Tetra Tech Inc (TTEK) 2009 Q3 法說會逐字稿

Good morning and thank you for joining us. By now you should have received a copy of the press release. If you have not, please contact the corporate offices at 626-351-4664 and we will get one to you right away. With us today from management are Dan Batrack, Chairman and Chief Executive Officer, 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 and may differ materially from actual future events or results.

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

At this time I would like to inform you that all participants are in a listen-only mode. At the request of the Company we will open the conference up for questions and answers after the presentation. With that I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Thank you very much and good morning and welcome to our third-quarter earnings release conference call and I'm very pleased reports our financial results for this past third quarter. I'd like to start right up at the top with our total and net revenue for this past quarter.

Our total revenue was just over $550 million for the quarter which was actually down 2% from last year. But last year Tetra Tech generated more than $75 million of additional revenue from Iraq that we didn't have this year. And this year we essentially placed all -- replaced all of that work with new environmental water projects with the federal government here in the United States.

Our net revenue was up 7% from last year, this was the highest net revenue we've ever generated in a single quarter for the Corporation and that number was at $357 million for the quarter. This quarter our operating income was $33 million, that's up 17% from last year which was also the highest of any quarter in our history, also very, very strong performance.

Now that operating income translating into earnings per share without any prior tax benefit was up 15% from the prior year and 29% up without any prior year adjustments. And David King is going to spend some time during this call going through the breakdown of these numbers and the impact of the tax on our earnings per-share.

Finally our backlog was also up, it was up 8% year over year and it was also up sequentially by $47 million from the prior quarter or second quarter of this fiscal year. I'm a very happy with all of these results from the top line to the bottom line and with the visibility provided by the backlog that we've added this past quarter.

Now as in the past, our largest and strongest client continues to be the US federal government. It represents about half of our business and, to be a bit more precise, it was 46% this past quarter.

We grew our net revenue with the federal government at a pace of 13% compared to last year or year on year and that was work driven from our long-term traditional clients with the Department of Defense, that's the Army, Navy, Air Force; the Army Corps of Engineers was up substantially and USAID continues to be one of our largest clients and we had excellent visibility and contributions this past quarter.

State and local work is actually stabilizing. I talked about this last quarter when it represented 15% of our net revenues; this quarter it represents 14% of our net revenues. And while year on year it's down 17%, it actually was up financially by $2 million or it was $2 million greater than its contributions last year. So we are seeing stability on a sequential basis from our state and local work.

From our commercial clients we saw regulatory driven programs continue to move forward, projects like the Fox River, which is a sediment remediation project up in Wisconsin and I'll talk a bit more about that later on in this call. However, we did see further reduction in commercial development and commercial property work and some discretionary services with our industrial clients. So in the commercial sector some strength, some weaknesses, overall on a sequential basis also flat. In fact, it was up about $2 million from the prior quarter.

International growth, that was up substantially. These percentages really don't even apply. We had such a small amount of international work and it was all driven by the acquisition of Wardrop in Canada this past quarter. So exceptional growth and a large move for us there.

With respect to our operating segments, this quarter we saw some of the largest growth in the segments that are focused on the beginning of the project cycle. This is really a hallmark of Tetra Tech and the cornerstone of our approach into the marketplace.

The biggest growth within the Company was within our environmental consulting services group that leads with science. This is where we believe that science and technology in this segment was up more than 30%, but it also did include the contribution of Wardrop which went into this segment. And so this is where we identified the projects way upfront where the alternatives are being evaluated and studies are being completed.

The second area of highest growth was with our technical support services group. This is the segment that staffs our most complex projects for our clients and where most of the international development programs for USAID are all performed and this grew at 7% year over year. Also very strong growth.

The next group internally refer to as our infrastructure group were the design activities take place -- civil, mechanical, structural, all of the infrastructure constructible design takes place in our EAS group, our engineering and architectural services group. They had some very, very nice wins this past quarter with the Army Corps of Engineers, with the Navy and other federal clients to do design of military infrastructure work.

But this also happens to be the segment that has most of our state and local work that is a discretionary and also the commercial development work. And so that's why this is the one segment where we've seen a reduction both sequentially and year on year in revenues. And also it shows up on additional pressures on their margins which you can see in our financials.

The final segment is our remediation and construction group and this is the entity or the group within the Company where all of the Iraq work was performed last year. This group replaced all $75 million of work that wasn't performed this year in Iraq and replaced it with other federal work here in the states and maintained the same revenue that they had last year. You can see they're essentially flat year on year. So they did an exceptional job of replacing all of that work that transitioned out. So, very good performance.

