Tetra Tech Inc (TTEK) 2011 Q1 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. The number again, 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 we 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. These 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 now 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.

Great. Thank you very much, Stephanie. And good morning and welcome to our first-quarter fiscal year 2011 earnings release conference call. As in prior conference calls, we will have David King, our Chief Financial Officer, present the specifics of the financials for the quarter, but I would like to start with a brief overview of some of the key financial metrics for our first quarter.

We had a very strong first quarter of fiscal year 2011. All of our metrics were up double-digit percentages over last year. Starting with the top line, our total revenue and net revenue were up 13% and 18% respectively. And one of the metrics that I haven't presented on this first slide, I would like to introduce today. It's one of them that I use to assess our operation's ability to generate cash, and that is EBITDA which grew over 20% year-over-year and is at the highest level in more than five years.

And David King is going to talk a bit more about this and the difference in the calculation between our operating income or EBIT and EBITDA.

Our backlog is up both sequentially and year-over-year and for the first time, we finished the quarter with a backlog at over $1.9 billion and we had a very good first quarter overall and we are on pace and even a little bit ahead of our goal to grow both our top and bottom line at 15% or greater.

Our customer mix has been changing a pretty fair amount recently due to our expansion into Canada and the addition of [lining] support in our commercial sector. So let me go through our revenue distribution by customer in a little bit more detail.

Our Federal revenue was actually up year-over-year in actual dollar amounts, but this last quarter it represented only 38% of our overall portfolio and that's the first time that it's been under 40% in almost a decade. So while the dollars are up, the diversification of our portfolio with respect to Federal is broader than before.

International revenue has increased. We had forecasted that it would achieve 25%. I'm glad to say this last quarter it was 25% of our net revenues. And we are going to continue to invest and drive this number up into higher growth and higher margin markets, and in fact, we are anticipating it will reach 40% or more in the next three to five years.

We are seeing a pickup in our commercial work primarily due to mining and energy projects and those investments and strength in those markets resulted in 11% increase in our net revenue year-over-year in this market area. And state local revenue was in line with our expectations at 13%.

I would like to talk a little bit about segmentation and where revenues were coming in the different business segments we have. One of Tetra Tech's biggest differentiators is our strength in providing engineering science-based solutions at the very beginning of the clients' projects. We often say we lead with science, and this starts with our ECS group. Our ECS group grew very quickly this last quarter and it's the group that focuses on the earliest portions of a project as growth year-over-year was at 55% and now represents almost half of the Company's net revenue.

It is this group that is giving us the very first look and the first exposure to projects at their very inception. This is where we are doing feasibility studies at the earliest stages of mining projects, long before they are designed and built. This is where we are doing regional watershed studies before any designing or building of dams or other flood control structures. This is where we're doing environmental permitting before the design and the actual construction of any of the wind farms are being taken place. This is the group that we get the first look at the biggest and the best projects that we carry all the way through.

The other two front-end groups we have, TSS, Technical Support Services, and EAS, our design group, who also provide front-end technical staffing and design services, also grew this last quarter. And the three front-end service groups together, ECS, TSS, and EAS, now represent over 80% of our net revenues.

Now we are a full service provider and we do provide construction activities and the fourth group that does provide construction management activities is still seeing weakness. We are still seeing weakness in opportunities for backend construction work and that was reflected by an 11% drop in RCM's net revenues for the quarter.

As I mentioned earlier at the beginning of this presentation, we did finish the quarter with our backlog at just over $1.9 billion, and that's a 19% increase from the same quarter a year ago. It's the fifth consecutive quarterly increase in our backlog. We've done that five sequentially.

The increase was driven by a mixture of organic growth and the acquisition of BPR in Canada which give us a very large presence in Quebec. BPR contributed approximately $100 million to our backlog in the quarter, which was very significant. That number is in line with the rest of our -- generally in line with the rest of our business at about 60% of their annual revenues. We earlier had thought that the number would be even a little higher, but the actual contribution was about $100 million.

Orders for the quarter were dominated again as in the past several quarters by new front-end work with one notable exception. As we had anticipated, we received several wind construction projects just before the end of the calendar year and the timing of those awards were largely associated with the twilighting or the conclusion of the Department of Energy cash grant program here in the United States.

Now coming into the year, I had indicated that we thought we would -- we forecasted we would do about $100 million of wind-related work this year. We entered the year with about $50 million in backlog, so the addition of the $75 million in new orders during the quarter round out all of the work we need to have in hand to achieve or even exceed this $100 million target for the year for wind.

With that, I'd like to turn the presentation over to David King to present more details of the financials for the quarter. David?

Thank you, Dan. I am pleased to report the financial results of the first-quarter fiscal 2011. Again, this is a solid quarter by all financial metrics. Our revenue was $611 million. Canadian acquisition was a big part of it. On the organic front, our mining business was strong, fast growing in the US, Canada, and Australia. Net revenue was $406 million. Our guidance was $380 million to $410 million.

Income from operations was increased by 10% to $34.3 million. Our operating margin was 8.5%. The 8.5% reflected the large incremental charge call intangible amortization. Without it, the operating margin would be slightly over 10% versus 9.9% last year.

EBITDA -- Dan mentioned this -- EBITDA, 22% increase to $47.3 million. I want to point out that our financial profile has changed of late, given today's accounting environment. You start to see a bigger separation between our EBIT margin and our EBITDA margin and I will -- there will be more -- I will talk more about it later.

Let me mention a couple of unusual items for this quarter. First, as we all know, Congress extended the R&E or R&D credit through December 2011. As a result, we were able to enjoy $0.02 of tax benefit from the prior year. In addition, there was less than about $0.01 of R&D benefit that we benefited for this current quarter.

On the opposite side for the quarter, we had about -- a similar amount of interest expense that as we finish our first price accounting for EBA and BPR, it had to do with imputed interest for our acquisition-related earnout liabilities. For the quarter, the positive $0.01 offset the negative $0.01 from increased interest expense.

