Tetra Tech Inc (TTEK) 2011 Q2 法說會逐字稿

Good morning, and thank you for joining the Tetra Tech earnings second-quarter conference 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 Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results and then we'll 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 Legislation 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 Security 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 up 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, sir.

Great. Thank you very much, Lane, and good morning. Welcome to our second-quarter earnings release conference call. While Steve Burdick, our newly appointed Chief Financial Officer, will present the specifics of our financials, I will start this day's presentation and briefing with a review of some of our key financial metrics for the second quarter. But, I would like to say just a couple words before I get started. I am very pleased to be here today with our new Chief Financial Officer, Steve Burdick. While Steve is new to the Chief Financial Officer position, CFO, he has actually been here a long time. He has been serving as our Corporate Controller for most of the last 8 years and, for practical purposes, he has been our Assistant Chief Financial Officer for the past 5 years. So when we did have a departure at our CFO level, there was no question, no doubt and no time lag in naming Steve in that position. And so, thanks for joining me today, Steve.

Thank you, Dan.

I will get started with a quick overview of the financials and the performance for the second quarter. We had an excellent second quarter. All of our metrics were up significantly over last year, our total revenues went up by 30%, and our net revenues hit a new record of $430 million for the quarter, up 32% compared to the same quarter last year. And, this net revenue increase also included a significant portion of organic growth at about 7.5%, which is our long-term goal for contribution from organic growth. For earnings, our EBITDA was up 34%, and the diluted earnings per share for the quarter was $0.28 or up more than 20% over last year. Our backlog, which, of course, is my favorite metric -- one I watch the closest -- was up both sequentially and year over year, ending the quarter at a record level of approximately $1.99 billion. Overall, I was very pleased with the Company's performance during this past quarter.

For our US federal, our US commercial, and international revenues, they all increased over the same quarter last year. We have changed our customer mix quite a bit in the Company with the expansion into Canada, and so the year-over-year comparison of the revenue contribution has actually changed quite a bit due to this expansion internationally. And, our international net revenues more than tripled from last year, and now represents about 28% of the revenues that we generate. US federal work remains strong, it was up 16% year over year, primarily due to the demand for our services within the Department of Defense and USAID.

Our US commercial work continues to pick up and it now delivered about 22% of our revenues, which is a 14% increase from last year. Now, our US state and local revenues -- net revenues for the quarter did decrease, but this reduction was almost solely due to a winter shutdown of one of our construction and CM projects for transportation in the northeastern United States. I do expect that our state and local revenues will remain reasonably stable at about 10% to 12% of our net revenues in the future as we go forward. And, I will state one more time, if you take the single transportation project out that shut down for the winter, our state and local revenues would have been stable from the same period last year.

One of Tetra Tech's biggest differentiators is our strength in providing high margin, engineering- and science-based solutions at the very beginning of our clients' projects. Our ECS group, or the Engineering Consulting Services group, that focuses on the earliest portions of a project, grew at 75% year over year, and that represents almost half of the Company's net revenue. This is the group that is doing feasibility studies at the early stages of the mining projects; this is the group that is leading our hydro-power initiatives; this is also the group that is building our oil sands practice; and, through these fast-growing programs, this is also the group that is creating new opportunities that can leverage the capabilities of our other 3 business groups.

So they are not only building their own business, they are building opportunities for our other business segments. Both our TSS and EAS groups, who provide front-end technical staffing and design services, they also grew this past quarter. And, together, our 3 front-end services groups now represent over 80% of our net revenues. Now, our fourth business group, the Remediation and Construction Management group, although they are still seeing some weakness in the back-end construction work, did have growth this past quarter. They grew at 12% year over year, but that was primarily driven by construction activities for the US government of levies and flood protection structures in the Gulf coast.

A lot of this revenue that was driven through the RCM group, was for materials or subcontracts that contributed to the revenue, both net and gross for the quarter, that didn't carry any margin -- either very little margin, or no margin. And that is what drove the impact to RCM's reduction in the margin for the quarter; and, in fact, actually impacted the overall margin for the Company, just due to this large revenue inflow that drove us to the high end of our guidance without really margin contribution. We did finish the quarter with our backlog at about $1.99 billion. It's up 19% from last year and we almost cracked the $2 billion mark. In fact, I went back and had them count that 2 or 3 times to see if we were going to break that level.

There is no doubt we will break that in the future, but what's most important to us isn't that $2 billion number. What's most important to us is the continued, long-term increase in the backlog. We were up about 4% sequentially from last quarter, and this is the sixth consecutive quarterly increase sequentially in our backlog. And that is also through much of the global financial crisis period. So, I feel very good about the operation. The backlog has gone up this past quarter, even in our record high net revenue quarter. And, that means we had to replace all of the revenue that we expended and actually grow the backlog, which means we had a book-to-bill this last quarter of about 1.1, so I feel very good about that.

The actual work that drove this backlog increase was driven primarily in our core markets of federal government, US federal government, infrastructure, and mining projects. Now, if you are following along on our webcast and you see a list of the projects that drove our backlog, new orders for the quarter, it was almost all front-end work -- very little construction, with the largest individual area of over $100 million in orders from our front-end mining projects.