For our backlog in the third quarter it was up, as I had mentioned earlier at the opening of this morning's conference call, up 8% year on year, up sequentially by $47 million or up a couple percent. This quarter our backlog was driven by orders both from the public and the private sectors. Our largest order this quarter -- this past quarter was from New York State for the Route 17 road and bridge crossing project and this is a project that we've been working on for many years. So it was an excellent continuation of a program at the state level.

Our second largest order was from a commercial client and this was from a regulatory driven program to clean up the Fox River. Now the Fox River project is for the clean up of the contaminated sediments in the Fox River up in Green Bay, Wisconsin and it's the largest turnkey sediment remediation project currently underway in the United States.

We do expect to see other opportunities where we can apply the technology that we're using at the Fox River and there's a handful of these very large programs that we expect will come forward in the coming years. So this is not only a good current project, a multi-tier project, but will actually serve as a baseline for us to compete for other similar type projects.

At this point I'd like to turn the presentation over to David King to present further details on all of our financial performance. David?

Thank you, Dan. This is again a solid quarter by all financial metrics. Our revenue was $551 million, mainly a result of softness in state and local and commercial markets, as Dan mentioned. However, $551 million was a respectable volume. Keep in mind, as Dan mentioned, we backfilled $75 million worth of work in Iraq we did last year with our water environmental program domestically.

Net revenue was $357 million, up 7%. Our guidance was $330 million to $350 million. This was a result of a higher level of sales performance which in turn delivered higher margin to the bottom line. Our income from operations was $32.8 million, up 17%, our margin was 9.2%. In addition to higher levels of sales performance we had a couple of project closeouts in our RCM segment, which typically happens in our third and fourth quarters. Our EBITDA was $39.6 million, up 20%, EBITDA margin was 11.1%.

Continuing on the income statement, SG&A cost increased 11% to $41.9 million, the increase was a result of higher selling cost, we increased selling cost by $3.5 million year over year. Also amortization expenses were $1.3 million higher than the same period last year. Worth noting was our G&A cost, it was flat. This is another reason we were able to deliver higher margin to the bottom line.

Tax $1.3 million, down 89% as a result of R&D benefits which I will spend some time in the next slide. Our Q4 forecast tax rate will be 39%; again I will spend more time in the next slide. Diluted EPS $0.51, an increase of 88%, excluding prior-year tax benefits would be $0.35. Our guidance was $0.29 to $0.31. Let me do the tax slide next.

We had a sizable tax benefit on top of a very solid quarter. I'll be happy -- given the technical nature of the tax topic I'll be happy to answer any questions you may have in the Q&A session or after the call. Again, there are two types of benefits going back to fiscal '97. First one is research and experimental credit commonly referred to as R&D credit. The second one is a tax accounting method change for revenue deferral.

R&D credit has ongoing benefits to our tax expense and tax rate, but it takes complicated study to support a claim. Tax accounting method change is a one-time benefit [done in] accounting pretty much in cash. In our second quarter we settled '97 to '01 claims with IRS, estimated '02 to '04 benefits and recorded a $3.3 million tax expense reduction and added about $0.055 to EPS.

In our second-quarter call I mentioned that we would conduct the R&D credit study for the subsequent years which we managed to complete in the current quarter. As a result we recorded a benefit of $0.16 for claims in FY '05 to FY '08. We also recorded a $0.04 benefit for the current year in the quarter. On a pure operating basis using 41.1% tax rate without any tax benefits our EPS was $0.311. Our high-level guidance was $0.31. As I mentioned, Q4 tax rate will be 39% and if Congress continues to extend R&D credit our ongoing rate will be around 39% and we will validate that in the November call.

Accounts receivable was $556 million, up by 3%. As I mentioned, this is merely a result of commercial clients paying us more slowly. Accounts payable $170 million, down 5%, and this was a result of a higher level of sales performance and lower subcontract activity.

And let me say a word or two about our project in the asset portfolio. We continue to monitor risks associated with certain clients, particularly our commercial clients in accounting for them accordingly. Year to date we have provided close to 100% more lost vision and reserve compared with -- compared to the same period last year. Net debt $6.6 million, down 63%. As I indicated in the last quarterly call, we received a $40 million refund from IRS at the beginning of this third quarter; we used the money to pay down our debt.

Cash flow was $60.8 million, up 262%, this was contributed by the combination of higher profits and $40 million tax refund. As a result we will increase our FY '09 forecast to for cash flow to $115 million to $125 million. CapEx, $3.5 million and as a result of our cost containment we are reducing our FY '09 forecast for CapEx to $20 million from $25 million we previously stated.

DSO 75 days, this again is a result of commercial clients paying us more slowly. However, our DSO was an improvement of four days sequentially. In the coming quarters I continue to see our DSO to be in the high 70s given the current environment.

