Tetra Tech Inc (TTEK) 2010 Q4 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 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. 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 this 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 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, Carrie, and good morning. Welcome to our fourth-quarter and fiscal-year 2010 earnings release conference call. While David King, our Chief Financial Officer, will present the specifics of our financials, I would like to start with a brief overview of some of our key financial metrics for the fourth quarter.

Our fourth-quarter results were very, very good, with every one of our metrics up substantially year-over-year. Our net revenue and backlog are at all-time highs for the Company, and I am very pleased to report that both our net revenue and earnings per share exceeded the guidance we provided at the beginning of the fourth quarter.

The metric I liked best, and I have said this on the call in the past, our backlog had the largest increase of all, 17% year-over-year and 10% higher than we had just the previous quarter, giving us excellent visibility going into fiscal-year 2011.

For the fourth quarter, our US federal work was up 6% and now represents 42% of our overall net revenues. If we look at the work we have just here in the United States, our domestic work, federal work is now over 50% of our business.

The work we do for the federal government continues to be focused on essential services to support water quality, environmental management programs, and energy efficiency activities. These programs have provided a lot of stability for us during the slow economic conditions here in the United States.

Our international work, which is dominated by our expanding presence in Canada, is our fastest growth area. International work now drives 15% of our revenues, as I will point out later in the presentation. I expect that the international work, including Canada and other locations throughout the world, will represent 25% of our net revenues in 2011.

I am also very pleased to note that our changing portfolio is providing us access to the faster growing economies like Canada. This will be a full quarter of our net revenues here in this coming year.

Our state and local work -- and if you take a look at this, it looks like a very large growth area. It is now about 17% of our business. But this growth is not representative of what we are seeing in the marketplace.

Our increase in the state and local work was driven by just a few large transportation projects. The remaining work that we have that we are doing for state and local governments primarily supports regulatory-driven programs. We see these as stable projects that should continue even with funding pressures at the local level. But this is not a growing market for us here in the United States.

As expected our US commercial work was down year-over-year by about 2% with continued weakness in the demand for backend projects. But I do feel better that this has flattened out and we have seen some stability in this area.

Our three front-end service areas - the ECS group, our TSS group, and EAS -- represented 74% of our net revenues in the fourth quarter. These front-end groups grew their net revenue collectively at over 20% year-on-year in this fourth quarter. Together they drove the overall Company's growth at a 15% pace. Really just did a great job.

The increase in our front-end groups was driven by organic growth, supplemented by two acquisitions that took place in the fourth quarter, one that went into ECS and one that went into TSS. That's a very small one into our TSS group, and I will talk more about the additions of groups into our ECS group.

We ended the year with a record backlog of over $1.8 billion. This is the fourth consecutive quarterly increase in our backlog and with a 10% increase in our backlog over just the previous quarter.

This increase was driven not by any individual order or any single client, but rather very broad-based awards for consulting and engineering services, primarily from our front-end groups. Backlog -- and it's on the slides if you are following -- was up organically even with the addition of the acquisitions during the quarter. Our organic backlog grew 8%; and together with acquisitions as I mentioned earlier was up over 17% from the same period a year ago.

At this time I would like to turn the presentation over to David King to present the details of our financial results for this past quarter and for all of fiscal-year 2010.

Thank you, Dan. This is a solid quarter by all accounts. In addition to acquisitions in the quarter, we experienced strong organic growth in backlog, as Dan mentioned. We also had strong organic net revenue growth.

Revenue grew 9% to $627 million. Net revenue grew 15% to $421 million. Our guidance was $370 million to $390 million.

Acquisitions in the quarter contributed $20 million in net revenue in the quarter. Organically, net revenue grew over 9%. It came from USAID, EPA, FAA, internationally many mining projects. Again, it was broad-based growth from our three front-end segments.

Income from operations increased 14% to $37.1 million at 8.8% operating margin. This is a respectable margin given additional M&A-related costs we had to carry in the quarter. As you know, we now not only book intangible amortization; we also expense M&A-related costs incurred instead of capitalizing them this year.

EBITDA increased 15% to $46.4 million at 11% EBITDA margin. SG&A increased 13% or $5.4 million to $44.9 million. This increase was attributable mainly to increased or higher M&A-related costs.

For the quarter, M&A cost was about $2 million. Amortization is about $1 million. Both together account for $3 million of increase in SG&A costs in the quarter. The rest came from revenue growth.

Tax was $13.5 million due mainly to higher income. The tax rate for the quarter was 37%. We expect FY '11 tax rate to the 37%, excluding R&D tax benefits. Again, as I mentioned in previous quarters, our continuing effort on tax efficiency has paid off.

EPS grew 13% or $0.04 to $0.37. Our guidance was $0.31 to $0.34. Acquisitions in the quarter had a minimal contribution to EPS, as I explained, due to the higher M&A-related charges.

Accounts receivable increased 12% to $567 million. Accounts payable increased 11% to $167 million. Both of which were a result of revenue growth.

