Tetra Tech Inc (TTEK) 2008 Q3 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, Chairman and Chief Executive Officer; Sam Box, President and David King, Chief Financial Officer. They will provide a brief overview of the results and then we'll open up the call for questions.

During the course of this 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 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 a question-and-answer period after the presentation. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Great, thank you very much and good morning and welcome to our third-quarter fiscal year 2008 earnings and release conference call. I am very pleased to present that what was a very good quarter for Tetra Tech this year. In fact, this was the quarter of our greatest revenue in our history, gross revenue, the highest net revenue that we have ever had, highest profit and the greatest backlog that have ever been recognized here at Tetra Tech.

In some respects, these results were better than even we, the management team, had anticipated and I would actually like to discuss what drove some of this additional revenue and income from the quarter that were substantially above even our own guidance going into the quarter.

This additional revenue and income were really driven by three primary areas. The first, and it was the most significant factor, was acceleration of wind projects that we had won in these previous quarters. It was the largest additional contributor to revenue and income and it was really driven by acceleration requests by our clients, quick turnaround on permits and being able to meet the requests of our clients and some of the project needs. And so that was the single biggest driver.

But there were two others that were also material contributors that drove both income and revenue for the quarter. The second was USAID, United States Agency for International Development. We had won a number of projects, specifically in Afghanistan. And we had gone from what was essentially no staff in country for USAID at the beginning of the quarter to well over 100. In fact, approaching 200 staff, half of which were US, another half were in-country staff. This was in response to a request to accelerate the presence and execution of the work and we went from zero to a startup and full operation very quickly through this quarter and we just hadn't anticipated how quickly we were going to move on that project at the client's request.

And the third, and it is one that we have been watching for a number of quarters and in fact, well over a year, is that the base realignment and closure work, BRAC work, in the latest round, we finally saw a pickup on some of the infrastructure projects. So for the U.S. Army, we had a number of infrastructure BRAC projects that were awarded and that we went from award to initiation starting during the quarter.

The combination of these three wins -- USAID overseas and most notably in Afghanistan and the third, BRAC work -- contributed just over $30 million of additional net revenue that we had not even forecasted going into the quarter.

We feel very good that we were able to respond to meet the requirements of the clients and in fact, this isn't an acceleration of revenue from future quarters into this quarter because, as I will speak to in a few moments, we replaced all of that work with even new orders that continue to grow our backlog.

In our current portfolio, all three of our reporting segments grew. Our Resource Management, Infrastructure and Communications, which are our financial reporting segments, all grew but most dramatic growth was recognized in our Resource Management group, which grew over 45% year-on-year. It now represents 70%. Going back to look, but it's approaching an all-time high. So 70% of our revenue is now in our Resource Management group. It's the reporting segment that houses our energy practice, which it includes the wind projects, which are the fastest-growing component of the Company. That is what is driving this component, the revenue partition to the largest portion of Resource Management.

Generally, our clients and our customers are generally similar with respect to the percentages as in previous quarters and is consistent with our plan. I have said -- I have talked about this on previous calls and quarters and this combination and these percentages are what we have planned and we really like it. We like the stability of the federal government. It is exceptional. We like the higher profits of the commercial clients and the long-term projects of the state and local really give us the right combination and the right balance for stability and I think these results these past several quarters, including this one, show that it is very favorable in all sorts of different economic times.

I'd like to speak just for a moment about the performance by market. First, federal growth, the federal market for us, it was the area of the Company that was up the greatest in gross revenue and net revenue was up essentially in the mid 30%s, 34% and it was led by, as I spoke just a moment ago, the large growth in USAID projects that we had specifically in Afghanistan and the base realignment and closure work that we are doing at a number of military installation projects.

These two clients -- USAID and the Corps of Engineers -- are our top two clients and so we feel very good about our top clients actually continuing to grow and drive both gross revenue and net revenue at such a great pace.

The area that is growing the fastest on net revenue is our commercial sector and it is being driven by wind energy projects and I would like to spend just a moment talking about what type of projects these are and who we are working for.

Primarily, we are working for utilities and commercial developers and the wind market has just been exceptional for us. In 2007, we did approximately $50 million in revenue. We originally expected $100 million in 2008, fiscal year 2008 or a 100% increase. Based on this acceleration in new awards, we actually expect 2008 to be closer to $150 million or three times, a threefold increase from what we had the previous year. And an initial look, and we will talk about this more as we enter in 2009, we expect probably in excess of $200 million in this type of work for 2009.

