we have in the Company. For the quarter we were up 19.8%, nearly a 20% year-on-year increase. This is a historical high for the Corporation. And this double-digit growth in backlog wasn't just one of our segments, it was in Resource Management, it was in infrastructure and communications. We saw strength in all three areas, double-digit growth.

At this point I'd like to turn the presentation over to David King, our CFO, to go over the specifics of our financials for the quarter and year.

Thank you, Dan. The quarter '07 we achieved -- top line grew, both revenue and net revenue up nearly 10%. We experienced very strong growth in our state and local and commercial business. In the state and local side we grew on a year-over-year basis 59%. The commercial business we grew 14% year-over-year. Our net revenue guidance was -- our net guidance was $270 million, we ended the year with $275.5 million, 9.8% growth again.

Income from operations grew 22.3% from $20 million to $24.5 million and margin, as Dan mentioned earlier, of 8.9% compared with 8% last year. Excluding acquisition-related charges of $700,000, on that basis we were at 9.1%. Again, this is a -- I have a slide later on to further elaborate on this. As we initiate and reinitiate acquisitions we will talk about that. At a high level it is a non-cash charge as a result of assessing certain intangible assets for acquisitions.

As Dan mentioned earlier, all segments are performing very well. On resource management we have margin of 9.3% for Q4, infrastructure at 9.7% and communication 12.5%. EPS grew from $0.20 to $0.24, a 20% increase, exceeded guidance of $0.21 to $0.22. Again excluding this non-cash charge above we will be at $0.25.

SG&A cost from $27.7 million to $32.6 million, first we are a 10% bigger company than last year. In this quarter, as Dan mentioned earlier, we actually dedicated incremental resources to pursue some large programs and we spent about $1.5 million just the fourth quarter alone to pursue these large jobs. And again, there was a $700,000 acquisition-related charge, non-cash, of $700,000.

On a full-year basis our SG&A cost actually dropped from 11.7% to 11.3% as we continue to increase the S part of our SG&A and maintain and control the G&A cost of it. Net interest expense continued to be relatively low as a result of our low borrowing and the strong cash performance. Tax expenses were 9.9% as a result of increased earnings. Our Q4 tax rate was about 41.3%; on a full-year basis we were about 41.9%, and for FY'08 we'll come back to that later on.

Accounts Receivable grew from $346.5 million to $437.3 million; pretty much there are two major components, one is the revenue growth of $40 million and the subcontract accrual -- much of our activity in Iraq of $30 million which we didn't have in the prior year. ERP implementation accounted for the balance. Today we are 80% on the Oracle platform, we have about 18 more to go, and I expect to see the implementation and impact on our receivable will drop or improve down to about the $10 million range in FY'08.

And Accounts Payable grew from $105 million to $155 million, again this is part of the business growth, combination of business growth and the Iraq subcontractor accrual of $30 million. If you look at offsetting the Iraq subcontractor accrual over on the receivable side and payable side, which is pretty much offsetting and there's no working capital impact, so the difference is actually much smaller.

Net debt, again that's a great net debt result. We had $7.6 million from $10 million of last year as a result of positive opening cash. Our debt and equity ratio is about 20% at year end; debt to capital ratio is about [17]% at year end.

We had a great cash flow quarter in Q4, $34.5 million. On a [fiscal] year basis we generated $46.7 million in FY'07, beat our revised guidance of $35 million to $45 million. FY'07 estimate is $50 million to $60 million. CapEx is $5 million for the quarter and our total CapEx for the year is about $13.1 million. We expect to spend $14 million to $16 million in FY'08.

DSO is 80 days. Again, about six plus days [headed] for the Iraq subcontractor accrual and the remaining balance of ERP, again, I expect to improve about a day or two in the first half of '07 to high 70s net debt. Again, this is a very favorable trendline on debt and cash. We expect to continue to use our cash to grow and pay down our debt. For Q1 FY'08 -- [typically the] first, Q1 is the quarter that we use cash and, number two, we actually borrowed some money for our ARD acquisition. So we expect the net debt to be about $70 million to $80 million for the first quarter.