A second area that was dominant for us in the quarter was the award of a whole series of USAID projects that were primarily focused on energy and agricultural services. So, both the mining and the federal government were the primary drivers.

I am now pleased to introduce Steve Burdick, our new Chief Financial Officer, and Steve will provide us a more detailed look at the financial results for the quarter. Steve?

Thank you, Dan. I will begin with the second-quarter financial overview. Revenue increased $143 million, or about 30%, to $612.6 million, as a result of growth in our mining and energy business in both the US and international markets. And secondly, revenue from our Canadian acquisitions, which includes BPR, EBA, and Fransen contributed to our revenue growth. Net revenue increased 32%, to $430.3 million, which is a slightly higher rate than the revenue for the same reasons noted above. Also, this increase resulted in Tetra Tech exceeding the top end of our net revenue guidance.

Income from operations increased 24%, to $29.3 million. The operating income grew at a lower rate than revenue and net revenue, resulting in a 6.8% operating margin. This margin was impacted by higher intangible amortization expense, which was $6.9 million this quarter, versus $3 million in the quarter in the prior year. Also, seasonality is more accentuated with our Canadian operations, and we experienced a lower back-end margin in our RCM group. This margin was expected as we entered into the second quarter. The increase in the EBITDA margin was slightly better than our revenue increases.

SG&A increased 14% or $5.6 million to $45.6 million for the quarter. Most of this increase, as I noted, was for the intangible amortization. However, our SG&A cost is growing at a smaller percentage when compared to our revenue growth, as we continue to grow our top line and leverage our back office costs. Tax expense increased to $9.7 million, due to our higher income. We continue to forecast an annual effective tax rate of 34% for fiscal 2011. Also, the rate will be 35% for Q3 and Q4. Our earnings per share of $0.28 was in line with our previous guidance.

The accounts receivable increased 33%, or about $150 million, to right around $599 million. This increase is virtually all related to the $143 million increase in our revenue. Accounts payable increased 15%, due to relatively higher subcontracts and activities in the RCM group. On second-quarter, year-over-year basis, our net cash position changed to a net debt position, and we are now at $55.1 million of net debt. The debt was taken on for our acquisitions in Canada, relative, again, to BPR, EBA and Fransen. The cash used in our acquisition-related activities for the current fiscal year have amounted to about $188 million.

The quarter to operating cash flow was a healthy $33.7 million in the quarter. On a year-to-date basis, we have generated over $42 million, which is more than the first 6 months of the prior year. We continue to forecast our fiscal 2011 cash flows from operations to be in the $90 million to $110 million range. CapEx of $5.2 million is consistent with the prior year, and tracking to the low end of our previous guidance of $20 million to $25 million. Our day sales outstanding of 76.5 days is higher than this -- at this point than last year. The primary reason for the increase in the higher DSO is our recent Canadian acquisitions. This higher DSO was known at the time of the acquisition; however, we have seen a 10-day improvement over the last 6 months in those operations as a result of our integration strategy to bring the DSO down.

This next graphic shows the impact of our positive operating cash generated in the cash used for our acquisition. As you can see on the graphic, if you're following on the web, our net debt position has improved sequentially to $55.1 million from the first quarter. In addition to managing our cash, we just renegotiated our credit facility and, as a result, our borrowing capacity has increased by $250 million. We continue to leverage our balance sheet to invest in growth opportunities that will provide high profit margin and access to new markets. That concludes our second-quarter financial overview, and I will hand it back over to Dan.

Thanks, Steve. I would like now to present to all of you, what we are seeing with our clients and our end markets through the rest of this fiscal year and into the near subsequent quarters after that. I really want to start with the federal government. I see our federal -- US federal government work as being, overall, actually very stable. Based on the projects we have now -- projects we have already won, projects that we have in backlog -- we have very good visibility through the rest of the fiscal year and, actually, into 2012. A lot of these projects that are currently in our backlog will take us well into fiscal year 2012.

Many of the programs we are working on are multi-year commitments by the government and that have been funded not only to the rest of this year, but are just at the beginning of long-term programs. And, I would like to go through three of them to give you some insight into some of them that are growing, ones that we see stable and, actually, those that we even might some challenges with.

First of all, we see our USAID, United States Agency for International Development work, to continue to grow for us. In fact, we are looking to add resources, capabilities, and add additional resources in this area to address emerging opportunities at USAID and the State Department. So, we are hiring in this area, we are actually filling it in with other resources internally, and we are even looking outside the Company to determine where we can bring additional capability in this area because of the growing areas of opportunity. At the Department of Defense, we see a commitment from this client to their environmental cleanups and energy efficiency programs, and they continue to be the primary drivers for orders for us. So, we expect to see our DOD markets remain stable for us -- long-term drivers, long-term projects, and priority funding in these areas.

We do see some softness at EPA. We have not seen it to date -- our orders have continued to be strong, we are fully funded; but, based on the changes in the funding, and there budget constraints, we do anticipate seeing some softness in this area for us. It is a very small part of our federal government revenues these days, but it is one area that we anticipate some softness. So overall, when you take those collectively, we see our US federal government work as being very stable, not only for the rest of this year, but on out into the future.

