Tetra Tech Inc (TTEK) 2009 Q4 法說會逐字稿

Good morning and thank you for joining us. By now, you should have received a copy of the press release. If you have not, please contact the corporate offices at 626-351-4664 and we will get one to you right away.

With us today from management are Dan Batrack, Chairman and Chief Executive Officer and David King, Chief Financial Officer. They will provide a brief overview of the results and we'll 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.

Thank you and good morning. Welcome to our fourth-quarter and fiscal year 2009 earnings release conference call. I am very pleased to present our financial results for what was a record year for most all of our key financial metrics. And while David King, our Chief Financial Officer, will present the specific of our financials, I would like to start this call with a brief overview of some of our key financial metrics for 2009.

First, our total revenue for 2009 reached just under $2.3 billion, which is an all-time high for Tetra Tech. Our net revenue grew by 11% from the previous year to just under $1.4 billion and we added more than 800 full-time staff during the year.

Our operating income increased by 15% to an all-time high of $122 million, which produced a 19% increase in our earnings per share, or $1.21 per share. And that is before a one-time tax benefit. With the one-time tax benefit, we produced $1.43 of earnings per share or a 40% increase over 2008.

And finally, we probably had our very best performance in operating cash where we generated $198 million of cash for the year, almost three times the level of 2008, or more than $3000 of cash per share during 2009.

Our net revenue for the fourth quarter was also up. It was up 5% to $367 million net revenue. That was the highest net revenue that Tetra Tech has ever had for any quarter in its history. It was really exceptional. However, our total revenue was down 11% on a year-to-year comparison and that was primarily due to the completion of some large construction projects in Iraq and the installation of wind turbines that we were doing at the same time last year. So the year-to-year comparisons were against those very large construction projects.

We did produce $33 million of operating income in the quarter, which is also a record for our fourth quarter, the highest number we have ever had in the fourth quarter and our earnings per share were up 10% from the same quarter a year ago.

We have continued to see some short-term challenges in our backlog with our backlog down 4% from the same time last year and I will speak more to our backlog in just a few moments.

I would like to say a few words about our performance and our customer mix. In the fourth quarter, we substantially grew our work with our US federal and our international clients. Those are the two client sectors that were up the most. And these are the two were areas that we have been focusing on and investing most of our resources. Our work for the US federal government grew by 23% over last year and overall, the US federal government represented this last quarter 45% of our net revenue for the fourth quarter and 53% of our total revenue. More than half of all the work that we perform was directly for the federal government.

Now as expected, our state and local work has stabilized at around 15%. In fact, it was 16% this last quarter of our total revenues. But in the commercial area, this has been the one area that has been one of the most challenging on year-to-year comparisons and this is the commercial sector.

Last year, much of our commercial revenue was driven by large wind, so turnkey construction wind projects and commercial development work. And this is work that we would do for designing new buildings such as the green engineering, low energy usage and that type of work. It is a great market; it is just really slow right now.

This year, our commercial work is dominated by a regulatory-driven environmental remediation program that will have a much more defined and predictable spend rate because of regulatory compliance requirements and a variety of smaller-end, front-end renewable energy projects and I will talk a bit later on this call about how those small-end, front-end engineering projects are leading to larger opportunities in the wind market.

And finally, internationally, our expansion into Canada that we initiated earlier this year is really contributing now. It represented over $30 million in the fourth quarter and is providing us more international work than we have ever done before. That is working very, very well.

In our four business groups, or our four business segments, we saw our largest growth in our largest segment -- the environmental consulting and services group. This is the segment that drives our growth and differentiates in the marketplace and where we start front-end work on projects with science and engineering.

This group, the ECS group, saw a 32% growth from the same time last year in our upfront services and it is this type of work that generally leads us to the entry point to some of our largest turnkey projects. So this is a very good sign for us. We see many of these upfront studies that will actually develop into much larger projects that will move down through design and ultimately through implementation and construction for Tetra Tech.

On the other hand, we did see the remaining impact of the economic slowdown in our commercial development in our state and local markets for our EAS group. That is the engineering and architectural services group. This is where we support green building designs and municipal wastewater plants and we have seen that slow. As I mentioned on our last quarterly call just over three months ago, we saw this area as on a year-to-year comparison having the strongest challenges and it is reflected in the numbers.

Fortunately for us, this is the smallest group within Tetra Tech and most of the remaining work in this group is regulatory-driven. So we think we have seen the worst of the reductions in this area and it should be stable as we go forward.

For new work, we did see a reduction in our backlog by 4% from the same period last year. And while we did win more than $1 billion in new contract vehicles during the fourth quarter, consistent with our practices, we didn't factor any of this contract capacity into our backlog. We only will add it into our backlog as it becomes funded and authorized at the task level or individual project level.