Now these revenues are being driven from specific projects obviously and these are projects like work we are doing from T. Boone Pickens large wind development projects that we are supporting right at this time on some of the upfront studies work. The turnkey development of wind farms that we are doing and we have provided press releases for PacifiCorp up in Wyoming, work we are doing on the East Coast, New York and other areas in the Eastern portion of the US for Noble, Noble wind programs.

And finally a different aspect of our alternative energy is work we are doing supporting transmission lines. One component, while we talk about wind a lot, our alternative energy practice is not just wind. Wind is the largest component by far, but it is supporting aspects of solar, geothermal, bioconversion plants and a big component that is common to all of these is how do you get it from the generation to the grid and that is transmission line programs. And those are programs such as the energy Gateway West transmission project that we are supporting and other large programs. So those are the items that are primarily driving the large growth, in fact, the largest growth in our net revenue year-over-year that we have had in any of our customer segments.

The last area that I have spent a fair amount of time talking in the previous calls is state and local and really our results at the state and local market have been mixed. On the net revenue, we are still seeing strong growth. In fact, 13% growth in net revenue year-over-year, but a little bit of softening in our gross revenue and let me just say a word about what is driving the mixed performance.

Our water projects, which are predominantly the work that we are doing for the states, which is regulatory enforcement programs, combined sewer overflows, in fact, are what were the major contributors to the growth in net revenue this past quarter. They are strong. Water at the tap are strong and watershed management and water quality are all very strong and continue to be one of our best performers.

Areas at schools and let me describe what that is. That is our K-12 or kindergarten through 12, which are driven by bonds and levies for school construction have been weak driven by housing tax receipts, levies, other fees at the local level. They have been weak. So we have seen a bit of a reduction there.

And municipal communication programs, which are also driven by tax receipts and other types of local funding, have also been weak. So fortunately those are very, very small aspects of our state and local exposure and the areas that we are predominately focused on, continue to be very strong.

Aggregating all three of those, the growth in federal, commercial, in state and local, that is what yielded a 40% increase in our gross revenue and approximately a 30% growth in our net revenue. That increase in net revenue also was accompanied by Tetra Tech having added approximately 400 additional staff during the quarter sequentially from the previous quarter.

One of our strongest areas of performance in the quarter was our new orders and in fact, this third quarter represented the second-highest book of new orders that we have ever had in a quarter. It was only eclipsed by the previous quarter where we had these more than $150 million of initiation of wind projects. With the exception of that, this is the highest book of orders that we have had and is much more diverse than we have had in the past. We more than replaced the record revenue that we expended during the quarter, which was $564 million. We covered all of that and continued to grow our backlog this quarter.

If you are following along on the slide presentation, you will notice that many of our largest contract wins haven't even been represented in backlog yet. In fact, they have only begun to contribute to our backlog. In fact, if you add this up and some of the others that comprise the new contract capacity, we have added over $1 billion of additional contract capacity during the third quarter that we didn't have before.

Our backlog. I would like to say just a word or two and put some context around not only the quarter's growth in backlog, but really the progress we've made over the past several years. We had almost a 30% growth in our backlog year-over-year and while this backlog is made up of lots of individual great projects, if you look at it in aggregate over the past several quarters, what you will see is that the integration of our acquisitions directly contributed to our ability to win larger, more complex projects all around the world. That is really what is underlying the successes that we have had and that is what is driving our backlog. And so really all of these acquisitions have come in, have really added a different level of synergy to the operations that we have had and made a big difference and made Tetra Tech even more competitive than we have been previous. And with that, for the details on the financials, I would like to turn it over to David King.

Thank you, Dan. Again, this is a great quarter. If our second quarter was a strong quarter, this third quarter was even stronger. Revenue was $564 million, a 40% increase. Net revenue was $332 million, a 30% increase as a result of strength and client demand, as Dan mentioned earlier, in our wind and BRAC activities and work in Afghanistan for USAID.

More importantly, we registered an 18% organic growth in the quarter and it is a tremendous number for us for the quarter. Income from operation was $28.1 million, a 27% increase. On a margin basis, it is 8.4%. Excluding intangible charges, it was 8.9%. I want to make note here, on the $28.1 million operating income, about $2 million of it had to do with a project settlement, which will not repeat and we have factored that in our Q4 guidance in terms of comparison.

EBITDA was $33.1 million, a 29% increase. We are paying a little bit higher tax as we expand. Again, these are -- the charges will only occur in the first three or four years in terms of intangibles.

