Tetra Tech Inc (TTEK) 2009 Q2 法說會逐字稿

Good morning, and thank you for joining us. By now, you should have received a copy of the Press Release. If you have not, please contact the Corporate offices at 626-351-4664, and we will get one to your 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 we'll then open up the calls 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 development. The statements are only predictions and may differ materially from actual future events or results.

Tetra Tech's 10K and 10Q 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.

(OPERATOR INSTRUCTIONS.)

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 fiscal year 2009 Second Quarter Earnings Release Conference Call. I'm pleased to present our financial results for what was a very strong second quarter for Tetra Tech. And while David King, our Chief Financial Officer, will present the specifics of our financials, I'll start with a brief overview of some of our key financial methods for this past second quarter.

In a very challenging economic environment, our focus on water, environment and infrastructure, and alternative-energy programs resulted in double-digit growth in every one of our key financial metrics. For this past quarter, our total revenue was up 13%. Our net revenue was up 16%, which represents an increase of about 1,400 more full-time staff than we had the same quarter a year ago.

Our operating income was up 12%, and our earnings per share was actually up 37% over last year, which did include a favorable resolution to an IRS claim that contributed $0.05 to our earnings for the quarter. And David King will speak specifically about this later in our call. And, finally, our backlog, which was a compilation of our new orders, was also up 10% year-over-year from the same quarter last year.

In the second quarter, we accelerated our growth with our federal government clients. In fact, we grew our net revenue of 18% over the same quarter a year ago with the federal government, and that was Tetra Tech putting people to work on US federal jobs.

In fact, in the second quarter, 47% of the work we performed was directly for the US government, and that's close to a 10-year high for us. And this is actually a focus that we'd had some time ago, and we feel very good about this.

We've seen the revenue from our state and local clients stabilize at about 15% of our overall work. That's about the same number as we had last quarter. Now, most of the projects that we have at the state and local level that were discretionary or at risk are now gone for us, and it's really leaving us concentrating on our core state municipal clients working on their water projects. And so, regulatory projects, watershed programs really are serving as the basis for most of the state and local work that we're doing.

In the Commercial sector, we saw mixed results, which reflected diversity in our clients. We saw further reduction in our commercial land development work, where we're doing soil mechanics work, stability foundation and vertical design work, and, with some of our industrial clients, we saw additional reduction.

But, we saw continued growth in other commercial sectors, such as alternative-energy work for wind, solar, and transmission line clearance. So, that portion of the Commercial sector, we actually saw grow.

Our international growth, which on a percentage was by far the highest, was driven by the integration of Wardrop Engineering, which was an acquisition that we completed after the first month of last quarter.

And I'm very pleased to say that 8% of our net revenue is now contracted for outside of the United States. And while 8% is a big increase, it's just a start to our international growth plans, and so I feel very good about the movement on this sector.

As I presented just a moment ago, earlier, we did grow our net revenue at 16% this past quarter, but our growth was not equal in all four of our segments. The three segments that are focused primarily on the federal government grew the fastest, and they grew at a rate between about 18% and 28%. So, we'd had very strong growth in those three segments.

But, our Engineering and Architectural Group, which is the segment that performs most of our state and local work and the commercial land development work, well, we actually saw a decrease of 5% in their net revenue this past quarter. So, that area we saw under pressure, and it really reflected the softness directly in those markets.

What we are doing is we are continuing to transition more of their workload to our Federal contracts that we have, and we're looking to provide more architect and engineering services to our existing federal clients across the board. So, going back to our same clients, the largest contract capacities we have and taking the services and moving it across there.

Our backlog. Our backlog was actually very interesting this quarter. While our backlog was up year-over-year 10%, it did go down sequentially from last quarter by 6%. This is the first sequential drop that we've seen in backlog in more than two year.

Now, normally, at this time, we would've seen an increase in our federal orders in second quarter. But, due to the confluence from what we see as three factors -- we've seen a slowdown in our federal orders this past quarter -- and the three factors were, first, the change in the new administration. This is the first change we've seen in the country of administration in eight years. And so, you think two terms, but it's actually eight years, it's the first time we've seen that, number one.

Number two, the recent passage of the Omnibus Bill, which actually authorized the funding -- the full funding for fiscal year 2009, which we're here in mid-year, for the federal budget, and that was passed just in March.

And finally, the passage of the Recovery Act in mid-February. This all took place at generally the same time, and it's had the effect of resulting in a lag or a delay in our overall federal orders.

And if you can take a look at the slide, if you're following along, that our second-quarter federal orders were comprised of mostly small maintenance funding on contracts that we currently hold. No new large--new programs or major new phases were actually issued to us during the second quarter.

Now, that was the second quarter. In April, we're already seeing indications of orders that we would've expected in the second quarter. And I'd like to mention just a few of these awards that we've received in April that were recently announced by our clients. We'll make a formal announcement both in our Press Releases, and they will show up as next quarter, but I would like to mention a few that are already out in the media and we've received a number of calls for clarity on these.