Net cash increased 19% to $93.4 million. This did include our acquisition investment in the quarter, as Dan mentioned earlier. It does not include our BPR acquisition, since it was closed at the beginning of fiscal '11.

Cash flow from operations was $42.3 million. This in and of itself is a strong number relative to Tetra Tech's fourth quarters. As you recall, in Q4 of '09 we had a very large win payment; about $30 million came in, in the fourth quarter, which skewed the fourth-quarter number.

For 2010 as a whole we generated $107 million in cash from operations versus $80 million to $90 million we expected. For 2011 we expect to generate $90 million to $110 million in cash flow from operations.

CapEx was $5.7 million for the quarter. For the year it was $21.6 million. We expect fiscal '11 to be in the range of $20 million to $25 million again.

DSO was 73.4 days. The Q4 payment, large payment in '09 actually decreased DSO and skewed the DSO down.

For this quarter, I will note that the new acquisitions coming to Tetra Tech in the quarter carry higher DSO than Tetra Tech average. It will take a few quarters for us to get them calibrated to the low 70s Tetra Tech discipline. I view this as an opportunity.

Again, cash position at the end of the year was $93.4 million. You will note on our balance sheet we mobilized cash at the end of the year in preparation for the BPR acquisition, which closed at the beginning of fiscal '11. We will be in a net debt position in Q1, Q2, and Q3; and we will be back in cash flow positive in Q4, barring any new acquisitions.

For the year, net revenue grew 5% to $1.46 billion. Again, this is a broad base; a lot of federal and international strength in our portfolio. Our guidance was $1.41 billion to $1.43 billion.

Income from operations up 2% at $124.5 million at 8.5% margin. Again we carry higher M&A-related costs for the year. For the year M&A cost is about $2 million; amortization is about $2.9 million; summing up to about $5 million. Without it, our operating margin would be about 8.9%.

EPS was $1.24. Our guidance was $1.17 to $1.20. Excluding the tax benefit we have in 2009, EPS would be up by 2%.

EBITDA grew 6% to $157.6 million at 10.8% margin. What you have seen and what you will see is a bit bigger separation between our EBIT and EBITDA margins due to intangible amortizations, especially when you have increased acquisition activities.

To sum up, we are proud to register a solid year despite a challenging environment. Back to you, Dan.

Great. Thank you very much, David. Since our last quarterly call we have had two firms join Tetra Tech, and both of them are from Canada.

The first was EBA Consultants, who joined us in August of 2010 this year. They have added world-class Arctic engineering capabilities to our Company. Their capabilities support both our global mining clients in the North and expanding infrastructure needs in Northern Canada and Alaska.

Just recently, about 30 days ago, in fiscal year 2011 -- so this would be a first-quarter event for us -- BPR joined Tetra Tech, bringing us our first-ever presence of Quebec. From their Quebec-based operations they work in Eastern Canada and actually have a lot of projects and presence here in the United States also. They have a very specialized expertise in combining sewer overflows that address very expensive regulatory-driven improvements needed in older cities in the United States, Canada, and even in Europe.

BPR fits extremely well with Tetra Tech. They also lead with science and are very closely aligned to our water, environment, and energy service lines.

With EBA, BPR, and Wardrop -- who joined us just over a year and a half ago -- we now have coverage across all of Canada from the Atlantic to the Arctic, down to the border, and off into the Pacific. Together with our US operations we are now able to offer Tetra Tech's full capabilities to new clients in this faster growing economy of Canada.

I would like to discuss our reporting segments for a moment and the impact of our recent acquisitions on our expected business outlook and our margins. I want to point particularly to our margins here through this page.

The last two acquisitions, EBA and BPR, come gone into our ECS segment. That is the very beginning of our project lifecycle segment.

ECS is now our largest segment and it provided 37% of the Company's net revenues in the fourth quarter. With the addition of these acquisitions and ECS's anticipated organic growth, we expect ECS to provide 47% of our net revenue and deliver margins between 10% and 12% during the year of 2011.

I expect relatively little change in our overall share of net revenue and margin contributions from our TSS and EAS groups in 2011. And the RCM segment, which provides backend services, is expected to deliver about 19% of our net revenues in 2011.

Overall I expect our net revenue to grow by 15% in 2011 when compared to 2010. As you will see in a moment, that is reflected by roughly the midpoint of our guidance.

Our earnings before amortization will also grow at over 15% year-on-year, showing additional leverage in our financial operations. However, and as David just mentioned a moment ago, due to the recent acquisitions our fiscal 2011 intangible amortization expense will be up to $24 million for the year, almost doubling from 2010. This will result in a lower reported operating income margin.

This non-cash accounting charge will result in slightly lower operating income margin than you might expect with this business mix. But these intangibles are amortized over about four to five years, and they will yield an increase in our operating income margins as they drop off. If you take a look at our earnings before amortization you will actually see that they are remaining at a very high level and actually increasing.