SG&A costs were $37.8 million, an 18.5% increase. On the net revenue basis, it was about 11.4%. This increase was a result of increased proposal pursuits. As I mentioned in the prior quarters, we continued to invest heavily in our bid and proposal efforts as demonstrated by our quarter-after-quarter strength in new orders.

Part of the increase had to do with higher depreciation and amortization. Excluding only the incremental amortization, our G&A structure, that is G&A only, increased at only 12%. And keep in mind, this is to support a 40% bigger company today. Clearly, we are seeing some efficiency, incremental efficiency and synergy as we break into a $2 billion company.

Tax was $11.4 million, a 26% change from prior years as a result of 30% higher earnings. The effective tax rate was 41.5%. EPS was an increase of 29% at $0.27. Our guidance was $0.22 to $0.24. As I mentioned earlier, about $0.02 here was a result of a large project settlement and which will not repeat.

On the balance sheet, I mentioned this in the last two quarters, we had reclassified some tax accounts as a result of adopting FIN 48. There was no P&L impact nor equity adjustments. Accounts payable and accounts receivable were at $537 million and $177 million respectively, an increase of about 28% for both versus our revenue growth of 40%. Not only did we have strong collections, but also smarter contract terms versus our vendor management.

Net debt was about $18 million, a 54% reduction as a result of strong cash collection and minimal borrowings. Our debt equity ratio was about 14% at the end of the quarter. Debt to total capital ratio is about 12% for the same time period.

Cash flow. Cash flow has also been strong this quarter and year-to-date. We registered $16.8 million for the quarter, more than doubled from a year ago. Again, I attribute that to strong cash collection and improved contract terms. Fourth quarter, I expect to do about $15 million to $20 million and we maintain the FY '08 target to be $55 million to $65 million, which we raised last quarter.

CapEx expenditure was $3.6 million. At the whole year, we expect to be $20 million. DSO was 72 days. This is again a very, very strong performance with a strong cash collection and a smarter contract term with respect to advance payments. However, I do expect Q4 to be in the mid 70s and mid to high 70s and longer term to be in the mid 70s.

Net debt chart. We take this chart to heart, keep a very close eye at our cash flow and debt levels. I expect net debt to be around $15 million, give or take $5 million, at year-end as we closed some acquisition at the beginning of the fourth quarter. With the capability of generating close to $50 million of free cash flow a year, we will continue to fund or if not self-fund our organic growth and to some extent acquisitions.

To close my remarks, this is indeed an outstanding quarter in terms of all operating metrics and financial metrics -- revenues, backlog, operating income, margin and EPS. Again, I attribute this success to our focus on water, environment and alternative energy. The strategy we have chosen is paying off. Back to you, Dan.

Thank you very much, David. The success we have had in these markets and with our clients directly drive our guidance and at this point, I would like to provide the guidance both for the fourth quarter and for the aggregate of fiscal year 2008.

Our net revenue guidance for the fourth quarter is from $325 million to $345 million with an associated diluted earnings per share of $0.27 to $0.29. Now with three quarters behind us and in fact, the first month of the fourth quarter behind us, the range for the year, our guidance for the entire year of net revenue is relatively narrow at $1.22 billion to $1.24 billion or about a $20 million range.

With diluted earnings for the entire year, you simply take our fourth-quarter guidance on top of the first three quarters actuals, you will yield a $0.99 to $1.01.

A couple of notes here that, at this $0.99 to $1.01 range for the year, that includes $0.06 of intangible amortization expense, which has been incorporated into this. It includes no contributions from future acquisitions, either for the fourth quarter or for the year, but, again, I will know that we are only approximately 60 days away from the end of the fiscal year and as David King had indicated a moment ago, assumes a tax rate of approximately 41.5%.

In summary, our management team delivered outstanding results for the third quarter and while we have excellent clients and prospects, I'll tell you it is excellent execution by the management team here and I would like to thank all of them for just a great continued performance and a great quarter.

We have seen continued growth in our long-term water and environmental businesses, which have been our strategic focuses for essentially forever. That is the core of Tetra Tech -- the water and environmental programs. But the third area of focus, energy, is seeing accelerating growth, particularly driven by these wind energy projects that I talked about a moment ago.

Our record backlog, which we have not only seen for one quarter, but on the earlier slide where you see a trend, has been driven on a consistently upward basis, is providing us excellent visibility and with the continued book-to-bill of greater than 1, it continues to provide us just great insight into future projects and prospects.