On the to go guidance, you also see we will benefit about $0.02 from the reduced tax rate. In the meantime, it will be offset by $0.02 increase of our imputed interest expenses.

SG&A costs increased to 7% to $41.3 million. Again, it had to do with higher amortization costs of $3.8 million. The total amortization for the quarter was $6.8 million versus $3 million last quarter. Excluding amortization, our SG&A costs decreased by about 3%. This was mainly a result of a cost reduction in our RCM group.

Tax, I mentioned all year was $10.3 million, a reduction of 16%. It had to do with R&D tax benefit. Our EPS increased 20% to $0.36. Our guidance was $0.31 to $0.33. As I mentioned, we were at $0.34, exceeding our high end by $0.01.

Accounts receivable $600 million due to higher revenue, as I mentioned in my last conference call, our Canadian portfolio of companies carry relatively higher AR and DSO. Accounts payable $152 million due mainly to lower subcontracting activity. Our net debt $65 million, it was a result of our acquisitions.

Cash flow for operations was about $9 million. It was due -- it was a great number, but it was mainly due to a timing of a payroll cycle which was accrued in Q1 and paid in Q2. The amount was about $15 million. Excluding that amount, we will be negative $6 million, which is still a great number. As you know, we typically run a very large deficit in our first quarter.

For the full year, the forecast will be $90 million to $110 million for the cash flow from operations. CapEx $4.2 million, our forecast maintained at $20 million to $25 million for the year. DOS slightly under 77 days. I talk about this about our Canadian companies. In fact, I would say 77 days is better than what I expected. And for the remainder of the year, we will run in the high 70s for DSO.

Dan and I both mentioned about the EBITDA percentage. I believe the EBIT margins in today's accounting environment is not a fair representation of our margin and even less representative in terms of our cash trends and earnings power.

For example, in this quarter, we carry $6.8 million in amortization or 1.6% in margin and another $6.8 billion in depreciation or another 1.6% in margin, totaling $13.6 million for D plus A or 3.2% in margin. There are others such as option expenses, imputed interest on earnout liabilities. These non-cash items for the quarter alone equate to approximately $0.17 in charges, $0.04 in margin, $0.17 in earnings.

For the full year, it adds up pretty quickly to $0.65 to $0.70 for the year. We believe that EBITA or EBITDA is also a good indicator for Tetra Tech's longer-term earnings power. We are now proposing to report on non-GAAP income in our margin, but I suggest that you look at these metrics to supplement your analysis. In the future, we will continue to provide (inaudible) visibility of these metrics.

Cash position, we have proved to you that our ability to generate cash and self-fund our growth. By this year-end I expect us to return to net cash position barring any major acquisitions. In summary, I am encouraged by this quarter's performance especially our strong foothold in Federal business, growth prospects in Canada and potential opportunity in mining and energy. Back to you, Dan.

Thank you, David. I would like to spend just a few minutes sharing with you what we are seeing in the two major components of our markets. First, the government, and then the commercial and our international clients.

Here at Tetra Tech at the very core of who we are is that we are a water and energy company focused on developing solutions for our clients in these areas. Over the past two years, we've seen the United States government increasingly focus their procurement on the efficient use and energy of water in all of their programs. I'm going to give a couple examples of those in just a moment.

But as one of the world's leading consulting and engineering firms in water and energy and as a major contractor for many different branches of the US Federal Government, we are in an excellent position to address these funding priorities where they are taking their programs.

Let me give you a couple examples of these. First for the Department of Defense, we are managing their storm water programs, reducing their waste, reducing energy use, and identifying alternative energy sources for the different facilities. One of their programs are they are looking to go to a net zero program and these are net zero energy used in the buildings. They will generate as much energy as they use.

In net zero water use, they will recover and reclaim and recycle water and net zero waste discharge. As they move to these programs, that is exactly where Tetra Tech's core heritage and strength is, so we think we are in an excellent position here.

For EPA, we're working on the most critical water management programs. You have heard this in the past and these include programs like Chesapeake Bay, the Great Lakes, and the other large waterways of the United States.

And for USAID, we are working on water supply and energy service programs in priority countries for USAID for the Agency for International Development in their priority countries like Afghanistan, Pakistan, and Indonesia, and we've seen these strong and we've seen them actually increase in priority for the government.

Now, based in the Federal Government's spending priorities, some of these I've just outlined and we are currently supporting these, we expect to see our Federal Government work remain stable.

In the commercial and international sector, I'd like to start with mining. In the mining industry, water is an essential resource that touches essentially every phase of the project lifecycle. Without water, most mining can't be performed.

We are using Tetra Tech's expertise in water supply, water treatment, reclamation, which is the recovery and treatment of the waste in the mining process to expand the services that we are offering to the mining industry. We are using this as a primary differentiator to get in with these clients and then we are offering all of our services.

Now this is the fastest growing sector in any of the businesses that we have right now and I've set what some of our operations consider an ambitious goal. It seemed reasonable that our mining practice would double or triple its revenues from about $150 million a year today to over $500 million a year for the next three to five years. And in fact, I've asked our mining leaders to see if they can beat that three-year goal and I've gotten different opinions? I said, no problem. But this is a fast-growing area for us.

The next area that we think is emerging is energy and water is also an absolutely essential resource in the production of certain energy sources. So we are focused on bringing our technical capabilities and expertise in water into three rapidly growing areas of energy production.

First, hydropower. Obviously you don't have hydropower without water. And the addition of BPR in Eastern Canada in Quebec has given us the critical mass to pursue very large scheme hydropower projects. In Eastern Canada, the Quebec area, these large steam Hydro projects, these are like 1000 megawatts and larger, we have the ability to now pursue from the front-end from water resource management, watershed flooding areas, environmental impacts, design. We can even do the self-construction management of these.