Net debt -- the net debt charge shows the trend to be net debt free by year end. Just a reminder, we did buy a sizable company, Bryan Stirrat, in the fourth quarter and we used cash to pay for it and we funded some working capital for them. So -- however, I remain optimistic that we will still be net debt free by year end. Back to you, Dan.

Thank you very much, David. At this point I'd like to spend a moment describing the trends that we're seeing in our key markets. Our first market and the biggest for Tetra Tech is the federal market. The biggest moving piece in the federal market for us is the timing of the solicitation and award of major programs and stimulus funded projects.

We see these programs beginning to ramp up right now; they have been a bit slower than we had anticipated, but while we're seeing the ramp up now we can't say exactly when we expect them to be solicited or awarded. But let me give you an example of some of the types of proposals that we have in pending right now to give you some insight into what we expect to move toward award from the federal government.

As an example, we currently have more than $200 million of proposals pending for work in Afghanistan and that's with the Department of Defense and USAID. And we're confident that it's not a matter of if these types of programs are going to be awarded, and certainly we'd hope to be successful on a good portion of these, it's not a matter of if they're going to be awarded, it's just a matter of when they're going to move forward and we believe that applies to both the existing baseline work for large programs from the federal government and for stimulus funded projects as we move into the later portion of the fourth quarter and 2010.

State and local, what we expect to see at the state and local work is we expect it to be weak because of shrinking tax revenues. So where our focus is we're going to focus to continue pursuing essential water programs for the states. And these are essential water programs that will be supported by bonds or federal grant programs or federal matching fund programs. And so they actually have the financial backing to move forward.

Let me give you an example. Here in California there are approximately 20 different desalination projects that are in the planning phase right now, and Tetra Tech has been selected for two of the largest of these programs that happen to be located in Southern California. One of them is a 50 million gallon a day plant that's being led by a commercial developer located -- the plant itself will be located in Carlsbad, California.

It's already received its permits and the developer is working on completing its funding now. Once the funding is in place we expect the project to move forward and a 50 million gallon a day plant and Tetra Tech has been selected on a turnkey basis for this, both for the design and build of this plant. And a plant like this is about a $300 million program overall that would take two to three years to complete in total.

So you can take the number of desalination plants, they're all not 50 million gallon a day plants, but you can do the math and determine it's a very large market of essential water programs that will move forward in this market space. But with the exception of these critical water projects we don't expect the state and local budgets to get much better until far up later in the recovery process.

In the commercial sector, in addition to the regulatory driven programs that I described earlier like the Fox River, we see strength in the renewable energy market, particularly wind. With the tax credits in place and clarity on the grant programs we're seeing more bid opportunities for more turnkey projects for wind projects and primarily from the utilities than we've seen in some time. And with this number of opportunities having been bid or in the process of being bid we anticipate some of these awards to actually come out late this quarter or by the end of the calendar year.

However, as I had mentioned earlier, we are seeing some softness in the commercial sector in commercial development projects and we expect the commercial development projects to be weak through at least the rest of the calendar year and perhaps much longer.

And the fourth marketplace that we're focused on is international. Our international growth strategy is largely going to be driven by acquisitions as you saw that we did in Canada with the acquisition of Wardrop. So the big moves you'll see overseas will be driven by acquisitions. However, there are a handful of very large technically driven programs that will provide us select opportunities around the world. Now let me give you an example of one.

The Panama Canal Authority recently selected a consortium that Tetra Tech is a member of to design and construct the third lock system for the Panama Canal expansion. We expect the contract to be negotiated over the next 30 to 60 days and work to be completed by the end of the year.

Now our portion is we're not involved in the construction, we're just a member of the design team and we expect this to be on a valuation or the contribution sort of in the tens of millions of dollars over the next roughly two to three years. So while it's a $3 billion plus program and perhaps the highest visibility lock and dam program -- lock program for navigation in the world, our focus is on the very high end design portion of this.

At this point I'd like to present our updated guidance for the fourth quarter and for all of the fiscal year 2009. Our guidance for the fourth quarter for net revenue, and that's our revenue net of subcontractor's costs, is from $330 million to $360 million range with associated diluted earnings per share of $0.30 to $0.33 and those numbers are for the fourth quarter.

If you take those and add them onto our actuals for the first three quarters that would put our overall net revenue guidance for the entirety of fiscal year 2009 at $1.35 billion to $1.38 billion and with associated diluted earnings per-share of $1.40 to $1.43.

A couple items I'd like to clarify for those not following along on the slides -- this guidance does exclude any contributions from future acquisitions that we would make on this quarter that would have any subsequent contribution that we've not yet closed already and for fiscal year 2009, a couple items to be aware of.