First, and perhaps the most visible, is this week we signed a contract for the removal of contaminated sediments from the Fox River up in Green Bay, Wisconsin. This is the largest project of its kind currently underway in the United States, and with a value of between $400 million and $600 million over the next 10 years. A big program, and that just took place here in April and, in fact, this week.

Also in April, we were selected for a $95 million infrastructure project in the state of New York for the Department of Transportation. It's a large program that was press released by the client. We've also received over $30 million in new Navy task orders during the month that were released by our clients. And just this week, we received the US AID Award, Agency for International Development Award, for work in Haiti, for around $20 million.

And the reason I mention these is, one, they've been released by our clients already, and it actually does provide the data that actually confirms what we're seeing out in the field, with more proposals and more activity on the front. And this is what we're seeing starting up in the third quarter.

At this point, I'd like to turn the presentation over to David King, our Chief Financial Officer, who will present the details of our financial results for the second quarter. David?

Thank you, Dan.

Again, Q2 is a quarter where there's strong results. Revenue grew 13% to $522 million, with the particular strength in our federal business, as Dan mentioned. Their revenue grew 16% to $332 million, which was at the high end of our guidance. Operating income grew 12% to $27.8 million, with operating margin at 8.4%. This 8.4% is a respectful margin for a couple reasons.

One, we integrated Wardrop into Tetra Tech, and Wardrop did not contribute during the quarter any operating margin. In addition, we picked up $1.3 million of additional amortization expenses from acquisitions. Number two, we continue to monitor our projects and receive more portfolio throughout the company, and critically assess the impact as a result of today's environment, market conditions, for example accounts receivable for certain commercial clients, and we've provided additional reserve in the quarter to reflect these risks.

Last on the page, EBITDA grew 20% to $34.6 million. Now, let me spend a minute or two on this page, our (inaudible) income tax page. This is a great news on top of a strong quarter.

Given the technical and detailed nature of this subject, I'll be happy to answer any question you may have in the Q&A session, or, preferably, just give me a call at your convenience after the conference call.

There were two types of claims we made in all our tax returns going back to fiscal '97. First one was R&E credits, or commonly referred to as R&D credits.

The second one was a tax accounting method changed. It was a deferral of revenue recognition for tax purpose. For example, we will defer recognizing revenue of our unbilled accounts receivable until they become billable. Two important points on these two topics, one, R&D credit have ongoing or sustainable benefits on our tax rates and tax expenses.

Tax accounting method change is effectively one-time items. It is a deferral. It benefits only timing and cash.

In the second quarter, we successively settled with IRS for our fiscal '97 to fiscal 2001 claim. The settlement also provided us the basis to estimate our claims for fiscal 2002 to 2004. Very importantly, we also received cash refund from IRS for approximately $40 million at the beginning of our third quarter.

As a result, the P&L benefits for the second quarter 2009 was $3.3 million in the form of tax expense reduction. It also reduced our tax rate by 12.3% and added $0.055 cents to EPS.

For the year's post-fiscal '04 up to fiscal '08, we continue to claim R&E credits. Currently, we are conducting a study to support those claims, and the study will be expected to be completed in the next few quarters. If we are eligible for the credits, we will record those benefits there. For 2010 and beyond, we will provide estimate in our future tax rate guidance.

So, what is this all means, and what does it take away? Number one is, as part of our core competency, we are entitled to R&E credits in the past, now, and in the future. Our tax rate is essentially lower than what it has been reported in the past and what will be reported.

And Tetra Tech today is a larger, more complex company, comparing to five or 10 years ago. We will need to complete our study to know how much we can claim in the coming quarters, in the coming years.

Number two, the $40 million cash refund received will substantially strengthen our liquidity and reduce our net debt. I'll come back to that.

Income statement page, SG&A costs grew 17% to $38.5 million. This is higher than what we have expected, and we are very sensitive to it.

There are three main reason for it. One is, as I mentioned earlier, intangible amortization was $1.3 million higher incrementally due to acquisitions. Number two, there was one-time legal fees of about $700,000 to settle a legal claim during the quarter.

The number-three point is Wardrop acquisition added about $1.8 million in our SG&A cost structure. We believe it is too high, and there is potential synergy in the G&A cost structure, and we have already begun the efforts.

Tax. As I discussed, 20% reduction of tax expense had to do with the IRS settlement. Number three -- I'm sorry, the diluted EPS--without IRS settlement, EPS was over $0.26, which was at the high end of the guidance.

Next page. Balance sheets, accounts receivable increased 19% to [$516] million. Accounts payable increased 27% to $182 million due to business growth and better payable management.

Net debt increased 54% to $62 million due to acquisition due in the quarter. Again, $62 million exclude IRS refund we receive in Q3. Our debt-equity ratio is 18.7%, and debt-to-capital ratio was 15.8% at the end of second quarter, again, without IRS refund.

We have an excellent cash flow for operation in the quarter. We have received during the quarter a couple large payments for our wind projects. In addition, we have, as you recall, significant revenue in Q4 '08 and Q1 '09. These receivable got liquidated and contributed to our cash flow in the quarter. Our revised forecast for the year, with IRS refund of $40 million, our cash flow for operation will be $95 million to $105 million for the year.