In Western Canada, it's a much different market. Many, many decentralized small sized hydro projects. There's literally -- I've heard the numbers up to 1500. In Western Canada, that is primarily in British Columbia and these are to support remote city locations and mining locations.

And hydropower capability we have, we can actually follow our mining clients to Latin America, where hydropower projects are actually emerging. And we can support these projects in remote locations throughout Latin America.

With the addition of Fransen, we announced this about a month ago and they've joined us just this week. We closed the acquisition of Fransen last Friday. We are very happy to have them on board and now for the first time we have both contracts and relationships in the oilsands in the Canadian region of Alberta.

So we expect to take our water expertise and other engineering and consulting capabilities and become a primary provider to the oilsands.

From our existing base of operations, primarily here around the United States in the geographies that overlie the Marcellus Shale Fields, Haynesville, and the other major shale fields across the country, we are in an excellent position and have the capability to support this natural gas production from shale. We are already supporting some of the early development of shale gas and as natural gas prices increase, they hit up around the $5.50 or $6 level, we expect this to be a large contributor to the Company. And that's both in water supply and the water treatment that comes out from the production of natural gas.

The strength that we are seeing in these commercial and international areas have provided us additional visibility and confidence to increase our guidance for the entire year. So let me start by presenting our guidance both for the second quarter and then for the entire year.

For Q2 fiscal year 2011, our net revenue guidance is a range of $375 million to $405 million, with an associated diluted earnings per share of $0.25 to $0.29. I'd like to take just to moment here to put our earnings per share and our revenue in context of the entire year's production.

As Tetra Tech has expanded internationally into Canada, as we've gone north, we have actually created a bit more of a seasonal -- I don't want to call it impact -- but a seasonal effect of our revenue and our earnings cycle through the year. We will be doing less work in the winter months of January, February, and March, because of the work that we're doing in Canada.

I expect that second quarter will be our lowest revenue and income both this year and in the future and I do not find this unusual or an anomaly nor effect the overall production during the year. However, you will see a bit of seasonality both in our forecast this year and I believe in the future.

Based on the strength in the markets that I've covered here just to moment ago, our net revenue for the year, our fiscal year 2011, will remain at $1.6 billion to $1.7 billion, but we've increased our diluted earnings per share for the year by raising the low end from $1.28 to to $1.32. So we've increased it by $0.04 and we raised our top end of our guidance from $1.40 to $1.42. So resulting in an updated guidance of $1.32 to $1.42.

David had covered this in a fair amount of detail, but I would like to repeat this. Our fiscal year 2011 assumptions include an estimated $0.28 of intangible amortization for the year, $0.11 of stock compensation expense, effective annual tax rate of $0.34 but for those of you calculating or modeling the tax rate for Q2, Q3 and Q4 it will be 35%. If you are following the slides, you can see that.

And we've assumed an estimated 63 million outstanding shares, diluted outstanding shares.

In summary, we had a very good first quarter and a very strong beginning to fiscal year 2011, driven by the excellent performance on the higher margin and the higher front-end services that we're having both from the commercial sector and the international contracts that we have primarily in Canada and locations that those clients have taken us internationally.

The international acquisitions have diversified our clients' mix very favorably. We have not reduced the amount of work we're doing for the Federal Government, but as a percentage of our overall portfolio, it has come down.

And the international work in Canada, isn't just in Canada. It's where we've contracted it for, but these clients have taken us to locations like Latin America, Australia, and Asia to support some of their mining and energy projects.

As I had mentioned, I do see our US Federal revenue as being stable as I believe where the shifting of the funding priorities is going. It is going to where we actually provide the best service in the contracts that we have.

With our increasing backlog and new business opportunities, I was glad to be able to both increase our guidance and expect a very strong fiscal year 2011.

With that, operator, I would like to open up the call to questions.

(Operator Instructions) Will Gabrielski, Gleacher.

Thank you. Good morning, guys. I have a few, so please bear with me. But the wind quoting activity and wind coming back maybe a little more quickly than you thought, is there a pipeline for more of that from here? Why would you say that came back maybe a little quicker than you expected?

Let me clarify that. I would not want to convey that wind has come back quicker and that we see an increased pipeline. We had actually anticipated that we would have early contracting at the end of the calendar year of 2010. The twilighting of the cash grants that some of the Department of Energy cash grants allowed 30% cash payment of the total wind project or the energy project.

And so we did expect that there would be a early or contracting associated with the end of that program, which is the end of the calendar year of 2010, which was our first quarter. So that's why we believe that that came in. We still do have some opportunities, but we don't expect that to be representative of the remainder of the calendar year.

Okay, thanks. If you go through the segment margins, excluding RCM, all were at our above I guess the high-end of some of the targets you've laid out in the past. What's driving that? And can we expect that to be maybe the trends with the mix improving or I get shifting a little more internationally towards your Canadian acquisitions? Just some color on that would be helpful.

Sure, sure. Let me go through the top three. In fact, I will go through all four, because I think it's good to give you some insight into clients' markets and margins.

First, ECS was right about in the middle of what we expect. They -- typically 10% to 12% is our range. They were at 11%. That is where most of our Canadian -- in fact all of our Canadian operations are located in that group. I expect it to remain right in the middle and to be strong for both the outgoing quarters and the year at sort of an 11%. So right in the middle of the range, maybe even slightly higher than the middle of the range.

So I would say there's no outlier there and just great performance. Both the TSS and the EAS were at actually above the upper end of the ranges that we expect at 13%, 13.6% for TSS and 9.1% for EAS. Good performance, good amount of work, but they did have project close-outs that took place at the end of the first quarter where we had favorable closeouts and pickups that drove us above our anticipated margins.

I would not expect TSS to be at 13%, nor EAS at 9%, although I do expect them both to be at the upper ends of the ranges that we've listed before. I will repeat those now so that you can understand those.