Now these past several quarters, we have seen the release of task orders or project funding that I have just referred to from the federal government to be slow compared to historical patterns, especially in this past fourth quarter. We expect this to continue and to be a bit uneven in their release of funds by the US government over the next couple of quarters as these key federal agencies first complete their transition to the new administration's policies. The new administration is just now completing assignment or appointment of key positions of the individuals who are actually responsible for implementing the policies and getting the funding out to support their mission.

Another item that they need to work through is getting their individual budgets approved and allocated for the 2010 budgets, many of which have just recently been approved. And finally, they need to get the rest of the stimulus funding into the market. So it is those factors that we will see streamlined here over the next quarter or two that should make this much more predictable and consistent with what we have seen in the past.

At this time, I would like to turn the presentation over to David King who will present the details of our financial results. David?

Thank you, Dan. Again, the fourth quarter is a solid quarter by almost all accounts. Revenue was $575 million, a decrease of 11%. As Dan mentioned earlier, the combination of Iraq and wind work accounted for a $145 million reduction in revenue. However, we were able to backfill it with more federal and international work that registered $367 million of net revenue, an increase of 5% year-over-year and exceeded our guidance of $330 million to $360 million.

Operating income was $32.7 million, an increase of 7%(Sic-see presentation slides) and operating margin was 8.9%, were both respectable and especially in light of a higher amortization charge and a higher provision for AR and contracts during the year and in the quarter. EBITDA was $40 million, an increase of 13%, EBITDA margin was 11%.

Income statement. In the second half of the year, we took very aggressive actions to align our cost structure, both G&A and overhead structure. Our SG&A was $39.6 million, a decrease of 9%. Selling, the S part of SG&A, increased by $3.4 million during the quarter as we continue to invest in bid and proposal efforts. G&A costs on an apples-to-apples basis had a reduction of $5 million or about 25%.

Tax. Income tax was $11.8 million, a reduction of 4%. Higher income was more than offset by an R&D credit and state tax benefits in the fourth quarter. For FY '10, we expect our tax rate to be 39% and we assume R&D credits will get extended as they have in the past.

EPS was $0.33, a $0.10(Sic-see presentation slides) increase year-over-year meeting the high end of the guidance of $0.33. Balance sheet, please. Accounts receivable was $506 million, a decrease of 19%. Fourth quarter was an extremely strong quarter for billing and collection. Accounts payable was $149 million, a reduction of 33%, attributable to lower subcontracting activities as we wound down in wind and our Iraq work.

This quarter, Tetra Tech turned from a net debt position to a net cash position of $78 million as a result of higher income and strong working capital management. Later on that.

Next page, cash flow, please. Cash flow from operations was $90.8 million, an increase of 259% for the reason Dan and I cited earlier. Our cash flow forecast for FY '10 will be $70 million to $90 million. CapEx for the quarter was $6.5 million. For the year was $20 million. $20 million was about 30% less than what we planned for the year as we continue to watch what we spend. FY '10 forecast for CapEx will be $20 million to $25 million.

Our DSO was 63.5 days, 14% or 10 days improvement year-over-year. I must note that our team has done an excellent job on DSO. The low 60 day DSO is not sustainable. Our forecast for FY '10, the DSO will be in the low 70s.

Again, a net cash position with our bank debt. Just to put things in perspective of how we got there, in addition to higher operating income, lower tax, strong working capital management, we spent $20 million in the year in CapEx, over $100 million in acquisitions and we cleared up our debt, paid down by $15 million. So we have no bank debt moving forward. So this is how we got there at the year-end.

For the whole year, as Dan mentioned, we broke many records. Our net revenue was $1.386 billion, or an 11% increase year-over-year, driven by a strong federal international business. It also exceeded our guidance of $1.35 billion to $1.38 billion. OI was $121.9 million, or a 15% increase, which carries a margin of 8.8% versus 8.5% for FY '08.

EPS was $1.43, at the high end of our guidance. With our prior year's tax benefit, EPS was $1.21 versus $1.02 in FY '08. $1.21 also exceeded our original guidance, high end of the guidance of $1.18.

Cash flow for the year was $198.2 million, an increase of 190% year-over-year. Before you ask me how we got there, let me address that now. Again, higher income, higher non-cash charge like amortization expenses. Number two, our AR and AP netted $40 million in working capital. On top of that, we had a $40 million IRS refund in the third quarter. So that is all resulting in close to $200 million of cash flow for the year. Back to you, Dan.

Thank you very much, David. I would like to spend a moment talking about our outlook as we go into fiscal year 2010. And in fact, we're about halfway through the first quarter already. So here is what we are seeing as we enter this fiscal year. The US government accounts for more than 50% of all Tetra Tech's revenues on an annual basis. And usually the federal government, the US federal government's budgets grow at about a level associated with gross domestic project or a cost-of-living increase and so somewhere between 1% to 3%. So very modest numbers, but not this year.