Second area, I see our international and commercial businesses continuing to grow in the areas of mining, energy, and oil sands. And, it is these markets that represent the primary growth areas for us in the coming quarters. So, I would like to give you an update in a couple of these areas that will be our primary growth drivers. Over the past 2 years, we have expanded our geographic base and invested in companies that have been specializing in supporting the mining industry across a wide range of commodities. I have talked about the individual commodities on previous calls; but, today, the rapid increase in the demand for natural resources and the high commodity prices in this area from our investments are just beginning to pay off for us. We haven't even seen the full contribution of those.

In the mining-related services within Tetra Tech is one of the fastest growing areas for us, and we are seeing an organic growth rate of over 20% in the mining areas for the Company. And our mining customers are continuing to take us internationally and expand our work with new orders, just this past quarter, across 5 different continents. So, we are seeing work not only in Canada, and here in the US, but really all around the globe. At the same time, we are seeing energy-related services, especially internationally, as long-term markets for Tetra Tech.

With the addition of Fransen at the beginning of the second quarter -- and actually it was just about February 1 -- we are now working to help these clients up in the oil sands manage their tailings throughout the entire oil sands region in northern Canada. We're also focused on supporting the development and distribution of the emerging shale gas markets here across the United States. It's still very small for us, but it is beginning to grow. And, we are also working on front-end studies for utilities all around the world on evaluation of their long-term energy needs. So, all three of these areas are large growth opportunities for us. And, I'm really pleased at the number of opportunities that we are seeing in these markets will help us accelerate our growth in these coming quarters.

I'd now like to present our guidance for the third quarter and for all of fiscal year 2011. For the third quarter, our net revenue guidance is a range of $450 million to $475 million for our net revenue for the third quarter, with an associated diluted earnings per share of $0.33 to $0.37. For the entire year, we are increasing our revenue guidance that we provided earlier for net revenue to a range of $1.7 billion to $1.8 billion.

Now, that's our revenue minus -- our overall revenue minus subcontractors. That's our net revenue. And, the associated diluted earnings per share of $1.34 to $1.42. We did take our diluted earnings per share EPS for the year and moved up the bottom end, and moved up the midpoint. We would have moved up the top end, and moved up both sides, but the continuing uncertainty in the back-end construction work has left us -- I won't use the word cautious -- but being prudent about moving the top end. The front 3 business groups, as I've talked about earlier in this presentation, business opportunities in performance is exceptional and the lack of opportunities in the back-end have given us just a bit of caution.

This guidance, both for earnings, does exclude any contributions from future acquisitions; and, so, we do expect to continue to be acquisitive, but we are not incorporating any anticipated future acquisitions into this guidance. And, our earnings does include a $0.30 charge for intangibles, that's actually up from last quarter, from $0.28. With the acquisition of Fransen we expect the intangible amortization to actually increase for this year up to $0.30. That does include $0.11 of stock option; both the intangible amortization and stock option expense are non-cash charges.

It does, as Steve had mentioned earlier -- is based on the 35% tax rate for Q3 and Q4, which gives us approximately 34% for the entire year, and is based on a 63 million shares outstanding for the Company. In summary, we had an excellent quarter and a very strong first half of fiscal year 2011. Driven by the growth and operational performance of our front-end services groups. Our international acquisitions have diversified our customer mix and given us the ability to tap into new, high-growth markets, not only here in North America, but really around the world, now.

Our commercial business is growing and, while our US federal revenues are stable, we are seeing growth at the top end because of both these commercial and international opportunities. So, based on that performance, and our increasing backlog, we've raised our guidance, both in our revenue and our earnings, and look forward to an excellent fiscal year 2011. And with that, I'd like to open the call to questions. Operator, Lane?

The question-and-answer session will begin now.

(Operator Instructions)

Your first question comes from Will Gabrielski with Gleacher.

Thank you. Good morning.

Morning, Will.

Can you talk a little bit more about the USAID trends you're seeing? And, some of the stuff we've seen in the news about international funding through USAID and how that may impact you? And you talked about growing the business, how close are you on M&A within that market?

I'll start with the opportunities. We are seeing opportunities for the priority services that we have, across many different countries. It has been, in the past, the priority countries that have driven it, but really it is a much broader approach that we have with the client. We're following USAID and the State Department to any and all the countries as they move. So, as they move from current countries of priority to new locations, like Indonesia, for deforestation, or protection of the coral reefs for CO2 generation, we are following them there.

These new contracts that we've announced, and you've seen a number of them this past quarter, most of the orders that we have had are not associated with these new contracts. So, these new contract vehicles, many of them are single awards that haven't even begun to get tapped, and these are for long-term programs. So, that's what's giving us visibility into USAID and the State Department.

We are adding staff, we are utilizing and leveraging our design staff internally, our engineers, to support more work for USAID and State Department. And, we have been encouraged to look outside the Company to bring in even more resources. So, as individual opportunities arise, and we find the right fit in the marketplace on M&A side, this could probably be, I don't want to say the sole area, but the primary area in the federal government we would like to add an opportunity for the Company.

Can you just -- sorry was there more?

No, go ahead.

Sorry, can you just expand on the State Department and what type of opportunity that could be for you? And where you are on that process?

