Tetra Tech Inc (TTEK) 2010 Q2 法說會逐字稿

Good morning, and thank you for joining the Tetra Tech earnings call. By now, you should have received a copy of the press release. If you have not, please contact the Company's corporate office at 626-351-4664.

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 the actual future events or results.

Tetra Tech's Form 10-K and 10-Q reports to 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.

In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the appendix to the presentation and in the Investor Relations section of Tetra Tech's website.

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

Thank you very much, Christy, and good morning and welcome to our fiscal year 2010 second-quarter earnings release conference call. While David King, our Chief Financial Officer, will present the specifics of our financials, I will start with a brief overview of some of our key financial metrics for this past quarter, the second quarter of 2010.

Our second-quarter results were at the high end of our guidance for net revenue and earnings per share. As we had expected, our gross revenue was down 10%, while our net revenue was down about 2% year-over-year. Our operating income tracked very similar to our gross revenue and net revenue moves, with our diluted earnings per share being at $0.23 for the quarter, which was at the high end of our guidance.

I think most importantly for the quarter, our backlog was noted -- was up slightly at 1% up year-over-year and sequentially up 4% from just the prior quarter, three months ago. We think this is the best leading indicator for our business, and I will discuss the drivers associated with the increase in this backlog a bit later in my presentation.

If you are following along on the webcast with the PDF file, I'm calling out the pages for your reference. On page four, I would like to note that for the second quarter, our Federal work was down slightly overall, but it was a mix. Mostly, the reduction was attributable to slow construction activities for the Department of Defense on a year-to-year comparison. But our front-end services for the Federal Government grew -- for the US Environmental Protection Agency, the US Agency for International Development, the Army Corps of Engineers and the Federal Aviation Administration were all up, particularly noted associated with our front-end services.

Our state and local work remained at about 18% of our overall business, which is exactly the same as it was last quarter on a percentage basis. A few large projects that we have are driving our year-on-year growth, and we are now seeing stability returning to the state and local market. And I really do believe that the worst is behind us with respect to any further reductions in this client sector.

Commercial work continues to be weak year-over-year, primarily due to slow demand for renewable energy projects. And that is more specifically on our wind construction projects.

And finally, International now comprises about 11% of our business, which is a bright spot for us. Our International growth is primarily being driven by demand for our mining-related services and water infrastructure projects in places like Canada, which we've had some very good successes, Latin America and Asia.

On page five of the webcast, that shows a triangle and actually the financial results for our business segments. As depicted in the graphic, we are organized into four business groups according to a project lifecycle. We present this on each of our quarterly presentations.

Three of our business groups provide front-end services, including consulting, technical support and engineering design. We did see the largest growth in our largest group or business segment by net revenue and total staff. That's our ECS group, which provides front-end consulting and engineering services. And they also provide services for a portion of our International group.

This business segment grew by 11% year-on-year, and it is in this group that we are seeing more orders for more new, emerging programs across our entire client base than we've seen in the past two years. For example, we are now seeing funding for regional programs in the Great Lakes for water quality and shore protection and restoration projects. We are seeing restoration projects in the United States Gulf Coast area. And we've had some excellent new projects start up for climate change evaluations in Southeast Asia, all within the ECS group.

The next group that we have on our front-and services, Technical Support Services, our TSS group, the revenues were stable, with their support for the US agency for international development programs. And they've been providing new international development services in Afghanistan and in several countries in Africa and South America that have kept this very strong and essentially stable from last quarter.

Interesting, our Infrastructure Design group, or EAS, Engineering and Architectural Services group, was down year-on-year about 12%. But that really doesn't tell the story of this group. Its revenue and headcount was up from last quarter sequentially, and this is the first sequential increase in headcount we've seen in this group in six quarters. And it is associated with returning strength and projects at the state and local level. So we actually think we've turned the corner on this group.

Finally, revenue from our Remediation and Construction Management group, where our large construction activities take place, was down both year-on-year and sequentially, as we expected. And it's primarily as a result of slow construction work, both from the federal clients -- or state clients, local and even commercial on the wind construction. Overall, when you take these all in aggregate, our net revenues were down 2%, which was in line and actually a bit at the high end of our revenue guidance for the quarter.

Page six on our webcast shows our backlog and lists some of the significant wins we had for the quarter. In total, we received approximately $530 million of new orders during the second quarter, and we ended the quarter with our backlog at $1,673,000,000.