I would like to present our guidance for the first quarter and for all of fiscal-year 2011. The guidance for the first quarter -- and I will start with net revenue guidance. The first-quarter range of net revenue is between $380 million and $410 million for the quarter, with an associated diluted earnings per share of $0.31 to $0.33. For the entire year of 2011 our net revenue guidance is a range of $1.6 billion to $1.7 billion, with an associated diluted earnings per share of $1.28 to $1.40.

I will note as is our practice this does exclude any contributions from future acquisitions or anything else we would close from this point forward. We do not include that in the guidance nor forecast that as we enter the year.

Some of the assumptions that are included in this forecast -- we have included $0.24 of intangible amortization expense; that is a non-cash charge but it is an impact to our operating income. $0.11 of stock option compensation expense. As David indicated earlier, we are anticipating a 37% annual effective tax rate; and this is also based on 63 million shares of diluted shares outstanding during the year.

In summary, we had a very good fourth quarter and a very strong end to fiscal-year 2010 with our net revenue and operating income at all-time highs for the quarter. We are continuing to see the demand for our front-end consulting and engineering services pickup. And with our new partners, EBA and BPR, we have even more opportunities to provide our services in the faster growing economy of Canada and actually for those entities to provide their expertise to our clients here in the United States and all around the world. This is definitely a two-way street with our new partners.

And perhaps best of all, our broad base of new orders from all across our business groups puts us in a good position and with excellent momentum into fiscal-year 2011. With that, operator, I would like to open up the call to questions.

(Operator Instructions) Corey Greendale, First Analysis.

Hi, good morning. Congratulations on the quarter and the year. Want to ask you about the guidance. Looking through some of the specific assumptions in the presentation here, at least my calculation would suggest that the low end of the guidance range assumes organic growth would be negative in the year, and particularly in the RCM segment.

So can you just first of all confirm that I am calculating that right? And second of all, talk about what assumptions you are making or what you are seeing in the market that leads you to think that that is actually a reasonable possibility given the strong backlog growth in the quarter.

Corey, let me first address the calculations that you have made with respect to the organic growth, given the financial guidance that we provided. For 2011, we anticipate our front three end business segments -- ECS, TSS, and EAS -- will organically grow. But with the uncertainty in project construction activities and backend startups with our clients, I have forecasted a reduction in the backend work activities at the low end of the guidance.

So at the low end, you are right. The actual calculated organic growth would be negative, slightly negative.

The midpoint puts it about flat, roughly. And the high end of the guidance puts it up slightly.

The reason for the low end being at $1.28 is the uncertainty. Now a year ago, we had provided guidance at this exact same conference call and had not factored in sufficient -- I don't want to use the word conservatism, but the possibility of projects being put on delay; and we actually ended up at the low end and in fact even adjusting our guidance. So we felt it only prudent to incorporate the potential for additional delays or activities at the bottom end.

But I do want to say just a word about our guidance. If you -- let me start with the midpoint of our guidance, roughly. The midpoint of our guidance is pretty close to a 15% net revenue growth. And at EBITA or our earnings before amortization at just over 15% growth.

That is completely in line with what we anticipate, and that is without additional acquisitions coming on during the year. But I will repeat; with the uncertainty in the backend construction projects we just took a conservative view at the low end of our guidance.

Okay, I -- one question about the federal government work. You have spoken in the past about your views on what a shift in control in Congress could mean. I just want to revisit that a little bit again, in light of the fact that at least Republicans have talked about rolling back budget levels to fiscal 2008.

So can you just give us the outlook on budget for areas that are of importance to Tetra Tech and as a hypothetical, if budgets were rolled back to 2008 levels, what that would mean for you?

I haven't gone back and actually compared it precisely to the 2008 levels. But what I will say is for the federal markets that we are focused on at the front-end we don't see a significant risk. We are focused on -- and I will be specific here -- critical EPA programs, Environmental Protection Agency water programs; priority projects for the Federal Aviation Administration that are at the early end of their initiation; and the US Agency for International Development programs around the world that we are doing for the country. These programs are a continuing priority for the country, and actually we have seen on both sides of the political aisle, and they are generally unaffected by politics.

Great. Thank you very much.

[Justin Hawk], Robert W. Baird.

Good morning, guys. How are you? Great quarter. So just a first question would be on the guidance for the margins in RCM coming down a little bit. Would it be fair to say that that is primarily due to lack of wind projects moving forward? Or is it just the conservatism of the uncertainty of when the backend work on some of the front-end activity you are working on picks up?

We have assumed that there is a little conservatism on wind; but it is not just wind. I would actually put it in a more general category of backend construction or implementation activities in general.

That would include wind. That would include Afghanistan has been a bit slow in the startup. And even some of the funding timing out of the Gulf Coast. So those are three good examples of areas where we have seen slow movement of projects where we are currently working on the front-end studies.

We are doing engineering work, we're doing design work, we are doing different evaluation and feasibility studies. But that hasn't yet translated into backend construction; and we are just being much more conservative. So it is not just wind. It is really those three and even other areas.

