Tetra Tech Inc (TTEK) 2011 Q3 法說會逐字稿

Good morning and thank you for joining the Tetra Tech's earnings call. By now you should have received a copy of the press release, if you have not please contact the Company's corporate office at 626-351-4664. With us today from management are Dan Batrack, Chairman and Chief Executive Officer, and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results, and will then open up the call for questions.

During the course of the call management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning future events and Tetra Tech's future financial performance. The statements are only predictions and may differ materially from actual future events or results. Tetra Tech's Form 10-K and 10-Q reports to the Securities and Exchange Commission, identify certain risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements.

In addition, some management will be presenting some nonGAAP 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 conference over to Dan Batrack. Please go ahead, Mr. Batrack.

Great. Thank you very much, Kristin. Good morning, and welcome to our third quarter of fiscal year 2011 earnings release conference call. While Steve Burdick, our Chief Financial Officer will present the specifics of our financials, I will get us started this morning with a brief overview of some of our key financial metrics for this past quarter. We had a very strong third quarter of fiscal year 2011. All of our key financial metrics were significantly up over last year, including many new record highs, or all-time highs for the Company in area like total revenue, net revenue, our earnings before depreciation and amortization, and our earnings per share.

I will start with an overview of our revenues. Our total revenue went up by 20% over the same quarter last year. Our net revenue was up 30% to $481 million. Both of those numbers were all-time highs for the Company for any quarter in its history. For earnings, our earnings before interest taxes depreciation and amortization, which really takes out primarily the amortization component of our earnings was up 29% over last year. And one item I am particularly pleased with, is it does show that we have what we call leverage, or the profitability of our business is growing faster than the revenue. That was up 29%, again the highest level ever in the history of the Company for any given quarter.

For our actual shareholders, our earnings per share for the quarter was up to $0.38, up 15% year-over-year. Also an all-time record or a high number for us on any given quarter, and our backlog up 12% year-over-year, ending the quarter at just under $1.9 billion. Overall I am very pleased with the Company's performance for the third quarter. I would like to briefly go over our clients, and the market sectors that are contributing to our generation of revenue.

Historically our largest client has been the US Federal government. For this past quarter our US Federal work was now at 34% of our revenue. It has been a remarkable transformation. I will talk about this a bit later in this call, but this 34% for the past quarter, compares to 46% just a year ago. This is the lowest percentage of revenue generated from our federal client that the Company has had in almost a decade, and it is not due you to a reduction of the revenue with the US Federal client. That has still been very strong, but it is actually the growth in other areas I will talk about. Due to the completion of Federal flood control projects in New Orleans specifically, where we were doing levies and sector gates protection for storm events, our US Federal work was down.

It was very strong at the beginning of the quarter, but otherwise overall it was done about 4%. However, the front end work we are doing for the US federal government in our front three segments was up 4.5%, due to continued support for high priority programs across all of our federal client base. For the state and local, and that is the United States state and local markets, we were at 11% this last quarter of net revenue. About what I expected. I expected it to be some where between 10% to 12%. We are right in the middle, and I expect that to remain stable in that area. This quarter our growth was led by a growth, increase in revenues with our US commercial clients and our Canadian operations.

Our US commercial work has grown at an increasing rate each of the past three quarters, every one of the quarters this year, and is up 26% compared to the same quarter last year. Tetra Tech's Canadian operations, we do put it under international here, but Tetra Tech's international operations are really overwhelmingly our Canadian operations, and that operation is now up 30%, and is really growing at a phenomenal rate. I will give you one example, a Canadian unit the first one that joined us that has been with us is going on the third year now, is growing organically at a 35% rate year-over-year. It is really doing very well. And together with the acquisitions that we have added this last year, our Canadian operations grew at 200% over the same period last year.

One of Tetra Tech's biggest differentiators in the marketplace is our strength in providing engineering and science based solutions at the very beginning of our clients' progress. Our ECS, or Engineering & Consulting Services Group that focuses on the earliest portions of a project, grew at 77% year-over-year, and now represents half of the Company's net revenue. This is the group that is doing the feasibility studies at the earliest stages of our mining projects. This is a group that is leading our hydropower initiatives. Actually the same group that is building our oil sands practice, and it is these fast growing programs that are creating new opportunities for our other three business groups. And it really is the beginning of the project life cycle, and we are looking to stay with these clients and projects all the way through.