For the first time in more than 10 years, the budgets of our key clients are all up significantly. Let me give you a few examples. The proposed budget for US, the US Agency for International Development, which is part of foreign affairs department, is up about 8%. Now this is proposed; it hasn't been finally passed. I want to point that out as we go, those different numbers. Some are higher than this, but this is a significantly higher number than they have seen in their increase in past years.

The budget for the Army Corps of Engineers is up by more than 30%, which is inclusive of some of the remaining stimulus funding that is going to be spent by the Corps, but this is the biggest increases that they have seen in many, many years. And finally, the budget for US EPA as an example is up 36% and this has already been passed and is going to be put in place. These are very much higher numbers than we have seen in these agencies in many, many years. So these should be very good indicators for us.

Now while these are excellent indicators for our business, I want to reiterate what I said earlier on the backlog is that we believe that the full impact of these budget increases won't be completely realized until the second half of 2010. It does take some time for these individuals to be in their places from these administrative positions, to get their budgets under control and to get them allocated and then to put them out into the market. So we are seeing opportunities now, but from the time that they are competed, awarded and then contracted, we expect that to be late second quarter and this is really a second half of 2010 item with the federal government.

Because the state and local markets have stabilized, although at a much lower level than they were in past years, we expect to see some growth in the state and local markets for us, mostly due to a few very large long-term regulatory-driven projects we have at the state and local level and so we think that Tetra Tech will have a favorable comparison of state and local in 2010 to 2009. But we don't think that is representative of the state and local markets overall. We think that they will be sort of flat and just stable.

At this point, we see the commercial sector being relatively flat during most of 2010 and that is how we incorporated it as its component into guidance. We don't see significant near-term investments in commercial buildings or building developments and while we are seeing growth and good opportunities in renewable energy projects, we are not seeing the rapid growth that we saw back in 2008.

But one item that is very noteworthy in the commercial sector. This is the sector that can change the fastest to improve economic conditions, which could make this a large contributor to our growth during the year. As the economy moves forward, they can change very fast.

And finally, while international work is somewhat small for us, our introduction of core services of water, environmental and renewable energy is going very well, particularly into Canada and other locations worldwide. In fact, we expect our international work to grow the fastest of all of our customer sectors as we go into 2010.

I would like to present our guidance for the first quarter of 2010 and for the entire fiscal year. So I will start with our guidance for Q1, FY 10 net revenue. Our guidance range is from $330 million to $345 million with an associated diluted earnings per share or EPS of $0.28 to $0.30 as a range. For the entire year, for fiscal year 2010, revenue, net of subcontractor costs, of $1.45 billion to $1.55 billion with an associated diluted earnings per share of $1.25 to $1.35.

Now a couple items here I'd like to make note for those running models or needing this for input. Our guidance for fiscal year 2010 does not include contributions from future acquisitions that we would anticipate would take place during the year as they have in past years. So there has been no factoring in of future acquisitions in these forecast numbers. And the guidance does include an anticipated charge of $0.10 of intangible amortization during the year and $0.11 of stock option expense. Both are non-cash charges to our earnings and assumes a 39% effective tax rate as David had indicated earlier.

In summary, as David had indicated and I started this call out, we really had an exceptional 2009 and a very strong fourth quarter to finish out this last fiscal year. Even in a very difficult economic environment, we continued to improve the margin across our entire business line and our record cash generation has put us in an excellent position to continue expanding both here in the United States and internationally.

Both of our key clients, and the biggest one, of course, the US federal government and international clients we expect to be the primary drivers for our growth in 2010 and so we are looking very optimistically as we head into this next fiscal year. And at this point, I would like to open up the call to questions.

(Operator Instructions). Will Gabrielski, Broadpoint.

Sure, thanks. Good morning, everybody. A couple of questions if you don't mind. First, just quickly, what was the amortization impact in fiscal '09, if you could remind us of the EPS number?

It is about $0.01 less. Let me just do a quick check. It is about $0.09 to $0.10.

Okay. I was curious -- on slide 7, you guys talk a lot about contract capacity and some of the awards you got in the fourth quarter and obviously a lot of that is underfunded. But if you were to give a total dollar value of your contract capacity right now, and then your expectations by agency of where you see that getting filled up more quickly? And actually start there, that would be great.

We will start with -- the overall contract capacity now is in excess of $8 billion, so somewhere between $8 billion to $9 billion. Most of that is with the US federal government. Our largest contract capacity exists with the Army Corps of Engineers, followed by the different Department of Defense agencies, very large with the Navy being the largest, Air Force being very close and the Army itself being the smallest, but they are all in the same order of magnitude, very large. EPA would probably be -- EPA and USAID with respect to contract capacity would be next, very large and so that would constitute most of our federal locations of contract capacity.