Now with the success in all of these areas, we have raised our guidance for fiscal year '08 and the midpoint of the upgrade that we have just provided for earnings per share reflects a 25% growth over our 2007 numbers in performance on earnings and the midpoint of our updated guidance for revenue reflects more than a 20% increase. And I think this is reflective of the excellent performance through this point of the year, our confidence going into the remainder of this fourth quarter and really as we go into fiscal year 2009 and we see all three of our key markets -- water, environment and alternative energy -- as being very strong and having excellent long-term prospects.

And with that, I would like to conclude our presentation and I look forward to answering your questions. At this point, Tina, if you can open it up to questions, we will transition to this portion of the conference call.

(OPERATOR INSTRUCTIONS). Alan Robinson, RBC.

Good morning. Congratulations.

Thank you.

You talked in the prepared comments about alternative energy. We know all about wind. Can you talk a little bit in more detail about some of the opportunities you see in terms of solar, geothermal and the transmission line business that you were talking about? Perhaps an idea of the kind of revenue run rates that you can expect over the next couple of years from these businesses.

Well, the work that Tetra Tech is providing in solar, geothermal and transmission are all very similar. They are siting. The work we are doing are upfront siting. That would be for, in the case of solar, siting the locations with respect to permitting, environmental impact reports, endangered species, geotechnical work with respect to investigations for soil stability and in fact, you can imagine, for all of these, it is a similar requirement.

We are not in the hardware and in the wind work, I have commented before, I will use it to draw a parallel, the work we are doing for wind is everything other than the turbines and the towers. They are being acquired by the owners or the developers.

In the case of solar, the panels and the generation hardware are also being acquired by the owners or developers and what we would do is the siting of where it would locate, some of the engineering work, the consulting, the permitting, the oversight. And so that is what we would do for solar. Geothermal is the same.

Really the most exciting and perhaps the largest portion for us is the transmission. The one item that is common to all of these power generation alternatives, and then quickly moving from alternatives to mainstays, but these different sources of energy generation are how do you get it into the grid.

A big aspect of what we are doing with respect to even the early portions of each of these energy production alternatives are how do you situate it so that you minimize the transmission into the grid and once that has been selected, how do you then identify the routing, the clearance, the right of ways, the investigations, environmentally, geotechnically from an engineering aspect and those are all of the types of projects and services that we are providing. The size of these markets -- there is great wide ranges of the size of them, but it is really a multibillion dollar opportunity in transmission.

In wind, we see currently the Wind Energy Association is estimating approximately a $9 billion a year expenditure. About half of that is in the turbines and towers. So the part of the market that we would address there would be approximately $4 billion. So as you can see, we are still a small player and have great headroom to grow. I have seen some very wide ranges on transmission. But those appear to be larger than even the wind numbers, substantially larger, and we are just at the very front end of that.

Interesting, interesting. And then just finally, can you give us an idea -- let me see here -- what proportion of your state and local business is non-water and what kind of revenue visibility do you have with the water side of your state and local business?

The percentage of non-water is about 20%. About 80% is water or water-related and I am sorry, the second portion of the question?

The second portion, in terms of your visibility regarding the water portion of your state and local business, I know typically these are longer-term contracts. What kind of visibility do you have now in terms of your horizon for state and local business? I am kind of interested to see if you see it sort of drop off a couple of years down the line or if it is just sort of a steady type of revenue stream that you have from that line of business.

What is interesting is the state and local work -- states typically fund our projects one year and we are not seeing any change. We have not seen any of our work move to a shorter timeframe. Typically, we can get a two or three-year contract period with the states. The longest periods are with the federal government. We have contracts that go out 10 years as a contract capacity vehicle, but they are typically funded on an annual basis. We have very, very little of our backlog that extends beyond 18 months and in fact, 75%, three-quarters of it or more would all be expended in a one-year period. At the state, because of requirements at most states for annual budget authorizations, and not to encumber future years of tax receipts and other items, our programs are funded typically for one year and we may have contracts that go multiyear. But in our backlog, for the most part, it is all in 12 months.

Okay, thank you.

Corey Greendale, First Analysis.

Good morning. Nice job on the quarter. I had a couple of questions. First of all, with BRAC ramping up returning to the way you had described it probably a couple of years ago now, that there would be a bell curve in the activity, where in that bell curve would you say we are with that ramping up?

I think we are still at the very front end. We are at the very front end. The work that we are seeing is not associated with the base closures and environmental cleanups, but with the early construction of military family housing and some of the infrastructure at these new consolidated bases.