I would like to provide a point of clarification. We report our backlog more conservatively than most in our industry. Our backlog only includes orders for projects where we've signed a contract with a client, where it has been funded and all this funding has been authorized by the client and where the client has provided a notice to proceed to Tetra Tech on the project. Our backlog does not include any factoring of our contract capacity, which is quite different than many in our industry.

For new work, we saw an increase in our backlog by 1% over the same quarter from a year ago and 4% from just three months ago. We were very glad to start work on one of the wind projects, for the first new wind turnkey project that we've had authorized in over a year, and this is one of the projects that I talked about in our last quarterly call three months ago that had previously been delayed, but it is now under work. It was a $40 million turnkey project.

We've also been awarded new contracts that expand our scope of services to the government. Those include water infrastructure projects for the Navy. And in fact, we announced this just yesterday -- large Navy water infrastructure project. And we've expanded our support for IT services to the National Science Foundation. So this is new scope areas that open up new markets that we hadn't been in before.

This past quarter, we are also very pleased to see the federal government begin to issue task orders from their 2010 budget, fiscal year 2010, at a pace much more similar to what we've seen in the previous years. So -- and most of that was derived and booked in our upfront three segments.

In all for the quarter, we won an additional $700 million in new contract capacity that gives us access to new work. All in all, we had a very good quarter of orders and contract wins across the Company.

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

Thank you, Dan. Page seven, financial overview. Q2 2010, as Dan had indicated, we performed as we guided in January. Revenue down 10% or $53 million. Same quarter last year -- I'm sorry -- net revenue was $470 million. Same quarter last year, we were completing a large wind project and exiting Iraq, both of which accounting for entire delta.

Net revenue, $326 million, down 2%. It is -- our guidance was $310 million to $330 million. It was a respectable number, especially in light of extraordinary weather conditions in the East Coast; for example, Washington, DC was shut down for a week.

In addition, as we mentioned last quarter, we continue to experience solid workload in our front-end business, which is mostly [self-performed]. Operating income, $23.5 million, a 15% decrease, principally, as Dan mentioned earlier, is top-line driven. Operating margins, 7.2%. The decrease was a combination of certain charges we took in our EAS group and the severance costs, as we mentioned last quarter, in our RCM group.

EBITDA was $31.5 million, or 9.7% EBITDA margin. Let me point out the amortization this quarter was about $3 million versus $2.4 million last quarter.

Page eight, the income statement. SG&A costs, $40 million, an increase of 4%. This increase was due entirely to two items -- higher amortization, as I mentioned earlier, and the severance costs also mentioned earlier.

Tax, $8.8 million. Let me point out in the same quarter last year, we had a one-time tax benefit of $3.3 million. And the tax benefit translated to about $0.055 cents in the EPS. Net of benefit, same quarter last year was $0.265. This quarter, our EPS was $0.23. Our guidance was $0.20 to $0.23.

Page nine, balance sheet. Accounts receivable, $450 million, a decrease of 20%; in fact, versus revenue decrease of 10%. This delta actually helped us -- resulted in a better DSO in strong cash flow -- from the cash flow.

Accounts payable, $119 million, a decrease of 35%. As I mentioned, we had a higher level of self-performed work for a couple quarters, resulting in a substantial reduction in subcontracting activities.

Net cash, over $102 million, a record net cash for Tetra Tech. The same quarter last year, we used cash in expanded into Canada with the Wardrop acquisition.

Page 10, cash flow. Cash flow was over $45 million, a solid number for second quarters. Same quarter last year, we had a significant payment as we closed out a large wind project. Six month year-to-date 2010, cash flow from operations was $40 million. As a result, we are bringing back our original forecast of $70 million to $90 million for the year.

CapEx was $5.6 million. The forecast for 2010 remains at $20 million to $25 million. DSO, 70 days. With less construction and construction management projects for milestone payments and a higher level of front-end consulting and design work, we were more working capital efficient. Our working capital delivered a nine-day improvement on our DSO. Second half of the year, I expect our DSO to be in the low to mid 70s.

Page 11, cash position. Again, this is a strong cash position -- very, very strong cash position. We had $110 million of cash in the bank and no bank debt at quarter-end. Again, we will work hard to put our available capacity into good use in the coming quarters.

Back to you, Dan.

Great. Thank you, David. About 75% of all of our business is for front-end services, provided by three of our four business groups. I'm on page 12 of our webcast, or of the PDF file, if you have it downloaded.