Okay, great. That's helpful. Then my next question is sort of a bigger picture question. After these deals you have done in Canada I know you guys have talked about other opportunities to expand internationally. I think you have talked about looking at Australia as well. Just curious if you could give us an update on where the M&A activity is right now and what the pricing environment looks like.

Well, the list of opportunities are pretty good. They are actually very good.

The pricing points I think have come -- have gotten more reasonable. We have seen a few outliers where there have been some interesting public auctions that have driven some points to higher valuations. But I would say overall this economy, which has represented challenges last year and in the back and even now, has brought the multiples that folks are asking to what I would consider reasonable.

I have actually seen the expectations by the sellers and the amount that the buyers want to pay actually get much close. So I think deals can be done. It is good for both parties.

Australia is one of those locations we are quite interested in. In Canada I think with the BPR joining us we are done with large acquisitions. We will still have additional small pieces that we will look to add that will bring us specialty services or additional client penetration; but I think we have got our team in place to go in Canada.

Now we are turning our focus at least on the international component to Australia and other high-growth areas. But I do not discount the United States. There are still many different markets that are strong and growing, and the US is still the largest economy in the world. And we are going to continue to round out our capabilities here.

Great. That's very helpful. Thank you very much. Great quarter.

Joe Ritchie, Goldman Sachs.

Good morning, everyone. So I guess starting off on your ECS segment, margins were really strong at 13.4%. The highest margins I have seen in quite some time. Was that driven predominantly by the acquisitions? Or can you give us a little bit of color of why it was so strong this quarter?

Acquisitions helped, but it was broad-based and really strength across all the operating units. But there were a couple items that did contribute to that margin, and it was good.

But if you take a look back a year ago we were in the 12%s, the mid-12%s. The fourth quarter seasonally is our best-margin quarter for ECS. There is a bit of seasonality in it.

We have -- there is some leverage in that operation, so when revenue goes way up -- as it did within ECS -- we have more leverage in the back office; we have more people at work; utilization is up.

We did see some favorable pricing opportunities with some of the clients where they just need services. Right now, mining is an example generally where there is beginning to get to be a shortage, or at least its availability is becoming a little bit of an issue in some of the mining areas. And we have a very nice-sized mining group now, so that is some help. And that resides in ECS.

But the combination of seasonality, fourth quarter being high, scale, giving us additional leverage in our back office, and a little bit of pricing opportunities in some of the hotter markets drove that number.

Okay, that's really helpful. Second question is really on your -- as you think about your organic growth rate for next year, and if I think about the midpoint of your guidance it implies something like 2% to 3% organic growth.

What are the swing factors that will turn that organic growth either sub-zero or plus 5% in your view as we enter into next year?

Well, I think it is the backend. I think the backend is the big swing area for us. I think we have one of the best full-service models out there in the industry. We can go from the front-end all the way to the backend, and our ability to implement these large programs I think is as good or better than anyone.

But with that said, the opportunities actually have to be there and the funding for the projects to go forward. So the three areas that could drive us to the top end or even higher would be some awards in wind -- so if the wind projects actually get implemented. And let me give you -- I know this is a question that has come up on previous calls, so I am going to give a little bit of details for the wind work.

We have about $100 million in our plan for fiscal-year 2011 for wind. This would be a good example of what could drive us up or down. About half of that we have in backlog right now. So we have got to get another $50 million.

If that doesn't come in, that would be a $50 million challenge. But let me give you some insight into where we are at today.

We have about $200 million in opportunities. These are hard opportunities that we think we have identified and that we are in reasonable position for. So we don't need much of that to come in for us to achieve our plan.

If all 200 came in, that would push us $150 million over what we have anticipated for our wind contribution for 2011. So you can see there is much less risk in that aspect than there is upside opportunity.

But given this last year I don't want to discount any of the potential risk in these constructions. And there's similar areas in Afghanistan construction and Gulf Coast restoration. So there's three that are good examples that could be swing items for us.

When you talk about the $100 million, is that on a gross basis?

Yes.

So that would be effectively doubling your business from this year. Because if I am correct you are going to do about $50 million in 2010, or you did about $50 million in 2010. Is that a fair representation?

Yes, that's very fair, Joe. That is just about exactly right.

Okay, great. Thank you for answering my questions.

Will Gabrielski, Gleacher.

Good morning, guys. So a couple of questions on the federal side, I am just wondering -- we keep hearing about austerity and we hear about the mix maybe of more DOD work going to fixed price and more top-line pressure. But we are not really seeing that in -- you look at the mix of your backlog and revenue, it seems that we haven't really seen that yet.

I am wondering what your expectation is there and how you're preparing for that, if there is anything you can do to mitigate that.

Well, in general, there is no doubt there is this concern over the budgets. What is interesting is in the Democratic-controlled House and executive positions we get great headlines like the -- I don't think you could have gotten better headlines than the stimulus or the recovery act. The great headlines are things move along as they did before.