Well, the State Department, it's interesting, the US Agency for International Development, used to not be under the State Department. They have become a division of the State Department, although they are managed quite differently. And, even though we have had great success and are doing well with USAID, we've had, I'd like to say little, but the reality is, no success in doing work for the State Department. They have incumbents that do work, it's similar work to USAID, they are generally much earlier in the process.

So if there are issues in countries like Haiti, where you had the earthquake down there, and they had development of emergency needs, that comes out of the State Department. If they need emergency response, as to -- the Department of Defense and the Corp has provided some of it, but a lot of it comes through the State Department. We haven't participated in that because we are not with the State Department.

USAID is actually implementation of the long-term remedies, everything from institutional strengthening and governance, and long-term infrastructure. But the first bit of work that comes out in all of these locations around the world, is at the State Department and, that's the type of work that we would be looking to tap into. It's just taking the USAID model we have, and moving it earlier in the process. And the dollar amounts that are available there, or equal to or even larger than USAID and, that's why we are interested.

Okay. State and local. You commented on some weather and winter weather and timing run in northeast construction project, if -- when I look at the next quarter or the current quarter we are in, should we flat line that essentially with the year ago numbers and add back the revenue you didn't have this quarter? Which is what would drive sort of a flat year on your number next quarter? Or what is the way to think about how that's going to come back this current quarter?

We would look at if flat year-over-year. It should be flat.

Okay. That's helpful. And then on the acquisitions you've made in Canada, I guess how much color can you provide on where we are on GAAP accretion? I mean we see the intangibles flowing through, I'm just wondering on a GAAP basis how those performed for you?

Well on a GAAP basis, all in, they are nominally accretive. They are accretive, but the IEA of course directly offsets the earnings for the first couple of years. So we believe that they will become increasingly accretive as the IEA intangible amortization reduces. We are looking somewhere between $0.07 to $0.10 reduction next year in just IA, and all of that will flow directly to our EBITD line. So all of the acquisitions in Canada have been nominally accretive in the first year but, its due strictly to the IA factor.

And then, last one, you talked about materials and sub cons flowing through the income statement with little margin. Do you know how much impact that had on your reported out margin this quarter?

We hadn't quantified it in dollars or either dollars of operating income, or EPS, but I will say if you backed out the 4.5%, roughly, from RCM and moved them up into the low sixes, that Delta would account for that change.

Okay. Great. Thank you so much.

Great, thank you, Will.

Your next question comes from Andrew Whitman with Bayard.

A better sense of kind of the cycle here, can you just talk maybe, Dan, about the hours that you were working? We did notice the headcount was up, a nice trend. Can you talk about the hours that are being worked, and where we are in the ability to maybe get some price increases, if at all?

Well, the hours worked with utilization of our staff, our utilization of staff overall, has been good in the test group and the EAS group. Which is our advising, staffing group, which is primarily federal government, that's where our USAID and our EPA and even some of our DoD cleanup work is. So, utilization was high there. Actually, I'm parsing it this way because we have some different moving pieces.

EAS Design Group was very good, you can see the margins were actually above our target range of 6% to 8%. They are up into the 9%'s, so, very good utilization there. ECS, the biggest group, we had two things going on. The US was quite busy, but the Canadian operations were not that utilized as far as hours that were being built and that is as expected during the winter months. The months of January, February and March are downtime months because of weather. A lot of our operations are in the far north, and although some of oil and gas does a lot of their work during the freeze up and frozen tundra, that's not really our work.

The winter months are not big revenue month for us. So, this is the time we write proposals, times that we send people of for their engineering training and other types of items. And so, utilization is actually low, and in fact, some of the operations in Canada make no profit at all during this quarter. It was that collective reduction in utilization and revenue, or income contribution, that impacted the ECS margin from being double digit, 10%, 11%, 12% down to the 9%. That's not a surprise, we knew that ahead of time, I tried to be vocal and communicate that on the last call.

And I will reiterate that I believe from this quarter forward, from this year forward, our second-quarter of our fiscal year will be the low point on our margin. And so, that's not a surprise to us. And then RCM was busy without margin. I talked about that because some of the construction activities. As far as passing on pricing increases, we have been able to do that on our commercial business. And the federal sector, we have built-in escalations or cost plus, it is already embedded.

And then, just can you talk about a little bit about the design construction cycle where you feel like you are clearly? Tetra Tech strength has been in the front end, that is where it was led this quarter. Can you talk about maybe the projects that you are working on, your ability to see those through the process and maybe into your RCM Group? Maybe if it's not projects that your currently working on, when you see the RCM business getting busy with a little bit greater profitability?

Well, I think it is going to go back up, profitability for RCM, I will answer this from the last question up. I do see that we are right sizing the staff within RCM, based on the workload that we have. And, it is a bit of a one-time event driving these Gulf Coast levee and flood protection structures that caused the margin to go down a bit. I do expect it will get back in that range of sort of a 6% to 8%, albeit at the lower end.

We are going to right size that business, and while we do have a very, very large number of projects that we are studying, and even designing, we don't have visibility as to when they are going to convert to construction. And, I do think that it will be still a few quarters out. But still, there is no doubt the one area of the Company that we have the most uncertainty are the least of visibility. But, when they begin to translate to construction projects, it is going to move fast.

