Tetra Tech Inc (TTEK) 2008 Q4 法說會逐字稿

Good morning and thank you for joining us. By now, you should have received a copy of the press release. If you have not, please contact the corporate offices at 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, and David King, Chief Financial Officer. 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; they may differ materially from actual future events or results.

Tetra Tech's Form 10-K and 10-Q reports to the Securities and Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements.

At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

With that, I would now like to turn the call over to Mr. Dan Batrack. Please go ahead, sir.

Great. Thank you very much and good morning and welcome to our fourth-quarter and fiscal-year 2008 earnings release conference call. I'm very happy to present our financial results for what has been a record year in all of our key financial metrics, both for the quarter and for the year.

While David King, our Chief Financial Officer, will present the specifics of our financials, I did want to cover a couple of the key special highlights in our financial performance here this last quarter and year.

For the entire year of 2008, our performance produced an increase in gross revenue of about $600 million increase over what we had performed and generated in 2007. Our net revenue was up more than $230 million, and that was driven by an addition of approximately 1400 -- 1,400 additional staff over the year. And that 1400 staff increase includes about 1000 staff that we now have working overseas, with the addition of additional contracts and an acquisition we brought on that brought us US Agency for International Development work all around the world.

And maybe most significantly, our backlog of authorized work grew by 31%, or $390 million, from a year ago. And this was driven largely by large federal program awards with the Department of Defense, USAID that I just mentioned, FAA, and some select, very large commercial clients, not only growing revenue top-line, but net revenue, backlog growing, but also driving earnings per share at 29% for our shareholders increase over 2007.

Now, while we had very strong first three quarters of the year -- they were very strong, our fourth quarter was even better. And that was the quarter we are reporting on during this call. During this past quarter, we generated our highest-ever total revenue for a quarter, net revenue, income, backlog, all of those at the highest level of any quarter in our history.

Specifically, we grew our total revenue by about 50% from the same quarter a year ago. We booked about $725 million in new orders during the fourth quarter, and we did both of those while growing our operating income and EPS by about 25% for the fourth quarter.

In the fourth quarter, we substantially grew both our federal and our commercial projects and revenues. While our total commercial revenues more than doubled from the prior year -- and I will talk about that on our outlook, both on what specifically drove that and what we are seeing for 2009, our largest client historically and still for the year, the federal government, grew by more than 20% and continues to be our most stable client and providing us with the largest number of orders.

In our smallest client sector, state and local government, we did see a reduction in some of our revenues. We have seen some softening there, but it's primarily been attributable to two key client sectors or project sectors within the state and local market. First, it's been attributable to weak schools programs. We've seen funding for schools, bonds and funding for new infrastructure work with schools within Tetra Tech be very soft.

And second, on a year-to-year comparison, a year ago we had a large municipal build communications program that accounted for approximately $5 million of net revenue that we say go away completely, with no revenue contribution from that communications program this past quarter. So those two areas, we have seen some softness on our state and local work.

For the fourth quarter, both our federal and our commercial client sectors each represented about 40%, federal just under that and commercial just over that. But both of those about 40%. Our state and local business represents only 17% of our revenues. And much of our state and local work is for essential water programs and regulatory-driven projects, and so we see this work being relatively stable. We would consider it flat with some softening in the areas that I've indicated a moment ago, the communication programs that have gone away, some of our schools work we see soft. And an area that we see general softness in, the state and local transportation, we have very little exposure to. So we don't see this to be a highly volatile area for us.

In the resource management group, it continues to represent a dominant part of our business; about 70% of our annual revenues are in this one sector. This group includes the work for our water studies, our modeling work. Environmental projects are in this sector and alternative energy programs are here. And that is why it represents such a large component.

Our infrastructure segment, which is about 25% of our revenues, contains about 2000 engineers that are designing water supply systems, treatment projects and infrastructure programs.

Next page, as I've mentioned earlier we booked approximately $725 million in new orders in the fourth quarter, which capped a booking of about $2.5 billion of orders for the new year. This is by far the highest we've ever had in our history. And I want to point out a couple of the projects, individual projects, that drove this large bookings of new orders.

Eight of our top 10 largest orders for the quarter were with our long-term federal customer base. That not only increased our funded work, but it increased our contract capacity. And if you're following along on our webcast, you can take a look at some very, very large contracts. And if you take a look at the very top one with USAID, a $500 million contract capacity that we received, and none of it is represented in backlog. So not only did we have a very strong bookings, which is our backlog driver, but we increased our contract capacity, and it's primarily with the federal government, to approximately $8 billion. So we've seen a large increase in our available ability to execute work while also driving new specific orders.

Now, [while] we've continued to grow our backlog sequentially for each of the past seven quarters, and really it's this continued growth of our backlog sequentially, one quarter after and other, which has taken us to our all-time high backlog of about $1.65 billion. Our backlog does come from all of our different clients. They fund their individual orders at different times during the year. And it's these funding cycles that can cause some incremental jumps or some lumpiness in our backlog.

But what I look for and we look for at here at Tetra Tech is an overall long-term upward trend, just like you see in this graph, if you are following along with the webcast. And it's capped most recently with our recent increase by 31% increase in our backlog from a year ago. So while we may see some jumpiness on it on the percent increase or even some variability in it, we are looking for the long-term trend moving this backlog.

At this point, I'd like to turn the presentation over to our Chief Financial Officer, David King, to present the details of our financial performance for this past quarter and year.

Thank you, Dan. This, again, as Dan mentioned, was a great quarter and excellent year, as we exceeded all financial goals while continuing to grow our top and bottom lines. We achieved record revenue of $649 million, with growth on all segments.

Net revenue was $349 million, a growth of 27%, exceeded the high-end guidance of $345 million. And our resource management grew 33%; infrastructure grew 6%; communication grew 36%. We also achieved a record high operating income of $30.8 million, with operating margin of 8.8%, including higher intangible amortization.