As Dan mentioned, we initiated -- executed certain acquisitions during the year. And I would really like to spend a minute or two on the topic I call intangible assets. Again, intangible assets are above and beyond [goodwill] you purchased. And so what are they? The largest component of it being the customer relations and backlog. Customer relations are customer lists and contracts and the longer and the more you work for a customer the more value you have to pay or assess for this customer. The more backlog you have the higher value you have to attach to a backlog.

Again, just this item alone, customer relations and backlog, is probably 90% of the total intangibles for us. Non-compete is not a major number for us. And how the schedule works is they typically -- you need to amortize them over -- for us a three- to five-year period. And they decline, have a declining balance over time. For example, on a four-year basis roughly the first year is 40%, for example, of the total; the second year is about 30%, 20% and 10%. That's how the schedule works.

In FY'07 we had an intangible charge of $1.8 million and we expect to have $4.1 million intangible charge in FY'08 which is baked into our guidance. $4.1 million translates to EPS of $0.04 for FY'08. Again, this is a non-cash charge on a cash operating basis. For FY'08, we will earn approximately $1 per share.

Let me bring us back to how we truly ended the year. On a full-year basis net revenue grew from $959 million to $1.012 billion, we exceeded our guidance of $992 million to $1.007 billion. Income from operations grew 24.2% from $69.5 million to $86.3 million. Again, our margin grew from 7.2% to 8.5%. EPS $0.63 to $0.79, a 25% increase. Again excluding intangibles of roughly $2 million we will be at $0.81. Backlog at $1.26 billion, a record. Again, we have achieved a great quarter and an excellent year. Back to you, Dan.

Thank you very much, David. As we move into 2008 I'd like to put into context where we've been as a company and where we're going in the next couple years, not just 2008. Back in 2005 and 2006, a few years ago, we really put an extraordinary focus throughout the Corporation on aligning our operations with our core markets and servicing two primary areas -- Natural Resource Management and Water Infrastructure markets. The focus was primarily internally aligning our operations, increasing our efficiency, increasing backlog organically and driving our margins back up to historical levels they've been before.

This 2007 really wasn't focused so much on alignment, it was really focused on expanding our core water business. As David has indicated, our SG&A went up because we increased our sales investment substantially as a result of this increase in the backlog; it also allowed us to reinitiate our strategic acquisitions.

We looked at and bid large acquisitions in alternative energy which added to our Natural Resource Management areas. We also added an international component which we had a recent acquisition here just a little over a month ago which will begin to give Tetra Tech the presence internationally. And we also expanded our capability being a turnkey provider for our clients. We're seeing more and more our largest clients look for turnkey solutions that are really provided only by the largest firms.

As we go into 2008 we're going to continue to focus on Natural Resource Management markets, we expect big growth in mining, we expect big growth in alternative energy, and of course our core business, which is environmental work and water infrastructure projects. We also expect in 2008 and technically speaking, it was the first day of fiscal year 2008 we completed an acquisition that has all of its work performed overseas -- the ARD acquisition. And so we'll look to initiate further international growth strategies primarily through acquisitions.

That's what you'll see in 2008 from Tetra Tech. And then really 2009 through '12, the following three years, we'll continue to expand our geography, the presence of our services that we're providing not just in the U.S. but overseas.

But as we begin 2008, let me say a few words about our actual customer base and where we'll expect our revenues and our markets to grow over this next 12 months. We're looking strong across all three of our client types -- federal, state and local, and commercial.

First, federal, we expect federal, which is our largest client type by far, to remain steady, with upside potential with very large programs. We have 70% of the work with our federal clients already in backlog right now. We expect large water infrastructure opportunities to come out late in fiscal year 2008 associated with the Water Resources Development Act. There's nearly 1,000 programs, I think some of you on this call may be familiar with that. For those that aren't it's nearly a $23 billion program on approximately 1,000 programs. And of that, while it's a 20-year program nearly half of that $23 billion will be expended in the next five years for programs.