We expected 9% to 11% for TSS. I think they will be at the upper end of that for the year, these outgoing quarters, but not up at the 13% level. And EAS, strong performance, we've looked at 6% to 8%. I expect them to be at the upper end and maybe even slightly above but certainly not for the year in the 9s or better.

And then for RCM's, since you're walking through the segments, the run rate there.

Yes, I am glad you reminded me. They are experiencing -- we are experiencing pressure in work opportunities, and so as the revenue continues to drop, we will see pressure on the margin. We are rightsizing the back office and G&A commensurate with the workload and I expect that to show pressure. We saw this last quarter at 5.9 was one of the lower margins you've seen in a while and I actually see it testing that level and even a bit below here in the next quarter or even two. So I'd expect that to be under pressure.

Okay, then lastly, you guys did a good job highlighting the difference between EBIT and EBITDA and what's driving that. What's the pace of the amortization roll-off that we can expect from these acquisitions -- from EBS, BPR specifically?

Yes, we expect this year to be about $28 million including Q1. Next year is going to be about $19 million and the following year is going to be about $10 million.

Okay, great. I appreciate it. Thank you very much.

Alex Rygiel, FBR Capital Markets.

Nice quarter. Quick question. With regards to backlog, could you give us a little bit more color on the mix of backlog either across your end markets or across your different business segments? And directionally how that has changed over the last three to six months?

It's still been actually in line with what we've seen with our revenues. The backlog has come in generally in line with the amount of work we've been doing in the different segments with our clients, with a heavier emphasis on Federal.

Interestingly enough and if you follow the webcast on the sheets, USAID at the Federal level was one of our strongest sectors with respect to orders in the quarter. And so USAID was the single largest and in fact, we see some very continued favorable trends there. So you can look for additional press releases if in fact these come to pass. So that looks strong.

I'd also like to just state -- I have received a number of questions over this past quarter on USAID. We have not seen any of our programs canceled that we have in hand. We have not seen our put hold. We've not seen any of the procurements withdrawn and we've actually seen strength with respect to notifications of additional procurements coming out from USAID for Pakistan, Indonesia, and of course, Afghanistan. So that was the biggest single contributor.

I talked about wind, $75 million in wind for the quarter was a pretty good number and it was not any single large project, but a handful of smaller ones. And the rest was really made up of a lot of mining projects on the commercial sector.

So I would say if there's something that shifted, commercial has moved more to mining. Federal Government had moved more to USAID, longer programs, and energy has been pretty diverse, with wind being strong for the quarter.

That is helpful. And secondly, as it relates to your acquisition program going forward, should we think about new geographies or new end markets? Or should we think about backfilling existing geographies and end markets?

Well, we are no doubt we are focused on international expansion. We have a solid pipeline, lots of opportunities out there. We're going to remain disciplined certainly going to certain geographies, really test our metal with respect to remaining disciplined on our multiples.

It has got to fit our strategic plans, we are not looking to go outside our knitting so to speak, or our core competencies. But we are going to be focused on international expansion, where we are seeing greater margins and greater growth.

And as I had said in my prepared remarks, we expect our international business to grow from its current 25% up to 40%. A fair amount of that will be organic. We can carry through our Canadian activities overseas, but no doubt acquisitions will be a big component of that too.

When you think about organic growth over the next three years, could you give us maybe a range of what you think the organic growth rate could look like in the US versus the international market?

Well, my crystal ball for the US is probably as clear as most, which is a little fuzzy. I believe the core Tetra Tech and the work that we have, the US organic growth rates will be lower. I expect they could be at -- I do believe they will at something a little bit better than a US GDP level because of the markets that we are focused on. It's not just one homogenous marketplace.

But I do think that -- so you could be looking at or US maybe low single digits, 2%, 3%, but I think that the work we're doing internationally could be up maybe 10%-ish.

Excellent, thank you very much.

John Quealy, Canaccord.

Thanks, good morning. It's Chip Moore in for John. I was wondering if you could talk a little bit about the hiring environment in energy and mining specifically in terms of recruiting and maintaining talent as you look to expand those areas fairly aggressively.

Great question, great question. A couple of moving pieces there. We do see a difference in energy to mining. Mining is beginning to be a tighter market and we do see a difference in geography with respect to mining hires. We do see the Canadian market moving to be more scarce, top mining talent in Canada.

Here in the US, it's a bit more available and so it's working out well for us now as the work that's being brought on in Canada not only being performed in Canada but also being augmented by our staff that we have here in the US. And in fact, I've heard from areas such as our staff in Australia and others they consider the United States mining staff as a low cost service center to provide that work.

So here in the US, not so tight. Canada pretty tight. We have not seen that type of -- I don't want to call it lack of availability -- but that type of pressure on the energy side, we still seem to have plenty of resources in the marketplace there.

All right, great. That's helpful. And then just lastly, as you look out three to five years at those targets for those groups, how should we think about that broadly from an organic, inorganic perspective?

Organic, inorganic, let me talk about or let me share with you our sort of three- to five-year -- you're talking about what they're going to look like. Let me talk about the mix of our business with respect to clients. Then we can back into how we would get there through a combination of organic and acquisitions.

You know our current mix. Current mix, 38 Federal, 25 international, almost the same number commercial, and 13 state and local. Our three to five years from now I would like to see our business we call it a 40-30-20-10. 40% international, 30% Federal, 20% commercial, 10% state and local, and while those numbers sound nice and clean, 40-30-20-10, we actually have looked at these from where we are going as a Company. We think that they give us the right mix of margin growth, stability here in the US and diversification of our portfolio.

So I think you'll see us sort of move to those types of numbers here over the next few years.

Great, thanks.

And just to answer your organic acquisitive, our goal is that they would be roughly equal, as I had mentioned in my prepared remarks, we still remain focused on a 15% top and bottom line growth rate. In difficult growth rates such as here in the US, you'll see a bit more of it in short-term and acquisitions, but as certain economies recover and as we get more exposure to those, you will watch organic go up. So our goal, though, remains about half and half.