Republicans get in position; there is very difficult headlines or challenging headlines; and the programs move on as before.

We are focused on programs that have large regulatory drivers. They generally remain stable through changes of political regimes, either side. And are really priorities that need to be or have to be implemented because of different legal requirements or priorities for cleaning up the environment, water.

I will give you one example that the executive order that came out here at the beginning of this calendar year calls for a 20% reduction in energy consumption and water use across the federal government by the year 2020. So it is a 2020 plan. 20% less water, 20% less energy by 2020.

Those programs have hardly even gotten started. Those are largely going to be spent and complied with by our key clients like the Department of Defense. So we will shift a bit from some of the BRAC, or the Base Realignment and Closure work. We will keep following that; but there's other areas that are moving and that have additional opportunities for us that are right up our alley.

It's our clients. It's the work we do. And I think those will be areas that will offset any type of short-term funding. But as I have said in my prepared remarks, at this time we don't see any significant risk to the programs we have.

Okay, thanks. It seems that you have maybe a very high level of front-end federal work in backlog right now. You guys have just addressed that there is not this push on the backend and moving it to the construction phase, maybe.

What do you think changes that? Because it would certainly seem to have a pretty full opportunity set for that going forward.

Well, it's interesting. I will use the Gulf Coast as an example of something that could change.

The programs have come out. They have come out on a judicious basis. That is our largest client, so I don't want to say slow basis; but they have been very cautious about this.

But there is significant additional funding coming in now, for instance (technical difficulty) BP and some of the other responsible parties for this recent incident down in the Gulf Coast. And they are going into large accounts for restoration of the wetlands and other coastal areas.

So there is an area where there will be large funds that will represent large-scale studies, restoration, and that are -- may come out through the state, local, or even federal administration. They will be out in the future, but they will be untied to budget items.

Okay.

So there is an example of opportunities where backend can move forward that is not directly tied to existing budgets.

Okay, that's helpful. It just seems like you guys should have a pretty big opportunity in front of you. Just trying to figure out when that plays out. Because certainly you would seem very well positioned given the amount of front-end work you are doing. Is that fair?

That is our perspective. We just can't get the timing.

Got you. Okay, then is there anything unique to the Canadian market that might make it more difficult to line up the DSOs with what you wanted to do internally? Or is it just a matter of implementing your systems?

Yes, number one is to implement the systems; and that is why I mentioned earlier it'll take a few quarters to review their contracts, review their systems, which we are doing.

Okay, but there is nothing unique that might make that challenging to do?

No, there's not.

Okay, that's helpful. Then just one last question I guess for fiscal Q1. You will be adding more backlog from an acquisition; and I am just wondering if you can maybe quantify that, to remind us what that will be ahead of time.

Well, BPR is going to bring in close to 1 times their annual revenue. We are forecasting them at roughly CAD170 million, so it may be up toward that level.

One thing that we find that is a little bit unique at least within Tetra Tech's organization about BPR and the work that they do in Quebec is their projects are funded for longer period of times and are not funded just on an annual basis that we see in Western Canada or here in the United States. So while their backlog as a percentage of the revenue is quite a bit higher than the rest of Tetra Tech, the backlog actually represents a much longer burn-off period. So it doesn't really represent much difference than what we have on a given 12-month period of work in hand.

Okay. No, that's very helpful. Thanks, guys.

Alan Robinson, Royal Bank of Canada.

Good morning. I would just like to expand perhaps on Corey's earlier question. If you look back over the last five-year cycle, you're averaging something like 10% net revenue growth and -- I don't know -- 3% to 4% organic growth. But if you look at your overall growth strategy you have typically been aiming for about 15% annual growth split 50-50 between organic and acquired.

Are you starting to reshape the way you think about the long-term growth you can achieve given the way your end markets have been growing over the past few years? Are you perhaps thinking of moving away from this 15% long-term growth target?

Well, no, I don't think we are looking at moving away from it. I think if you went back and took a look at the years 2006, '07, '08 we would be at or above the 15%.

The problem was that little thing in late 2008, 2009, and this last '10. I will use this -- I will use 2010 as sort of a surrogate to your question as an example.

As David said, we had a modest growth in our earnings. In fact our top-line growth was down a couple percent in total revenue and net revenue was only up a little for the year.

But if you took a look at the quarter as we were beginning to come out of this financial challenge that existed, we were up 15% overall. So if you took a look at the year and said, boy, Tetra Tech should you modify your forecast because you are only up 2% or 3%? That is all you had for the year.

I would say -- you know what? The second quarter of the year, where we had our construction projects and a number of backend activities, shut down completely; skewed that; and gave a misrepresentation of this longer period. Because you had single -- use the word aberrations, but single events that actually took the numbers and moved them off.

I believe we can achieve it. I think that what will happen is that in periods of economic growth or in locations where economies are growing quicker, you are going to see our organic growth go up fast.