[Cap expense] is $6.6 million, and, for the whole year, we expect to be -- will continue to be $20 million to $25 million.

DSO went up by 3%, 79 days. We are seeing our commercial customers paying more slowly. Given our great cash flow in Q2, and the pattern we are seeing our commercial clients of late, I will not be surprised to see our DSO break into low 80s before they come back to high 70s to finish the year.

Net debt. Again, with our excellent cash flow for the quarter and IRS refund of $40 million in Q3, I expect Tetra Tech to be debt-free by fiscal year-end, even in light of current challenging economy and market conditions. I'm confident our liquidity and strong cash position will provide the engine for us for further growth in the second half of the fiscal 2009 and beyond. Back to you, Dan.

Thank you very much, David. And great job on that cash generation from all of our accounts.

At this point, I'd like to present our updated guidance for the third quarter and for all of fiscal year 2009. Before I get directly to the numbers here, I'd like to note that our guidance does not include any special anticipated funding from the stimulus bill--that is such a large topic of speculation--or any contribution from future acquisitions that we would complete during the remained of fiscal year 2009.

The guidance for the third quarter for revenue, net of subcontractor costs, is $330 million to $350 million, with an associated diluted earnings per share, EPS, of $0.29 to $0.31. With this guidance for the third quarter, we have updated our entire fiscal year 2009 revenue, net of subcontractors, and we, in fact, narrowed our guidance for net revenue to $1.35 billion to $1.4 billion dollars for the entire fiscal year.

We've also increased our earnings per share guidance by $0.05 to reflect the second-quarter IRS settlement that David King just spoke to, increasing both the lower and upper end of our previous guidance by $0.05, to take us to $1.17 to $1.23 for the entire fiscal year.

Make a note here, if you're following along on the slides. Please note that, again, this does include the contribution of the $0.05 from the IRS settlement. It does includes $0.09 of intangible amortization, which does not affect the cash, but is factored into our earnings, and does assume -- and David certainly can answer questions on modeling for the third and fourth quarter--but assumes a 41.1% effective tax rate for both the third and fourth quarter.

Now, I do want to make a note that the low end of our guidance, we've assumed no appreciable increase in the United States federal spending from our federal customers in either the third or the fourth quarter. The faster the federal government issues new orders, the bigger impact we'd expect to see in the third quarter, fourth quarter, and especially in fiscal year 2010.

And one thing that's very clear to us here is the clear priority of this administration and the majority party here in the United States are to support programs for clean water and water infrastructure, cleaning the environment and energy-efficient buildings, and energy independence while reducing CO2 emissions, and these are the markets that Tetra Tech is primarily focused on. So, when their funding goes up, we're exactly in the right spot.

I do want to say a word about the stimulus package and the Recovery Bill that's been passed. That still remains the number one news item on the front page of most newspapers and continues to be the economy and stimulus funding and speculation of when it's going to actually arrive.

And while the American Recovery and Reinvestment Act has been passed, we don't know when the funding is actually going to be released and the exact timing from each agency. And, in fact, it will vary depending on the agency. It's not just a single answer that applies to everything. But what we do know is that the Recovery Act does provide funding in the areas that intersect with the services that we provide and the contracts that we hold.

Now, in this slide, following along on the webcast, we've identified four major areas of stimulus funding that are directly associated to the work that we do. First is water programs, second are EPA and Department of Energy programs, third is alternative energy and grid upgrading, and then the fourth is Federal Other, which is really Department of Defense and the base realignment enclosure, restoration cleanup, and the realignment of the Department of Defense facilities.

Just these four areas, which are key clients for Tetra Tech, represents more than $34 billion in federal investments in the type of projects that we perform. And from our perspective, the firms that will be the most successful are the ones that have contracts in place today.

I've said this before in our previous call, but with two and a half months gone by since the signing of the Recovery Act, it's increasingly important to get this into the economy fast. And the only way we see to do that, it's got to go first to those that hold contracts.

We at Tetra Tech hold in excess of $8 billion in contract capacity to date with these key customers, and that's mostly in the federal sector, and it's with these clients that this work for the stimulus program is going to get done. They're the entities that are responsible for getting this completed. And as we've indicated before, our project managers are actively identifying projects where we can help our federal clients get the work done and put people to work on federal programs right now, and that is their mission.

In summary, in this past quarter, we continued to grow the Company at double-digit rates both in revenue and income. It was a very strong quarter for us. We generated more than $70 million in cash from operations, and that's among the highest ever for any quarter that we've ever had here at Tetra Tech.

And I want to reiterate what David King said a moment ago. At $70 million -- in excess of $70 million did not -- did not -- include the $40 million payment we received from the IRS in the first days of the third quarter. That will be reflected in our next quarter, or this current third quarter.

We've increased the work that we do directly for the US federal government to very close to 50%, adding stability to our entire company. And even the areas in the segments within the company that we've seen some softness in because of the economy with certain commercial clients, and state and local, we're looking to get them involved in more federal work.

And as I've stated a moment ago, the priorities of the new administration are aligned with the services that Tetra Tech provides. We're at the right place and at the right time for the markets of the future. And finally, when the stimulus funding is released, we're in an excellent position to participate in these programs.