State and local, we expect increased funding for water infrastructure programs which is our core business. We think it's going to be driven by the bond measures that passed a year ago in many of the states. Those opportunities are coming out right now. Water demand, particularly out here in the Southwest is triggering a new high demand in investment in water supply, particularly desalination. It's a large program, there are approximately 20 different desalination plants that are slated for construction out here in California. We announced a win here several months ago, nearly a $250 million (technical difficulty) program and we expect there to be many more out here over the coming year.

Finally, commercial, we've had great growth in commercial, primarily driven by our industrial clients. The wind energy investments, both in the acquisitions and in mining, are both (technical difficulty) commercial sector. They're driving higher margins, higher commodity prices in oil and gas and in minerals are driving this very strong. We're also seeing industrial strength with our clients across the U.S. where they're closing plants. It's sort of the commercial version of the military's base closure program. So before these plants are closed they have to be evaluated, clean up the soil and water and that's a large driver for us also.

Forward guidance, the financial guidance for fiscal year 2008. The numbers presented here, if you've looked at the midpoint on both the revenue and the operating income, or EPS, which actually converts to our earnings per share, midpoints are up approximately 15% both on revenue and earnings per share. For the quarter, first quarter which we're nearly halfway through already, we have revenue net of subcontractor costs in the range of $280 million to $300 million with earnings per share of $0.19 to $0.21, and for the year $1.1 billion in revenue to $1.21 billion with earnings of $0.86 to $0.93.

Let me reiterate what David said earlier. These numbers are after incurring more than $4 million on an earnings basis of intangibles, non-cash charge. That intangible amortization that we'll incur in 2008 is associated with these acquisitions that we've added. David didn't talk at any great length about the timing, but these amortization schedules are relatively short, they're measured over several years. Typically in our business they'll certainly have been fully amortized over five years or less. So this is a temporal impact on our earnings and, again, it's non-cash.

A couple other notes -- our guidance includes no contributions from future acquisitions that we would actually conclude this year in 2008, expect to remain strong in that area. And another area I think we're an industry leader is our tax rate. We're right up there with the highest of them in the entire industry. So we think we've got some good opportunity there.

In summary, we think we've just had a great fourth quarter and 2007 with all of our fiscal results -- solid revenue profit, cash generation from all of the business segments. It feels good and it also looks very strong going into 2008. We're pursuing and winning larger programs, obviously that's shown to you, our shareholders, with our record backlog and it's something we're going to continue to drive. It is very important to us.

We're executing the acquisition strategy. The excellent cash collections has put our balance sheet in the strongest position in our entire history by far and you've seen four acquisitions in the last 90 days and expect to see us to continue to be aggressive in this area.

And finally, and probably most importantly, our clients and end markets. This is as healthy as we've ever seen them and it's really what's driving our favorable outlook for 2008 and we feel very confident here as a team. With that, Jennifer, we'd like to open up the call to questions.

(OPERATOR INSTRUCTIONS). Richard Paget, Morgan Joseph.

Good morning, everyone. I wonder if we could talk about margin trends in infrastructure. If I look at the first half of the year they were low 7s and now in the second half you did 9.6% in the third quarter, 9.7% this quarter. Is this more now the trend and is this -- utilization has gotten better, some better pricing? How should we think about the infrastructure margins going into '08?

Well, no doubt they've improved. We had an excellent fourth quarter. Fourth quarter is seasonally our strongest quarter; we have folks not only busy in the office but also folks out in the field doing construction management oversight, different types of items that drive our utilization on a seasonable basis higher. We've indicated in the past and we'll remain consistent with a range of 8% to 9%, so it is an improvement. But on an annual basis we expect it to be 8% to 9% and of course we'd always be looking for the upper end of that range. But that's what we would expect out of our infrastructure group.

Okay. So going into the first half of '08 we should expect I guess at least a sequential drop at minimum?

That's correct.

Okay. And then with WRDA, do you expect to start winning contracts at the end of next year? Or is it you'll actually start doing the actual work?

We think we're going to bid and win them earlier in the year and we expect a revenue contribution late in '08. A lot of these projects have been slated -- the Army Corps of Engineers, which is the group that, the federal entity that will be administering most all of the Water Resource Development Act funds, has been preparing for this for some time.