On the bell curve, we would be still at the very beginning of the first -- the ramp-up period. If you wanted to turn it into -- use the baseball metaphor, we would probably be in the second inning maybe. So we are still very early in the first -- well within the first third. So the largest portion of the revenue, we still expect that to be well out in front of us.

I believe that '09, we will see some ramp-up, but I think I have indicated in the past our belief and our view of the BRAC is that it will be partially associated with what happens in expenditures overseas, specifically Iraq.

So as Iraq downsizes, the troops repatriate; we expect those funds then to be reallocated to BRAC and the work to pick up materially. And that is where you're going to see the biggest revenue expenditures and the big area under that bell curve.

Okay. And then turning to the wind project, what is your capacity utilization there, and how much more could you grow that business given the headcount that you have?

Well, I would love to be able to capture all $4 billion of that a year. That is our goal. We do have people highly utilized. We do have additional capacity. The reason we are doing some work on the T. Boone Pickens is he is looking for companies that have the capacity and the proven track record to actually meet his time schedules. That is why we are working for him.

Some of these large transmission projects that I have talked about, the same item; they are looking for large companies that have capacity. I will tell you the differentiation of Tetra Tech that we bring to the market is full-service. There is lots of folks that are constructors. There are some that are upfront permiters only, but one of the primary differentiators for Tetra Tech is our full-service capability.

We have started an internal training program, because the engineering skills required for the civil engineering, the electrical, other support, permitting, environmental impact statements, engineering, plans, drawings, construction oversight, all are transferable skills from the several thousands of engineers we have in our infrastructure and our other units that we have here.

So we have started a training program internally, a wind training program. We are rolling our own staff through, so it is not a function of whether or not we can go into the market and bring these folks on, which we are doing. But we also have internal capacity within our -- we're almost 9000 staff now internally. So we are feeling pretty good about our capacity to execute what we have and to take on more.

And the latter item, going outside internal, are you seeing anything in terms of weakness in labor markets generally helping you or is it still pretty tight to find good engineers?

No, it has actually gotten better. It has gotten better. Four quarters ago, a little bit more hesitant on this in saying that there is a little bit of pressure. But the softness in some of these, what I'd call, adjacent markets with housing down and some of these, I don't want to say housing framers, wood framers are transferable to large crane lifts. That is not the case, but a lot of the softening in some of these adjacent markets in construction and in engineering have made more staff available.

And the last one for your is on the commercial segment, outside wind energy, are you seeing any indications of softness in project flow because of the economy?

Water is good. We actually see water and environmental programs are good. The smaller programs for environmental projects for investigation assessment governance is a big issue, have actually strengthened for us. We have seen the small projects for those that were marginal kind of taper off, but we have been successful with more large programs. And some of the areas that are just beginning to emerge are -- we talk a lot about base realignment and closure for the military, but the automobile industry is going through a great consolidation and closing of old smokestack industries. And as part of that closure, there is all sorts of investigation assessment and cleanup work and so that is a very strong. And so we are seeing great strength.

The other area that we have a great focus on and it leads right to our heritage of coastal engineering is there is a lot of sediment remediation programs that requires a great differentiator from traditional low-tech investigation assessment techniques and really lead to the leading science and technology and evaluation differentiator that is Tetra Tech. So sediment work with rivers, ports, harbors is really -- we are seeing pick up materially. They are larger projects, more complicated, more expensive and less competition and better margins. So our traditional water environmental work is very strong.

Thank you.

Debra Coy, Janney.

Thanks, good morning, guys. Dan, you have posted another great quarter of backlog. If we take the $1.7 billion or $1.6 billion and look at a 40% subcontractor level, we have already got north of $600 million in revenue, net revenue coming in for next year. How should we think about organic net revenue growth? The 18% number this quarter was pretty astonishing. Certainly estimates for next year I think have been probably on the organic level certainly substantially lower than that. How should we think about how this backlog is going to flow through and what else continues to be in the pipeline for next year, leaving aside acquisitions?

Our organic growth, you are right, was exceptional. We have talked and we are focused on achieving and then beating a 15% top and bottom line, which we have said half of it would be organic. So we are looking at 7% or 8% and we just did 18%. No doubt that is a strong performance.

But let me make one note on that 18%. We did acquire a year ago, it was just a year and a quarter ago for the most part, Delaney, which has made a material contribution and is very valuable and being instrumental in helping us move into this wind market and alternative energy. But our practice, as disclosed, is after a firm has been with us over a year or more than 12 months, we account for their revenue as organic.