This does include -- this overall EPS guidance of $1.40 to $1.43 includes $0.22 of tax benefits from prior years, $0.09 of intangible amortization expense, $0.10 of stock option expense, and finally, as David King had indicated earlier, it has assumed a 39% effective tax rate for the fourth quarter.

In summary, we had a solid third-quarter, just across the board in all of our financial metrics. Our cash generation was very strong and after just three quarters of the year or nine months we've generated more than $100 million year to date in cash from the Company. Just exceptional. Our margins have improved and even in this economic environment the 9.2% from our operations is among the highest we've ever had.

Our key clients with the federal government and the international acquisitions that we've had join us are driving the growth of the business and these are key long-term clients we have with the federal government; we expect them not only to remain strong but even get stronger as we go into 2010. And finally, funding from the stimulus offers exceptional prospects for accelerating our growth as we move into fiscal year 2010. And with that, operator, I'd like to open up the call to questions.

(Operator Instructions). Mike Cox, Piper Jaffray.

Thanks a lot, guys. Congratulations on a nice quarter. My first question is on the Wardrop business. Just wonder if you could comment a little bit on how that's performing relative to your plan. And just maybe rehash the seasonality of that business, the $40 million that you did in revenue in international business in total for the quarter, how would that compare from a seasonal perspective?

Wardrop is performing very well, they've integrated and that was one of the first questions we had on last quarter's call, their integration has gone very well. They've linked up across the board with Tetra Tech operations and it's going very smooth and both the cultures, clients and focus of the market are all in full alignment.

Their financial performance, their revenues have been right in line with our expectations and their margins are similar to those that we reported as on an aggregate basis for the Company. The $40 million that we did overall in international, probably three-quarters of that roughly is from the acquisition and about one-quarter of it was from existing work we had prior.

This is the season where, like the rest of our business, revenues are a bit higher, just a little bit higher, because of field work and that's field surveying, field assessment activities and on a minor amount of construction activities that take place in the spring and early summer and we expect that trend to continue through our fourth quarter, which is a seasonal effect of not only Wardrop and internationally, but also the corporation where more construction work activity takes place. So we feel very good about it.

Great, that's helpful. On the wind side of your business, could you disclose what the backlog currently is for wind at this point?

The backlog currently is -- it's about $25 million. Our revenue from wind was roughly $40 million for the quarter. And if you go back and follow the earlier transcripts from the calls, that puts us about $190 million of revenue from wind year to date. So about $40 million for the quarter. So we are burning up through the third quarter. We did burn more of the backlog than we replaced. But that was very well expected, we saw very few opportunities during this past quarter and just here recently are seeing large turnkey projects come out.

That's helpful. And my last question may be difficult to answer broadly, but as the stimulus projects have been a little slow to develop but now are starting to show some sign of life, could you talk a little bit about the time it would take to convert these projects once an award is made into revenue for your company?

It's really highly variable. Some of the projects have a fair amount of permitting and design component, which means that the beginning of the ramp up of the conversion from backlog or in order to revenue would be a bit longer. Some of the shovel ready projects that -- Tesoro, an acquisition we did it this past quarter -- would be ready to implement, would happen the same quarter.

So from the time that they would be awarded to the time that we initiate work where permits and designs are already complete would be very quick. So that could be ramped up in a matter of 30 to 60 days. So it's actually highly variable depending on the type of project.

Thank you very much.

John Quealy, Canaccord Adams.

Good morning, thanks. This is actually Chip Moore for John. I'm just wondering, you've seen some relative out performance in the higher-margin consulting and technical support segments the past few quarters. Just how should we be thinking about that looking out into 2010?

Well, both of those entities are within the ranges that we've expected for those segments. Actually technical support services this past quarter was just slightly above a target range of 9% to 11%. They were up at 11.4% this past quarter. And our ECS group is right in the range of a 10% to 12%. This is largely being driven by workload. The workload from the federal government in these upfront studies work is very strong, utilization is high and that's converting into margin being at the upper end of those ranges.

We think that on an aggregate basis that they'll remain strong, the three that we expect to remain strong are the ECS group, the very front studies, the technical staffing of these large projects will remain strong, we expect strong workload, and even the large remediation and construction services to be strong.

Those should be where they're at now and maybe even some incremental increase in those margins. I do expect that our infrastructure group, Art EAS group, will see more pressure and, in fact, see that margin go down further. But on an aggregate basis I see in the fourth quarter and as we move into 2010 margins very similar to the past quarter we just completed.

Okay, that's helpful. And on the remediation and construction and management side, down slightly but it looks like margins have been pretty strong the past two or three quarters at least. Can you just talk about what's going on there?

Yes, that's where our large EPC contracts for the wind have taken place. All of the work for those large turnkey wind projects has been located there. They're largely fixed-price contracts and as projects have been closing out, and as I've spoken on earlier calls, we completed some very large turnkey wind farms up in the Wyoming area.