They've been sort of under a spotlight of doing this much more efficiently than perhaps they've had on other programs. They're well positioned to put vehicles in place, many of which we have already which accounts for some of the difference between our backlog at $1.2 billion and our contract capacity at $7 billion to $8 billion.

So that difference are vehicles that are in place that allow the Corps to move quickly on these task orders or procurements. We do think it will be six to nine months before we actually see funding in dollars so it will be a little bit toward the late end of '08, but we think we'll see revenue contributions late in the year.

And then beyond some of the larger projects around Louisiana or coastal restoration, what are some of the other kind of plum awards that you'd be looking to target?

We'd love to get the entire Everglades restoration program because there's a lot of dollars there. So Everglades is one of the world's largest water handling programs and wetland restoration programs. We're present there now, we have contracts with the South Florida Water Management District which is funded through many different agencies including contributions with other programs for the Corps of Engineers, that's one area.

We're going to see the upper Mississippi navigational upgrades and that's going to be coastal protection, navigational, dredging, sediment work. We're also going to see work that would be funded for Sacramento River Delta, which is about 1,600 miles, 1,600 miles of levies that will be addressed, investigated, assessed, designed and upgraded. So those are just a few of them that we're positioned, we have a large presence in and those are programs that are exactly what we do.

Okay. And then finally, with the amortization going into next year, how will that flow quarter to quarter? Will it be spread out evenly or is it also front end loaded?

It will be, on an annual basis will be equally on a quarter-to-quarter basis.

Thanks. I'll get back in queue.

Corey Greendale, First Analysis.

Good morning. I wanted to ask first for an update on the labor front. It looks like you were able to add some FTEs in addition to the ones you got from the tuck-in acquisitions, is that right and what are the labor markets looking like and what are your internal hiring plans for this year?

We did, we added about 200 staff, a bit over 200 staff from the third quarter to the fourth quarter so we were up. We have about 450 openings, so if you went to Tetra Tech's web page and looked at our posted listings, there's just over 450 positions we're looking to fill right now. It continues to be a tight market; it continues to be something that we wish we could add the right people very quickly. But it has not been a factor that has slowed us down or limited our ability to win or execute programs.

The three tuck-ins were actually late in Q4, so they really didn't add staff to us that impacted or contributed to our net revenue. There was such a very short period of time. But the one thing you will see as we continue to add heads or add staff and additional resources is you will watch the growth on gross revenue and net revenue more closely be aligned. In fact, you saw that this fourth quarter where we had approximately 10% both at the gross level and the net-net level.

Makes sense. It sounds like you are targeting international more. You have spoken in the past about kind of a mid -- 15% revenue growth target with half of that organic, half from acquisitions. First of all, is that still what you are targeting, and can you kind of quantify where international fits into that picture?

Well, that's exactly right, the 15% is exactly as you have portrayed; half of it organically from our internal operations and the other half from additional acquisitions that we will bring on.

I did, on this morning's presentation, mention the word international probably as many as any other word. But I want to make one thing clear, it is in addition to what we are doing now, not in lieu of. We're going to continue to be very aggressive here domestically. We're going to have our largest investments in our core businesses and our key clients and services, but we're looking to add. It is not hard for us to make huge increases in our international presence when only 1% of our work is internationally. So if we can add 1%, we have doubled our business.

But the actual contribution from an international acquisition in 2008, if we find the right one, it will be lumpy. You will either see nothing or if we find the right one at the right location at the right price, then that will be a move we have. It is not an imperative for us in 2008, and it is not something that we have actually included into our forecast or guidance.

So our guidance, if we actually broke it down into business sectors or geographic locations, does not include appreciable change in the international presence.

So just to be clear, the 15% growth target, that would not include -- international would be gravy on top of that for the near-term.

Well, I would say it is a very small component of that 15%, very small.

Okay.

So if turns out to be a large move for us, then that would be additional upside.

Okay. Then I also wanted to follow up on the WRDA thing. Of the $23 billion, about how much of that do you think you could easily do, given your expertise?