So of the 18%, about 8% was Delaney and so it was part of a reclassification. The other roughly 10% was organic from what I will refer to as the old Tetra Tech or the underlying business. And so by any of these measures, it was very strong. I would see that we would -- upper single digits, 8%, 9% even 10% in the fourth quarter. I would see us at 10% or perhaps better for organic growth. But I am cautious and not providing guidance of just organic growth at 18% to 20%. So I would say upper single digits to even touching 10%.

Okay. And that would be, as we look ahead in terms of your visibility going into next year, that continues from fourth quarter, as far as you can see right now?

That's right.

Okay. And it looks like the mix of subcontracting work as you've moved into the larger projects is settling in around 40-ish. Should we expect that that will continue as well?

I think so.

And if that stays stable, what we are getting on the gross revenue line should be more equivalent to what we are going to get on the net revenue line going forward?

Yes, that's right and I would say upper 30s to 40, that's right.

Okay. And I think I ask this question every quarter, but margins -- I know there was a special item this quarter that benefited margins, but generally speaking, as you have shifted into the Resource segment, EBITDA and EBIT margin contribution has been a bit ahead of I think general expectations. Are we kind of maximized there? Is there still room for improvement? How are you thinking about margins as we wrap up this year and move into next?

I think we still have room for improvement. In fact, everyone here at Tetra Tech knows no matter what number they gave, we have room for improvement. But if you take a look at the Resource Management, we have talked historically about 9% to 10% and if you take off -- we were 9.9% this third quarter. If I take back out this roughly $2 million of project settlement, we are more like 9.1%. So my vision is that on that 9% to 10%, we are at the lower end of where I have an expectation. So I think we do have expansion there.

Infrastructure has been somewhat impacted by the state and local work and the schools. We have more or less a de minimis amount of transportation work, but that is also particularly soft. And so we have said in the past Infrastructure at 8% to 9% and we are sitting at 8.2%, so I believe we have a pretty material increase available there.

In our Communications, we have said 7% to 8%. I know that we were well over 10% this quarter, but I have talked in the past about the seasonality. The Communication work, because it has such a large field component, is very lumpy with respect to low margins early in the year and higher margins late, but they are coming in right as we expect. So I would say Communications is close to optimal, but it is such a small part of our business that I think we have a fair amount of upside.

Someone asked me prior to this call here, while we are hitting on all cylinders, I don't believe we are hitting on all cylinders. Absolutely not. There is additional strength that we could have at the state and local market that could have us doing better and the additional work that we see coming with USAID oversees, the BRAC work and even this alternative energy work we are just starting in transmission. All offer upside, both revenues, but also margins.

Helpful, Dan. And just a final clarification, because there is so much attention paid to this wind business, what percentage of your current 1.57 in backlog is attributable to wind and I know you just announced another $38 million yesterday as well, but where -- what is the total wind backlog currently?

It's about 10% to 12%. So it is still a pretty small number and in fact, it is not that far off of the revenue contribution, which is -- which is close to that number. So about 10% to 12%.

About 10% to 12% at the gross revenue line and more like 5% at the net revenue line?

That is correct. The wind work tends to be about 50% and I think you bring up a good point here that I would like to make particular note and highlight that the wind work is -- about 50% of that is in subcontracted -- 50% is self-performance, which is very valuable for us because there is materials, earth work and other items that we subcontract out or we would make the decision -- we have the capability of implementing all of it. So we are certainly not beholding to any particular subcontractor, but we do make a make/buy.

Do we do it internally or do we have it subcontracted out? That is for our clients. We want to make sure the clients know that they are getting absolutely the best value. If you have subcontractors because of a tight labor market or tight cranes, we will self-perform it. We have our own cranes, we can execute it. So we will not be held hostage either for schedule or pricing from any subcontractor. We can self-perform it. However, to meet these accelerated schedules, we have a great group of contractors that are teaming partners that we use and are very financially competitive.

That business, again, just to understand how it flows through, it seems like that business is pretty quick turnaround versus some of the other stuff in backlog that's going to be more 12 months or so that it sounds like as the wind projects are coming in, you are turning them back around pretty quick.

That's right. That's correct.

Okay. All right, thanks.

John Quealy, Canaccord Adams.

Good morning. This is Chip Moore for John. Congratulations on the nice results. I was wondering if I could get your thoughts on the Senate failing to extend the renewable tax credits. Specifically, is this a case where you could see some potential acceleration in the near term just given the uncertainty?