You saw that, the work that we did here in the USA in late '06, '07, '08; those were organic-driven numbers. We didn't need to buy it. We had plenty of opportunities and the Company was growing well.

In a period of economic austerity or difficulty, the programs aren't out there for us to drive easily organic growth. So what we have done is we have moved things to add additional partners through acquisitions.

In FY '11, again if you take a look, our net revenue is 15%, it is roughly a midpoint. And our EPS is up 8%. The difference between those two is just the amortization.

Okay, that's helpful. Thank you. Then if you look at the above-average growth you have experienced in the front-end over the last six quarters or so, I know you have touched on this broadly, but why don't you think that has meaningfully translated into a pickup in backend work yet?

Does this signal a permanent change? Is kind of lag something you have seen before in down cycles in the past? Could you just guide us through that a little?

I'm sorry, Alan; could you do the front part of that question again?

Yes. Just looking back at your front-end growth over the last six quarters or so, you have posted above-average growth there. But it really hasn't meaningfully translated into backend growth over that period.

Typically we look for, what, a two- or three-quarter lag there. And the lag time seems to have extended fairly significantly. Is this something unique to this cycle? Have you seen this kind of phenomenon in previous cycles? Could you just guide us through that?

Well, this has been -- I have got the question and we have seen this with a lot of clarity. We have seen that as different.

What we have seen in the past is, when our front work has come back, there hasn't been this accentuated downturn in availability of capital or liquidity in the market. So let me give you an example, and I can actually -- I'll keep it to one although I would be happy to give you more.

Wind and this alternative energy. We are working on more wind project sites doing permitting, doing environmental clearance, than we ever have. But because of a lack of availability of capital in the capital markets this last 18 months, the ability to actually take those and to provide funding for them and turn them into construction has been significantly reduced.

So yes, the front end is up. We have biologists, engineers, scientists, electrical engineers, power professionals working on these. So that is all the front-end work, design. But the actual converting those to new starts -- you haven't seen a new start come out from Tetra Tech in the better part of a year, with the exception of a very small one here in the last 60 days, the Lameque wind project in Canada and a small one in Oklahoma.

And that is not because Tetra Tech isn't winning these projects; because these projects aren't out there. And as Power Purchase Agreements get put in place and there is more clarity in the price of power -- and so if these PPAs or Power Purchase Agreement are signed with utilities that will trigger funding, which will have these to go on.

So this is unusual that the funding or the economic drivers or availability of cash and liquidity to fund these projects -- this has been unusual.

Interesting, okay, thanks. Then just finally you mentioned that you expect international to account for 25% of your 2011 revenue. What percentage will Canada represent of that 25%?

Well, probably about 24% of that 25%.

All right, that's fair enough. Okay.

And the 25% -- I will tell you I am not out on a limb on that. If you take the Wardrop revenues -- and by the way, this is revenues that are contracted for in Canada. We're at 15% that we concluded the year at 2010. We add on top of that the net revenue component of BPR, and I will tell you that puts us at 24%. So essentially all of it.

With the addition of BPR, presumably that mix will be less weighted towards energy and resource extraction. Is that right?

That's right. Actually, BPR brings us some excellent -- I will tell you, I am just very happy, certainly with Wardrop and EBA; but BPR brings us a new dimension. They have got a lot more water work. They are really a worldwide leader in DSOs or these combined sewer overflows, which are water projects.

They do have some energy work, but we would also classify it as water. They are extremely strong in hydroelectric work, so dams and hydro, water generation of power.

And their water utility work throughout Canada and other locations is just first-in-class. So it diversifies not only our geography but they are a pure water play.

In fact let me mention something I did not cover in my prepared remarks. BPR has such a high component of water engineering and consulting that they will actually move Tetra Tech's overall portfolio of projects associated with water or water resources up from 75% to well over 80% to even 85% of our revenues will be associated with water-generated activities.

Interesting, thank you.

John Quealy, Canaccord.

Thanks, good morning. It's actually Chip Moore for John. I guess just following up on that last question looking at Canada, obviously energy and mining is doing very well right now.

Can you just speak to the relative size of that part of your business and some of the opportunities you are seeing there? And then looking forward where you see that going to.

Let me start on mining, on opportunities. I don't know that I have a precise percentage on mining right now. I'll see if I can give you an approximate number.

I would say probably less than 10% of our net revenue is mining, so probably $100 million to $125 million a year on a run rate. The opportunities though are many of the major mining players -- or the mining majors, as some refer to them.

Uranium is high-growth, precious metals are high-growth, and these are all the major mining players. I won't actually mention our specific client names although we have them on some of our press material.

But what is interesting is they are not only representing large opportunities in Canada itself, but they are contracting for work around the world where the extraction is present. So this is taking us by the very nature of the clients and the work we do and the engineers we have -- we are growing presence rights now on project-related basis.