So, they do have the designs on the shelf, a lot of these things have even been permitted, permits could lapse and may have to redo them or re-up them. But when they do move to construction you will see them in our orders, our orders, the numbers will go up much quicker. They come in bigger denominations, backlog will drive up very quickly, and then that will translate into revenue in RCM. I just don't have a specific time frame on that although we do believe it is still a few quarters out.

That's helpful. I just want to finish up with one kind of bookkeeping, I apologize if you said this beginning of the call. The queue was quite long today. Just in terms of sequential organic backlog, did you share any numbers on what that was for your segments, or for the business overall?

I didn't, but it would be similar to our organic net revenue growth.

Alright, great. Thank you very much.

Thank you, Andy.

Your next question comes from Corey Greendale with First Analysis.

Thanks. First question is, I want to ask you about construction, not so much from the market perspective, as from a Tetra Tech perspective. Looking back several years, I know, doing some lower margin construction type work I think didn't pan out the way that you had hoped, so can you just talk philosophically about your position on doing that kind of work? And what's changed over those years that resulted in making sense now where it might not have made sense several years ago?

Well, I lived through all of those and I think that there is significant difference in our approach at that time with our construction and now. And here's the key differences. Those projects that we did, this was a decade ago or more, we had our construction activities led by the constructors. A lot of it was low bid work, a lot of it was public bid opening work, and a lot of it was civil construction work that was not leveraged from our earlier design and consulting work.

Our goal, I would love to be in a position where all of our back end work, all of CM work, all of the construction work, was direct negotiated with our clients, because of the work that we did on the studies and the design. That is our objective. We do believe we can offer the best value to the clients, we will be competitive, but we will not be in an open, undifferentiated low bid position. That is the difference.

It would also be our goal that we would bid and perform relatively little work at the backend, on the construction, that we haven't done either the upfront studies or the design work. I'm not going to say anything is absolute, certainly there are others that we will be selected for, back end work because of our expertise, but the primary differentiation needs to come from the front end and our goal would be that all of the projects would be driven from the top through the bottom and that is significantly different than what we embarked upon over a decade ago.

That is very helpful, thanks, Dan. And just one other question, you talked about the relatively long-term visibility on your work for the federal government. Given where budgets are trending, I mean is it fair to assume that at some point, if EPA's budget is down, et cetera, that there could be some impact from that? And your working to offset that with other areas or, do you look at the projects you're working on our so mandatory that they would be in the bucket of things that are safe, regardless of what happens to those budgets.

I think there are those that are so critical that they have regulatory drivers, they have legal drivers, they have others that will make them persistent. But as I indicated in my prepared remarks, I actually do see some areas of EPA softening up. It is a relatively small business for us, it is about 2% to 3% right now, and so, if it is impacted 10%, let's say, that is 0.2% to 0.3%, so that's very small for us. I don't believe that our EPA work, overall, has a high risk profile. And in fact, the impact of our programs should be less than the budget amount that's being imposed at the department level because of the type of programs that we have.

Thanks very much.

Thank you, Corey.

Your next question comes from the line of Alan Robinson with Royal Bank of Canada.

Good morning, gents.

Good morning Alan.

Dan, could you provide some color? Where did the revenue surprise come from, compared to the guidance you provided halfway through the quarter? And, was this a back-end loaded quarter?

It was at backend loaded quarter, and it came from the revenue, primarily out of the New Orleans, Gulf coast area. So, the construction activities, we were able to make good progress on construction of levies, on meeting the government's, and primarily the Army Corps of Engineer's, timeline of having all of these in place, prior to the official start of hurricane season, which is June 1. So, we were trying to push, we are pushing hard, they were successful in that. That did drive the top end beat on the revenue line. But, the flip side of that was, it also drove the margin in that group and the Company down a little bit.

All right, got you. Okay. And then, you know you mentioned a winter shutdown impacting your state and local business. Do you expect this business to come back this quarter or next?

It will be ramping up here in the spring. And so, it will, as you can see, our year on year comparable's, a year ago, the numbers are up for state and local, this year they will go up, so you will see it relatively flat year-over-year. And we still have about another year-plus on that project. So, it will go through the same cycle here this next year. Construction through the spring and summer, and then shut down in the winter.

All right. So your view of a fairly stable share of business there is predicated on the thesis that this business will come back?

Well, it's already under contract. This is an existing contract, we are part way through it. It is not something that can be terminated, it actually has a completion date and a construction deliverable. So that isn't a predication that it's going to go forward, its already been fully funded. And I think of all the things we have, the lowest risk with respect to revenue.

Okay. Understood. And then, just finally I guess this is for Steve, you mentioned your borrowing capacity expanded by $250 million. Is this designed to address any specific acquisition? And perhaps could you walk through your outlook there?

Right now there's no specific acquisition that we are tying this to. However, we are looking at larger acquisitions, and this will give us a lot more flexibility to do things in the future.

And has there been a change in your philosophy with respect to acquisitions? Are you still looking I guess, looking to expand your energy practice, moving internationally?

I think our strategy has always been to expand both geographically and strategically where we think the markets are going. So, that hasn't changed.

Okay. Thank you.