As those have closed out favorably we've recognized the upside with those based on our strong performance. And so as we complete more of these types of projects that closeout, and I think David talked briefly about these closeout adjustments to reconcile the performance, we expect that number to be high.

Okay, great. And just last one. You talked about desal, seems like a great opportunity, particularly domestically. And is there any potential there for international opportunity?

Well, we have an excellent partner on our desalination project here in the United States, it's a foreign entity and we would like -- we've helped bring them here because of our location and relationships with the clients and we'd like to see them return the favor. So unless we have a local presence it's quite difficult to spend the effort and to have an exceptional position without a local partner, and so we would look to identify folks in country.

So it's not a high focus for us unless someone has a preferential relationship. But the partner that we've brought together with us for this US opportunity we would hope to have the same. So if they're on the phone, we're looking for the same back.

Thanks very much.

Alan Robinson, Royal Bank of Canada.

Good morning. You've had a strong revenue contribution obviously so far this year from your federal clients. Can you provide some color as to how we should look at this client revenue stream in FY 2010 if we don't get any federal stimulus money? I'm trying to get a feel for whether we're likely to see a little bit of a dip there next year as we wait for federal stimulus money. Could you comment on that?

Well, I think what you've seen here this past quarter is our federal work has been stable without it. And in fact, I had one of my colleagues here ask what I felt -- what was the biggest disappointment for the quarter. And I said that our backlog hadn't gone up further. Because the baseload work we have across the board for our federal clients I actually expected more large programs to be awarded independent of the stimulus program.

I'll use EPA, or the United States Environmental Protection Agency, as an example. Their budgets that have gone through for 2010 or fiscal year 2010 from the US Federal Government have been passed by the House and are being reconciled at about 30% up from last year. Those are the types of numbers that are being forecast. And we're seeing work at the State Department for USAID budgets that are up near 10%, so our core business outside of any stimulus funds from our key clients are up.

So we'd expect that, to the extent that they're not completely overloaded with workload between the stimulus and other priorities, just the baseload annual funding work should be very strong for us, again independent of recovery act funding.

Okay, okay. And then is there any likelihood that Iraq revenue will return or has that wound down permanently, do you think?

I think the Iraq work is pretty much permanent. We think that there is a possibility, not through the Department of Defense, but perhaps through USAID with the state Department there is some potential in the future, but we think that may be off either many quarters or many years. But we've not forecasted any contribution in Iraq. We believe that the actual offset for Iraq is Afghanistan. And while Afghanistan is a -- obviously a different country, but it has a different type of priorities as to where the funding is going to be spent.

There wasn't large-scale damage to infrastructure that has to be reconstructed. But there is support for military construction activities at new bases, there is a lot of work with US aid work on agriculture and water resources and reservoirs. And so we think it will be a different type of work -- not as large as Iraq, but still a material contribution as we move off into this next year.

Okay. And then my final question revolves around the -- your outlook for the fourth quarter. Of the $330 million to $360 million revenue -- net revenue range you provided, what contribution comes from Tesoro in that guidance?

On a net revenue basis probably $5 million or less. They're a turnkey construction management contractor and most of it will be associated with projects that would be managing other contractors, but a relatively small number.

And so by implication very little in your backlog comes from Tesoro?

That's correct.

And then just one last one for David. The $8 million in acquisitions you registered in the quarter, what was that due to?

We have bought three companies in the third quarter. And that was the cash outlay we paid for those three companies.

But Tesoro was not included there?

It was.

And we expect further payment in the fourth quarter?

Yes, based on their performance.

I see, okay, thank you.

Corey Greendale, First Analysis.

Good morning. A question about utilization. What is your utilization running at and, hypothetically if you were to see stimulus money start to flow pretty strongly in a couple quarters, do you have the bench capacity to handle that or what would you do to be able to handle the extra workload?

Well, our utilization is somewhat variable between the units. I would say that three of the units the utilization is ranging between 65% to 70%, so sort of at an optimal performance number. And again, our infrastructure group is a bit lower, probably closer to 60%, so about 5 points lower.

As far as our ability to handle the capacity, we have a substantial ability to handle an increase in federal awards and work. We haven't actually translated that into a specific dollar amount, but a substantial amount. We're ready, we're staffed for it, we're knowledgeable of these programs. And so we're ready to put more people to work.

We have had folks that we have put on reduced hours or we have actually furloughed on markets that have been weak. And in fact, this is a good point for me to add, we've taken about $20 million per quarter out of one of Tetra Tech's hallmarks which is pruning back businesses where the markets and the businesses aren't strong.