Our front-end opportunities are continuing to pick up across the board, really across all of our clients and business areas. We are seeing strength in our overall core water infrastructure markets. Feasibility studies for our large commercial mining clients are up, and that includes internationally at many locations. And even at the state and local level, which has been particularly challenging for us and really the business sector, we are seeing an increase of work for us for watershed planning work and waterfront redevelopment work, including projects like the Seattle Seawall project that we were awarded just last month and press released, which is being done for the city of Seattle.

These front-end projects are excellent indicators for us that the economy is recovering, and this makes us very optimistic for the future growth in our markets. These are what we look at on the front line to indicate how things are going to turn for us.

Our past experience has shown us that strength in these front-end orders is typically followed by an increase in back-end opportunities. So these back-end opportunities from a timing standpoint typically lag the front-end activities by anywhere from two to four quarters, depending on the type of work. So this increase in our front-end work is a very good indicator that our back-end opportunities for RCM are going to increase here in the coming quarters.

On the next page, our guidance. I would like to present our guidance both for the third quarter and for all of fiscal year 2010. Guidance for the third quarter is net revenue of a range of $350 million to $370 million for the quarter, with an associated diluted earnings per share of $0.27 to $0.31 as a range.

For the entire year of fiscal year 2010, we've updated both our net revenue and diluted earnings per share guidance, with the net revenue guidance of $1,375,000,000 to an upper range of $1,425,000,000, with an associated diluted earnings per share of $1.10 to $1.18. We did narrow both the net revenue and earnings per share, and in the case of earnings per share, we brought the bottom end up by $0.02.

A couple notes of what this earnings include and exclude. Our guidance does exclude any contributions from future acquisitions that we would make either in the third or fourth quarter that would contribute to EPS or revenue. So [they're] not incorporated any anticipated contribution from acquisitions.

And for fiscal year 2010, these numbers that you see here do include $0.11 of intangible amortization for the year, $0.10 of stock compensation expense. It does assume a 39% annual effective tax rate and an estimate of 62.4 million shares outstanding.

In summary, our second-quarter performance was fully in line with our expectations, both on revenue and income, so we feel very good about that. While our orders for back-end services do remain weak, and a little -- still hasn't firmed up, our front-end services show significant activity in new contract wins and orders that contributed to our growth in the back end and our backlog, and indicate a strengthen in our overall end markets.

As David just indicated, Tetra Tech's net cash position is now at an all-time high and puts us in an excellent position to pursue acquisitions; our capital structure has never been stronger. So with that, I would like to open up the call to questions.

(Operator Instructions) Andrea Wirth, Robert Baird.

I wonder if you could first give us a little bit more color on the state and local side. It does sound like things are incrementally positive, but just wondering how broad-based some of the inflection is that you are seeing. Or is it more sort of just kind of pockets of strength that are starting to crop up?

Generally broad-based. I would say that we aren't seeing any single location with -- an isolated location of large procurements that is driving this for us. The sequential numbers are being driven by a handful of larger projects that we've had in place over this past year. But we have seen wastewater plants for municipal clients pick up, smaller projects, but very broad around the entire country.

The same is true with some redevelopment projects. That has been a combination of existing funding and a combination of even contributions from stimulus. So that actually has had some contribution.

And we have actually seen for the first time in well over a year that tax receipts are going up in a few locations around the country. So I couldn't point to one location and say this is driving it. It is really broad-based across the country.

Got it. And then switching over to the wind side of the business, you know, definitely sounds positive that one of the projects is starting to move forward. I guess maybe you could give us a little bit of commentary on your thoughts on the remaining projects. Are you incrementally positive that these others may start moving forward soon, or there are kind of other things that will keep those still delayed?

Well, I will tell you our clients are telling us they are very positive. We have about half a dozen projects that are currently -- or proposals that are currently submitted pending award. Some we feel very confident in, others we will see how the final competitions are decided.

But the definition from many of our wind clients, when they say it is going to come out imminently, sometimes we are thinking that it's days or weeks, but we have now come to realization in this environment it is months or quarters. And so these half a dozen or more proposals that we have pending range in size from maybe $20 million to $50 million, generally with a couple even as high as maybe $80 million. So it is a good size. We have a substantial amount of opportunities pending.

But we have taken that out of our forecast for revenue contribution that we've included with our guidance. So for the most part, we don't need to have any of these converted into wins or successes in order to achieve the guidance we have provided.