As far as getting filled up, we expect probably similar levels across the board. We don't see one agency being -- leaving these contract vehicles being empty; we actually see them filling them up. EPA, we think, historically has been one who hasn't used the contract capacity because they have had large contract capacity, but not as much funding that has been authorized during the year. So we actually see, on a relative basis, more favorable funding coming out of EPA. Their budget overall is up at sort of the $10 billion level. And some of the key programs that we support the EPA not only at headquarters, but areas like cleaning up the Great Lakes, we expect to be big beneficiaries of funds in past quarters and projects and we think we are positioned very well there.

Okay. You guys obviously have done a great job on the balance sheet, cleaning it up after every acquisition. Right now, looking at the balance sheet and as you said, it feels like it is time for another potentially meaningful in size acquisition. Can you talk about priorities geographically, internationally? And specifically in Australia, what that environment looks like right now and has that, in fact, had any impact on your ability to go get an attractive valuation on a company there?

Australia is an excellent location. We see it as the most robust of the international growth areas, a little bit stronger than Europe and the UK. The locations internationally we are looking at and primarily focusing are Australia, additional focus on Canada. There is a lot of additional environmental renewable energy projects and green infrastructure projects, particularly in accessing and managing the resources in the northern part of Canada, oil and gas mining areas, restoration of old mining activities, big programs. So we are looking in those parts of Canada, the UK and Australia.

Now, the exchange rate in Australia, you are referring, has made it relatively more expensive to go there, but there are a great number of companies that are available there. The downturn in the mining industry from commodities in the past few years have made many more of them receptive to joining a large firm like Tetra Tech. And we are particularly attractive because adding a firm in Australia from their perspective doesn't create any overlap either in geography or customer client sets. So a North American-based firm is particularly attractive for them.

On multiples, you have -- first of all, the exchange rate does make it a bit more expensive, but ultimately the multiples never came down nearly as much as the valuations of the public companies. Expectations for these privately held firms have stayed, I don't want to call it lofty, but stayed at a fair value or they simply elected not to go to market. So we think there is plenty of opportunities and your reference to Australia is consistent with where we think our priorities should be.

Okay, thank you. One last question. Can we really drill down into the wind market and what is going on there? Obviously, there has been a lot of activity on the federal side to try and stimulate that market, but some of it seems to have gone through obviously projects already in or completed -- in construction or completed at this point. What is the expectation there? What are clients saying? What are the project sizes looking like? Are you guys submitting bids right now? When can we expect to see that become a contributor to growth again?

Well, we are actually seeing -- this is finally becoming more encouraging. I have talked briefly on the last two calls about -- our front-end services we have seen pick up. So our net revenue has been okay because we are doing engineering and consulting work, but the actual big turnkey projects, which are doing the final design, constructible design and installation on a turnkey basis of wind farms, up until the last 30 days, we have seen very few to no opportunities this past year.

In this past few weeks and certainly no more than a month, we have actually seen a lot of new opportunities on turnkey programs. Now it all depends on the size of the power generation from the wind farm, but they typically would range from a $30-ish million to a $50 million or $60 million for an individual opportunity. There are a few mega opportunities out there, but they are relatively few. But we are seeing a pretty good number of these sort of $30 million to $50 million opportunities come out right now.

Now in our guidance for this next year, we have cut or included in our guidance for the year a decrease from what we saw in 2009 both on gross. On the gross revenue, we cut it in about half, so we have been -- I hate to use the word conservative, but based on what we saw in these past few months, it was very, very slow. So we decreased the contribution of guidance to about half on a gross level and kept it about flat on net revenue because of the upfront services work.

So if these go and they get awarded, we don't need many of them to achieve our guidance number. And if there is many of them, this could be a big upside for us if these actually go to award and we think we are positioned very well.

Okay, thanks a lot.

Alex Potter, Piper Jaffray.

Hi, guys. Thanks for taking the questions. I guess the first question, could you talk a little bit about the composition of backlog? How does that look? Is it basically similar to what you've seen here with regards to your revenue recognition in the last quarter with regard to the breakdown between federal, state, local, commercial, national?

It is, it is. Our backlog does resemble and is comprised very similarly of our revenue with a little -- of our revenue mix with a bit more emphasis toward federal. So we do have -- more of our work is in federal, so it is disproportionately represented in our backlog from our revenue because of the size of the projects. But generally, it is similar to the 50%-ish plus federal. Commercial is much shorter because it is typically short duration projects, so it is slightly underrepresented from its percentage at 30%. And then state is about where it is, 15%, 16%. So very similar to our revenue.

Okay, great. I was also hoping you could comment a bit on the competitive landscape right now I guess just in the different segments here with regard to say commercial or versus federal. Are you seeing any additional pricing pressure on bidding for these projects?