Andrew Wittmann, Baird.

I wanted to dig in a little bit more and kind of decompose the guidance. Just as I kind of look at the guidance increase here, it looks like math would suggest about $0.06 of benefit just from the tax benefit, the tax rates change; $0.04 the other way on the increase in the amortization, so there is $0.02 hit or a $0.02 benefit right there. Is that a fair way to look at it?

What does that imply for the $0.03 beats at the top end of your 1Q guidance? Does that imply that maybe the back end of the year the last three quarters are now kind of forecasted to be lower than originally expected?

Andrew, I actually think I'll ask David to go through it. But you have materially overstated the tax benefit. And in fact, I'll have David go through that, but at the highest level a $0.02 retroactive tax benefit from the prior year and the remaining tax benefit for Q2 through the remainder portion of the year is offset only with the imputed interest charge, so there's no net effect. So all of the remaining portion of the guidance is increase associated with operational performance, and that was what we -- what drove our increase.

But, David, I will have you go into a bit more of the detail.

Well, we mentioned in our prepared remarks, tax first-quarter is about $0.02 and the $0.03 is actually offset by increased interest charge, so that's $0.02 incremental from prior years. On a to go basis, there will be $0.02 benefit from tax. There will be again an offset $0.02 increase in interest costs. So again, I mentioned earlier, they are pretty much effectively offset each other.

On the amortization last year was $13 million. This year we plan $28 million, so the first quarter was roughly $7 million and incremental was roughly $4 million.

Okay, so the rest of the year tax is $0.02 and so that's not as much benefit as the $0.06 that I was forecasting. Okay. That makes sense.

I want to just dig in a little bit into the strength that you are seeing in the front-end of the engineering market clearly where you guys are very well positioned. What is kind of your outlook? Are you seeing continued front-end work or are you seeing project progressing through the cycle? When do you expect that the backend RCM segment might be starting to see some of that benefit? Is that this year do you think or is there just not enough clarity that it might be further out?

You know, at this moment we're not giving any estimate of when we are going to see it convert to actual constructible projects. We have not incorporated into our guidance any material uptick, I'll say that. If in fact if it does take place and they actually move to construction and it's largely driven round capital expenditure programs or CapEx, we do think that the Federal Government, we've seen a softness on backend construction projects there. Our guidance has forecasted it will remain soft and that we see no appreciable uptick here in fiscal year 2011.

As soon as we see these move into new opportunities, which we have not seen a material uptick, or if we see them not only opportunities but then our success, you will see them move to backlog. You will see us announce them. Then we will begin to move into timing with respect to how that would convert into revenue and then guidance. But we don't see any material uptick at the backend.

Just to address the front, the first part of the question, how is front-end opportunities and how are they progressing? Lots of studies, lots of valuation, lots of putting projects on the map. We actually expect some of the mining projects to move into construction. That's not an area that we've been big at the backend yet and we're looking to explore how we can do that. But we don't see any softness at the front-end through 2011 and really even off into the future beyond that.

Okay, that was actually very helpful, thank you. And then a final question just on the state and local business. Can you just talk about what you think is driving the more challenging marketing conditions there? Is that really a funding issue? Is it maybe the fact of stimulus burning off? Can you just give us a little more clarity or commentary about what's going on or what you're seeing there?

Yes, we've actually seen -- I hate to use the word stability because it's fundamentally a weak market, we don't see it coming back. We did see a reduction in the first quarter of our state and local from a year-over-year. It was associated with a single transportation project we have in the Northeast. If you took the single project out of our year-on-year comparisons, which was shut down for the winter activities, we are flat. Most of the programs we have are regulatory-driven and so they have fixed times, fixed expenditure requirements and so we expect that 13% of our revenue to be relatively stable.

We are not involved in large CapEx or road transportation projects or large wastewater treatment construction programs that are probably more vulnerable to funding cycles. So that's not really the market we are in. The regulatory-driven programs we have actually look pretty stable at the state level.

Great, thank you very much.

Ryan Connors, Janney.

Thanks. Good morning, guys. This is CJ Purtill filling in for Ryan. Looking at the 25% international contribution, can you give us a sense of the breakdown there between projects funded by government and private entities? And then as you look out to that 40% target in a few years, what you think the makeup will look like at that point?

It's about -- probably 70/30, 70% commercial on the international work and 30% what we call government up there. So it's not US Federal but 70/30. Of the 70%, most of that is in the mining sector. Although we do have a pretty good energy component of that in hydropower and I think that as of this telephone call, we have zero revenues in the oilsands, but we expect that to increase here both in second quarter and out through the year.

I expect that to remain similar. If anything, the commercial may grow faster. We'd like to grow our government work that we're doing overseas, but really it's going to be the commercial work that's going to drive us and that's both on the energy side that I outlined in the presentation today and the mining side.

I guess sticking with Canada, the seasonality that we -- that you talked about in the press release and in your formal remarks, can you kind of describe the type of conditions that are favorable to operations up in Northern Canada and what we should be looking at to gauge how things are progressing?

Well, the big period for the work, I know that we did have a little bit of work in our northern operations with the ice roads, so there are some niche areas that contribute in the winter. But for the most part the work that's taking place in a lot of the mining locations that are a little bit farther south certainly in Saskatchewan, are significantly curtailed during the more severe winter months.

So I know that the big uptick, the big months are August, September, October, so really starts ramping up quickly in late June, but then sort of mid-summer through fall is when we see a material uptick, so that would be our historically our fourth quarter for the Tetra Tech prior to the Canadian exposure was large. I think fourth quarter will become even bigger with the Canadian business that we have now.

All right, great. Thanks, guys.

[Mike Rittenbahler], Piper Jaffray.