And so we remain cautious on the timing. We still are very positive and very optimistic on the outlook for that business, but the timing of it, we remain uncertain.

That is very helpful. And then just a final. Did you happen to know roughly how much weather did impact the results in the quarter?

No, we didn't quantify it. David did talk about a week -- roughly a week worth of downtime. We have about 1000 people in the Washington, DC Capitol region, and many of those folks either work directly in our clients' locations or we support the clients while they are at work. And with a week -- so one of 13 weeks of 1000 people, you could run those numbers. But we didn't quantify those.

But it's not just the staffing in the DC Capitol area for our federal clients. Heavy, heavy rains in the southeast of the United States -- some of our construction activities to slow down in places like Florida and Georgia and the surrounding areas. Heavy snows in the Northeast, upstate New York and the surrounding area, actually slowed down some of the other projects we have.

So we always anticipate some weather downtime and we include it in our forecast, but this year was unusually more significant. But we didn't quantify it.

Great. That's helpful. Thank you.

John Quealy, Canaccord.

It's actually Chip for John. Wondering if you could touch on International a little more, with commodity markets improving, particularly Wardrop in Canada, just your outlook there. You talked about some increase in feasibility on the mining side, feasibility studies. Maybe you could just provide some more detail.

Well, Wardrop has the largest -- the Canadian acquisition that joined Tetra Tech just over a year ago has the largest mining component of any of our operating groups within the Company. They do reside in our ECS group, and most of it upfront studies, design, feasibility studies and generally engineering and consulting support. And it's for most of the mining majors.

Now, there is a lot of work that is in Canada, so from what we consider our domestic work here in the US, that would be International. But Wardrop is not only doing work in Canada, where there's large mining deposits, but it is taking them to Latin America, Australia now, and we've even seen a little bit of work in Asia.

So I would say the International commercial work is driven overwhelmingly by the mining support, and we are seeing that pick up pretty materially. Cameco is one of our big -- largest accounts, but other mining majors also are major contributors.

Okay, great. And then just kind of dovetailing on that, obviously with the strong cash position, you've alluded to potential acquisitions. What are you seeing out there? What should we think about timeline, etc.?

Well, I would provide a timeline to you after we closed the acquisition. So we will tell you the date that we closed it, so I will make sure that is clear to every --. We are always very cautious about, and in fact have stayed away from, forecasting a date of close.

But I will tell you we are very focused on three areas, and I would say that we haven't given them specific priority. But I will give a little bit of indication. We've talked about, sort of from east to west, the UK, which would give us access to Europe. We've talk about Canada. And while we have Wardrop, we think there is plenty of geographic areas and service location -- service areas and geographic locations that we can round out in Canada. And of course, we are very keen on Australia, because of its access to the very high-growth areas in both Australia itself and Asia.

I would say it is almost the exact -- going from west to east, Australia is a priority for us. There is plenty of opportunities there. There are many firms that are large. It is growing. I guess from purely a foreign-exchange standpoint, since we are spending US dollars -- kind of glad we didn't consummate something here the last month or two, because we would have ridden that exchange the wrong direction. But I think that movement of the dollar at this time is both stable and strengthening for us, so it makes that movement there more attractive.

As you've said, we've got plenty of capital, and we would look for an acquisition of the Wardrop size or larger, meaning $100 million or greater. We are focused there. We still -- again, I'm going to say Canada is probably the second area we're focused on as a high priority, rounding out Canada.

In Europe, and while I focus at the Commonwealth, UK, there is some short-term challenges there that make it still attractive in the long term, but short-term, making it probably the lower of the three in priority.

Great. Well, good luck. Look forward to it.

Thanks, Chip.

Corey Greendale, First Analysis.

First of all, I wanted to ask you if you could dig in a little bit to the operating margins by segment, since I'm not sure where some of these -- like where the weather impact might have been or some of the nonrecurring items might have been.

So the Technical Support Segment continues to run above the levels that you talk about, Engineering and Architecture below the levels you talk about. So could just talk about kind of what is driving that and what your expectations are by segment going forward?

I'm going to start in the order of those that had -- I guess that were more of an outlier from our expectation. And I will start with the one that is clearly the largest, and it is our EAS group, our Engineering and Architectural Services group. We anticipate -- and we've talked about this and presented it to our shareholders in the past and analysts -- that we anticipate a 6% to 8% margin. And as you can see, they were at 1.5% (technical difficulty).