No, the type of markets that we are in, we haven't really seen that competitive pressure. The upfront work that we do for the federal government is mostly qualifications-based, so technical merit-based and then it is a negotiation on overhead rates or the final pricing. So we have not seen a pricing change there. The state and local, we haven't seen pricing pressure; we have just seen less opportunities. But when they have actually been procured, we have not seen that as the deciding factor. And then the remediation and construction. Because of the vehicles that we have where the rates have already been established in previous years, we haven't actually seen that. So I think it is more of an artifact of the markets and the clients that we have than it might be in some of the commercial sectors where it is open low bid competitive. That is just not our market.

Okay, and then I was just -- one last question here on the utilization rate of your staff. I guess how utilized are you right now? Do you guys have excess capacity, people basically just sitting around waiting for work to show up or do you have everybody pretty much working all the time?

Well, we have everybody working pretty much all the time. We do move very quickly to adjust staff based on our workload. We don't put in investments or leaving a bench team in anticipation of a market to come back. We staff to the projects and so I would say that there are areas where we have seen movement that has been very quick and I will use the EAS business section segment, our engineering and architectural services where, on a year-to-year basis, you have seen our net revenue decline 22% in response to commercial projects where design for green buildings have slowed up very quickly and the impact, for instance -- layoffs and severance and other one-time costs -- are showing up in the lower margin. That is how we get a 3.5% margin in that one segment. But overall, the strength in the other segments allowed us to have one of the highest margins ever.

Back to your comment, the question just a moment ago on pricing pressure going into 2010. If you take the midpoints of our guidance or did the calculations, you will see that we are guiding to a margin to be equal or up even from 2009.

Sure. Okay, great. That does it for me. Thanks a lot, guys.

Debra Coy, Janney.

Yes, good morning. My question is on organic growth. It looks like we ended up the year slightly down on a gross revenue basis and up about 1% on net revenue, yet you still did close to 20% on the bottom line. Looking at -- and obviously acquisition contributed to that. Looking at the guidance range going forward, if we take the midpoint, it is about $115 million of revenues. How much of that is coming from legacy acquisitions and how much is organic?

Let me start with -- the forecast that we have, the guidance we have provided for fiscal year 2010 does not incorporate any new additional firms that aren't part of Tetra Tech already.

Right. I understand.

So all of the guidance is for what I would consider organic firms that are folks with us today.

Yes, but some of them have not been with you for a full year.

That's right. So if you calculate the numbers, the firm that represented the largest contribution during 2009 was Wardrop. It was acquired at the end of January. So if you use our definition, which is they needed to be with the Company a minimum of a year before we count them as organic, it would be this first quarter, the months of October, November and December and actually the first month of January of the second quarter, where it will be considered acquisitive growth. Those would represent the largest acquisitive contribution versus organic. And then after that, really the rest of it is all organic. So on a quarter-to-quarter basis, it would be --. Overall for the organic component for fiscal year '10, if you want to do it on an aggregated basis, organic would be somewhere between -- it would be 1% to 7% organic and the remaining would be the acquisitive associated with this first-quarter calculation.

And Tesoro?

Tesoro, yes, but Tesoro has a very, very small component of net revenue. As construction management, it is almost all gross on the construction activity. So that is true. They came in early third quarter, but again, very nominal contribution to net revenue.

Okay, got it. And then just to -- in terms of what supports then your margin guidance, I presume that we see more of the same, that the mix is weighted toward the front-end consulting type work.

It is, it is. You saw this more than 30% increase in our front-end work with our ECS and the technical support services work to USAID, EPA hazardous waste programs and the Navy investigation programs, also very, very strong. So all that front-end work, which carries a higher margin, we think is what is going to drive this increase in 2010.

So my last question is taking the slightly longer-term view. You said that you added about $1 billion in contract capacity and you are now around $8 billion. So you went from $7 billion to $8 billion. Presumably the recovery of that doesn't really hit substantially until the second half of the year. You also talked about larger federal budgets. Can you give some sense of how your early-stage crystal ball is shaping up for 2011 in terms of project opportunities, again leaving acquisitions aside?

We think better. We think that some of the biggest opportunities that exist -- and I talked about the Great Lakes and US EPA work. The work that is going to get started in 2010 and sort of mid to back end of 2010 will be the upfront work that will drive the largest sediment, coastal restoration and the largest overall turnkey programs that we have seen in decades.

And so even though these projects look very attractive, very large, the front end is not where the big dollars are with respect to driving revenue and operating income. It is the actual converting it from feasibility studies and evaluation and design into implementation. And that is really even farther out. That is a 2011 and even 2012 opportunity.

All right. Thank you.

John Quealy, Canaccord Adams.

Thanks, good morning. It is actually Chip Moore for John. I was wondering first, just back to guidance for 2010, if you could give us a little more color? You talked about modest growth in the first half, picking up in the second half. Maybe just some more detail on some of the assumptions there.