Thank you.

Your next question comes from the line of John Quealy with Canaccord.

Morning, it is Chip Moore for John. You highlighted oil sands in your prepared remarks. Maybe you could just give us a few more specifics on what you're seeing in terms of opportunities now that you have been in that market for a full quarter or so?

You're right. As of about three months now, as of this week. We had Fransen on who has existing relationships and contracts with any of the oil majors up there. The work we're primarily focused on is the water, and it is addressing really just an emerging, and we believe a high-growth area, of managing and treating the tailings from the oil sands production process. It's an emerging area because environmental regulations are just beginning to be promulgated and permits are beginning to be contingent upon plans to address the tailings.

And, we believe that we don't have to displace anyone out there to get this work. This is a new work that fits our technical expertise, our market differentiator, and with relationships and the contracts in place, and really, exceptional engineering capability coming out of Fransen. There may be fewer of them, but technically, we put them up against the best in the entire industry. And so, that group leveraged with additional capability in Tetra Tech, that's where we expect to see that big expansion in oil sands.

Great. And then, just another market specific question, maybe you could update us on what you're seeing in terms of pipeline, RFP activity in the wind business, and if that sort of $100 million expectation for the year is still on track?

The $100 million expectation is on track. I think we will achieve that number. We have essentially all of that either in revenue to date, or in backlog that we will complete between now and the end of the year. And, as far as the pipeline of opportunities out there, we are seeing them. There are some, but it is sort of at a, I would call it, at a $100 million a year run rate. I would say that it is not appreciably increased, but it hasn't dropped off either, so I think for the foreseeable future we are seeing that as a run rate level.

Okay, great. Thanks, guys.

Your next question comes from the line of Richard Padgett with WJB Capital.

BP recently committed $1 billion to coastal restoration. Is that something that you guys are going to be able to participate in?

I hope so. And, where those dollars are going that we have been following, a lot of those dollars are going to go into different trust funds, or different accounts, that will be administered by the State of Louisiana, or different jurisdictions within the state. So, state and local folks for actually spending those dollars. Some of it federal, but a lot of it is going to be at the state level for restoration.

Some of it will be direct restoration, which will be, I'll call it backend construction activity, but a lot of it is actually going to be for the front science evaluation. Characterization, long-term health impacts, ecological impacts, all of that type of work is right up our alley, and we think that we have a very good position to do that. So, we hope so, the money is just going to be funded to the state, local, a little bit Fed, and we hope to be not only to compete, but to be quite successful there.

Okay. And then, on the energy side, you talked about oil sands and a little bit about shell gas, I wondered if you could talk what's going on in hydro, now that you're in the market? And, is that a longer-term opportunity, or there are things happening right now?

Well, there are things happening. The hydro work in the short-term, and I will talk about that being the next two to six or eight quarters, so the next six months to two years, primarily is going to be in Canada. The bigger opportunities we are seeing are in the East, so sort of Manitoba, eastward up through Quebec. We have seen some opportunities that we are currently following, and we will actually compete for on some very large hydro schemes. These are hydro schemes that are 500 megawatts and up.

These translate into multi-billion dollar opportunities, where we will be teaming and we think that they will develop over that time frame sort of the next two to eight quarters. There are smaller opportunities, although more of them out west. These are smaller hydro facilities, sort of five to 50 Mega Watts, also good opportunities, I would say also the same time frame. And I think, if you look out longer term, some of our mining clients in Latin and South America have asked us to bring our capability down there for energy supply, really associated with mining and remote power sources for these mining locations.

So, if we look at your $500 million revenue goal in energy, is the lion's share going to be oil sands to get there and then that's supplemented by hydro and shale gas? I am just trying to get a market size as it pertains to you guys specifically in energy.

Well, our contribution, $500 million, as a percentage of those three markets, is infinitesimal. And actually we could potentially achieve that goal with any one of those three. And those three could actually build up in a different order, I don't have full clarity at this moment whether or not hydro will be the primary driver, oil sands or shale gas. There is a regulatory driver, either at the US Federal level, or even a more consistent approach to the states. The requirement to treat the frac water could go up immediately and that in and of itself could represent this growth.

Oil sands, we know the business, it is growing, we want to make sure we can walk before we run, but it is probably the most certain and the most predictable. And, depending on certain items, it is probably the nearest term and the most certain. Hydro will come in big pieces, and if we are successful, it will drive that number quickly. I think that a combination of a regulatory driver or increase in outright production of natural gas from the shale formations, will drive large -- regulatory driver is very clear, it will drive business immediately. Or quantities. If you generate more gas, you generate more water, and you only have so much transportation capacity, so that will drive treatment requirements.

And then on the frac water, I know there is a lot more public scrutiny and the EPA is starting to do more studies. I mean, is there anything we should be tracking specifically, or anything on your radar screen on the regulatory front that is imminent?

No, we actually don't see anything. It will come out in the next 30 days to one or two quarters. But no doubt that, if you followed the media, there have been a number of uncontrolled discharges of frac water from producing that have flowed into creeks into waters. These types of singular events, it was originally Superfund and Clean Water Act were driven by rivers catching on fire in the United States.