Well, we think maybe 90% of it falls into service areas that either we -- that we can perform internally or teams that we construct that have construction components into it. But overall, with the vertical capability we have all the way through implementation, which would be construction of these, with the appropriate teams we have we think about 90% of it is we could -- we'd pursue.

If I could just sneak in one more. State and local, I know you said it's strong across the board, but could you highlight just a couple of things that were particularly strong that drove the growth?

CSOs. CSOs combined to our overflows were particularly strong for us. We're up to 16 different municipalities that we have CSOs with. It has been an area that -- one that represents some of our largest wins that we had, new contracts that we have had, particularly in the Northeast.

I am very happy to announce this is an area that we actually focused on and have had great success. It wasn't something that came in that was tangential to our focus. So that was really one of the big drivers for us.

Great, thank you.

Debra Coy, Janney Montgomery.

Good morning, all. Dan, following up a bit on the budget outlook, the WRDA program now approved, but the Army Corps of Engineers budget for fiscal '08 hasn't been approved yet, nor EPA's and a few other agencies. Do you have a sense yet of how you see that playing if we see some delay in the fiscal year appropriations? In other words, are you expecting just a continuation of fiscal '07 levels? Kind of how do you see that playing out over the next couple of quarters?

It is unclear to us, as many, whether or not some, many or all will get passed. There are approximately 12 different appropriations that will go through Congress. Some may get through. As you are aware, a year ago, to the defense portion went through; the defense appropriation went through. Funding that Tetra Tech receives is actually spread out through about half of those. There are six different appropriation bills.

So, first of all, we are not concentrated in any one area. So if one appropriation bill isn't passed with this new funding level that it would have any material impact. I will go back to a statement I had earlier on the federal. 70% of our backlog for the federal work that Tetra Tech will provide this year is already in backlog.

The new programs, I was in a meeting with the Department of Energy which is one of our clients, and there are some interesting phenomenons, if you look at the underlying numbers. The continuing resolution actually allowed the Department of Energy to have more funds to expend in fiscal year '07 than it would have if the bill had passed.

In the past, it had reduced budgets and, in fact, the '06 budgets were higher. So a continuing resolution does have plus-ups in some areas, is flat in others, and does have declining. But the Department of Energy is an example, with continuing resolution there's actually more funds for the entity to expend with just a continuing resolution at its prior-year levels.

That is helpful. Just one quick follow-up on that. Within the Corps of Engineers which has become your largest client, it does sound that they have gotten a lot more proactive as they are gearing up for WRDA implementation, and it also sounds like they have funds and projects and vehicles already in place, so that we could see significant work coming out of them even with an ongoing fight over the forward appropriation.

That is what we see. We think that the Army Corps has done a very good job of positioning new contracts and starting upfront planning, studying evaluation projects, many of which we are involved in, that are sort of the precursors to these large projects that will come through WRDA.

So we think they're actually doing a very good job. It is the right client, we think, at the federal level to be closely aligned with. So having the Corps being one of our largest clients positions us very well, so I agree with your thesis.

Okay, that is helpful. Thanks. Then a question on the forward growth. I certainly understand the impact of the non-cash charge having an effect on margins, but I'm also trying to understand how you're thinking about organic growth on net revenues that your midpoint of guidance range is around 15%. Obviously, that is still including a significant amount of acquisitions. Backlog, obviously, is growing faster than that. And your organic growth for fiscal '07 was only, according to the data, a little over 2%.

So should we expect that the percent of subcontracted revenues will come down; will it stay flat? How should we think about leaving acquisitions aside and ARD's contribution and so on; how should we think about organic growth and net revenues over the next several quarters?

Let me comment on the organic growth. 15% is right, 15% is our target, half from acquisitions, half internal. So our goal in internal is up at the 7% to 8%, so that's where our goal is. As you've observed, we've had about a 2% organic growth in 2007. We had one program that accounted for about 4% of our net revenue with the Department of Energy. It's a program that was at the end of its contracting period and went into reprocurement at the beginning of the fiscal year and we didn't see it replaced.

If you take that single project out, we saw all of our operating units grow organically at a number of about 6%. So we actually saw the fundamental growth, again in all of our segments in our core markets, growing at about 6%. Our goal is to pick that up to be a little bit higher than that, 7%.