Thanks for taking my question. One, I was wondering if you guys had looked at how much of the revenue exposures -- as you expand internationally, it seems like more of the exposure is going to be tied to commodity markets and I'm just wondering if you've tested your model on how sensitive revenues could be to swings in commodity prices especially in mining and oil and gas?

We have looked at that and if you -- I would maybe take you back to one of the slides that we presented. We are looking to diversify the exposure that we have within the commodity market of mining to different aspects, so for instance uranium is an example. That isn't necessarily going to be driven by building or construction. It's a long-term energy play.

And so as the nuclear facilities in China and India and the Middle East progress -- and that doesn't even include having to provide additional stock here in the US, that provides us a natural hedge against construction activity that might be associated with aggregate and some of the other materials.

Some of the work that we are providing in coal, I will use as an example. It's not from the energy side, but it's actually from the reclamation and the restoration side, so acid mining drains, surface waters that have been impacted by coaling activities should actually be sort of countercyclical as they begin closing down coal fire power plants, perhaps less coal. There be more reclamation work that takes place. So we've looked at that.

We are actually increasing a little bit in what we call precious metals, but that would include gold, platinum, and other minerals, so we actually see these rare earth metals be actually increased in exploration, so -- and that's different than construction. Those go to electronics and other specialty production.

So we actually have looked to balance our portfolio across the commodity side to make it less singularly dependent on any one of these.

I will also mention that the other areas internationally that will grow, it's not just commodities but it is on the energy side and we think that these will progress independent of even just purely construction activities. So things like hydro and some of the others that I listed.

Okay, thanks, that's helpful. One other follow-up is that I think in your prepared remarks you mentioned that BPR contributed $100 million to the backlog. Did I hear that right? I guess what I'm trying to get a sense of is the contribution of the acquisitions that did quarter-over-quarter or backlog increase.

That's right, about $100 million in backlog from BPR and it was the only acquisition that contributed during the quarter.

Okay, great. Thanks.

John Rogers, D. A. Davidson.

Dan, your comments on the mining business just as I look at these various customers, are these mainly project contracts that you have or do you have contracts with the parent companies? I'm just saying about as some of these companies are looking to grow their operations.

Both. We have projects for the mining customers at their mine sites and they are both to support the sustainability component or sort of the M&O where we are doing on-site engineering work for tailings in control of our water supply at the mines and management of the waste. But we also have -- and this is actually a portion that's increasing for us -- strategic alliance contracts where we actually support them at the corporate level from augmenting engineering staff and actually becoming partners with them.

These are nice assignments because they are dedicated staff that cover their entire portfolio and not any individual project. So the answer to that is both.

Okay, that's helpful. As far as the oilsands work you mentioned, it sounds like you've gotten some additional projects there that should start to ramp up second part of the fiscal year. How big an opportunity is that for you?

Well, let me talk about what we have, describe very quickly what we have now and then perhaps what we hope to have. Fransen is focused primarily on existing operations within the oilsands. They are working for the large majors up there and you know who those folks are, the Shells and Suncors and the folks that are the producers in that area.

And it's primarily on tailings management, very large programs and the waste material that comes out from the oilsands production, basically everything that gets discharged other than the oil has to be contained in these enormous (inaudible) and it is everything from the mechanical design of the pumps, the pipes, the containment, that's the work that we're doing currently, what Fransen is doing.

We are looking to bring in the rest of the Company's capabilities to begin to offer solutions such as water supply, which is something new, where the water was coming from, recycling of the water, treatment of that waste, not just containment but treatment, and all of the other aspects for it.

So it's a little bit early for us to give a specific forecast on what oilsands is going to be because they have been with us now four days, but it is an enormous opportunity up there and I would expect over the coming quarters to have more clarity on that.

Okay, then just one more end market specific. In terms of the shale gas work, how much -- how big of a market is that for you now? Because we keep -- or I keep hearing stories about those major projects coming down. I am just kind of -- could you give us a little more color on the opportunity there and when we might see it for Tetra Tech?

Well, it's a pretty small component of our revenue right now. On a run rate for the year, it's probably $10 million-ish something like that, so it's a very small number. But we think that it's -- I hate to use the word directly tied -- but largely tied to the price of natural gas. So it's hovered in the $4, mid $4s. We've seen it touch the high $3s. At those numbers, it's not a large driver for this energy source.

But we see as the number moves, the number internally that we understand is 5.5 to 6. When you move to those types of numbers we expect that this business will pick up a lot. We are well positioned and our focus is on providing water, water sources, identifying water sources, the permitting of these extraction locations, and the biggest part we think is ultimately going to be the treatment of the water that comes out of the shale gas production.

Yes, okay, but you are not doing any treatment at the current time?

There is actually relatively little. The scale of the gas production right now is still very early and very low and so the investment in either single point collection treatment or decentralized wellhead treatment just isn't economical until the volumes go up. So there's been a lot of trucking and piping, but as the volume goes up, I think that may become less of a viable alternative.

Okay, thank you. One other quickly, just what was a large infrastructure project in the northeast?

That is a transportation one. We've talked about it. We don't call out the individual client, but it's one we have had for the past couple of years. We've got about a year or so left on the project and this is just a winter shutdown.

Okay, great. Thank you.

Avi Fisher, BMO Capital Markets

Good morning. Dave, you've been talking about $0.02 in interest expense. I'm just trying to understand what you mean by that. I'm a little bit confused.

I'm glad you asked this question. When we buy companies in today's purchase price accounting, we have to estimate in the future earnout payments. And in the future earnout payments, we have to use our borrowing costs and discount them back. And so you see our substantial increase, our interest costs and they are not true cash interest expense. They are part accounting interest expense. That's what I was referring to.

And let me add to that. I expect our total interest for the year -- I want to put this to you and others -- to be around $6 million. Let me explain that. We talk about acquisition-related earn-out liabilities and including interest and that's about $2 million plus for the whole year.