EBITDA was also a record quarter, $36 million with EBITDA margin of over 10%. Next slide.

Before I address this slide, I want to call your attention to our investor report, the summary page. Under segment income, there is a line called elimination/other. You will see a higher than normal negative item. This is a line we capture non-segment related cost, the biggest of which is our option expense. The balance is [non-allowable] expenses such as insurance and legal.

This particular quarter, fourth quarter, we had some unusual insurance and legal matters, and we reserved about $3 million against them. I believe they were appropriate, if not conservative.

Let me go back to the slide. SG&A was $43.5 million, a growth of 33%. We continue to increase our selling effort while containing our G&A cost structures. As the Company gets bigger, we also able to leverage our cost structure. For example, the Company grew top line from '07 to '08 on a whole-year basis at 38%. Our G&A costs increased by half of that, about 18%.

Net interest expense was about $0.4 million due to strong cash collection, but we did experience lower interest yield. Tax was $12.2 million, an increase of 23%, due to 26% higher earnings. Annual effective tax rate was 41.1%. I expect for the next year to be again 41.5% tax rate.

Diluted EPS was $0.30, a record high. Our guidance was $0.27 to $0.29.

Our accounts receivable was $626 million and our accounts payable was about $223 million, a growth of 43% and 45%, respectively. Both were in line with our revenue growth. Our net debt was a record low of $6.3 million, a reduction of 17%. Our debt-equity ratio at year end was about 11%; debt-to-total-capital ratio was about 10%.

Cash flow, the quarter ended with $25.3 million cash flow from operations; it was a great number. Especially whole year, we achieved $68 million in cash flow from operations. Our revised guidance was $55 million to $65 million. Our associates and project management organization continue to surprise us with excellent collection efforts and working capital management.

Our CapEx was $3.9 million. The whole year was $18 million versus our forecast of $20 million. FY '09, I expect our CapEx to be $20 million to $22 million.

DSO was another strong quarter, 74 days, as a result of strong cash collection and smart contract terms. I do expect the coming year DSO to be in the high 70s, especially given the economy in '09 and beyond.

The net debt charge, this is my favorite chart. We have successfully grown our company without incurring more debt. A couple of statistics, if you will. FY '06, we were a $1.4 billion company. We ended the year with a net debt of $10 million. FY '07, we were a $1.6 billion company. We ended that year with $7.6 million of net debt. This year, we achieved $2.1 billion; our net debt was $6.3 million.

I believe our focus on cash and working capital management will enable us to sustain our growth target without compromising our capital structure.

For the year -- Dan already went through some of these numbers -- we were $1.25 billion in net revenue. Our guidance was $1.24 billion. Income from operations was $106 million, with operating margin of 8.5% and EBITDA margin of 10%. EPS, $1.02, an increase of 29%, exceeded our revised guidance of $0.99 to $1.01. Backlog, a record high at $1.65 billion, an increase of 31%.

In summary, we not only exceeded all financial metrics for the fourth quarter, but also beat all financial goals for the year. As Dan mentioned, we also took our first step into international markets with ARD acquisition. We have one of the strongest balance sheets in the industry with nearly no net debt. As a side note, we have a very strong bank syndicate with continual commitment to our space, particularly Tetra Tech. All of them are standing tall today in today's environment and we have their full support. Back to you Dan.

Great. Thank you very much, David. We are really proud of our performance in 2008. We think so many things did well. But really it's about how we are going to perform both in this first quarter and as we go into 2009.

And with that, I would like to talk for a moment about our outlook for 2009 and how we see the markets that we are focused on, that we are pursuing and that are our key growth drivers for this next year. First, core Tetra Tech's business is our water and environment programs. It represents about 80% of our revenues, and this is still the core of our entire corporation. We see these programs continuing to grow organically, with significant potential to expand beyond the growth rates that are listed on this chart here, ranging in the 4% to 8% that we are seeing at this point.

With stimulus packages being proposed by the new administration, with bills that have passed previously, such as Water Resource Development Act, that we have in fact seen no funding for, we have included no upside opportunity from any of those programs in our projections. Anything that would come through a stimulus package, anything that would come through Water Resource Development appropriations or any other unusual funding we see as additional upside to these programs.

And to the guidance and the forecast that we see for this next year organically.

We also see a new focus, certainly, as part of the platform by the new administration on protecting the environment. And any type of movement to protect the environment with water quality standards, protection of any type of environmental aspects of soil, air, global warming, will also generate substantial upside opportunity that is also at not baked into or included in the forecast that we have here. We have been very -- I hate to use the word conservative -- but appropriate, given the market, and still showing strong organic growth.

A second area, alternative energy, is the second growth area for the corporation. It's not something that we started recently; we started this several years ago. And while often is referred to for the corporation as wind programs, that is not really a fair characterization or a complete characterization. We are active in wind, solar, nuclear and transmission programs, and even have a project or two associated with geothermal. So all of the different aspects of alternative energy, we have a presence in.

Now while this is the smallest part of our revenue, very small at about 8%, it has been our fastest-growing part of the market for us this past year on a -- of that 8%. And this is an area that we expect to benefit from the long-term commitment to US energy independence by the administration. It is not strictly a matter of whether or not the cost effectiveness of these alternative sources of energy to conventional oil and gas -- does it match the cents per kilowatt. It's also a function of energy independence. So we expect these to, in the long-term, continue to go forward.

We are also -- and in that area, we are seeing growth of 15% to 25%. I'll speak to a moment on how we see that actually being funded for us.

We are also seeing continued growth in the other markets. They are much smaller for us, but areas such as communication that was very strong this last quarter, for the telecoms and information technology. We are seeing those grow in the middle single digits organically as we go forward.