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

(OPERATOR INSTRUCTIONS.)

Michael Cox with Piper Jaffray.

Morning, gentlemen, and congratulations on the quarter.

Great. Thank you very much, Michael.

My first question is on the margin profile. As you look at the types of projects and contracts that you're looking at in the stimulus package, and obviously there's a lot of uncertainty there, but I'd be curious what you would anticipate the margin profile would be of those types of projects. Do you anticipate competition escalating?

It's a question that we get asked frequently, and generally is associated with observations that there's an expectation there'll be more competition, more participation, and potentially pressure on pricing. We actually don't expect to see that, and, in fact, we expect that most of our work is going to be awarded, at least initially, through the existing contracts that we have in place. Quite often, these are what we refer to indefinite delivery/indefinite quantity contracts that we already have in place.

That's why I referred to and referenced a moment ago, about the $8 billion in contract capacity that we have in place today. And both the rates, and if it's time and material, it's the unit rates for staff. And if it's cost-plus, they're already in place. And so, we believe that, one, the competition's going to be limited, because the contract holders are already in place.

And typically, these IDIQ contracts for a given client are held by perhaps two or three to as many as four or five, and in some locations, we're the only contract holder where it's a unique service. So, we expect the competition not to increase by the very nature of the contracts that are held. The pricing has already been established and negotiated as part of these contracts. And, so, we think that the rates or the profit margins will be similar to what we've seen in the past.

Yes. That's very helpful.

And shifting to the Wind segment, I'd be curious what sort of activity you're seeing there, what you're anticipating through the balance of the year. There seems to be a level of optimism that that will pick back up. And is that a segment that you could build back up to a $200 million backlog level at some point?

We hope so. We hope that's just a milestone or a waypoint to even a bigger number on backlog. We currently have about $50 million in backlog, roughly. We've incurred revenue, or incurred billings so far of about $150 million. So, we're still on track. We're on target to hit the estimated revenues for alternative energy.

We did see a very slow first and second quarter, but here in the past 30 days, and actually, similar to what we've seen in the federal government, we've actually seen an increase in proposal activity primarily associated with favorable tax incentives and grants that were included in the Recovery Act.

Most of the proposal activity we're seeing is at the front end of the project cycle, so it's for services like feasibility studies for some of the wind locations, alternative analysis, determining a distance and access to the grid, environmental clearance and evaluation, and sort of preliminary engineering activities.

We think this is the best place. In fact, we'd hope that every project would go this way, because we're one of the very few firms that actually offers from the very front end all the way through the back end on a turnkey basis.

So, we are seeing this front-end work at proposal pick up a lot, but we really think this would translate into larger revenues in early 2010 and 2011.

We have been spending time with our clients, and it's the large utilities, and it's interesting. They have identified a cost analysis as to the feasibility of wind and some of the other alternative energy sources, including Solar, and these tax credits make it particularly attractive in 2010, '11, and with completion by 2012. And so, some of the estimates by the largest utilities show adding significant capacity in these alternative energy or zero CO2 emission technologies here over the next two years.

Great. Thank you very much.

Debra Coy with Janney.

Yes. Thanks. Good morning, guys.

Morning, Debra.

Question on just the organic growth outlook. Organic growth dipped a bit in the quarter. And if we look at your revenue guidance for the third quarter and layer in the acquisitions, it looks like, actually, probably, we have a temporary decline in organic growth.

You also mentioned that the low end of your full-year guidance assumes no real pick-up in the federal government. If you can just kind of walk through the segments, or the end markets, and look at how you're kind of seeing the underlying organic growth trends, and then what gets you to the top end of the guidance, since you've said you haven't included any stimulus impact in those numbers?

A good question. Organic growth for the third quarter, if you take out contributions from the acquisitions, is flat to slightly declining on the third quarter, and it's flat to slightly increasing in the fourth quarter. And so, I'd call for the second half, organic growth in our guidance is flat between the two.

The third quarter, where we see a primary driver is, a year ago -- and this is going year-on-year growth -- we had a very, very large contribution from Iraq. And in fact, in our Remediation and Construction Group, during the entire year, on a gross-revenue basis, we did about $300 million worth of work in Iraq. And in fact, a year ago, on a gross revenue, maybe almost $100 million for a quarter.

And to translate that to the third quarter, to show you what type of -- to give you a example of what type of headwind on a revenue trade out, or what we did to replace, we'll do something less than $10 million. And on a net-revenue basis, it'll be de minimis, $1 million or $2 million. So, with that amount of revenue falling off, we have replaced it across the board to leave the organization as a whole for the quarter on an organic basis, roughly flat or even declining a percentage or two.

So, we actually feel very good about that. It almost was our contention that as Iraq ramped down, we would see the US base realignment enclosure. And so, cleaning up of military bases, design infrastructure work and preparation for the new alignment basis to pick up and to have relatively even offset.

Still believe that would have actually been the case, and, in fact, an increase if we'd hadn't had this confluence of these three factors with the federal government that's just slowed down the federal funding. And even with that taking place, we're still in a good spot. So, we expect, with respect to the rest of the markets, we see them actually increasing.