It wasn't this long, slow ramp regulatory process. It was sort of this catastrophic event that said okay, put the regulations in place. So, there is certainly enormous precedence, many, many precedence that this stuff can move fast with these type of events.

Okay and then finally, some other of your competitors in the states, were talking about the Army Corps being a little slow to let out work in the beginning of the year due to budget uncertainties, and now that has been shored up, they are expecting a stronger second half. Is that what you are seeing in terms of your markets with the Army Corps?

You know, only a little. I heard that, because it sounds logical with the uncertainties of the budgeting process for 2011. The reality is we didn't see that type of reduction, significant reduction at the beginning of the year, and we haven't seen a meaningful uptick. It hasn't been like a big flood of RFPs, request for proposals have come out. It's actually, has ramped up but nothing I would say is substantial .

Alright, thanks, that's all I've got.

Great, thank you very much, Richard.

Next question comes from Joe Ritchie with Goldman Sachs.

Good morning everyone.

Good morning, Joe.

I guess my first question is following up on some of the discussion we've had so far on your Federal business, given that the DoD is your largest customer. You see the business essentially being stable going forward, but can you help highlight some of the puts and takes in that business today? Where are you seeing particular strength, where are you seeing some weakness? Just to get a sense for a little bit more granularity in that business?

Well the strength we are seeing is an increase in energy efficiency studies. We are seeing more what the refer to as REM, or resource energy management programs. It's doing the baseline studies of all the facilities. In the case of DoD Proper, Army, Navy, Air Force, of their actual installations everything from administrative buildings to barracks to warehouses to hangers, so doing baseline studies. Doing initial evaluations of energy consumption and developing alternatives for energy reduction, that type is a put, it is going up.

We are actually seeing design work for lead buildings, so decisions to either do demo or elimination of high energy use buildings, and design of either lead buildings. We're also seeing initial feasible -- and that's another put, something that's new and is up. We are seeing initial feasibility studies on net zero buildings, net zero energy buildings, that is a put. That is an up.

The things I would say are consistent and have been funded on out into the future are some of the regulatory environmental cleanups. Those are Navy bases throughout the San Francisco Bay Area, a number of them on the East Coast ,so we see those as being persistent. Regulatory drivers of commitments to clean them up.

And then, I would say that on the takes or the reduction, we actually are seeing the additional gulf protection work, down in New Orleans, we expect will actually soften up and will be a reduction. And, it is primarily because a lot of that has been done. The large barriers across the Mississippi, the Inner Harbor Navigation Channel is reaching completion. A lot of the sector Gates that we ourselves are doing are moving toward completion. So, that sort of what I would call to take. So those are the ups, the flats and the downs in DoD.

Okay, that's very helpful. And in your organic revenue growth this quarter was quite good year-over-year. Your guidance seems to imply for next quarter mid-single digit growth. Is that how we should be thinking about your business over the next several quarters? Or just help us understand across your business, whether mid-single digit is the right way to be thinking about your organic growth today?

I think that is right. So our organic growth, these out quarters here, are I would say low- to mid-single digit. And with the acquisitive growth up North, of course, our total, should achieve 15% or better that. Let me make just one comment on the why low- to mid-single digit if your target is up at 7.5% or better. We actually have two things moving. The front end studies, organically, which is the first three business groups, ECS, our test group and our EAS, are actually growing at levels better than that.

Very strong, this is all organic work, but the lack of construction opportunities, or the extremely competitive nature for those opportunities that do come out, have put pressure on the RCM group and so we are seeing actually a shrinkage or reduction organically in that group. So when you net it out collectively, the front end is able to more than make up for the reductions in the RCM, but it is netting us out at the these low- to mid-single digit organic growth rates.

Okay that's very fair, and I guess one last clean-up question. You mentioned earlier that you've increased your amortization of intangibles this quarter to about $0.30 for the year. Can you give us a sense of how that is going to trend going into next year and beyond? Assuming no significant acquisitions for the remaining piece of this year?

I'll let Steve answer that accounting question.

Yes, we are looking at probably close to about $28 million in amortization for this year, and we expect that to decrease to about $21 million next year on a current run rate.

Perfect, thanks for answering my questions.

Sure. Thank you, Joe.

Your next question comes from the line of John Rogers with DA Davidson.

This is Tristan and for John Rogers. Morning, guys.

Good morning, Tristan.

Just a quick question, when we think about Canada, I'm curious what was the impact of foreign exchange on the quarter?

The foreign exchange was relatively minor for the quarter, and relatively minor for the whole year so far.

Okay. And then going forward, as Canada becomes a larger piece of your business. Do you try and make some assumptions about foreign exchange in your guidance? Or how should we think about that relative to guidance?

We do consider it and we look at where it could go from -- increase or decrease, but so far we've been fortunate and at hasn't had a material impact on our earnings.

Okay. Okay. Well all the rest of my questions have been answered. Thank you, guys.

Thank you, Tristan.

Next question comes from line of Tahira Afzal with KeyBanc.

Hey, guys it's Agar on for Tahira. One question led to your mining business. With the Japan earthquake, first, how much of your earthquake is related to uranium? And has any of that been impacted by the earthquake?