With this client base, we do have an opportunity to improve our operating margins from what we saw in 2008. The increase in our commercial actually does provide us better margins. And with acquisitions -- I will speak to that in just a moment -- we do expect to grow our top and bottom line at about 15%, inclusive of acquisitions, 15% or better.

Our guidance. Our guidance for the first quarter and all of fiscal year 2009, I'll cover here. For the first quarter, we are forecasting and providing guidance of $310 million to $330 million as a range for revenue, net of subcontractor costs, with an associated diluted earnings per share of $0.25 to $0.27.

For the entire year, our guidance is $1.275 billion, $1 billion $275 million, to $1,375 million, or a range of about $100 million, with diluted earnings per share of $1.10 to $1.18.

Now a couple notes. We say this every time, every quarter. I would like to reiterate this just to make sure there is no confusion. Both our revenue and our earnings guidance includes no contributions from acquisitions. We certainly expect to do that. We have more opportunities right now than we have seen really in several years. So we do expect this to actually transpire, but they are not included in these forecast numbers.

We have done acquisitions this last year and the year prior, and we do have an expense of $0.6 of intangible amortization that is included in these estimates already. And as David had indicated already, for those modeling, we do anticipate a 41.5% effective tax rate.

In summary, we had a very strong fourth-quarter and a great 2008. And I would like to thank all of the associates at Tetra Tech because they are the ones who did it, both they and our clients. So really it was an excellent performance for the year.

We see our core businesses in water and environmental projects to continue to grow, with large additional upside, as I indicated a moment ago, any type of stimulus, any type of additional funding or focus we expect to be on top of these estimates that we have provided.

In 2009, wind energy projects, we've all heard, we are watching very closely with our clients any type of volatility, both in funding or priority of these programs. For the forecast that we've included in our guidance, 90% of the wind projects that we have have already been funded. And again, our definition is we've won the contract, they have provided the funding for it, so it's a contract, they have funding and they have authorized to do the work, and most of this is underway. So we have a significant upside here also, and there's a number of opportunities that we see going forward that we are competing for right now.

We did finish with $1,650,000,000 in backlog. We're entering the new year with a record high backlog. And at this time of volatility, it's one of the real strong points of the corporation. Our near-term debt is -- we are essentially debt-free, as David King had indicated. Funding all of the acquisitions and our operations with our cash flow from operations has really put us in an excellent position for acquisitions.

We are ready for acquisitions, and our patience, I believe, has really served us well. We have seen more opportunities now. There's more favorable pricing -- we've actually watched the multiples come down to what I believe are appropriate levels and are very favorable -- as we've indicated before, our acquisition strategy as we identify entities to join Tetra Tech, they will be accretive the first year. So as we bring these on, they will add to both obviously our revenue, but also contribute to our earnings for the year.

Something else that has been very favorable, not only are we seeing the multiples abate, but we've also seen a shift in the valuation of the dollar overseas, making the currency exchange rate much more favorable for us on international acquisitions. And we've seen a number of them that we've evaluated and are looking at, that are not only good opportunities, the price is right, but the exchange rate makes it much more attractive. So the patience has really served us well, and we are ready to have some of the very best of the companies join us here in 2009.

In closing, our 2009 forecast conveys and represents solid growth outlook with organic growth and we're highly confident moving into this next year.

And with that, I'd like to open up this call for questions.

Thank you. (Operator Instructions) John Quealy, Canaccord Adams.

Good morning. A couple of questions. First, on resource management margins, ended the full year at 10%. Can you talk about some of your expectations for that moving forward or some assumptions, how sustainable that number is, given your outlook?

Well, our forecast for the resource management group has been a range between 9% to 10%. Typically, the fourth quarter is the strongest. We do have some seasonality, utilization is higher, revenue is higher. So we have more leverage on our indirect costs in the fourth quarter. We see our resource management group continuing at 9% to 10%.

As we add a bit more commercial work, as we did this last quarter, it will be at the upper end of that range. And we would expect that during the early quarters of the year, Q1 and Q2, during the winter months, particularly for us, January, February, March, will probably be at the lower end of that range. And in the summer months, which is Q3 and Q4, we would expect it to be at the upper range or even above this, as you saw this last quarter.

With regards to headcount, it looks like it was up pretty decently in Q4. Is that roughly the range ahead that you are planning on keeping to hit this guidance?

Yes, it is. We will see -- we are watching this carefully, but we typically see headcount be a slightly higher in the late summer months. So the high headcount is typically at September 30. So Q4, if you look historically, you will see a slightly lower headcount in the winter months because field construction activities are a bit slower. But it will move just a few hundred heads, but we expect it to be at this level.

Lastly, on that alternative energy organic growth expectation between 15% and 25% can you give us a little bit more indications or your assumptions behind that given the credit market that we are in and some of the concerns in the commercial markets? Can you give us a little bit more detail about how you are coming up to those numbers?

Let me give you some specifics on one area that we have very high visibility in. Let me give you an example of some wind projects. We had very strong wind revenue contribution in 2008. We went from about $60 million -- $50 million to $60 million to about $160 million in 2008. We are forecasting that $160 million on wind projects to go up to about $200 million. Of that $200 million, as I had indicated earlier, we have about 90% of that already in backlog.

The rest of the commercial work that we have across the board for the most part is not in discretionary aspects of work we are doing for our commercial clients. A lot of it is in regulatory compliance work or other work that has to be done, so it's not in the discretionary field for the most part. We don't see a lot of variability in our forecast, but our forecast has been inherently somewhat conservative. We aren't making sure that we are not getting too far out there.