And just a note on our forecast going into '08. We're going to grow 15% and we are not going to forecast the timing or contribution of acquisitions that we make during the year. On a pure mathematical basis you might assume if you just went through our numbers you would forecast 8% and then as you added acquisitions throughout the year we would increase our guidance both on revenue and earnings per share. We feel highly confident -- in some ways I feel more confident going into this year than I have in 10 years -- that we're coming into this year without any contributions forecasted from future acquisitions and we're already at a 15% EPS and revenue growth going into the year. I hope that helps.

Yes, it does, thanks. And last question and I'll get back in line. Both you and David mentioned room for improvement on the tax rate. David, what are you thinking about for fiscal '08?

'08 we are targeting at 41.5% and let me echo what --

So that's pretty flat.

Right. Let me echo what Dan just said -- as we continue to look at our state structure, try to improve one or two points -- some percentage basis points on that. Also, as we expand more internationally and that is the biggest yield from tax rate from international lower tax countries. So you will see that happen and I really can't forecast when that's going to happen.

Sure. All right, thanks.

[Mark Segal], Canaccord Adams.

Just a couple of quick questions. As you look out into next fiscal year in evaluating international acquisition opportunities, are there particular areas that you're interested in, if it's Resource Management or if it's more alternative energy slanted or how do we look at that?

Our acquisitions initially will likely be associated with water -- watershed, water quality, water supply, wastewater treatment. So likely our largest differentiator going internationally would likely be water. The locations we would likely go to would be the geographic locations internationally that have government institutions specifically associated with the commonwealth countries where they have very developed, established and enforced regulatory and it's a -- regulatory enforcement and laws to support Clean Water Acts, drinking water quality.

So that's where we'd be focused. Those would be places like Western Europe, portions of Asia, Singapore, Japan, some of the other developed locations around the world -- Australia, New Zealand of course.

Okay, great. And then last quarter you touched upon a little bit your relative mix in contract structure and its implications on margins going forward. Just wondering if you could touch on that again?

Yes, the margins are generally the lowest for our federal clients. Most of the work or much of the work with the federal clients are cost plus fixed fee, very low risk, long duration, large contracts, excellent for cash flow. So many positive attributes, but typically the margins are the lowest. We looked at sort of 6 to 8 type percent. State and local are larger and then of course the largest on commercial.

Let me just make a note that the addition -- if you take a look at sort of a midpoint of our guidance you'll see that the margins for 2007 to 2008 are flat or even slightly declining on a margin basis. Of course income is up, EPS is up, that's going to be largely affected by the addition of ARD. ARD is a 100% federal client-based entity. All of its work is with the federal government and much of it on a cost plus fixed fee basis. So again, low-risk, excellent work, all of the attributes I just mentioned, but it does have an effect of tempering our margin just a bit.

Okay, great. Thanks a lot.

Matthew McKay, Jefferies Inc.

Just a first quick question -- how much did acquisitions contribute to backlog?

We don't have that broken out at this moment, but approximately $40 million.

From the way you're talking, it sounds like it is not going to be an issue any time soon, but at the same time with what is going on with property valuations and everything else, starting to get more questions about state and local economies and how potentially -- if state and local economies do start to head south here, maybe if you could just kind of walk me through a little bit in terms of how it potentially could impact your business or not impact your business?

Well, there are components of state and local budgets and funding that are highly sensitive to the residential market and residential housing. The areas that we receive our funding are generally not associated with that, areas such as the southeast -- in Georgia the water wars over Lake Lanier and the absence of water for existing homes; have special budgets put in place out here in California.

The investigation and evaluation of the Sacramento River deltas is a special bond fund that's been supported. It's also true of the coastal protection in Connecticut and a number of states in the Northeast. So most of the work that we are exposed to at the state and local level is not associated with the residential market and has earmarked fundings through bonds or other types of user fees that are put in place for existing households.

Okay, that's helpful. And then just one last question, just Iraq, what's the current situation with you guys over there and what's your expectation going forward?