Well, the assumptions are -- we have a pretty fair visibility here in Q1 and Q2 since we are halfway through Q1. That is why it is associated with a narrower range. So I won't speak to the quarter we are in already since we are well through it.

As I mentioned, the increased budgets in our key clients are one reason that we feel confident moving into the year. Again, being one of the largest EPA environmental hazardous waste contractors and their budgets being up well more than a third, we feel very good about that. Focus on clean water and cleaning up estuaries and lakes, a big focus of Tetra Tech and projects like Fox River put us right at the forefront of that. We feel good about that. EPA has made that a priority and put large budgets to that. So we expect that we will be a beneficiary of that.

And we were very modest in our expectation or our forecasting of contributions of wind work, particularly turnkey wind projects in 2010. And even as we put this forecast together over the past couple of months, we have seen that market begin to change. And so we have a very modest contribution in our forecast. And if we have any more success than just a couple of projects, that is pretty big upside. And again, from the time that it is procured to the time that it is spent, that pushes it back to the second half. So that's how we got there, Chip.

Great. And if maybe I can drill down on state and local a little bit. You actually saw a decent sequential improvement after a few quarters of kind of flattish results. Can you just talk about what drove the quarter-over-quarter improvement and your expectations there?

Well, generally, we have seen the decline in state budgets flatten out. We've sort of seen it stable. We did have a view state projects that were awarded that are sort of year-long type projects that received upfront funding. So we think that most of our 2010 is already in backlog for the most part. So we don't see this being very variable for us. So we see it stable with, depending on the expenditure rate that we ourselves do, depending on whether another permit is being in place, we think the year-to-year comparisons will be up.

But I want to say this again and I said it during our presentation. We think that is going to be an artifact of the contracts that we have already been awarded and we have in place. We don't see this as a high-growth area here in 2010. We think that state and local has become pretty stable. Additional losses, and you can read these articles about state tax receipts are down even further, but the stimulus dollars through the state revolving funds should more or less make up for it. So it will be stable, but not a big upside. And if you do see individual high points, it will be because of single larger projects that are one, not a change in the overall opportunity landscape.

Great. And then just lastly on the cost structure, good job on G&A this quarter. How sustainable do you see this moving forward?

We expect to -- I talked about DSO not sustainable. I think our G&A cost structure will be sustainable for the year.

Great. Thanks.

Jeff Beach, Stifel Nicolaus.

Good morning. First, you had a pretty good jump in the share base in the fourth quarter. Can you talk about what that came from and then give us an idea, an estimate on the share base for 2010?

Well, the increase in the share base is partially a function of share price. And so as the share price hit an all-time high for the Company this past quarter, more of the stock options and other items are in the money and so that was the moving piece during the quarter. So the overall number that we expect is about $62.5 million to $63 million for fiscal year 2010. So for modeling or calculating purposes, you should use that, somewhere between $62.5 million and $63 million. But that is dependent on stock price to a certain degree.

Okay, and then you just gave a nice description of the state and local and your view. Similarly, over in the commercial side of it where nonresidential construction in still just broadly declining, it has declined all year long. Still declining, looks like going into the beginning of the year, what do you look for to grow to get stable revenues in commercial in 2010 when it has been a deteriorating market?

Well, one is I totally agree with you that if you are in residential or land development, it is tough and may get tougher and so fortunately, we are not in that. We did get impacted by our participation in commercial development and that is the design of green buildings. And we are the design engineer on some of the very large, the largest, most high-tech green engineering projects like the Chicago Spire that has been put on hold because of development financial dollars. So I agree with you. Those are tough spots to be in. Fortunately, we have very little exposure there.

What is going to drive our commercial business we think, first of all, is wind and renewable energy projects. There is other projects where we are doing front-end work like solar, geothermal, water storage. Water stored very high and it's for hydroelectric dropping and some very big opportunities, but the one that is the closest and the largest and we have the highest confidence in is wind. I talked a bit about that. The opportunities again are much more on a turnkey basis than here in the last month than we have seen in the previous year to that. Just about a year ago until last month, we have seen it just be -- it is really almost nothing there. So we feel pretty good about that.

The other area is very large, regulatory-driven remediation projects. The Fox River was really a first of its kind in the country where a group of PRPs came to agreement with the EPA and the regulatory agencies and moved forward with a single project that was well in excess of $500 million and is a multi, multiyear program. And we think it is going to set a precedent for cleanup of other waterways, everything from the Hudson, to the Passaic, to portions of the Columbia River.

And all of those projects, the smallest of those, just for components are $100 million projects and the big ones are well more than $1 billion. And we think that we will see some of those actually come to the market this year and those are commercial too. And the drivers for those regulatory.

All right. So in summary then, stimulus into some of your markets offsets lower traditional commercial business?

Yes.

Okay, thank you.