Both our Technical Support Services Business group and our Engineering and Architectural Services group where we do constructible designs, they also provide front end technical staffing and design services they also grew this quarter, and together our three front end services groups now represent about 80% of our total net revenues. Our fourth business group, RCM, or the Construction Management group did have a 1% year-over-year growth, but it was primarily due to completion of projects in the New Orleans area I talked about a moment ago. And the startup of a few new wind projects.

We finished the quarter with our backlog as I mentioned a moment ago at almost $1.9 billion, up 12% from last year. Some of the new contract awards and orders for the quarter included many different US Federal awards for front end services from our largest clients with the US government, most notably a US Agency for International Development, US AID, the Navy, US EPA. These were all very front end projects that were just at their inception. Other major orders included hydroelectric projects and landfill programs here in the US, and various international energy and mining projects. Lots of upfront programs as I had mentioned earlier, most of the largest orders and the greatest number came from the front three business groups. I do want to make a note. It is quite notable that during the quarter, we were awarded a contract for the CJPS program for the US State Department, who is essentially a new client for the Company. This contract has a ceiling of about $10 billion. It is shared with five other firms, but it does have the potential to be a major contributor to us in the future.

I do want to note that it is a brand new contract. We have just executed the project, the contract, but no projects have been started yet. It contributed no backlog and no revenue to either the third quarter, and really we have not incorporated any contributions here in the fourth quarter from it either. So anything that we begin to develop on this contract is all upside, both in the client and the project, but the services and type of work that this represents, are very similar to what we are doing with the US AID, and our other clients, so this is the same type of work we do. We think we are well positioned. It is a very large opportunity, that is upside and is not currently factored into any of our guidance for the fourth quarter.

I would now like to turn the presentation over to Steve Burdick, who will provide us a bit more detailed evaluation of the financial results for the quarter. Steve?

Thank you, Dan. I will begin with the third quarter financial overview. Revenue increased $111 million or about 20% to $673.8 million as a result of growth in our mining and engineering business, both in the United States and in international markets. And revenue from our Canadian acquisitions including BPR, EBA and Franzen contributed to our revenue growth. Net revenue increased 30% to $480.5 million, which is at a higher rate than the revenue increases for the same reasons I just noted. Also this increase resulted in Tetra Tech exceeding the top end of our net revenue guidance. Income from operations increased 20% to $39.4 million, the operating income grew at the same rate as the top line revenue, resulting in an 8.2% operating margin. This margin was impacted by higher intangible amortization expense. This year it was about $7 million in the quarter, versus $2.9 million in the prior year quarter. And we experienced a lower margin on our back end business.

The EBIT to margin was better than the top line revenue increases, because as I just mentioned the amortization was higher in the current year. Our SG&A increased 8%, or $3.3 million to $43 million for the quarter. Most of this increase was for the intangible amortization. I also want to point out that our SG&A costs are growing at a smaller percentage when compared to our revenue growth, as we continue to grow our top line and leverage our back end G&A office expenses. Tax increased about $13 million due to higher income. We continue to forecast an annual effective rate of about 34% for fiscal 2011, and our tax rate for Q4 will be at about 35%. Our earnings per share as Dan mentioned before, $0.38 exceeded our previous guidance by about $0.01 on the top end.

Accounts Receivable increased about 29%, or $152 million to $669 million. The increase primarily related to about $111 million of the increase in revenue that I had previously mentioned. Also, our Days Sales Receivables increased in the quarter, this quarter compared to last year primarily from our Canadian operations. Accounts Payable increased about 21%, which is similar to our revenue growth. And on a third quarter year-over-year basis, our net cash position changed to a net debt position. We undertook debt as a result of our acquisitions in Canada and Australia during the current year, and the cash used in our acquisition-related activities for the current fiscal year has amounted to just over $200 million.

The quarter three operating cash flow was $55.8 million in the quarter. We continued to generate very good cash from our operations, and in this case, exceeding our bottom line. On a year-to-date basis, we have generated about $98 million from operations. As a result of this, we are increasing our forecasted fiscal 2011 cash flows from operations to be in the range of about $110 million to about $120 million. CapEx is lower than the prior year, and tracking less than our previous guidance that we had given. Our CapEx is lower as we reduce our investments on the back end equipment, and we now expect our CapEx to be in the range of about $15 million to $20 million for fiscal 2011.

Our Days Sales Outstanding of 78.2 days is higher than last year at this point. As I have stated earlier a primary reason for the increase is due to a higher DSO from our Canadian acquisitions over the last year. The next graphic shows the impact of the positive operating cash flow generated, and the net cash used for acquisitions. As you can see in the graphic, our net debt position has improved sequentially to $17.2 million from the beginning of the year. We continue to leverage our balance sheet, and our positive operating cash flow to invest in growth opportunities that will provide high profit margins, and access to new markets.