We did have a one-time charge during the quarter for the impact of receivables that we wrote off, a combination of reserved for and wrote off during the quarter, from some commercial development clients that we had. And the total number was about $3.2 million. David King did talk in his presentation about a charge that we took in the EAS group.

It was primarily driven by one client, though, in actuality, for one project. It was one that we came into the quarter, both the contract was current, the receivable appeared to be in good stead. But during the quarter, the client provided us an indication that they didn't have the ability to actually pay. And like many commercial building developers or structure developers, cash and liquidity is very difficult for some of them.

So we did take a charge. It was just over $3 million. If you put that back into the performance of EAS, it would have moved them from the 1.5% to 7%. It would have put them dead center in the range of 6% to 8%.

I do anticipate on a go-forward basis that they will be much closer to this range that we would expect, particularly with the strengthening of state and local markets. So that was the pretty much the single, one-time event that took place that impacted our operating income for the quarter.

The second one that was favorable, I talked last quarter that we expected softer revenues, and therefore, margins, because of leverage on overhead absorption in the back office with our RCM, Remediation and Construction Management group. They did have stronger revenues. They actually helped push our total net revenue toward the top end of our range. And it was really that additional leverage that moved their margin up to 7.2%; it was a bit higher than we had anticipated.

So we had an impact at EAS. It was mostly offset with additional contribution from RCM.

And as far as the two very front-end service businesses that we have segments, ECS and TSS, yes, 12.7% for the quarter from TSS was a little bit over the range of 9% to 11%. It is basically just workload. They still have a very high workload and excellent overhead recoveries; we have leverage on the back office. And ECS at 10.3% is in the range; we have expected 10% and 12%, and they were right in the range.

So we would expect ECS, TSS to continue at those types of margins, EAS to improve and RCM, depending on the revenue stream that we have over these next quarters, it will drive that margin either up or down incrementally.

Okay.

It was a bit long answer, Corey, but I know you follow these with great detail.

(inaudible) I appreciate it. And given your comments about the lag between the upfront work and the back-end work, is it fair to assume that you think that the overall Company should return to organic net revenue growth by either Q4 of this year or Q1 of next year?

Well, certainly next year. And I know that the range that we've provided, if you look at it, shows basically a flat organic growth here out in Q3 and Q4, with a slight increase as we move into 2011.

Okay. And I had one other question about acquisitions. The -- as you mentioned, you have the strongest balance sheet you've ever had. And given that you are so well-positioned for acquisitions, just what is causing you not to have closed anything by now? Is there some sort of evaluation discrepancy or greater due diligence, because you're looking at international operations? Or what is -- if things are being held up, (technical difficulty).

Sorry, there was a little feedback here. First of all, we actually have consummated a number of very small acquisitions, we call them tuck-in acquisitions. We generally don't announce them. In fact, we don't announce them unless they eclipse a materiality threshold. I know that some of the small acquisitions announced it themselves or some of the local media pick it up.

For example, here just over a week ago, we acquired a small wastewater treatment firm in Toronto, that joined Tetra Tech in our Wardrop operation. So we actually are continuing to move forward on some very small tuck-in acquisitions.

You did hit it right, that on the larger acquisitions, the time associated with due diligence, because both of the size and the location, does take a bit longer. I am not openly signaling or even closed signaling that we are currently in due diligence. We will announce when we close an acquisition. But that is true -- as we pursue larger acquisitions at international locations, the time process is a bit longer.

Great. I appreciate it. Thank you.

Ryan Connors, Janney Montgomery Scott.

A couple of questions this morning. First off, in terms of the backlog growth, we are hearing from other companies on these calls the last week or so that disbursements of stimulus funds really accelerated in March after a fairly weak January and February.

So the question is did you see a similar dynamic in your own order book? And if so, might that imply that the sequential build in the backlog actually understates the run rate of the backlog improvement exiting the quarter and presumably into the second quarter?

Let me answer that -- break it down. First of all, did we see an increased distribution or did we win more stimulus related projects? And the answer -- disproportionately to what we did before -- and the answer to that is no.

Okay.

The total amount of -- and by the way, stimulus funding has very specific earmarks that require reporting, tracking. You all can go and add it up and track it to a great level of precision, as we report on recovery.gov.

The total number, I think a quarter ago I reported that we were about $30 million, a bit over $30 million, in specifically, stimulus-related, Recovery Act-related funding. We are currently at about $50 million, still very, very small number. And it is mostly all for upfront studies.