We think so. We think that is a contributing factor that -- let's go fast, let's get it, let's complete it before the end of the calendar year. So we think that is a contributing factor. We have looked very, very close at the tax credit issue historically and we have certainly seen in the past an impact to the bill or the investments in the wind side based on the periods where these tax credits have not been in play.

However, we do think that there is a [sea] state change here that, number one, with the increased price of oil and the increased price of energy, wind is much more competitive. The difference between wind energy production and conventional fuel has narrowed substantially.

And number two, most of the states, most of the states throughout the US have passed required alternative energy mandates. They typically range from 15% to as high as, I believe, 30%. It seems like a lot of them are around 20%. But in order to meet these renewable energy requirement consumptions for the states, right now, wind is one of the primary drivers for this. Some states have deadlines coming up as quick as a year or two and so a combination of these political mandates or requirements that are being put across the country, plus the narrowing of the economic difference in production, I think make the tax incentives less critical than they have ever been before.

All right, thank you.

Jeff Beach, Stifel Nicolaus.

Yes, good morning and congratulations on a great quarter. You touched somewhat on one of my questions, which was the skills particularly in the wind power, the wind projects you are winning. Can you go into that a little bit more? It sounds like what you are doing, the environmental work, siting, permitting, is transferable to a large amount of the infrastructure work you do, but are there specialized skills that you have to look for out in the workforce specifically for wind and other alternative energy?

Let me talk about wind and then I will go to the other alternative energy. You are right. We have a lot of our skill sets and employees that it is transferable. But there are a couple of areas that are just not and one would be electrical. You can imagine that there is a large requirement for electrical engineers, for individuals who are experienced with the transformers with the transmission and all aspects of the electrical components. So that is a big portion and we are not turning civil engineers or geotech folks into electrical engineers. It is not plugging your toaster in.

The second is cranes. Cranes or heavy lifts or high lifts, they are heavy and high lifts, is a very unique skill set. And we have brought in large groups into the Company. So the one area that we have been very aggressive on and very successful is bringing both individuals and groups and even having subcontractors come join Tetra Tech.

We have created a group since electric is such a specialized expertise. We have created a group within Tetra Tech, Tetra Tech Electric and it is focused on the high-voltage aspect of transmission. And so it is an area that not only was originally created here over the past year, we started this about a year ago associated with the wind because we have a local collection system from the wind turbines themselves, the transformers into the collection system, then transmission. But quickly our clients and customers out in the marketplace have asked for that skill set then to be transferred over to the transmission of the high-voltage into the interconnects to the grid. So that is why we are not building this hoping that transmission work will be there, but we have built it for the work we have to execute and then it is being deployed into transmission. So those are two areas that are unique and are not readily transferable, but that has been a big focus over the past more than a year to build up.

The second question, and I refer to -- if you can help on this, the profit, operating profit margins on your net revenues within alternative energy, are they running below, at or higher than Tetra Tech overall?

They are at or above. By the very nature -- one comment I will make is by the very nature of much of this work, it is fixed price in nature. We are being conservative in our booking rates on these projects as we are at the very front end of these projects and it is excellent work, it is fast turnaround work, it is work that we are experts at. In many aspects, we are the leaders in the country in certain aspects of it. But nevertheless, large projects that are moving fast, we like to be conservative on our booking rates. But we have these projects planned at or above our commercial range, which is typically on a net revenue basis above 10%.

All right. And last, just within overall Resource Management, is there a portion of the work that you are doing that is fixed price or is almost all of it cost plus?

We have a fixed price component of it, but the majority of our cost plus work, which is around 30%, is in our Resource Management. So you can do the weighted average factoring, but 30% of our total revenues are in our cost plus, cost plus/fixed fee typically and it resides almost entirely -- in fact, I actually think entirely -- in our Resource Management group.

All right, thank you.

Richard Eastman, Robert W. Baird.

Yes, good morning. A couple things. Dan, could you just walk me back through once, the net -- the positive variance in net revenue was maybe $30 million from kind of your midpoint guidance. And I guess from the quick math, it sounds like maybe the wind was $20 million of that and the other number you mentioned, the USAID business in Afghanistan, would -- that would be part of your acquired growth yet, right, at ARD?

Yes, that's correct.

And then BRAC, would BRAC be maybe the other $10 million of upside?

I would say between $5 million and $10 million, yes.