Richard Paget, Morgan Joseph.

Good morning, guys. This is Jim Moore in for Rich. First question is could you give us an update on WARDA and maybe handicap whether it can possibly get passed by the first half of next year?

Well, the bill was passed, it all goes to appropriation and so we think that those types of projects -- and the one thing that was attractive about WARDA and still is is that it is a project-based bill. There is some 900 individual projects that you can go right down the line item and identify that dam, that levy, that water protection, that wetlands restoration project and so to put it directly, we are all over that. We are working at a lot of those because those projects weren't only funded or weren't only identified through WARDA; these are projects that have been on the board and other work has been being done for years.

The issue with WARDA was appropriation. We are seeing funded a bit through the energy and water appropriation, but as far as a wholesale appropriation to fully fund WARDA, we don't see that happening as a single discrete item. It is going to come from many different parts of the federal budget.

Okay. And then just on the margin for the EAS, it was a bit lower than usual. Were there any project adjustments or was it just mix?

No, it was broad-based and this is one time I was hoping I was wrong, but during this telephone call one quarter ago, the margins had already come down to about 5% and one of the questions were do you see additional pressure there. This is one you could see coming based on the workload, the type of end markets that it would be somewhat below 5%. We see that coming back. We have adjusted our back-office support and our cost structure, so we will see that come back up. It will get within our range of sort of 6% to 8% for the EAS group, but there were a number of one-time costs here in the fourth quarter -- severance and adjusting our cost support bases for this group.

Okay. Thanks very much.

[Justin Honk], Robert W. Baird.

Good morning, guys. I was hoping we could talk just a little bit more about the state revolving funds just because it sounds like, in order to kind of keep the state and local spending constant where it is, we really need the contribution from that to keep it from falling further. I guess to the extent that really at this point -- and I think I looked at the website recently, it was something like only 5% of the stimulus funds that were allocated to that have actually been spent and it seems like those are moving slower. I guess I just was hoping to get a little more clarity on what is the base level of just state and local spending that wouldn't even need that additional federal contribution?

Well, obviously, that's -- by its very definition, each state has its own budget set aside and where the dollars go is they go from the federal EPA, through the SRF for the water and the clean water funds. There is two colors of that money. They go to the state and then the state takes that and moves it to the municipalities because that is really where an awful lot of it is spent. So to go to an aggregation of how much they each spend, it is a very detailed discussion.

Overall, you are absolutely right that it has been slow to come out from the EPA to the local really ultimately the municipalities as far as spend. We think that it means it is going to, you might refer to it as trickle down into those to fill the continued softness in the tax receipts. And overall, on balance, we think, across the country, it is going to be about even. The reduction in the tax receipts will be made up by sort of the slow contribution by the federal.

I will say that Tetra Tech's forecast and the guidance that we have put into 2010 doesn't really rely upon those budgets from SRF funding to the states to make up for what we are forecasting. We really (technical difficulty) out there and the state and local didn't use it all to simply shore up their internal budgets and staff. To the extent that it comes out to contracts and consultants, no doubt this could be an upside.

Great. That is helpful. And then just the last question, just a housekeeping one. Do you break out the organic growth by segment? I didn't see that in the release.

No, we don't break that out.

Okay. Thank you very much.

James Ragan, Crowell, Weedon.

Yes, good morning. Thank you. I am wondering if we could -- I could ask you just to discuss or compare the ECS, environmental consulting and the EAS a little bit in terms of funding source. Could you just review the percentage or can you of the funding source in each of those segments?

Oh, absolutely. Very different and those are two of the easier ones and they are differentiated primarily by clients. ECS, our environmental consulting services, is largely US federal government and an awful lot of the work is the upfront studies, evaluation, consulting support. That is where the work that we support the office of water for US EPA is in the ECS group, where we support the Army Corps of Engineers for base realignment and enclosure. That is in the ECS group.

Work that we do, the upfront studies for the wind work, environmental evaluation of wildlife, that is in the ECS group. Some of that is for the federal. The work that we do, some of the work we do for Department of Energy. Again, one thing, these are all common, our large federal with the DOE is in the ECS group.

The work that we do in the EAS group, or our engineering and architectural services, this is the group that does our constructible designs for infrastructure and a lot of that work is for -- was for -- was for commercial developers for green buildings. And so we refer to it as MEP, so mechanical, electrical, plumbing, other type of civil design work that would support these large commercial developments would be almost exclusively in the EAS group and with that enormous downturn, you can see the impact there.

State and local work supporting design of wastewater treatment plants, that would be located in our EAS group and other state and local support of infrastructure activities is in the EAS group. So those would be the two differences.

Okay, great. Thank you. And then the last question, could you just give us an update on the desalination business, ongoing work and then what it looks like for 2010?