And again, this is not a cash interest. This is just accounting charge. Second, we plan to go out this quarter to refinance our credit line to support our growth and timing is very favorable. We're going to get very good terms, but the pricing will be higher than what we have today, which is substantially below market. So that effectively increase our interest costs to about $6 million and that should be factored in our guidance as I mentioned, when we talk about with Andrew at Baird earlier.

Yes, that's very helpful. I appreciate that. Also you mentioned $100 million in acquired backlog. If I back that out of your bookings, it was a good -- not a terrible quarter but it was below 1 book to bill. I was wondering if you could talk a little bit about the order environment, what you are seeing? Is that volume of projects? Is it pricing? A little color there would be appreciated.

Well, the first quarter of our fiscal year is typically a down quarter or a reduction in our backlog or orders and the reason is the biggest source of orders is the Federal Government. After the end of the fiscal year, which is September 30, October 1, the Federal Government generally goes through a hiatus or a much reduced funding level of orders. So then they all but closed down from more or less Thanksgiving through the end of the year. So you have two effects.

One, they push through all of the end of the year funding up through September, which is why Q4 is typically a big orders month. If you look back historically, our Q1 is generally down. So if you took out all contributions from acquisitions, you would've seen that sequentially, we would have been down 3% on backlog, but that's actually a less of a number than we would have normally expected at this time.

So the book of business other than construction projects was actually very, very strong and even in construction, I will give it one attribute which I identified during my prepared remarks. The wind projects at the end of the year were kind of the notable exception. That was kind of nice to see.

So it sounds like you are a little more optimistic about your second half bookings opportunities than you were last quarter.

That's true. It is absolutely true and the one thing -- I will restate what I said just a few minutes ago on an earlier question. We increased the guidance because of our increased confidence in these out quarters both here in the second quarter and the out quarters. It's not a tax-driven increase.

If I felt that our bookings were looking soft or I saw more uncertainty on the horizon, other than maybe to $0.02 tax, we wouldn't have touched our guidance.

Yes, speaking of tax, the 35% tax rate, what's driving that? Is that sustainable into 2012 as well?

I have mentioned this in several prior quarters phone calls. We have been working on our tax rate for several years and so first is we look at our state tax rate and how to be more efficient on the states because we touch many, many states. We are now at a level that's quite efficient and we have done various other things including R&D and R&D in many ways will benefit roughly at a high level about 2 percentage points.

And so we do foresee the longer-term rate roughly at 35%. And not a small piece of it actually has to do with our Canadian [order] companies, they enjoy lower rate than our US counterparts.

Got you. And again, you alluded to this before in terms of USAID and you have -- it sounds like you haven't seen any impact, but do you have a sense of whether the work you are doing there has been viewed as inherently governmental and it's just taking time to flow through or is it generally viewed as not inherently governmental, therefore unlikely to be touched?

I think it's not inherently governmental. I think that we are not staffing their programs at the program level. We are actually doing individual project work out in the field and that's not inherently governmental. That is work that they would contract for to be executed in our discrete programs.

These discrete programs may be two, three, four, five years long, but we do not see those as inherently governmental and not at risk from that standpoint.

Got you. I appreciate you taking my questions. Thank you.

David Wells, Thompson Research Group.

I guess first off, if we look back at the last conference call, it sounded like your previous expectations were that the wind business was the real swing factor maybe from the bottom end of your revenue guidance to the top end. And here we are first quarter, saw some nice wins in the wind business but you stood pat on the topline guidance.

So I guess I am trying to understand what are you seeing out there that would make you want to keep things there? Why not go on and move the topline guidance along with the bottom line?

Well, I think I had indicated -- I will have to go back and look at my comments from the previous conference calls. But coming into the year, we had estimated about $100 million in wind. $50 million was already provided in orders and so I think the amount that we have had potentially swing with respect to wind was only $50 million and I think that's off the table. So I never was -- we never had a $100 million exposure on wind for the year because we came in with half of it in hand.

Certainly it would have been one of the pieces at risk and I would've highlighted it only because of the very large volume we had done with wind in 2009 at well over $200 million. So it simply identified it as a continued risk factor and that was one of the drivers as to the variance in 2010. But I would actually characterize it more broadly as backend construction projects and it's still weak.

If we don't continue winning some work, we still do need some new awards to come in and book and burn in 2011, and variability there within RCM, the construction group, does create -- really all of the variance both at the top and bottom end reside there. We think we've got a lot of stability and visibility in the first three segments.

So I would say wind now has come off, so there's one less moving piece, but there still is some uncertainty in the RCM group.

That's helpful. I appreciate the additional thoughts there. Secondly, if I look at the balance sheet, assuming you hit your cash flow targets for the year, you finished the year -- getting back close to a net cash position, and I guess this is maybe even tied into the acquisition outlook. How are you thinking about the leverage of the business overall? And given the fact that it sounds like mining is an increased focus for you from an acquisitions perspective, I think you are probably not the only one looking at some of those assets.

So what gives you the confidence that you're going to able to use the balance sheet effectively to acquire in a disciplined fashion in that space as well?

Well, David has told -- they had a (inaudible) M&A activity myself. If we find the opportunity, he will get us the money. But being the discipline with respect to -- there's no doubt that there is competition. We're not the only ones to know that this is a good market, but the one thing that we are seeing is the people that we are teamed with today and their subcontractors and partners today are our acquisitions of tomorrow and the people that join the family.

And so most of the deals we do or most of the firms that have joined Tetra Tech are negotiated deals. These are people that we've worked with for many instances many years. We know them in the marketplace. We've worked together as teaming partners and even joint venture partners and this isn't a go to the market and sell to the highest price on a competitive auction basis.