Let me talk about what we see at the end markets. And I'll speak primarily to the federal sector, since it represents half of everything, and then I'll go to the State and Commercial and touch on them. At the federal level, exclusive of the stimulus, we've seen most of our key clients -- and I'll use EPA as an example -- their annual funding budgets go up 30%.

And in fact, just yesterday, the first outline of a bill for the 2010, fiscal year 2010 passed at over $3 trillion, and with our key end clients and markets, environmental programs, water programs, and alternative energy being the key benefactors in the proposed budgets for next year.

So, instead of continuing resolution through the middle of the year and a tug-of-war to determine if anything could be passed and ultimately not be, we actually see with the majority party, along with the President being on the same side of the aisle, we should a much more streamlined process.

So, if they fund only out of the annual funding budgets and we see a plus-up and the dollars actually come out here late in the year, that would move us to the high end, and anything on the stimulus should push us above and beyond that, Debra.

Okay. That's helpful. And then, just following up on the earlier question on margin profiles. Again, with the dip, or at least organic's slight dip in revenues and roughly flat sequentially that we're looking at, we're up a little bit for 3Q. To get to the guidance, we'd clearly have to see some margin expansion.

And I guess my question is, if we're talking about moving EBIT margins back up on an overall basis, call it into the high eights, as the federal government business comes back, would that be sustainable, or would we see the mix shift again as you go back towards some of the cost-plus contracts and maybe the EBIT margin move up and then move down a bit? Kind of how do you -- how should we think about that in terms of business mix?

I thought David covered this -- touched on it pretty well on his first slide. I thought he made an excellent point, and this is what we've seen. We brought on $20 million of net revenue this past quarter with Wardrop, and essentially had no contribution, zero, from operating income. And in fact, it wasn't zero. It was minus, because we had to take on the tangible amortization as part of our operating income expense.

And so, if you actually take and normalize that -- and by the way, it's not a surprise that, when a firm first comes in, go through the integration process and we begin bringing them on, this is very typical. Wardrop being a bit larger, well in excess of 100 million, it had more accentuated effect.

So, if you normalize the Wardrop for its contributions and you eliminate some of these legal expenses, I think you'll see that our margin -- I hate to -- I don't want to sound like anything's easy. We're in a challenging environment, but it's very achievable, very achievable.

Okay. All right. That's helpful.

And then, just one final housekeeping question. I think, David, when you gave the updated cash flow guidance for the year, that excluded the $40 million from the tax credit? Is that correct? The $95 million to $105 million excludes the [debt to] operating cash flow, excludes the tax credit?

In my entire--.

The tax refund--?

In my entire presentation, that's the only one was included.

So, the $95 million to $105 million does include the $40 million?

Yes.

Okay. All right. Thanks.

Thank you, Debra.

Richard Eastman with Robert Baird.

Yes, good morning.

Morning, Rick.

Dan, could you spend a couple minutes digging a little bit deeper into the Commercial piece of the business? We saw it just get a modest decline in net revenue, kind of broke a trend there. I know that you mentioned land development and industrial, environmental. That seems pretty straightforward as being down. How did the Wind bookings actually look in the quarter versus last year?

Bookings were--.

And then, also just the billings?

Okay. We have -- I'll call bookings, and then second half will be billings or revenue recognized.

Bookings from a year ago were down substantially.

Yes. I understand. Okay.

And in fact, we had nominal and new bookings, or new orders, during the second quarter. We saw very few proposal opportunities. We saw most of our clients, certainly the commercial developers, had difficulty with accessing capital, and so that was turned off, the utilities pulled back both in the first and second quarters. So, bookings were down materially.

Revenues, or billings, were up substantially over last year. A year ago, we booked well in excess of $100 million in new orders, or bookings, for new work, that ultimately was designed and constructed late in the year, and even in the first quarter of this year. And so, the billings and the actually revenue recognized were up substantially from a year ago.

Okay.

And so, in net revenue, I think we must have did about -- did we do about $30 million or $50 million in net revenue in Wind in the quarter? Is that too big?

That's too big. That would be very close to the gross revenue number. The net revenue number would be about $15 million.

Okay. Okay.

And then, when we talk about the Wind -- well, I'm sorry, just be able to finish that thought. The $50 million that you have in backlog now in Wind, that is a gross revenue number?

That's correct.

Yes. Okay. And most of that should ship by the end of the fiscal year?

Yes. We would expect to complete all that work by the end of our fiscal year.

Okay.

And then, also, when we talk about the alternative energy piece of Commercial, we have the Wind, the Solar, the Transmission Line business. Can you just give us a sense of kind of an annual maybe net revenue run rate for that alternative energy piece?

Kind of hard to do here with Wind moving around, but--.

How much of the Commercial piece does that alternative-energy stuff make up?

Well, I think in the net revenue for the year, we'll be maybe in the range of $50 million to $75 million.

Okay, for this year, okay.

And then -- sorry, last question on Commercial. The Fox River project now, you got some nice press on that in Fox Valley, up here in Wisconsin.