Another focus we have done both on our wind and our alternative energy in general has been -- we started this about a year ago simply by the nature where the work was coming out, but we had begun moving our focus for pursuit of these alternative energy including wind transmission projects from developers that were leaving these projects to utilities. And so most of the work that we are both performing now and for the clients that we are working for in that area, this represents a good component of our commercial revenues is for utilities.

Great, thank you.

Debra Coy, Janney.

Good morning, guys. First question is on the guidance. Obviously, it is the perennial issue of Tetra Tech being conservative on the outlook. But just starting with a first quarter, midpoint of your guidance range puts you flat with last year. I am wondering how you are coming to that.

One of the things I have wondered about is the transition to a new administration perhaps slowing some things down. But I would think that would be more of a Q2 impact than a 1Q impact. Kind of how are you looking at the year shaping up?

Well, let me start with income on the first quarter. Our income is up double-digit. In fact, the midteens on a 2008 Q1 EPS to 2009, so we see that up very strong. And again, that is all organic.

Okay, all right. I was looking at a different set of numbers; I have got it. The second quarter then would you expect that we would see any impact of a slowdown related to government transition or do not really anticipate that?

What we see -- it's interesting; simply the platform of the new administration and in fact, just for those -- I want to make sure that -- or others we are seeing, again, organically without any additional contribution a midteens increase on our income from a year ago. Now with administrations on the federal government, we have seen this before. We are not new to this business. We have been in this business for about 30 years, just with the federal government as a major contractor for environmental and water programs.

And some of the programs -- some of the administrations that have come in with great expectations and we expect that it's going to be a big plus up immediately, we don't see it. The government is -- David King uses it, it's a major aircraft carrier that doesn't turn very quickly. We expect the programs that we have been funded for to carry through the end of the year. The majority of our backlog, it's disproportionately weighted toward federal government.

They are longer programs. The contracts have enormous capacity behind the funds that we already have in place. There are certain stimulus packages that are being proposed now that could have a very short term plus up, but other than those we generally see the funding move very little.

We have also seen administrations that have come in that have been, appearing to be less than positive for us and we have also not seen impact. These programs move very, very slowly. But with that said, the priorities for the new administration from an international standpoint are emphasizing development in countries. We are one of the largest US agency for international developmental contractors that can provide full-service capability. So we think that we can be a valuable contributor and partner with the federal government on this. And that could group represent significant upside. That is something that has to take place on going and I think it will get additional contribution.

The Obama administration has talked about the environment, protection of water, protection of health for its citizens, protection of our resources, and those are all EPA programs. The EPA folks right now that we have talked to are very happy, encouraged, almost euphoric. And as one of the largest EPA hazardous-waste environmental contractors that translates into the contractors that do for work for them; that's us.

Finally, the defenses, they move out of Iraq and other locations, back to the states and Afghanistan. We would expect as they transition to Afghanistan we could take the work we are doing in Iraq and move it over. So that could be a plus up. It certainly keeps the Iraq work steady. Anything that moves back here is a big upside for us. In fact, we have finally seen these past few quarters some of the BRAC work begin to come up.

All right, that is helpful. Then, finally, on the subject of the economy and following up on John's question about the strength and the commercial work. How should we think about the range of your guidance for fiscal 2009 between the 110 to the 118? What are the contingency factors that push you down to the bottom end of the range? What are the -- it sounds like you haven't really built in too much of this upside potential. How do we think about the delta between the top and then the bottom end of that range?

Well, the bottom, certainly the bottom still represents a good growth for us. If we have factored in some contingency in the event of the obligation of some of the work that has then funded on the wind. We don't see that. We haven't seen it. We have started these projects, but we have factored that in.

Our biggest moving piece, quite frankly, is the state and local. It's just not clear exactly how soft that may be. Now I think we, as a corporation, are in pretty good shape. Again, it's about 17% of our revenues. It's typically or even last few quarters been 15% to 17%, relatively small. The projects that we have we think they don't have a lot of discretion. A lot of them are regulatory driven. A lot of them are watershed based so that they are precursors to water supply.

But I think there is going to be large pressure on state and local tax budgets, income from all sorts of different funding areas. We have -- if state and local is impacted dramatically and we get more than our share and maybe more and if we see some of the obligation of some of our commercial work, that could put us at the low end.

High end could be less impact on our state and local. In fact, executing the work that we already have in our backlog should put us at midpoint to the high end.

Have you seen any of de-obligations across your entire portfolio to date?

No, we really haven't.

Okay. Last question, it's just a quick one for David. How are you thinking about operating cash flow for next year, David? Are you still in the $55 million $65 million forecast range or how should we think about that?

Yes, $55 million to $65 million. Yes, that is correct.

Okay, thank you.

Alan Robinson, Royal Bank of Canada.

Good morning. Dan, could you just clarify on that last comment you made regarding your guidance. If I caught you right you said that to hit the middle to high end of your guidance you just needed to execute on your backlog. Did I get that right?

I would say the middle, that is right. That is right. If all the programs go through and we have favorable performance on our fixed-price work that we have in hand, we would be at the middle to upper end. I would say that is right. The difference being favorable execution on the fixed-price would push it above the midpoint, as planned would be the midpoint. And the bottom end of that guidance is -- I'd hate to use the word worst case -- but essentially that's what it is. It's worst case from what we see.

Okay. In terms of a comment you made when you referred to your backlog in your prepared comments, you said that you expected some variability. Could expand on that? Are you referring to the potential for a single quarter to decline, or do you see the potential for a series of longer-term year-on-year declines in backlog?

No, actually, what I was trying to suggest -- I'm glad you asked it on the questions -- is I want to be prepared for a single quarter. In fact, we have always been prepared for any single quarter decline in backlog sequentially. We have had a great run, if you took a look at the charts that we run. Essentially as far back as the chart goes, we've had sequential increase quarter after quarter after quarter. Very large increases year-on-year. For instance, this last quarter 30 plus percent. Sequentially over 5%, again, moving very quickly.