These people that join us are not looking for -- I am not going to say they're not looking for the best price because we want to give them the best price, we want to give them the best value for their company. But they are also looking to stay with a company and be part of an organization that's going to give them, their company, their employees, and all of their staff a better future and career. And so those are important aspects too, and we see that pipeline still plenty full.

Great, thanks for taking my questions.

Tahira Afzal, KeyBanc.

Good morning, gentlemen, and most of my questions have been answered, but I had a couple of thematic questions. Main one being if you look at your outlook, you've talked a lot about mining and energy, and those are exciting opportunities. But could you talk a bit about what your underlying assumptions are on the three- to five-year basis, on EPA regulations in regards to toxic substances in drinking water?

As you know, they talked a lot about perchlorate just yesterday. And then perhaps any opportunities you might see from potentially EPA regulating cooling towers on the power side as well.

Well, I did see that perchlorate is looking to be a regulated compound and perchlorate, (inaudible) chromium, nutrients, there's a whole host of what we refer to here as emerging compounds that are going to be regulated in our dripping water supply and they are primarily going to drive the largest revenues through the state and local business if you looking out maybe three to five years.

As these regulations get promulgated at the EPA level, they will then slow down to the states that will require modifications or upgrading of the actual treatment plants or the water supply facilities.

In the shorter term, we are doing more work with the EPA in the science side of the business. It's relatively small dollars, but it is -- we do have toxicologists and fate and transport modelers and chemists that are evaluating both the feasibility and ability to treat to these levels.

And also we are supplying monitoring support through the bays and rivers and surface waters of the country. So relatively small dollars, but continuous at the Federal level in the next one, two, three years as these move from proposed to promulgated.

And then at the state and local, the requirements will generate much larger opportunities. But you are right to characterize these as thematic and out a couple years.

Thank you. And I guess the other question I had is one of your larger E&C peers, [Jacob's] commented on water essentially being one of the safer areas in terms of funding both of its linkage to direct rate increases. So I would love to get a sense from you of what you're hearing on rate increases and if there are any regional preference where you are seeing rate increases go up more than other regions? Thank you.

Well, we see the workflow stable. How that converts to rate increases, we really haven't followed that and I don't actually have an opinion on how that's going to translate into individual rate increases. There is lots of different moving pieces there and I might defer to the actual water utilities who work with the water commissions who provide either their ability to increase them or not and there's lots of different factors that go into that. So I would defer to our water utility friends in the marketplace.

Thank you very much.

Michael Coleman, Sterne, Agee.

Good morning. I don't think this has been covered, but maybe it has. In terms of the two wind projects, I guess the one wind project that you are working on in the quarter Keenan II, do you have any -- do have an update for where those projects stand relative to the amount of work that's been completed and kind of the timing of it and so forth?

Well, the -- Keenan II is finished. That project has been delivered, so that one is over. And the other wind project that we press released here a few months ago was a project in Canada, a wind project that we press released. It's currently underway and has a delivery that coincides sort of with the end of our second quarter, beginning of our third quarter. It's progressing and it's under construction.

The other, we haven't actually called out any other single wind projects. The rest of them are just many other smaller projects that in fact were embodied in the $75 million of new orders that were listed on our presentation today and are at the very beginning of those projects. In fact, we will just be starting up here in the next few weeks to the next month or two.

Okay, a year ago you restructured the RCM division and took down headcount and so forth. Is that restructuring completed or is there more to go with respect to wind, with respect to your wind operations?

The wind operations we have actually right sized, so we brought it down. So we are staffed appropriately for the amount of work we have for wind. But I do want to address RCM at a more consolidated level, because wind is only one part of it. In fact, a pretty small part of it overall as far as revenue contribution.

We will and the individual who runs that group, continues to shape and to adjust his support staff based on the amount of work we have. And so I would say that that is a living process and will continue as the market adjusts the amount of work we have in place. So to say it's over, we're going to continue to adjust. And based on the recent reductions you've seen, we've continued to adjust our headcount and our back-office G&A support accordingly.

Okay, but no charges that you will call out with respect to those adjustments?

Not with respect to adjusting or rightsizing the business. We're not going to -- we don't envision taking a charge because of staffing adjustments, and I think you may be referring to a year ago this quarter, the second quarter, we did take a charge for a staffing adjustment for severance and other separation fees. We don't anticipate that this year.

Okay, thank you.

Alan Robinson, Royal Bank of Canada.

Good morning. Regarding your USAID work, are there any opportunities to leverage this work into non-Federal overseas work? And perhaps related to that, do you see any opportunities in emerging markets?

We do. We do. In fact, one aspect of USAID and US foreign policy has been to provide funding directly to the countries that are doing with -- that they would lead some of the infrastructure work and so some of the teaming and joint ventures and partners that we have in some of these emerging countries give us an opportunity to do that type of work. So we do see leverage there.

We do see there is another Federal entity that we would look to be a contributor, an export import bank. It's one of the US entities that is looking to have US, encourage US services and manufacturers to do more work as exporters. That's another area that we think we can move adjacent.

And in-country work, though, we will maintain a very high vigilance on who we contract with because we are really, really focused on not getting into receivables or some type of contractual position that David can't keep our DSO in the 70s or lower days. So there are opportunities out there, but we do want remain disciplined. In fact, there may be more opportunities than we are willing to actually transact for contractual and risk reasons.

All right, understood. Then without wishing to flog a dead horse here, could you just clarify for me has the midpoint of your pretax earnings guidance increased or decreased since the last call?

Increased.

Okay, thank you.

Okay, thank you very much, Alan, and actually thank you all for your questions. I wanted to -- I know we've gone a little bit longer today but I wanted to make sure that we were able to address all questions and all that were in the queue. Thank you for the questions. I think they were insightful and based on the types of questions, I think you have a very good perspective on where we are and where we are headed.

I do appreciate your support. As I mentioned earlier, I think we're looking for a very strong continuation in fiscal year 2011 and I look forward to talking to you all next quarter. Thank you.

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