Oh, good.

How do you think of that project billing out? Is this kind of more or less of a net revenue annuity every quarter? Presumably, there'll be less revenue in the winter up there, but should we think of that as being, in terms of net revenue, maybe $20 million a quarter or something, or how should we think about that project?

We think that, on a quarterly basis -- and you're right. It'll be a little bit seasonal -- but about $10 million a quarter on net revenue, and on a gross revenue, about double that, probably about $20 million. So, we think that it's around a $70 million or $80 million a year total revenue generation project, and roughly half of that would be net revenue.

I see. Okay.

Is the German firm that was kind of quoted in those press videos, are they subbing to you, subcontract to you, or is that a separate piece of this contract?

They are subcontract to us. We've been working up there -- prior to execution of the contract this week for the actual removal and remediation of the river itself for the contaminated sediments, we've spent the past -- more than a year getting ready with the project, not only in a regulatory and a permitting, but the engineering, design, and construction of the largest sediment dewatering presses in the world.

And so, that's what we've been doing. And that being up in your neck of the woods in Northern Wisconsin, this all was put indoors. So, it wasn't only constructing it, but it was also constructing a facility to contain it indoors so that you can work over a much longer season.

It was always actually easy to catch those sturgeon as they worked their way. They were glowing in the dark, so -- as they worked their way through Lake Michigan down to Milwaukee, it was fairly easy to catch them, so guess you could take care of that problem.

Well, as we do the dredging, we'll chase the sturgeon up into one corner for you.

Perfect, all right.

Thank you.

Thank you, Rick.

Corey Greendale from First Analysis.

Hi, good morning.

Good morning, Corey.

First question is just about how you're kind of balancing. With some of the federal work slowing, it sounds like generally, with the stimulus, there's a very good chance that it'll kind of be all his--systems go and full-speed ahead, but are you doing anything in the meantime to kind of manage costs down or position yourself for the potential that there could be some near-term weakness?

Absolutely. Absolutely.

We have been very aggressive on the cost side. I think David talked about some of the reasons why our SG&A appears to be higher, driven by accounting charges, like intangible amortization and bringing on new acquisitions. But, our goal is to keep our back-office costs down, while our headcount from a year ago is up 1,400 heads, approximately.

We actually are seeing underlying a lot of moving pieces. We've taken a lot of step out of the portions of the market where work is slow, like the Commercial development we've seen reductions. We've seen reductions in some of the Geotechnical soils work that we do down in the Florida area, for example, so another good example.

At the same time, we've been staffing up in areas where we see strengths, such as the Louisiana Gulf Coast, restoration along the Greater New Orleans Area, for soils work for a levy evaluation and other projects. USCID has been a very strong client for us and we've had very good success and been a good partner for them, and so we've seen staffing up there.

So, at the surface, it looks like our headcount is up, both attributable to organic growth of hiring folks and acquisitions. But, underneath the surface there's a lot of moving pieces, and we're being very, very aggressive on making sure that we keep our cost structure and our operations aligned with the work.

Okay. And roughly, what's your utilization running at, and how does that compare with where it has been recently?

Utilization has been in the low 60s. We do have, I consider, set lots of room for expansion of that. So, we're certainly indicating to our federal clients, "If you've got the work, we've got the people."

So, while we think we have several points of expansion there, but it's not a simple task, obviously, to downsize in an area where work's slow. We do have costs that are non-recurring, like severance costs, as you staff down in one area and then you have ramp-up in others. So, we'd say we're low 60s, but expect that we can get up many points.

Okay.

And David, sorry to return to the cash flow, but I think you said in response to Debra's question that the revised guidance does include the $40 million tax refund. Is that correct?

Yes, it does.

So, you effectively raised the range by $35 million. So, if that does include the $40 million, does that mean that you're actually -- would be lowering the guidance by $5 million, excluding that refund?

What we are seeing, as I mentioned earlier, is in our Commercial client sector that we want to be cautious, and some of the work that we do today, they are more milestone driven. And a shorter-term cash flow visibility can be choppy, and we did a great second quarter. So, with all that, we want to be on the cautious side.

Okay. I understand.

Great. Thank you very much.

Thank you, Corey.

Richard Paget with Morgan Joseph.

Morning, guys.

Morning, Richard.

Wondering if you could talk a little bit about the acquisition market. I know, as things have come down, and maybe some of the (inaudible) expectations have been reined in. But, with the promise of a lot of this federal stimulus money, at least in the domestic market, are they struggling to say, "Okay, wait a minute. Maybe we should hold out a little bit, because, with all this billing that's coming, maybe we can get better pricing?" So, I wondered if you could just talk about the dynamics there.

Well, the first were -- we typically look at are private firms. So, the private firms still -- I would say there's still a little bit of a lag in their realization that their value, where their multiples of earnings, have come down, like the public folks. But we are seeing more opportunities, and we are seeing more realistic expectations on valuation.

Now, those that do federal work, you're absolutely right what you've just described, what we're seeing. If they are in the federal sector and a niche player, they're saying, "Boy, we just got to hold out a little longer. Things are going to be good." But, those that aren't, and there's a lot of those, and they're looking at, "How are we going to get into the federal sector?"