Our mining work, of the different commodities, uranium is about one third, and it has not been impacted by the event in Japan. A lot of the work we do is on the upfront and is actually working with our clients to expand capacity to meet the current delivery commitments they are to have. So, we have not seen an impact from that.

Okay. And then, looking at the RCM business, again, forecasting $100 million for the year, where would you -- what are the opportunities in the solar business? And do you guys see maybe an acquisition to help that out? Or, is that -- is the barrier to entry in that business kind of hard?

You know, the solar business is a good business up front. There is a lot of environmental items in the Southwest United States with endangered species and with many different cultural and ecological potential impacts. There is a lot of environmental and up front planning and even engineering with respect to corridor right of ways for transmission, so T&D work, but the actual construction is primarily a manufacturer's game.

The actual difficulty into the construction, or placement of the panels, has not been a market that we see as a big opportunity for us. So, we think it is mostly on the consulting, the up front permitting, and the engineering, including high-voltage and transmission distribution. But on the actual solar collection systems themselves, the PVs, photovoltaic collection systems and generation, probably little on the construction side.

Well, that's all I have, congratulations on a great quarter.

Great, thank you.

Your next question comes for line of Alex Rygiel with FBR Capital Markets.

Hey, gentlemen.

Hello, Alex.

Just one quick question. How confident are you that the margins and the profitability inside your backlog is higher than sort of where you're at right now and over the last couple of quarters? It surely appears that your backlog is up very nicely and your revenue mix is shifting towards the higher margin end markets. But how confident are you that what is in backlog is greater than what's been reported?

Well, I'm confident enough to have moved up our guidance on earnings up twice in the past two quarters, including this one on the bottom end. And, I wouldn't do that lightly if I didn't have a high level of confidence that the margin embedded in the backlog is there.

And, does that also tell us that competition in the marketplace might be easing a little bit?

For us, that's not really the case. We've seen relatively little pricing pressure or competition at the front end, where the selection is on technical qualifications, and really selecting the best engineers, the best consultants, the best technical professionals to evaluate the projects. It's been a technical selection, not a pricing selection for the most part. So we hadn't seen it, particularly, be difficult for us through this last period and I don't really see that changing.

The difficulty has been on the backend, and the one thing we have seen, you heard the same comments I made, two, three years ago about the backend in our federal work, that we felt there would be less pricing pressure. Because there was the natural contract vehicles that would prevent residential and commercial construction coming in. Well, three years in a difficult, difficult market has caused these constructors to move into this marketplace, creating a bit of an extreme pricing pressure on the backend services with the federal government. So that has changed. Now it's not only fewer opportunities, but in that area, very competitive.

And then lastly, the term larger acquisitions was used on the call. Can you define how Tetra Tech defines a large acquisition?

Well, I think a large acquisition is something that would represent 10% or greater of our revenues or income. So, it would be -- we are about $2.5-ish billion dollars a year run rate, so on a revenue basis, probably $250 million or up would be a large acquisition.

That's great, thank you. Nice quarter.

Thank you.

And our final question comes from Jeff Beach with Stifel Nicolaus.

Would you discuss the competitive landscape in terms of the federal business you do, and the commercial business, and in particular, I'm thinking, generally in federal programs, there is two or three dominant players. Everybody else is try to be one of those top two or three, is there significant market share shifts? Are the big guys gaining market share? And maybe talk about it in that way, in the commercial markets?

Well in the federal markets that we pursue, generally speaking, the programs are smaller than what some would refer to as the big boys. And the big boys are folks that are doing the large weapons platforms for the Department of Defense. We don't see them migrating down into our market space. It is a different type of work, these projects are under contract sometimes for many years, these are three, four, five-year long contracts. It's not a natural migration down here.

We don't see the competitive landscape for those that hold large programs or large positions changing materially. We see the same competitors and generally speaking it hasn't moved around a lot. Some of those, we are, I think they would be clearly we would be identified as the leading competitor, or service provider, in certain areas and we retain those. At this time, the same competitors are holding on extra, extra tight to what they have. So I've not seen a lot of change in the federal sector.

On the commercial sector, I would say that we've seen more opportunities and less competition from the incumbents for many projects. And it is interesting, our clients have told us that some of the very large providers on the mining side, and I will use has as an example, they have gone after some of the very largest CapEx projects. So these large facility constructions, these large processing, they've really taken the resources, because no firm has infinite ability to expand to consume whatever opportunities are out there.

So as these larger opportunities have come, they've moved and shifted their best resources, and in some instances all other resources, to these very large projects. That has left more opportunity for the likes of Tetra Tech and the firms that have joined us, to take on more of these, what we refer to as balance of plant. Sometimes it is interesting that these sort of betweeners, these firms from our size up to 10 billion. Do they go after the very large projects? Or do they try to survive on the bread crumbs to them? Bread crumbs to them actually moves the needle for us, and actually make a big difference. So, we like to compete in the area, on the commercial side.

Right, thank you.

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

Thank you very much, Lane. This does conclude our questions-and-answers for our second-quarter conference call. I'd like to thank you for all your questions, and actually for your understanding of where our businesses and support both of the Company and your share position. And, I do look forward to speaking to you all next quarter, and thank you very much and goodbye for now.

Ladies and gentleman this does conclude our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.