We realize that, for instance, the federal government -- the federal government issues a lot of work at the end of their fiscal year. So during the month of September, which is the end of our fourth quarter, we see a lot of federal government funding. But during the first quarter of the year for us is October, November, December, not a lot happens in November. Sort of right about this date forward, you move into Thanksgiving and then you move into Christmas, and it's our largest set of clients.

And so where you see it slow down, I don't want there to be any concern by our shareholders or analysts or the public that one quarter that doesn't continue to increase sequentially really means anything particularly dire. I do not see a long-term flat or declining backlog for us, but I did want to indicate right up front that it is possible and would not be unusual to see some lumpiness and see a single quarter that is not increasing. Commercial lumpiness and timing of these projects is just inherent with the clients.

Okay. And then moving on to commodity prices. Given the drop in commodity prices we have seen since the summer months, has this impacted yet what you are seeing in terms of your pipeline for mine closures?

Not particularly. Not particularly. On the mining business, we really haven't seen it impact us at this point. In fact -- moving away from mining, where they are generating the commodities, from a client standpoint, we've actually seen some favorable impact by seeing the construction costs actually moderate.

In a lot of these fixed-price projects that we have put together, which is a good component of our portfolio, we were pricing with oil at $140, $150 a barrel. We were pricing with some of these commodity prices at higher levels. So it has given us some additional opportunity on our fixed-price contracts where we have execution. So we haven't really seen it on our mining, for the work we are doing, but we have seen it in other areas, additional margin opportunity.

Okay. Since you mentioned energy and fuel costs there, is there much of an impact in terms of your operating costs in terms of these lower energy prices we are seeing?

A little bit, a little bit. But I wouldn't say it is a big mover.

All right. Thanks. That is all I've got.

John Rogers, D.A. Davidson.

Good morning. Couple of things. First of all, David, you mentioned the $3 million of legal expense or legal reserves in the quarter. What was that for?

It is not exclusive legal reserve. Every quarter, we assess our legal and insurance matters, and particularly those not allowable under the Federal Government contractors, we will [chew] them up and we will reassess them and we will just reserve against them. And so it is a one-time, it's not going to be in the run rate next year.

Okay, but just so I am clear, these are -- whenever there is questions on federal contracts, that is where you put the reserves for those?

No, it is not just federal contracts. It can be legal dispute with another party. And you will see some of our disclosure in the K. So it is not government contract related. It is -- the reason why I use the word government contract is because in the context of unallowable under the government contract --

Right. Okay. And then of your current backlog that you have now, what portion of that is construction work and/or fixed-price work?

It is about 45% fixed-price in the backlog.

Okay. And is that lump sum or just fixed unit price?

It's a combination of both. It's a combination of both. We haven't broken that number out into the two, but it's a combination of both.

Okay. And the construction piece of it -- is that still growing? I mean, it started out very small and I know it's grown a little bit.

It's about 10% to 15%.

Okay. And that is mostly wind or alternative energy?

Yes. And also included a component of reconstruction work we have done in Iraq also.

All right, okay. And then if I look at your numbers -- and if I don't have this math right, correct me -- but it looks like you -- about $130 million, a little over, of net revenue from acquisitions over the past year. Would it be fair to use your average margins for those acquired businesses? I'm just trying to figure out how much the acquisitions added in 2009 -- or 2008.

I think that is fair, although the largest acquisition represents -- by far the lion's share of those numbers -- was from ARD, which is, I believe, a 100% federal contractor and a lot of that work is cost reimbursables. We have talked before about the margins of cost reimbursable, [TNM] and fixed-price. So if you can apply a combination of either those types of margins that we have presented, you could get it right.

Okay, but that would suggest somewhere around $0.10 or so from acquisitions last year.

Well, we have intangible amortization that is a great gift we get with the acquisitions that carries on for about three years. And so while we did have acquisition the prior year, Delaney, that contributed to that $0.06, a good portion of it was from this most recent acquisition. So you need to take that into account.

Okay, good point. Okay. I'm just trying to think about this next year. In terms of the acquisition opportunities that you are looking at, you mentioned pricing is becoming more reasonable. Unfortunately, the public market values have also come down quite a bit. Are the deals that you're looking at now, would they be immediately accretive?

Yes, yes. In our model --

Using cash --

No, we actually use -- they are more accretive cash. But our definition of accretive is all in -- cost of interest, which obviously get baked into David's financial models, and cost of intangible amortization, all offset by the contribution of the earnings brought by the firm. So our thresholds -- I mean, the firms have to be synergistic, they have to be in the spaces that we are in, they have to be complementary with the type of work they provide to our clients or add different geography, and they have to be accretive on a GAAP basis all-in on the first year.

Okay, okay.

So we consider it appropriate standard, most people consider it a high, and some liberal folks consider it unrealistic. But they are out there and they are the best fit for us.

Okay. Just last thing, in terms of the acquisitions, as you look at them and with your operating companies, will they all operate as Tetra Tech or will they keep their existing brand? What's your thought on that?

There is a transition; they all will transition to Tetra Tech. But certainly, there is value in the brand names that they bring with long, long histories with these clients. And the very small firms, the ones that we internally refer to -- and we have represented this as what we call a tuck-in, which are primarily resources -- they come in and they are Tetra Tech on day one. They are integrated into our operations and it is just -- they go to work on our contracts and assimilate on day one.

The very much larger, like ARD, Delaney, they have very high brand recognition, they do introduce themselves as Tetra Tech and we begin that transition. So, depending on the company, there is a different transition timing and plan.

Okay. And typically is that one to two years or longer?

One to three -- one to three years.

Okay, great. Thank you.

Richard Eastman, Robert W. Baird.