And it is interesting. I've talked with many folks -- many opportunities that have come to us and said, "Wow, we started three or four months ago, and we thought we'd become a federal contractor in three or four months, maybe a quarter. We'll go out and get some contracts, and we'll be ready to go by the stimulus package release of funding."

And they've come back and said, "You know, we've made zero progress, and, in fact, the federal government wants things like DCAA audited rates. They actually want experience at federal facilities. They actually want to work with people that have experience, and, you know what? We need to get teamed up with a bigger brother who actually has those."

And so, we have had a number of folks that have selected Tetra Tech because of that, and looking to do exactly what you say. The mindset's the same. They would like to get it on their own with no help, so they can keep it themselves. But, those that can't are looking for the right partner. And so, that's actually driven lots of opportunity to Tetra Tech.

Okay. Thanks. I'll get back in queue.

Thank you, Richard.

Will Gabrielski from Broadpoint Amtech.

Hey, thank you. Couple of questions.

First, you know, are there any other opportunities out there on the Commercial side, and in general that compare in size and scope to the Fox River project that you guys are tracking right now?

Yes. And actually, one of the focuses of our firm--and we think that we have a very specialized and, in some respects, unique set of capabilities in sediment remediation. You may hear from our peers in the marketplace that are public companies that you have these discussions with, that they see that environmental cleanup of soil and groundwater is a very strong market.

Another level of complexity beyond cleaning up chemically-impaired soil and water is sediment. It's a much more mobile media. You have additional, what they call receptors, or different -- you have recreational impacts. You have marine impacts, fishery issues, quite often endangered species, and then you have a contaminant that, once you begin the remediation, becomes mobile and can move in the waterways.

And so, understanding the science and leading these projects literally with the science of understanding what's going to happen, what's going to be impacted, we think is one of the absolute strengths. And the unique positions that we hold, thanks to the work that we've done for the federal government, the models that we've prepared for the EPA, and the work that we've been doing for, really, all the way back to our founding of the company, puts Tetra Tech in a much different position.

So, we're not looking at advertising, because I'm sure you'd like me to provide the names and dates and times of the individual projects. And while I'd love to provide those to our investors and shareholders, I'm not looking to provide those to our competitors. But, there are large projects around the country on waterways that both are commercial and federal, that are associated with ports, harbors, and other inapplicable waterways.

And so, we think this is a big market. Clearly, this differentiates Tetra Tech from many others, and we think this will be a big growth area for us in the coming years.

Okay. Great.

And you also mentioned ports and harbors there. I was wondering, the Army Corps of Engineers has published their list of projects to be funded with stimulus money. The Panama Canal project has been cited as one that's going to drive an upgrade cycle domestically on the Gulf Coast. And I'm curious if you guys are seeing any activity like that today, and what your expectations are through the core, as well as derivative plays off of the Panama Canal expansion.

Well, we're on a team. There's -- I believe it's three -- I think they ultimately receive three proposals to the ACP or to the Panama Canal Authority. We're on one of the teams, and those proposals just recently went in, and it's being evaluated by the Panama Canal Authority. And many of the people that advise on that, of course, are the Corps of Engineers who were the original architects and constructors of that.

So, we'll see how that plays out. We don't expect that determination to be until the end of the year, the calendar year. So, we will see. Might be mid-summer is the official report.

Now, the Army Corp of Engineers Civil Works budget is up substantially. It's over $4 billion, and they just released, this week--it's about a month behind schedule--but for the stimulus program, they just released this week a list of the projects.

And we are very happy to see that 45 individual projects are associated with the Mississippi River project, 67 different investigation projects, and these are individual projects that we're now sifting through very quickly to determine where we're present, what we're doing, and how it would be logical and beneficial to the government for us to take those programs to the next level.

So, we think the core is -- it has historically been our largest client and continues to be one of our very largest clients, and we'd be looking to move on these types of navigable waterways and marine projects.

Okay.

Shifting gears a bit to transmission and distribution, any expectations on when you think that will become a more material component of your business, in general? And any acquisitions or avenues that you might look to get bigger on the roadmap?

Well, we think it's going to -- we think it's one of the most attractive markets. One thing that we -- it's the one area that I see within Tetra Tech, and in fact the industry, that there is a shortage of capacity.

True high-voltage engineers are a very limited commodity, and we're looking for acquisitions. We're growing a few of them internally. We have created a Tetra Tech Electric Division within the Company, specifically focused on this. The Smart Grid, grid updates, connecting these alternative energy remote electrical generation facilities into the grid all require high-voltage engineers.

So, mechanics, with respect to towers or burial, if you're going direct burial, I mean, that's all right where we're at, but I don't see it being an impact to our top or bottom line in 2009. But, I do see it contributing materially in 2010.

And would that involve partnerships, potential acquisitions? Is there an avenue or mechanism from which you can get bigger quicker, or is it all organic and internal?

Well, we're looking for acquisitions, but, frankly, we know who they are. And this is the one space that was characterized earlier on one of these questions, is do these companies feel that there is an opportunity, a large amount of opportunity, right over the horizon, and so they want to stand pat?