So these aren't venture exploratory offices or people we are putting in the field. These are project-related activities in Latin America, South America, and Southeast Asia, and including Australia we are just getting started. So we have a number of project offices in Australia, and we think that given the engineering shortage in Australia we are a great solution for them.

With the dollar in some instances becoming cheaper, in some instances our US mining engineers are sort of the cheap outsourcing locations for some of these places for the work to be done. So that is some of the areas where we have opportunities in mining.

In energy, actually wind. Some of our best wind opportunities for wind generation of renewable energy are in Ontario Province. So we think that that is an area that is a great opportunity.

It is our understanding that hydroelectric is actually going to be expanded a bit in Canada in order to provide additional renewable exports to the United States for renewable energy to help with climate change and carbon footprint issues.

Thanks, that's good color. Congrats.

BMO Capital Markets.

Good morning. Thanks for taking my questions. First question. So the EBA acquisition, as I recall they had about $100 million in trailing 12-month revenues when you bought them. But it looks like you added $135 million in acquired backlog. Are you already winning projects on the EBA? I mean in EBA backlog?

No, we did not acquire -- that was not the amount of backlog that came with EBA. EBA's gross revenue is around $100 million, so that is total revenue, not net.

They are about similar to the rest of Tetra Tech at like six to seven months, so probably I'd say 60% to 70% of that. So the total backlog that came in associated with EBA was closer to just over $50 million, may be $60 million-ish.

Okay.

Not $130 million.

Okay, but if I look at the -- maybe I am doing the math wrong, I have done that before. But 8% organic growth in backlog implies you acquired about I think $135 million.

I think that would have been associated with earlier acquisitions we made during the year that simply hadn't rolled off on a one-year or tracking as we account for them, not from what was added from the most recent acquisition.

Got you, okay. I appreciate that. Also people have alluded to a lowered RCM target margins. I recognize utilization is likely an issue there. But I just want to allay any concerns.

Are there any projects we should be worrying about, in terms of that might be having cost positions that are lower than additional initial expectations?

Well, we are always watching them. Our largest fixed-price contracts are there in the backend. We are always watching them. But we don't have any specific project that we have an anticipated issue with.

But there is no doubt that in any engineering consulting practice the fixed-price and the scale of the projects do represent a higher risk profile than our front-end engineering and consulting work. But, no, we don't have a single project or even a small single group of them that we see as a primary EPS driver -- although we are watching them all the time.

Okay, I appreciate the color. I will follow up with you later. Thank you.

Richard Paget, Morgan Joseph.

Looking back at this cycle -- and I guess just given your results it does seem like we are coming out of it. I realized mix is an issue, and engineering is a little bit different on the front-end than the construction on the backend.

But it seems you guys were able to hold on to pricing relatively well. So I wondered if that in fact is the case; and what does that mean as we come out of this down-cycle, with potential for upside on the pricing side.

It's interesting. The questions on the downside on previous quarters were given the challenges in the economy how much pressure is in your business; and a lot of that comes to the front side. I commented in previous calls and I will reiterate it here that the contracts that we have in place on the front-end are typically multiyear or long-term duration, particularly with the federal government. And even state contracts are often multiyear -- maybe not multiyear with respect to the task orders they provide, but multiyear with respect to the underlying contracts that we have entered into.

So the prices we have negotiated are in place. So when we have had the difficulty and pricing pressures across the marketplace, I think I'd indicated in the past our margins held up very well through the front-end because we had already negotiated our contracts and our pricing.

That is also true now as perhaps there could be scarcity. They're going to hold us to these prices that we negotiated earlier. So I will see the market perhaps have dipped or even picked up and become more robust, but a lot of these are already in place. So I wouldn't expect to see any really short-term market increase even as demand.

Now with new contracts that we have or we're renegotiating or re-competing for it, those things tend to swing up or down depending on the environment at the time. But a lot of the work that we have on the front-end is under much longer-term contracts.

As an example, and I have used this number in the past and it has actually gone up, we are closer to $11 billion in contract capacity where we have terms and conditions and contractual relationships in place; and then the underlying task orders that are given simply are governed by those existing rate schedules and other contractual terms.

Okay so -- but -- and maybe I am not sure if you can break it down in percentage. Those incremental ones that you did actually have at market rates at the time, was there a big change in pricing?

No, no, there really wasn't.

Okay. Then just quick housekeeping with the BPR acquisition. What should we think about for acquisition-related expenses in the first quarter?

We will expense them as they incur. I really can't give you a forecast.

Okay, thanks.

By the way, most of the BPR expenses are picked up in Q4.

Okay.

Yes, it is interesting. You spend all the money before you get any of the contribution. Thank you very much, Richard.

Ryan Connors, Janney Montgomery Scott.

Morning. Thanks. Most of our questions have been answered. Been a very comprehensive call here. So I guess just a couple high-level things.

First off, you talked about the wildcards for the 2011 guidance. But obviously one of the interesting sidebars here is that you also talked about the downward guidance revision earlier in 2010; but ultimately you wound up above that reduced range and really just pennies shy I guess of the original guidance range.