Well, we're still over there. We're actually forecasting a ramp down throughout the year and we've forecast internally as part of our buildup, our work decreasing by more than 50% here in fiscal year '08.

Okay, great. Thanks a lot, guys.

Francesca McCann, Stanford Group Co.

Just one last question -- a lot have been answered. Looking at the number -- you talked about hiring 200 people and there are still 450 slots open. What percentage of those are specialty engineers?

Francesca, that's a good question. I don't have a breakdown, although I would, having been hired as an engineer at one time, would consider -- every one of them hired would consider themselves a specialty engineer or a technical person. The area that we have the highest demand right now is in engineering, mostly in the water supply and water treatment. So I would say that that's the largest component, that's been that portion.

Our Resource Management, and I would just estimate, there's probably two-thirds on the engineering and one-third on the environmental science side which would be the geologists, chemists and other science based staff. So I would say generally speaking I would approximate it at two-thirds on the engineering side, one-third on the research management side.

Okay, that's helpful. And then just the trend there, are you -- I know we've talked about for some time now kind of the difficulty in finding skilled engineers. Does that continue or is it increasing?

You know, we haven't seen it increase, we've seen it continuing at about the same level, but we haven't seen any particular change in this as a risk factor or something that's impeding any of our progress. So I've seen it pretty flat actually. It might be a function of the tuck-in acquisitions we've done because they've really helped a lot. And most of the acquisitions that we completed have added people on this engineering side. So I think it's really been an effective way for us to address the self performance on the engineering side.

Okay. And then a quick question on international expansion, what are your thoughts on India?

We have an office in India, it's one of the probably half-dozen countries where we are located internationally. We have a number of water infrastructure projects and, in fact, of all of the countries that we have a presence in, India is the location where we have the most number of water infrastructure proposals currently pending.

I'm hesitant to make any type of forecast until they turn from proposals to wins, but it is an area that we're seeing the largest proposal effort internationally. And not only the largest number of proposals, the types of projects are the largest also. So we're very hopeful, but I'm going to wait and see.

Okay, great. That's all for now. Thank you.

Rob Mason, Robert W. Baird.

I may have missed this in the organic growth discussion earlier, but what -- within your fiscal '08 revenue guidance what do we assume acquisitions contribute? And again, speaking completed, not future acquisitions.

Contributions from acquisitions will be about 6%.

Okay. And then just a housekeeping, Delaney contributed what in the fourth quarter?

On a net earnings basis about $20 million.

Okay, in the fourth quarter?

Yes. They are very, very seasonal. That's not an annual thing.

Right, right. And then just to clarify, David, your net debt comment for Q1 of '08, I think I missed that?

Typically we will be using cash for the first quarter, that's a big quarter for our bonus and everything else. And so we forecast about $30 million to $40 million usage in the first quarter on that alone. And as a result of the acquisition of ARD we actually borrowed close to $40 million against our line, so that's why I mentioned $70 million to $80 for the first quarter.

Okay, yes. That's what I meant. And then Dan, just to clarify your comment on the DOE second line of defense, you said Tetra Tech will not be participating there?

No, I did not say that. I said that that was -- that a DOE program was under procurement and it simply hasn't been finalized at this point.

Okay. So we're still waiting for some visibility on that?

That's correct.

Do you have a timeline or expected timeline?

Well, the DOE has a different calendar than some of us on their awards. So I'd certainly expect it in the next three to six months. It's possible it's even sooner than that; I certainly wouldn't expect it to be any longer than that. So three to six months.

Okay, very good. Thank you.

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

Thank you very much. I'd like to conclude with a few notes as we go into 2008. Number one, on a total revenue basis we're planning on exceeding $1.8 billion in total revenue as we go into 2008. We're moving toward that $2 billion number, we're seeing our end markets stronger than ever that will drive that. We continue to be focused on winning larger programs that have longer duration.

We also are focused on expanding our services not only to the U.S., but I also mentioned internationally and that will be largely be driven by our acquisitive strategy. And with that we're looking for another excellent 2008 and to continue the momentum and success we've had just concluding 2007. Thank you very much and I look forward to talking to all of you next quarter.

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