This is the one area that we see that, that even though they're running through difficult times now, they believe there's great opportunity from these private firms. There are some, though, that we have essentially as captive subcontractors or partners, and we have a lot of reasons, and so do they, that they think maybe joining Tetra Tech would be much more attractive. So, I would look for not a large acquisition in the transmission and distribution space, but probably many smaller ones that would aggregate up to essentially the same thing.

And how do you view the margins there?

Better than average. We think in the double digits, low double digits.

Okay. Great. Thank you.

John Quealy with Canaccord Adams.

This is Chip Moore for John.

Can you talk about the integration of Wardrop? We saw the nice jump in international. Just how things are progressing there, any new opportunities that you're coming across.

Yes.

Well, first of all, we remain excited and very positive on the Wardrop acquisition and integration. They have embraced Tetra Tech, and the same is true, vice versa, as much as I've seen any acquisition.

We have at one area, and while they're a natural resource firm, infrastructure and energy, and, in fact, the order would be that resource management, mining in Canada and other areas is the largest 50%. Energy is second, but infrastructure, which include water, wastewater, water resource work, is an area that was only about 15% of their revenue.

We've mobilized all of Tetra Tech's top talent and moved it into Canada and into the set of offices and executive teams of Wardrop and got out in front of the clients, because this is now a capability that exists within Tetra Tech and Wardrop in Canada now through their network of offices.

We've already had some early success being put on what they call rosters with cities, where we've been listed as an approved contractor now for water and wastewater work. And Wardrop doesn't have to generate this organically. It now exists at the highest level of any firm in North America, not just Canada. But with our number-one position in water in the US, that now exists in Canada.

So, I commend Wardrop for being open, and they've been excellent in getting us right in front of their clients. And to put this in context, it's been 90 days. This has been very fast, and, within the first 30 days, we were up in front of the clients, and, within the first 60, we've had our first award. So, it's early, but early polls look very positive.

Okay. Great.

And can you maybe just walk us through some of your margin expectations by segment? It looked like Environmental Consulting was maybe a touch light on our model. Just trying to reconcile the guidance.

Yes. Yes.

Let me go through the general range, and then I'll come back and reconcile very quickly, because there were two outliers. Our Environmental Consulting Services, we expect to be in a 10 to 12 margin range. Our Technical Support Services, nine to 11. EAS, our Engineering and Architectural Services, six to eight, and then our Remediation Construction Management, a seven to nine range.

Now, the two outliers that you saw this last quarter were ECS, as you just indicated. They were lower. We expect them to be sort of 10 to 12, and they came in at 8.8. And that's the group that Wardrop went into.

So, it contributed to the revenue and decreased, or took away on the profit, and that's what caused that to be outside the range. Otherwise, we'd be right there.

The second outlier for the quarter was our Engineering and Architectural Services Group, which we expect to be 6-8, and they were 6.4. So, they were within the range, but at the low end of the range.

And they really have the largest exposure of Tetra Tech, or the work that we do, to state and local, the municipal work, and the commercial development which is, we call it MEP, Mechanical, Electrical, Plumbing work of these very large high-rise buildings, but we do the engineering work. And that's the work that got essentially all but turned off across not just the United States but the world here, this past quarter.

So, those were the two outliers for the quarter from our anticipated ranges, and those are the reasons why they were a little bit off.

Perfect. That's very helpful. Thanks.

Thank you.

Jeff Beach with Stifel, Nicolaus.

Hi, good morning, Dan.

Morning, Jeff.

On the chart of the potential stimulus that you can address, the $34 billion, you said you were already in the programs. You're already seeing some of these agencies come up with proposals, programs. So you're starting to get some visibility, I assume.

How long do you think this $34 billion is going to stretch out? I know the government would like to see a lot of it in the next two years, but is this going to ramp up likely for two or three years to a high level?

We think that two to five, three to five years. I know that the expectation is to have it all complete and to run that amount in two to three years, but the expectation is that it would all be in the street in 30 to 60 days.

Realistically, these programs will have natural extensions to the work that is performing, so I think that that'll actually be over sort of two or three to five years.

And to put that in context, one of the biggest programs that we've been a large participant in has been the base realignment and closure, both the 1995 and then the 2005 that was just starting up.

The 1995 BRAC, which we did, oh, it's about $700 million-plus on, was a program that stretched over 10 years, and that was $20 billion or less. And the new BRAC, the 2005, that has been delayed a bit because of the work that the Department of Defense has done in Iraq and even Afghanistan, is estimated to be $30 billion over roughly 10 years.

So this $34 billion which we're focused on, the subset, is substantially larger, and in a shorter timeframe. So the impact should be substantially greater.

All right. Thanks.

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

Well, I'd like to thank everyone for your good questions and your interest and support of Tetra Tech and we're looking forward to a strong third and fourth quarter.

And as I have indicated both in our presentations and questions and answers, we're seeing early opportunities in this third quarter. And we look forward to reporting the actual results back to you on the next conference call in 90 days.

And thank you very much for participating, and I'll talk to you then. Bye.

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