So just wondered if you could give us a quick postmortem on that. Just in broad terms talk to us about what the delta was between the assumptions behind that lowered guidance range and where you ultimately ended up, and what that tells us about the perils of trying to project the business even nine months out.

Great question, Ryan. First of all, we do recognize that we did finish it a penny shy of the low end of our range last year. But I assure you, nobody on this call on our side -- David, I, or anyone at our corporate office or anybody in our operations -- are targeting to be at the low end of our range. That is not where we want to be. But I do recognize that.

I will tell you a couple items that drove us to that low end were, number one, wind. Wind as an example. We had forecasted coming in about $200 million that we had actually identified projects and some we had actually been selected for coming into the year; and we ended up with about $50 million. So we -- and by the way, those were incrementally higher margins, commercial clients. And we expected that to have been a major contributor.

Uncertainty in policy, US policy, and timing of ramping up in Afghanistan actually impacted some of our front-end. But a lot of the backend work that we would do in Afghanistan, that was another item that was slow. So those are two examples that (multiple speakers).

Well, I think actually you might have misunderstood. I mean what I am asking is -- you came in well above the lowered guidance range. You went down to $1.08 to $1.18, and ended up doing $1.24.

So my question is, what ended up -- what positively surprised you to end up coming out way above ultimately the reduced guidance range back in, I guess it was January?

Well, yes, okay. The flip side of that is our front-end business was much stronger. That included acquisitions, some of the -- we didn't program some of these acquisitions in.

Although, as David indicated it was relatively modest and at the end of the year it was a contributor; but the rest of it was just very broad-based at the front-end from all three of our groups. The ECS, TSS, and EAS were much stronger.

I wish -- actually I am glad I can't put my finger on a single project or a single client. We just don't have that concentration. We are seeing it broad-based across all of our client sectors in all of those groups. So I would say broad-based performance at the front-end.

Okay. Then just wanted to play devil's advocate with a school of thought that is out there. That is, that at this point in the cycle I guess is where you would normally see more front-end work start to predominate. But as the cycle matures you would see more of the backend work come through, as you have talked about; and that is lower margin work.

So for an investor that was looking with a time horizon of two years or more, what is -- A, is there any validity to that school of thought that as the cycle matures the mix of backend work will pick up? If so, what's the ramification for your business especially in terms of consolidated margins?

Well, we talked about this before. As we see our RCM or our backend execution group grow, it will have the impact of lowering slightly our operating margins. But our EPS will go up. The volume is large and the contribution to earnings is material, and so it will drive our EPS year-on-year growth rate up.

As far as timing now of conversion to front-end to backend, we don't have a precise estimate on that. I know you mentioned one or two years out. I hope that's conservative, but we will see.

As we began to win projects, and you will see them on press releases, that is what we will drive our updating of any guidance. But again percentage of our front-end is much larger of our overall portfolio and of the backlog we have right now.

Okay. Then you mentioned briefly in your prepared remarks the state and local business, but it hasn't come up much since then. But your commentary there did seem a little more guarded than on the last few of these calls in terms of the trends in the state and local business.

Can you just elaborate on what has changed in that part of your business to drive that evolution in your thinking?

Well, let me clarify or reiterate what I was intending to say in my prepared remarks. If you take a look at our slides associated with this presentation, it shows our state and local up on a percentage basis year-over-year, up over 20% -- 26%. What I wanted to do and I will reiterate it now is -- don't take that 26% growth year-over-year in state and local as an indication that this is going to be a driver for our business or that the state and local is strengthening for us.

What I indicated before is I see it stable for us. I still see it stable. If we ex out these transportation projects we would be stable; it is around 15% of our business.

I think as that work completes over the next several quarters, I think we will come back to a steady rate. I don't expect it to soften if you normalize the work for these couple contributions.

So I think that from our standpoint our position at state and local hasn't really changed. I hope I didn't indicate that it was a strong growth area or a bright spot for us.

It is stable. It is excellent clients. On these recent quarters it has had a good percentage increase; but those increases are not representative of a growth market for us.

Super. That is good clarification. Thanks for your time.

Tahira Afzal, KeyBanc.

Hi, gentlemen. Great quarter. Most of my questions have been answered. I had one question remaining.

I assume I will find the answer of this one in your Q later on. But just trying to figure out as you look past 2011 what your amortization schedule would look like as the backlog starts to roll off from the acquisitions.

Barring any additional acquisitions we will see a 20%, 25% decrease in our amortization in 2012.

That is going to give you a nice little jump up in margins and earnings cushion, I assume.

We hope so.

Okay. Fair enough. Thank you very much.

Thank you. Thank you very much, Tahira. With that, that is our final question for today.

I would like to thank all of you for your questions. I think they really helped provide and allowed us to provide additional information to describe what we are seeing now, where we are at, and how we feel going into the year. I do appreciate your support and look forward to talking to you next quarter. And with that, goodbye for this quarter.

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