And so in markets for the state and local clients where there are discretionary programs that are under serious pressure we've downsized those dramatically. And the same is true with commercial development projects. And so we've taken those and reduced headcount that would associate with roughly $20 million per quarter in headcount reduction. And so we'd love to bring all of those people back and to even increase the utilization of the folks we have now to handle any amount that they can hand to us.

Okay. And obviously you're not saying anything yet about specifically what you'd expect to get from the stimulus. But assuming that it's a pretty nice benefit to growth, can you just give a long-term perspective on would your goal then be to take that as a new baseline and continue growing 15% a year off that or do you think there could be a step up and then a step down affect that the stimulus money burns off?

No, our goal would be that the contribution from the stimulus package would create a new baseline for the Company and that we would use the new projects that are implemented as new platforms for us to support our clients at those locations and with that infrastructure on a go-forward basis. So it's not a bubble that will come in and go up and come down. We think it will be a new baseline created for the Company.

Okay, that's helpful. Thanks, Dan.

[Pete Mann], Dougherty Company.

Good morning, it's actually Greg McKinley. In terms of your view on the commercial and state and local client sectors, while those have been under a fair amount of pressure, particularly year over year, they are demonstrating, maybe at least in the short-term, some signs of sequential stability. Can you give us any color in terms of do you feel like the economic backdrop is allowing some of those more economically sensitive business sectors to perform on a run rate basis from here on out or what are you seeing in terms of the cadence of order and bid activity in those areas?

Well, state and local we're seeing -- I want to use the word stability because we're seeing the areas that were really slow and there's not any opportunities, we're seeing stability in that they're slow and there are not many opportunities in these discretionary programs. So I guess they would be predictable there. On the programs that have regulatory drivers or are key programs such as water supply -- in Southern California they don't have water, it's a priority and it's going to be driven by user fees.

We're seeing that I guess I will use the word stable or predictable, that those programs are going to go forward. So we don't see any specific catalysts that are driving new programs where we've seen the market be soft and dormant and we're not seeing any catalysts that would stop programs that are key priorities on critical, in our focus water essential projects.

And as I indicated last quarter, we think that most of the instability or these volatile programs have been wrung out of the market. And so I think the year-on-year comparisons are really not representative of what we're seeing. You really need to look particularly at the state and local on a sequential basis which we're seeing it stable and in fact up a couple million dollars.

Commercial is really very different, we're seeing very mixed results in the market. If you're looking at renewable energy and in our case wind we're seeing some opportunities in solar and the transmission to get those into the grid itself. We're seeing that very strong, we're seeing that begin to pick up with opportunities, not awards.

We feel good we've not lost any of these to competitors because it's just starting. And so I would feel that that is very promising and the catalysts for that are the production incentive tax credits, the grants that have had clarity. So we feel good for late Q4 and through the end of the calendar year.

Commercial development -- and I know some asked what do I mean by that. These are large vertical high-rises, new development infrastructure in Manhattan, the major cities, the new big-box stores. All of that type of commercial development where we would do geotechnical -- an example is the Chicago Spire, going to be one of the tallest high-rise buildings in the world. We're one of the design engineers for the mechanical systems for the building and the programs put on hold.

So those types of programs we expect to see continued pressure. I don't think it's going to get worse. But it's at a pretty low point now, there's not much more that could happen to it.

Okay. Thank you. And I'm wondering if you could maybe just share some summary thoughts in terms of what you're seeing legislatively at the federal government? Maybe just a quick recap outside of the President's 2010 budget request. I know there are a number of other legislative developments that are targeted towards water infrastructure development. Can you give us a sense for how meaningful those are, what your expectations of those are in terms of impacting your opportunity next year or is that a ways out yet?

Well, it's quite a contemporary topic these days, particularly today because just yesterday both the House and Senate passed both an energy and a water bill.

Right, right.

And the water bill included substantial funding for the core and energy, of course, for the Department of Energy. These have substantial line items for -- I believe the Corps has about 400 different water projects many of them out here in California.

But we have seen other bills passed and if you go back approaching two years, the Water Resource and Development Act was passed as a bill. But until it gets appropriations we watch it, we track it, but as far as providing any type of estimate as to what contribution it would make, until it receives appropriation and it turns into solicitations on the street, we don't factor it into moving the needle for the Company of Tetra Tech.

Okay. And then last question. Do you have any thoughts that you're willing or able to share in terms of where you think backlog directionally would likely be here at the end of this fiscal year?

Well, I'll say -- I'm not going to forecast the Q4. But I will say that on a long-term trend we expect it to continue to go up. Any single quarter can be impacted by the timing of awards from our clients. And so on a given quarter we may see it flat or even down. But on a long-term we expect it to continue to grow and we'd like it to grow faster obviously than our revenue burn. So I would say up.

Thank you.