That concludes our third quarter financial review, and I will hand it back over to Dan at this point.

Thanks, Steve. I would like to describe how the Company as evolved this past year. And it actually has been a transformative period for us, and how this transformation has affected our business mix and our revenue growth. Over the past three years primarily through acquisitions, and now through significant organic growth in our Canadian operations, we are expanding our international revenues. By expanding and creating a critical mass in specifically Canada, our international we call it international operations, I mentioned this earlier but I will state it again, for this past quarter and year-to-date is primarily our Canadian operations. That is what our international activities are, but we have moved from just one year ago from 13% of our revenue, to over 30% this past quarter.

This is our fastest growing segment, both sequentially and year-over-year, and provides us access to new geographies specifically like Canada, locations with higher GDP growth and with commercial clients in high growing areas, like mining and the energy markets, and with our newest acquisition in Australia, we have made our first step into expanding our presence there, and we are looking to do a very similar action as we did in Canada, and add new clients in geographies that are growing faster. I plan to continue this expansion of our revenues from outside the United States, and to move rapidly to change our business mix to more than 40% international. I do want to make one thing very clear, I am looking to increase that to 40% without decreasing our US Federal revenues at all. I am looking to maintain those numbers, increase those numbers, continue to participate in growing programs, and even take market share, but it won't grow as fast as these international operations.

This change in the business mix, though to more international, namely Canada, Australia, and I would say even extension, South America we are looking to add new entities, will result in an increasing earnings margin for the Company, and increasing organic growth rate as we move this transition up to 40%. At the same time I do want to reiterate I do expect our US Federal revenues to stay where they are at. I believe in the short-term they will be relatively flat or stable, but I do expect that we will be on higher priority programs. I think that over the next year or two our Federal revenues as a percentage of our overall revenue contribution will move toward 30%, and it be dominated by high priority, high profile, front end services that are for critical programs, that should be enduring and relatively unaffected by short-term changes in priorities, as they go through the budgeting process.

There is no doubt the US economy still remains the largest economy in the world, and is a strong base for our clients and our domestic lines of service. This month in fact it was just a couple of weeks ago, we announced our newest acquisition, and it was our first in Australia. We have had a couple of offices down there, but they are largely project offices. This is our first full-time permanent operation, and it is the firm Proteus, we announced the intended acquisition a few weeks ago, and I am happy to announce that we closed Monday of this week, so this is past tense.

Proteus brings to Tetra Tech a team headquartered in Perth, Australia. Really the fast growing area in all of Australia. And it offers immediate synergies with all of our global mining practices. I expect the integration is going to be very smooth. In fact we have been working with Proteus, and have had offices and staff almost co-located. We are just a few blocks apart in Perth, and have had a close working relationship, and they are already working on joint projects, even just in the first few days of their joining us. Proteus has an extraordinary potential for rapid growth. We would like to see something very similar to what we have seen in Canada, and I think with Tetra Tech's resources that we can bring to Proteus, particularly here in the US, where we can provide additional engineering capacity and resources, that they can take on larger projects, more complicated and longer programs. So we expect them to do very well as part of Tetra Tech, and in fact I understand our new Australian addition has said they will show the Canadians how fast they can pick up as being part of Tetra Tech. So welcome to Tetra Tech Proteus.

I have also announced this past month some key additions to our management team, and I am very pleased to announce and to welcome Frank Gross, who has joined us as the Business Group President for our RCM group. Frank brings significant operational experience in construction management, and shares my personal commitment to focusing on converting our front end services work into back end projects. He has a background in energy and mining sector, and he is very well aligned to our fastest growing markets, and I look for this to become an ever more prominent part of our business, taking projects from the study design to, I would like to say sole source, but at least sole negotiated execution of these programs.

I also announced the appointment of Brian Carter as the new Corporate Controller, and with Steve Burdick's formal appointment as CFO this past quarter, our finance team is fully in place. I believe that these additions have strengthened our management team, and will provide us all of the leadership, the depth and capability to manage, and to effectively execute on this growth and expansion plan we have over the next coming year, and on into the future. we had this year.