Okay. So BRAC and wind were the majority of it. And then --

Although, let me just clarify one small point on USAID. It wasn't entirely ARD, which is the new acquisition, which would be under our acquired revenue. They did, and this is the elusive synergy that we all search for, has actually really been well-recognized with ARD. They have utilized -- the one area that we have had a little bit of weakness in state and local is in some of our architects and design work. We have been able to mobilize them in country and so some of the revenues at ARD has brought or actually using Tetra Tech's engineering staff and architecture staff in-house. So we have been able to leverage our existing operations to help fill that. So all of that revenue in Afghanistan wasn't just in ARD or the acquisition category.

Okay. And then just a quick question on the UXO contract. I think we got funding on that sometime during the second quarter. Was the delta there year-over-year measurable as well?

No, it was flat. That was flat. Essentially little or no change from previous period comparisons.

Okay. And then just my last question is on the -- on the margin side, if I look at your segment profit margins and keeping in mind the $30 million variance from guidance in net revenue, if I take your segment margin, profit margin and I pull out the $2 million of settlement, the incremental margin on that net revenue, that $30 million in net revenue is only like $1 million, a little over $1 million.

Yes, I'm glad you mentioned that, as I referred to that indirectly just a moment ago. That work, the $20 million represented the majority or certainly two-thirds of incremental increase in the revenue, the net revenue that you just referred to, is what I was referring to as being conservative as a booking rate at the beginning of the project. So we intentionally didn't -- we intentionally didn't hit that hard. We're at the beginning of the project, we were being conservative and as those projects continue and move through the different milestones, we will adjust our booking rates.

So if all goes well on those projects, again, they are -- the theory is, in the commercial side, they are higher margin to begin with, set ourselves up for end of project profit recovery I guess. Is that how that flows through?

That is how we would expect it.

And what you are building now is all -- I mean most of what you have in the backlog is to be performed by the end of the calendar '08?

Most on the wind. On the wind portion, a good amount of it is, but some of the new work certainly extends into '09, but I would say most of it is a quick expenditure through calendar year '08, which gives us very high confidence in our guidance for Q4 and would be reflected in our Q1.

I see. Okay. Well, very good. Well, thank you.

Min Cho, FBR.

A couple of questions for you. So it sounds like, on the wind side, that you are increasing -- you are increasing your opportunity to do more construction-related work on the transmission side going forward. Is that a correct assumption?

No, actually, the work on the transmission -- let me add just a few words of detail on this. Wind, which is the -- we are doing on a turnkey basis, which includes the construction, on the transmission, we would do the -- none of the construction and implementation. We would potentially do the oversight, but it is siting, planning, technical geotech evaluation, which is soils compaction, permitting, some aspects of the engineering, construction oversight and owners rep, but not of the hanging or burying of the wire. So none of the construction component on transmission.

Okay. Now where did the cranes and the heavy lift kind of come in play? Is that not related to the transmission business?

No, that is lifting up the turbines and putting them on top of the towers.

Got you. So the turbines. Also, is there -- do you have any update on the release of projects associated with WRDA? Are you seeing any negative impact from the soft economy?

Well, we are not seeing any downturn on WRDA because nothing is coming through WRDA. We saw it past -- it was simply waiting for its appropriation. We had always, and I know I had spoken to this when it first had passed sometime ago, expected it to be a late, and I thought it would be September-ish if we saw any specific project funding, so it would be the end of fiscal year '08 and it was really a fiscal year '09 opportunity.

Now one thing I want to say about the federal government, I have had some queries on the election, on funding, on appropriations. We have been in a continuing resolution process with the federal government now for -- going on a few years now and so as far as plus-up surpluses on individual bills, it just hasn't happened yet. So as these free up, we would expect that to represent additional opportunities. So we haven't seen BRAC have any particular large plus-ups or release of funding. If that happens, we expect it to have a beneficial contribution. The same thing is true with the Water Resource Development Act, WRDA. So we have not programmed revenue for that and we don't expect to see it until '09.

Okay. And my final question has to do with your Communications business. I realize it is a small portion, but were there any one-time impacts to your margins for the completion of Utopia?

No, no. We just completed that phase and that aspect, so there was no pickup or extra recognition. It just moved to a natural closeout and so that did not contribute to that greater than 10% margin. The greater than 10% margin was really driven by sort of seasonal execution, utilization up, more work, leverage on its individual overhead. So it is just sort of a seasonal aspect of that business.

Okay. And most in that business now is tied to the fiber deployments for the various telco service providers?

That's exactly right. That's exactly what it is.

Great. Thank you.

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

Great, thank you very much. I appreciate your questions and comments and look forward to talking to you next quarter and we are busy here. We will work very hard at having another very strong quarter. Thank you very much and talk to you next quarter. Bye.

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