Debra Coy, Janney.

Thanks, good morning, guys. I have three questions. The first is related to the New York DOT contract that you mentioned. That wasn't one that I was aware of or tracking. Is that coming from stimulus, number one? And number two, I presume obviously that's a gross revenue number. How will that one fall through to net revenues over what period of time?

The DOT contract we've been working with New York DOT for a number of years. I do not believe, I have to go back and double-check, but I do not believe it's associated with stimulus funding. We will do a fair amount of self performing, but I'd have to go back and double-check, but I believe it's about 40% self perform, 60%. So almost half and half. And it will roll into revenue over roughly the next 18 months -- more heavily weighted toward the spring and summer months, winter a lot of other type of engineering support work will be completed.

That is something new or that's a continuation of a project you're already doing?

Well, it's a continuation of a much smaller project we were doing. So this is the largest funded portion. So this is actually an increase in revenue associated with this project, not just the maintenance of what we're already doing.

Okay, that's helpful. And then adding up all the different pieces that you talked about in terms of looking ahead. It sounds like we may expect to see continued relative weakness on the organic revenue side. We dipped into a decline in organic revenue growth this quarter. It sounds like that could persist for a another quarter or two. Is that a fair assessment?

That is a fair assessment. And I would point out to those following Tetra Tech closely that we have a very large headwind on this fourth quarter of our fiscal year and the first quarter basically between now and the end of the calendar year because those were very, very high contribution quarters from Iraq and also they were the largest revenue quarters from the large turnkey wind projects that we did much of the self performance on.

So when you take a look at just those two very individual select projects they create a headwind in and of themselves. If you take and normalize with just those two out you'd find that our numbers are actually up, actually up quite substantially, even organically.

Other factors going to be the roughly $80 million in annualized net revenue that you've just taken out with the restructuring?

That's correct and we've made up for a good portion of that with other federal water and environmental projects.

And finally, that leads me to my last question. Obviously acquisitions that you've met are driving growth now. Interesting hearing you talk about your international business and that was a pretty definitive up arrow that you put in the presentation. That suggests a high level of confidence that acquisitions are coming on the international side. Can you talk a little bit more about your thought process there?

Well, let me characterize the up arrow. I think there are two items over the next several quarters and in fact that page of the presentation said over the net six months, so between now and the end of the calendar year. Wardrop which brought to us about 1,000 staff to Tetra Tech is in Canada. We classify that as international revenues. And on a year-on-year comparison those will be new international revenues that we didn't have last year during either the fourth quarter or the first quarter.

So by definition if Wardrop exists, it will make the comparison on a year on year up substantially. And as I indicated in addition to that, I would -- we have some expectation that the Panama Canal project would start and it will contribute not substantially but on the international revenues a measurable amount that will show up on the year-on-year comparisons.

None of the strong arrow up is associated with our contemplation of closing an acquisition. We are working very hard not to signal expectations of moving the market for ourselves through additional international acquisitions. When it happens we'll announce it very quickly and put it in the context of how it will contribute. But that up arrow was not associated with an anticipated contribution of an acquisition.

But then just to wrap that up. You have talked previously about how you see the acquisition environment in previous calls, any changes in terms of seller expectations tempering? Is the market still as challenging in terms of the Gulf between buyers and sellers or how are you seeing at the overall market right now?

We are seeing a difference between the buyers and sellers. Our expectation is lower than theirs, theirs is higher than ours. But we are seeing more of them come to the market and explore and I do believe that they -- we have actually seen and you can see it through the three acquisitions this past quarter, we were able to close that gap much easier than we have before. So I would say the overall environment is improving -- improving for the buyer.

I understood that. Thanks.

Michael Coleman, Sterne, Agee.

Good morning. I wanted to circle back on the state and local one more time. The EPA has released about $2.2 billion to the states for the various state revolving or the revolving funds. And so the money is available, question is how fast it gets spent. But it doesn't sound that you're all that optimistic about that contributing to your results over the next six months. Could you talk about that?

Yes, the State revolving fund, or SRF, is what you're referring to where the funding has gone from the EPA to the states. It's our observation that much of that funding has gone to fill in the deficits for existing projects that were otherwise going to move forward with existing projects already at the state.

So it wasn't a plus up, I mean ultimately from a practical standpoint it didn't turn into a plus up from what they were spending before. The tax deficits have been so substantial at many states that this contribution has just put them back on track, so to speak, with the existing projects that they were going to execute.

So what would be a big pothole turned out to be sort of flattish. And so, the individuals who had existing projects did continue to go forward and that's why there hasn't been a big upside.

Okay. So putting that aside, then where in the stimulus are you going to see upside? What other avenues are available?

Federal.

Federal.