The desalination work overall is comprised of design support, which includes sort of the Southern states in the US for us and that includes Florida, Texas, a little bit of Arizona and California. The design work we are doing to support municipalities is consistent and relatively stable. There are a few game-changers for us that we have been pursuing for a number of years and those would be projects that we would take on a turnkey basis to do both the design and implementation or construction and commissioning of it.

The biggest one we have and it has had some visibility is out here in California. There are a couple of large desalination projects that we are working on in the design capacity or upfront, but these are generally being led by developers that need to get their funding in place and until that funding is in place, it is uncertain. So we have not included -- I hate to call them speculative timing of the start of these projects, but we have not included those in our guidance for the most part in 2010.

Great. Thank you.

Alan Robinson, Royal Bank of Canada.

Good morning. Dan, in your prepared remarks, you mentioned strong year-on-year growth in the ECS group. Could you give us some color on how this translates to other parts of the business and what is the typical time lag I guess between growth in this segment being passed down to growth in the other segments?

Well, I will give you an example of a couple of the areas that they are working that would have the potential to be handed down or to move down the project execution. The work that we are doing for upfront studies for wetland restorations in the Gulf coast, which is outside New Orleans, is being done in this group and this is where they are doing work on hydrology and hydraulics as to scouring of the river and different types of erosions of natural protection barriers. That work is being done for the Army Corps of Engineers and some other agencies. That work typically can go from six months to a year, sometimes a bit more and then it will be converted into a design and then implementation.

So at the federal level, when we are doing work, it has a little bit longer lag time if you want to use that term from the time you study it to the time it gets built. And the federal government is a little slower.

Other work that we do in the ECS group is study for a wind farm and where we will evaluate the environmental impact to wildlife and bats and birds and environmental clearance for properties and right-of-ways and those are commercial clients. And from the time you complete the environmental studies and the permitting to move to construction can be very quick, so it can be a matter of just a few months. So it really would depend on the individual client.

I would like to refer to one item I didn't talk on the call on the prepared remarks much. We have about 100 different task orders through the stimulus program that total just over $30 million. And much of those are for upfront study projects that will convert or will move to the next phase, which is actually implementation.

So there is an example where 100 different projects will turn, which total $30 million, will turn into and they don't all get converted into construction, but many, many different projects that will end up being procured and awarded for the turnkey, which is a much bigger program. So there are a couple of examples.

What is a typical multiplier for that kind of business? I mean if you get a $10 million ECS contract, does that translate into another $10 million further down the line? Or could you give us a rough idea of how that translates?

Yes, the rule of thumb is for environmental permitting and engineering it is typically 10% and I'm using a rough rule of thumb. The number can be higher or lower depending on the type of project but that is typically 10% of a project cost. So if you spend $10 million on an upfront study and designing it, the project itself may be 10 times that size as a rule of thumb.

All right, interesting. Thanks. And then just some clarification on your tax rate guidance for FY '10. You mentioned you expect a 39% book rate, but do you also expect occasional tax rebates, which would reduce the effective rate similar to what we saw in 2009?

That is already factored into the 39% forecast.

Okay. Got it. So there should be no tax surprises in 2010 then?

The rebate impact will be cash, not tax rate.

Oh, I see. Thank you.

Alex Rygiel, FBR Capital Markets.

Thank you, good morning, gentlemen. What portion of your annual revenue does not go through backlog?

There are some -- I have actually looked at this. There are some very -- well, all orders that we receive from clients become an order as we refer to it as. But the projects that come in as an order and get expended during the same month never show up in backlog. So if it is a one-month or, in the case of visibility to the public because we report quarterly, if the dollars come in and are fully spent within that quarter, you wouldn't see a net effect of it on our backlog because the order would come in and then be burned up. So technically, they certainly go through the books, but you wouldn't see the effect of it on backlog but it certainly would be in revenue. And the portion of our revenue would be less than 10% as the initial order and the full expenditure within 30 to 90 days.

And if we were to look at backlog on an apples-to-apples basis adjusted for acquisitions, obviously, in the quarter, your organic growth was down 20%, but what is the kind of year-over-year comparison in backlog on an adjusted basis for all the businesses you own today?

Well, for all the businesses we own today? If you are referring to those that we acquired during 2009, it was relatively modest. The entities that we brought over didn't bring over a substantial amount of backlog so it was not a material driver in the change in our backlog during the year.

That's helpful. And what was the gross net revenue from wind in 2009 so we have an understanding for the baseline of guidance that you provided for 2010?

Yes, it was about -- gross was just over $210 million and net was about $60 million to $65 million for the year.

Perfect. Thank you very much.

Great. Thank you very much, Alex.

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

Well, thank you, all, very much for your questions. I thought they were very insightful and just by the very nature of the questions, it is pretty clear to me you all understand exactly where our business is and where we are going. And I look forward to talking with all of you next quarter. Thanks for calling and participating. 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.