Just two questions. One is, Dan, if I look at the private commercial business and I pull out some guesstimate at acquisitions and I pull out -- and I don't want to not give you credit for wind -- but if I pull that out, it still looks like the year-over-year growth in private commercial was up kind of in the high teens in net revenue. Can you just -- what else in there drove that kind of growth?

Well, we announced here -- first of all, it is a combination of Fortune 100 firms where we are doing different environmental compliance and retrofitting of different processes for their -- for instance, air emissions, updating of their scrubbers, design work for sort of large industry that has specific drivers. We have also seen and you saw the very large growth in our communications, and that is almost all private work, where you talk about the major telecom, telecommunications companies.

Then we also saw a contributor as a large project, Carson Marketplace, which is a large development project in Los Angeles that just got started this year, that on a year-to-year comparison didn't exist the previous year. They announced this probably mid-second quarter. And so really, it is not any single project, but pretty broad across the Fortune 100, one or two larger development projects.

And we have begun a commercial project that -- a sediment remediation project in the upper Midwest -- that is just at the very beginning of it that also is another accretive program with respect to revenue. It's a large program that should go for many, many years, up toward a decade, and ramp up very large.

So we have seen strength across really a broad sector of the company, both with types of clients, types of work, from sentiment remediation, which is a natural play for us as one of the leaders in not only the country but in the world in that area, all the way to new development programs.

And you said -- (inaudible) sediment remediation, that would be for a commercial or a commercial customer? That is not a state-funded?

No, we have some that are state-funded, but that is a 100% commercial program.

Okay. David, could you just clarify -- someone, I think, previously asked the cash from operations -- I think that was an '09 estimate. Are you suggesting that if your DSO stretches out that that might more than offset any growth in EBIT? You suggested $55 million to $65 million, and you did $68 million this year.

Yes. Your [networking] capital increase, we actually -- has a much smaller impact than the gross revenue per day impact. So we try to give you a reasonable number.

Okay. So it might be flattish to down a little bit. Okay? All right, thank you.

Richard Paget, Morgan Joseph.

Good morning, guys. I know you guys aren't including any of this in your guidance, but I wondered if you could maybe get some more specific of any bonding measures that were passed recently that might benefit you, and/or anything specifically in one of these stimulus packages that we should look for that would hit your end markets?

We had a Sound Transit, and I will start -- go around a couple of markets that we have a particularly strong presence and infrastructure. In the Northwest, in fact, in the state of Washington, Sound Transit passed a multibillion-dollar bond measure that in fact is supposed to move forward here as early as 2009 with significant funding. And we have a large number of engineers, a good component of our engineering staff for design and that support touchdown points for bridges. So it is soil programs, soil stability engineering is a large presence. In addition of a firm, INCA, which is really best in class in the country in that area, and it is headquartered for us in Seattle, which is just a great spot to capitalize for that. So that is one.

In California, the high-speed rail program is a state bonded program, also multibillion-dollar program, that will have right-of-way clearance, which is what we do; geo-tech, environmental permitting, assessment work and preliminary civil design. So that we use all of ours. And it's an area where we have our largest headcount presence and offices and obviously our corporate headquarters.

$400 million bond issue in Pennsylvania for water and waterway upgrade programs. We have very large presence in Philadelphia and Pittsburgh and a number of other locations throughout Pennsylvania; we are well-positioned.

And then at the federal level, there is a number of sort of fast-track stimulus programs that would look to go to state-funded for the revolving accounts, which are for water programs and other water infrastructure projects. And if -- and I consider this analogous to a stimulus program -- is if the funding goes into a program like the bill that has been passed for the Water Resource Development, there is 900 programs there that haven't been appropriated.

If they want to put people to work, if they want to -- this is our opinion -- if they want to put the economy to work, put people out on projects, fund these projects. Engineers will go to work, constructors will go to work. And the first folks to get those, since these projects have been identified already, are the folks or the firms that have contracts with the Corps of Engineers, which is the primary implementing arm for this. And they are going to go to the folks that hold those contracts.

And the core is -- and it has always been our first or second largest client in all of Tetra Tech -- we have nearly a 30-year history; we are in a great position as those programs go forward.

So those are some that are out there that are not baked into our guidance. I'm glad you said that at the beginning. But those are an example of three state programs and a couple of federal ones that could represent real upside for us.

Okay, great. And then getting back to the acquisition market, I mean, you guys have been -- I think everyone else knows that the [E&C] multiples have come down in half and in some cases more than that. What kind of multiples were you seeing maybe six to nine months ago on acquisitions or at least the sellers' expectations, and what do you think they can come to or what are they around now?

Well, I'd say a year ago, even nine months ago, maybe even as recently as six months ago, they were a multiple of 10 times trailing earnings and higher. In fact, we saw -- you all probably have tracked these as well as us -- have seen transactions take place at 12, 13 times trailing for firms that were in the public space. So we saw them certainly above 10. And firms that had a good track record and felt good used these public acquisitions and mergers as benchmarks.

And so it was very difficult to talk to folks and use a number under 10. And under 8, you couldn't even get onto their doorstep. Now we are seeing numbers probably 6 to 9. Certainly ones where there is a lot of synergy and where you have a real close relationship as a partner and subcontractor (inaudible) for many, many years and there are natural fits, there are reasons why it might be a bit lower than that. But I don't see anybody who is actually going to have any success at numbers above 9, and that was well below a lower benchmark that we saw a year ago.

Is it still safe to assume that most of the buyers out there, the strategics versus any of the private equity guys coming in and --?

Yes, it's interesting; that is exactly what we are seeing. In fact, I would say that even as recently as 30 days ago, when we were communicating our reality to potential acquisitions, that it is not 10, 11, 12, 13, it's not even 9 or 8 -- it is these lower numbers -- they walked away.