Federal on the Gulf Coast, federal on coastal protection, federal on -- across-the-board, (multiple speakers).

So mostly the Corps of Engineers?

Corps of Engineers being by far the biggest. EPA also though, when you talked about the $2.2 billion going to the states, EPA will also have other programs that they themselves administered through the local regions. And what's happened is part of the administration change. Very few of the regional administrators have been put in place. And they're responsible for putting out these programs at each of the EPA ten regions.

So as this process continues we'll watch not only the administration transition, for instance USAID doesn't have its administrator either. And so some of these people just aren't in place and in order to send out these large programs, which will set the tone for those entities for years to come, sort of need the person at the top before these programs get awarded. So yes, it's being pushed out to the right; no, it's not going away; yes, there are individual discrete programs. And the biggest part of the stimulus is not at the state level, it's federal.

Okay. On the commercial, you talked about essentially commercial construction being soft and so forth. What portion -- commercial, I think it was 29% of your mix. Of that 29% how do you see that tied to the cyclical commercial construction market?

Well, we didn't have a lot of commercial construction. Where we had -- or where we have -- and I would say "had" because we've done some adjustment of our staff, downsizing and in some cases closing down entire departments and groups -- was for the design and even some construction management for some of these civil construction projects or commercial construction projects.

Most of our work is in regulatory compliance side. So if a site has contaminated water, sediment, air, soil, groundwater, those programs are the primary drivers. We expect -- we have not seen those slow. Regulatory requirements for cleaning up and remediating these contaminated sites we've seen continue, it's a big part. We've also seen commercial work for these commercial utilities which is the renewable energy work I spoke to, begin to pick back up with the clarity on the tax credits and the tax environment to make these go forward. So those are the commercial areas that we see moving forward strong.

Okay. And could you give us what the acquisitions -- or could you -- I think you mentioned earlier something about Tesoro, but it not being a large contributor to the backlog. What did the acquisitions add to the backlog that you reported?

Yes, we don't break out our backlog on either segments or apportionment to acquisitions or the existing business. But I will provide you and detail that, independent or exclusive of the acquisitions this past quarter our organic business grew backlog both year over year and sequentially. So the contribution from the acquisitions was relatively modest this past quarter.

Okay, I think that's it. Thank you.

[Alex Hutter], Broadpoint AmTech.

Good morning, guys. It's Alex for Will Gabrielski, thanks for taking my call. Sorry if this was already asked, but can you give more color on the 4Q guidance and why it's flat year over year when backlog was up 78% and you guys are clearly executing well?

Yes, I can provide some more details on that. It's really associated with two items. First, and we talked a fair amount about this on this call already, but the commercial sector being soft in the business we've taken out in some of the discretionary state programs we feel on a year-over-year will impact us maybe $20 million as I indicated earlier. That's piece one. That has factored into our preparing the guidance.

But the second piece and really more material is the timing of the federal solicitations and awards. Frankly, I was wrong when I thought that the stimulus and the other major federal programs would have been both solicited during the months of June and July and we would have seen awards coming out in late summer and August/September'ish. And the reality is now that we're here we've not seen that.

And with the lack of our ability to provide any certainty of when those projects are going to come out and contribute to the fourth quarter, we've provided a bit wider guidance coming into the quarter and the numbers that you've seen. So it's those two factors that have driven us to this guidance range.

Thank you very much, that's very helpful.

Min Cho, FBR Capital Market.

Thank you, just one quick question. I don't think you really described the competitive landscape that you're seeing. Obviously your margins have been very good this quarter. But can you talk about if you're seeing any increased competition or any increased pricing pressure for new awards?

We see them in two categories. Competitive pressures are increasing in areas where there aren't pre-qualifications that have already taken place. So if it's an open public bid where there's no prequalification or some other filter for those that compete we're actually seeing pretty significant competition.

For work that has pre-qualifications, an example would be federal government work where you have to be a holder of an ID/IQ, that we're actually seeing very little change in the competitive landscape because the pricing and margins and rates have already been established long ago. Or commercial clients where they have a limited number of national providers and those rates have already been established and they're under contract we're seeing relatively little. And that's why you're seeing overall most of our work falls into the second category where there's been a prequalification or we have a more limited competitive landscape.

And for those that would interpret this to they need to be more competitive, quite often the low bid is not the best provider, it doesn't provide the best value and ultimately the client ends up doing it again. So this low price creates other opportunities for re-performance for us. So even the clients that do go open competitive bid, pure low bid price, often we have an opportunity to go back and re-perform that work and do it right the second time.

Great, thank you.

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 every one of you and thank you very much for your questions on this call. I think they were insightful. I do think you have a thorough understanding and perspective of where we're at. And I look forward to talking with you all next quarter. Thank you very much. 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.