I would like to now present our guidance for the fourth quarter and for all of fiscal year 2011. First before I turn specifically to the numbers, I want to point out one item. For those of you on the call following Tetra Tech that are going to do year-on-year comparisons for the fourth quarter, and even for the year, last year, fiscal year 2010 our fourth quarter had 14 weeks, one week more than we have this year. This is something that occurs, it is an artifact of the calendar, and accounting, it is something that occurs about every six years or so. To do a straight-up comparison, please take that into account.

For the fourth quarter, guidance for net revenue for the fourth quarter is a range of $460 million to $480 million, with an associated diluted earnings per share of $0.38 to $0.41. For the entire year moved up our estimate for revenue, net revenue to $1.78 billion to $1.8 billion. Just an extension of our fourth quarter plus the first three actuals, with a diluted earnings per share for the year of $1.39 to $1.42. A couple of items I will note here for your modeling and assumptions in these guidance numbers, are this earnings does exclude contributions from future acquisitions, although we only have a couple of months left here in the fiscal year. It does assume $0.30 of intangible amortizations, our estimate for the year that we will incur, that will not contribute to our EPS. It does include $0.11 of stock expense compensation, that is a noncash charge. 34% effective tax rate for the year, but for the quarter 35%, and finally, 36 million(Sic-see presentation slides) average diluted shares outstanding.

In summary, we had an excellent third quarter, and are beginning the fourth quarter with strong performance in our front end services groups, all three of them, both here in the United States and really across the world, which for us is primarily Canada, and now beginning in Australia. Our growth in the United States for our commercial clients and Canadian markets and now with Australia additions, continues to diversify our customer mix.

We are not moving away from our US Federal government client, we are just adding additional clients so that we can bring our front end expertise around the world. Our US Federal revenues remain stable. We are focused on the front end services of the US government's highest priority programs, so we expect them to remain steady and stable. And our excellent cash generation is providing us the liquidity necessary to support a strong acquisition pipeline. We have the opportunities. We expect to be more active in Australia, and we also expect to begin supporting our clients with in country permanent presence in South America.

So I am looking forward to an excellent fourth quarter and completion of fiscal year 2011, and believe we are in very good position for growth in 2012. And with that I would like to now open the call for questions. Kristin.

(Operator Instructions). Your first question is from Jeff Beach with Stifel Nicolaus.

Good morning.

Good morning, Jeff.

The market right now seems to be concerned about a double dip recession, if increasing signs would emerge over the next couple of quarters that is going to occur, are there any actions that you would take, or do you feel like you are positioned and would move forward with all of the initiatives you have in place, and just ride through this?

Well, we are obviously on the cost side, we are very sensitive and we would look to make any adjustments necessary for our business. The one item I have noticed through the first dip of this double dip recession is that our focus on the front end work, has been much more stable than I would say the market. And that is for a couple of reasons. Number one, water programs. Even through a recession the supply of clean drinking water, and the supply of or treatment of waste water for some of the key clients doesn't change. Those are still things that take place. Water adds a very large stability component to our business, even through a double dip recession, ongoing operations with the commercial clients that utilize water, and that is from manufacturing to mining to energy, still need the supply of water, and the treatment of the waste products that come out.

And the other thing I have noticed that with 80%, in fact with the addition of Proteus, that number will move up even more on the front end studies work. We have actually seen an interesting sort of counter intuitive phenomenon, where smaller dollars are for studies, so more studies go forward where larger construction activities get put on hold. We have actually seen a slow down of the economic activity of the front end design study and science work go forward, and in some case even increase. You may study the same project twice or three times, in order to determine how you can value engineer more savings on the construction project, and that up front study work is really our fundamental home court.

Alright, thanks. And then as a follow-up question, on the Federal strategy to approach Federal to grow it, even though it shrinks as a percentage of the Company, is there going to be some sort of effort here to maybe cull out lower margin federal business, just by sticking to strong pricing and demanding high margins? Is that part of a program ahead here to bolster the Federal government margins?

Yes, Jeff. We really the one area where we have had pricing pressure on our federal work has been on the back end execution, and where it has been particularly competitive, and there are programs where at the Federal level the can be done on a turnkey basis, design build or others, and so we are going to look to emphasize where pricing is not the differentiator, but technical solutions are, and it does result in the best value for our clients, and so that is what I spoke to on conversion, and we are going to put an extra emphasis on that, so it will bolster I believe not only our margins which certainly will be the case, but I think actually our revenues also in that area.

Alright. Thank you.

Thank you, Jeff.

Your next question is from John Quealy with Canaccord.

Good morning. Chip Morley for John. Wondering if you could talk more about your current mix of backlog specifically for federal and state and local, and then also timeframes there?