So I do believe that the stimulus funding has been -- particularly has provided a positive impact for the Department of Energy and certain transportation projects. But it has been relatively small in the water resource area and coastal protection programs that we are looking at. So ours have come from the annual funding budgets of our clients mostly.

Okay. And I guess the point that we've been hearing is that there actually was - that was the case, but that in the very late part of the first quarter in March, there was actually a very nice acceleration after weakness through the first part of the year. You're saying you didn't really see that in terms of a recent acceleration?

No. No, we didn't.

Okay.

I would also say that in a positive standpoint, we didn't receive any orders or stimulus-related funds that are not replaceable or allowed to go on in an ongoing basis from annual funding budgets.

Okay. And then I had a question about a specific opportunity that we've been tracking closely for its impact on really some of the widget makers, if you will, and that's the Marcellus Shale unconventional gas wastewater issue. Our understanding is the EPA just began its own environmental impact study on that a couple weeks ago. The Pennsylvania DEP is conducting its own study as well.

Just looking at the magnitude of that issue and how much work needs to be done, it would seem like a pretty significant opportunity that would be right in your kind of wheelhouse, given your expertise. Is that something that you are participating in or expect to participate in? And if so, is there any way you can maybe try to quantify the magnitude of that as an opportunity?

Well, the Marcellus Shale is an enormous opportunity. We have a very large operation in Pittsburgh, which is sort of set -- very well centralized set for Marcellus Shale support and many of the gas producers that we are doing work for.

No doubt that the environmental impact evaluations for the additional drilling is going to generate work for us, but it is still very early. So I would say it is a very, very large opportunity that as of today has not translated into any material revenues. But we do see it coming.

And a couple of them, not only the environmental impact evaluations from the drilling and environmental impairment to the environment. But for these types of projects and the state regulations to protect the water supplies have a very, very high standard. And to produce the gas, they use produced water. So when they actually extract the natural gas, large amounts of water are removed also, referred to often as produced water, that needs to be contained and treated and then disposed of or otherwise recycled.

And then also what we refer to as frac water, or water that is used to fracture the formations, that also is recovered. Both of these have very high treatment standards. It is difficult. It separates sort of the standard technologies from those that are more at the very high end, like I would say Tetra Tech and very few others. So I think it is a big opportunity. It is just starting, but it is not a large contributor to our revenue at this time.

Okay, that's great. And then just none final question, kind of, I guess the third person to talk about acquisitions here. But just looking at it from a little bit of a different angle. I guess you -- one aspect in which you are not alone is there a lot of companies building up a lot of cash, and so, presumably, there is a lot of competition on some of these deals.

So what kind of metrics or disciplines do you have in place to avoid overpaying? And if in fact you were not able to get a deal done, would you actually consider initiating a dividend or otherwise returning some cash to shareholders?

Well, our financial rigor here and discipline at Tetra Tech is pretty clear. The acquisition needs to be accretive on a GAAP basis in the first year. So if you really want to know where it all comes down to, that is the number. So that is a very, very high standard. I know it is a standard higher than many of the primary acquirers have established. By the way, I will make that very clear, on a GAAP basis, not just on a cash basis.

We see plenty of opportunities out there, and so we see so many opportunities and the contribution to the increase of the earnings per share for the employees, it is more valuable for us to put it into the marketplace in order to move into new geographic -- high-growth geographic areas and into new service areas for the type of work that we provide and that will provide a bigger return to our shareholders by using that to be one of the consolidators and to grow our market both geographically and service-wise.

So we don't have an anticipation of either a dividend or a stock buyback or any other use of funds. We anticipate using these to consolidate the market and grow primarily geographically.

Okay. Great. Thanks for your time this morning.

Michael Coleman, Sterne, Agee.

I just wanted to clarify something on your guidance. In terms of the third-quarter diluted EPS guidance, do you have any charges or one-time items that are baked into that number?

No.

Okay, great. Thank you.

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

Great. Thank you very much for your questions. I very much appreciate your support and look forward to talking to you next quarter. And I will just reiterate that we do see strength, both from our clients and individual projects.

We certainly have heard the economists talk about the recession being over. We have a different perspective. We measure it not by macro indicators, but by the actual spending and orders provided by our clients. So we do see that on the upfront work strengthening.

So we look forward to a stronger third quarter, fourth quarter and end of fiscal year 2010. Thanks for your support, and I will talk to you next quarter. Bye.

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