And interestingly enough, it's in the last handful of days, literally, we've received calls back that, well, they decided to go with private equity because they got those numbers and they have come back, and said, well, that really didn't work out. What number were you talking to us about?

And then you say four or five?

Our number is that minus three now. So at any rate, private equity, we've have seen, for all practical purposes, really fall off completely; they are gone. I also say that there are firms that while we are doing well, some of our peers are doing very well, not everybody in this space is. And so the folks that have leveraged themselves up, we have seen them off the table. So even strategics we have seen culled down as competition pretty materially.

Okay, thanks. I will get back in queue.

Corey Greendale, First Analysis.

Good morning. Dan, earlier you did a good job of talking through the margins for the resource management segment, both what drove them in the quarter and your expectations for next year. Could you just do the same thing for the infrastructure and communication segments?

Let me start with communications, because I would like to bring any expectation that this last quarter, where they generated 25%, back in line. Look, the communication -- our communication operations managers, staff and their clients is really excellent. We expect it to continue to be a strong contributor, but not at 25%.

As workload comes in and spikes things up, we will expect to have these types of pleasant surprises where it is very high. But on an ongoing basis for the year and on a longer-term, communications, we would look to be about 7%, 8%. And again, we will have spikes above that, but take a look for communications.

Infrastructure historically, we've said and we expect an 8% to 9% margin. This last quarter, I know we were -- and fourth quarter is typically our strongest quarter, and we saw 7.8%, so we were just under that range of 8% to 9%. We did see some softness; we are reacting to it. We are going to adjust our size and our costs in the areas where there is a direct effected -- for instance, in schools and UTOPIA. So we do expect to still be in that range. But certainly with the variability in the state budgets, it could be at the lower end of that range.

Okay. And --

But again, resource management, we are seeing is such a -- 70% of our revenues in resource management versus 25% in infrastructure, we are seeing it, on a relative basis, that having a much less impact on our overall margin.

I know it's a small part of the business, but communications, it was a little surprising to see it spike up in the quarter, the net revenue, I mean, given some projects winding down. So what drove the revenue up there?

Oh, the big telecoms. We had the major telecommunication carriers in multiple locations across the country provided us really a lot of work. And we had an opportunity to take -- not only did we have more people in the field and headcount go up and go into over time, and obviously, those bigger revenues and higher utilization on a fixed overhead base helped contribute to margins.

But we were so busy, we took some of our fixed overhead office staffs that are telecom professionals and put them out in the field in trucks and got them busy. So it had an additional impact of reducing your back-office costs, which we normally would look at as fixed. So all of that ultimately contributed to the very large margin and also the revenue.

None of that was a project closeout. For instance, there was no settlement, there was no one-time major recognition as part of a project closeout. It was just excellent performance for the quarter.

That is helpful. And then I also wanted to ask about the federal government work, which the year-over-year growth was still good. If you look at it sequentially, the net revenue from federal government was down, which is not the historical pattern, given the usual fiscal year-end spending. Can you just address that question?

Yes, I can. Iraq. One word, for the most part, Iraq. We saw significant revenues in Iraq in 2008 and late 2007 just really running at the high point from late fiscal year '07 all the way through early summer. And we are seeing our work in Iraq ramp down. Now, each of the past two years, I have spent a bit more time talking about Iraq. We think we see with more clarity our timing and project load in Iraq, and it is ramping down.

But other projects within the federal government are ramping up -- the USAID work, work that we are doing in the Gulf Coast for the Corps of Engineers, the New Orleans District and others, are ramping up. And our plan all along was our expectation was Iraq would ramp down while these other programs ramped up, and in fact, that is the phenomena you saw sequentially. It was the beginning of a reduction in our Iraq work.

Do you know how revenue from Iraq was still in the Q4 numbers?

I would have to take a look at that. I can -- it is about -- on a gross basis, about $60 million; on a net basis, about $15 million.

And you expect it to continue ramping down from there?

Yes I do. I do.

All right. Thanks very much.

Jeff Beach, Stifel Nicolaus.

Yes, good morning. I may have missed a couple of things, but did you provide the acquired revenues in the fourth quarter?

We include in our investor analyst sheet here -- I can turn to it -- the amount -- we include our year-to-year net revenue growth organically. And so if you take that from the total growth, you have the acquisitive growth for the fourth quarter.

Okay. In terms of the outlook for the communications, I had here what you have in the backlog and what you look for. Are you are looking for growth or some contraction in that business in '09?

We are seeing it still grow, but we are seeing it grow at sort of a 4% to 6% pace. So I'd sort of call it middle single digit growth.

All right. And then spend a minute on what is occurring in your wind power effort. In terms of looking out at '09 and the business that you have booked versus '08, I think you are expanding the scope of the work that you do in and around wind or even alternative energy. Can you talk about that for a minute, about the new functions you do and how much that is adding to growth in '09? And then can you also talk about what you see? Right now, you're forecasting mostly what is in your backlog. But does the outlook right now look good for funding and a lot more wind power projects coming onstream over the next couple of quarters?

Let me start with the type of services that we are providing. And I need to put this in context -- let me put it in context of how we have gone from 2007, 2008 and then 2009, and show you how the revenues are ramping up and then how that is associated with the type of work we are doing.

We did around $50 million to $60 million in 2007 in work for wind projects. It was primarily associated with upfront services, with a very little bit of implementation. So it was right-of-way clearance, environmental permitting, regulatory permitting, geotechnical testing and foundation engineering work. And we felt that -- and we would then work with our both wind developers and utilities to help them select constructors, and then we would often do some type of quality control review or construction management.

And we felt since we were doing all of this work, why don't we take it on a turnkey basis. So what we have done from 2007 to 2008, we went from around 50-ish million in wind work to about $160 million. And essentially, that threefold increase, nearly threefold increase, was by Tetra Tech taking a turnkey execution all the way from the permitting all the way through commissioning, and setting up these turbines.

And in fact, in the last three to four months, Tetra Tech has stood up -- I mean having installed and are currently up and rotating, to put it practically -- about 215 turbines in the Wyoming area. The previous year, we wouldn't have done that. We would have done permitting, but someone else would have done that.

For a forecast, implementing that type of work, our wind forecast is going from about 160 in 2008 to about just over 200, and that is with the work we see. We do see other opportunities coming out. We have been provided a number of bidding opportunities. And it is driven by these turbines. They have been purchased and a number of these turbines, they can't send back, or there is very large expenses for them returning them or not taking possession. So we see a fair amount of work at least through 2009, and opportunities coming up.

Great. And then just one minute on -- within your commercial business and your backlog outside of alternative energy, is there vulnerability going through the course of 2009 to see reductions in some of the programs with your CapEx with your commercial clients? Is this what you saw in the last recession?

We do think there is some vulnerability, and we have factored it in. We have taken a number of the projects that we have and clients and we have internally put factors on them or cautious outlooks on them. Certainly, our crystal ball isn't perfect. We think -- we are looking at our clients very closely to make sure that they are -- they have liquidity, that they are going to be in business, that our receivables and the outlook are of high quality. So we -- but we have factored for some amount of reduction.

All right, thank you.

Rob Young, William Smith & Company.

Good morning. I was hoping you could talk a little bit about the effect on backlog and how it flows into revenue, given the greater portion of net revenue attributable to commercial.

Our net to gross won't change as a percentage. It is probably 35% to 40% of our total revenues. And it is also reflected in our backlog, is in subcontract. So 35% to 40%; the rest is all net. The commercial -- our backlog again is a bit more weighted toward federal, because they are longer-term programs, than it is commercial. They are a bit shorter. Am I answering your question with respect to our backlog components and its partitioning between gross and net?

Yes. I guess, from what I understand, it has been -- about 75% of the backlog is expected in the first 12 months, with the remaining coming in the first 18 months.

Yes.

And I was just wondering if the growing commercial allocation has any effect on that timeframe?

We really haven't seen the amount of our backlog grow to represent the commercial as we have with its actual percentage of revenue. The work that we've received on commercial is much more what we call book and burn. You receive it quickly it's a quick order, you get it -- or expend the funds even before the quarter is up.

So we have not seen the commercial component grow -- I understand your question -- we have not seen it grow and increase the amount of our backlog that would be expended within the first 12 months. You've got it exactly right. All of our backlog, I think with very little exception, would be expended within an 18-month period, with 75% to maybe 80% in the first 12 months -- in the next 12 months.

Okay, great. And then just looking at your guidance, I know it has been touched on throughout. But it looks like it is about 6% top-line growth from net of subcontractors, and then about 14% growth or so on an earnings basis. And those growth characteristics look like, from an earnings standpoint, is a little bit more optimistic than the actual results have been in prior period. And I was just hoping that you could possibly comment on that. Is that basically factoring in better-than-historical margins or --?

It has. The increase in our commercial work does have higher margins. We do see two items driving that. One is the percentage of the work that we have with commercial has gone up. And I believe they are archived on our webpage, on the investors section. What I find fortuitous is about a year ago, we made a decided, concerted focus to increase our commercial work, that if you take a look at the partitioning, we had arrows in there that we wanted to drive the work up to 40% or greater in order to increase the margins. So that is what we have seen, number one.

And number two, the percentage of fixed-price work also is driving higher margins. And the third item is as we go forward, the rolloff -- and I'll call it the rolloff or twilighting of intangible amortizations associated with these acquisitions that we have done a couple of years ago, we have an expense. And as that expense of rolls off or decreases, typically our intangible amortization has about a three-year life span, and it is a bit more heavily weighted to the first year, a little less the second and smallest the third. So as it rolls off, you are going to see an increase in our margin, because it will decrease our intangible amortization effect.

Okay, great. And then with future acquisition opportunities, you mentioned that the multiples are coming down. Does that imply that the size of the acquisition that you might look for has grown?

Yes. We continue to see synergistic tuck-ins, as I have described earlier. But the opportunities that we have seen are larger and are just really good fit. And so we do look for the -- we are looking for these larger acquisitions and they are out there now.

With that, would there be possibilities of tightened integration risk at all?

I don't think so. Delaney Group is running at -- which is two years ago -- in fact came in, and we have seen their revenues increase by 50% or more, that under Tetra Tech and the synergies between the front-end services and the other construction management that we have internally has actually caused them to grow at a level even faster than they had forecasted prior to Tetra Tech.

The exact same thing is true with ARD, with the US Agency for International Development. The integration and synergies of providing full services to their client really drives this integration faster, and it's really for one reason -- to offer the client more full services so they don't have to go to multiple contractors. So it has really worked very well and we haven't seen that with -- those are two examples of $100 million plus per year revenue run rate companies.

And so that is where we spend our biggest amount of time on due diligence. Is it the right cultural fit? Is it the right synergies? And are they going to fit well? Because we are not bringing them on to turn them around; these are top performers right out of the gate.

Okay, great. That is all I have and congratulations on the quarter. Thanks.

With that, I would like to close this conference call. I would like to thank everyone for participating. I can see it is quarter after nine here out on the West Coast; we had lots of questions. I was really glad to receive all of those. These are things that we've been focused on for the past several years, and we are glad to see the focus on the markets, our clients and the growth actually convert to the best results that this company has ever seen.

And that is for 2008. We are confident that things are even better as we move into 2009, even with the uncertainties of the economy. And so both the markets, the clients and the direction that we selected several years ago are really bearing out to be the right moves.

And with that, I'll look forward to talking to you all next quarter. Thank you.

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