Well, the composition of our backlog has changed. In past quarters I indicated that the Federal portion, our backlog was comprised of more Federal work than it was others. It actually now is slightly if you take our recurrent revenue run rate, it does approximate our backlog on a percentage basis. So Federal does no longer represent a larger component of our backlog. Now an artifact of that is our Federal work typically was longer backlog. They were larger projects. They were longer in duration. We now have more commercial, and while we call it international, which is Canada and now Australia, that is primarily commercial work also, and so it is a bit shorter duration. Commercial clients give the projects out in smaller increments. The overall contract which we do not report in backlog, we only report orders that are provided under the contract capacity, but our contract capacity has gone up this past quarter. It has gone up over this past year. It is now, well, we don't report it with any specific details, because of some vehicles are shared, our contract capacity really is at an all-time high. Backlog is burning a little quicker, so the backlog that we have will support the increased revenue forecast we provided in our guidance.

That is helpful. And I guess as we look out for some of the longer term Federal business, how do you think about replenishment there, and is there ultimately any risk of cancellations at all?

We have not seen any cancellations And we have seen orders look still strong in that area, so we have not seen any slowdown, and with the addition of a new client sector that we think have has strong funding and a priority for the US Federal government, and the State Department, we think that is all upside in addition to what we have now.

Okay. Lastly maybe you could speak to M&A. Sounds like you are getting more aggressive here. Clearly looks like eastern Australia is one area of focus, and then did you mention South America as somewhat of a precursor there by opening an office? Maybe just talk about where you are thinking M&A?

Well, Australia we are getting more aggressive. One thing that it is expensive, airplane tickets from the US down there to do this. We have got our folks down there much more frequently, and since M&A activity is expensed in the quarter, our performance is actually on a year-on-year basis even better, because of the expenses that we have on the M&A side, which ultimately will bear fruit and contributions to the Company. Australia, yes, we are going to go across the country, not just western Australia. In South America we are looking where the large mining and energy clients are, Chile being a great opportunity for us. We already have offices in South America, specifically Santiago. What their project office is supporting our clients that are multinational commercial mining clients who have taken us there. What I would look to do is to actually add an acquisition, so that we have a permanent presence with individuals that are local, familiar with additional new clients, and that could use a larger resource base and capability with Tetra Tech. Join Tetra Tech, and then leverage those contracts and clients relationships up, but mainly Chile and Brazil would be the two top locations we would be looking at.

Thanks, Dan.

Thank you, Chip.

Your next question is from Min Cho with FBR and Company.

Good morning, congratulations on a really strong quarter. A couple of questions here. Can you tell me what your organic revenue growth was in the quarter?

It was about 4.5%.

Okay. And it was great to see a backlog up 12%. Did notice it was down a little bit sequentially, book to bill is a little below 1, which hasn't been the case for several quarters. Is that just tied to quarterly lumpiness? Seeing any type of pullback in any of the sectors?

No, it was you are right we have had 1.5 years or more of sequential growth. You are right, year-over-year up 12%, I felt good, but almost all of it, the majority of that reduction came out of work that was executed through RCM without having it replaced. So orders were strong and up, really front end projects at the front three business groups. So I would say that the composition of our backlog may be at the highest quality we have ever seen, and what my definition of highest quality is, it has the highest margin, and also is at the earliest part of a project, so that it is not only a project that is going to give the revenue associated with the order, but represents an opportunity for us to continue executing on those projects downstream, meaning the additional studies, additional permitting, designing it, and then I am going to be looking to convert it to implementation. I would say a little bit of lumpiness, but it was mostly the burning off in the back end group.

Excellent. That is great. Also one of your peers is talking a little bit about seeing some increased opportunities in the wind farm market, and I know that is something that you have talked about in the past, and obviously not looking for a very, not looking for strong growth there. But are you seeing any improvement there? Seeing any increased kind of bidding opportunity?

We are. We are. This year we came into fiscal year 2011 with an internal forecast of about $100 million of wind work. We expect we will hit about that number. Actually looks like that is sort of a similar run rate that we have going forward. And we have seen bidding opportunities in order to meet tax opportunities for projects that would start up before the end of the calendar year. So these different tax incentives have again, are beginning to trigger or initiate more opportunities. So we have got a pretty full pipeline of bidding opportunities. But I think that what that would translate into is not a big growth, but a sustainment of a run rate of about $100 million of wind work.

I got you. Perfect, great. Thank you. And good luck this quarter.

Great, thank you Min.

Your next question is from Avram Fisher with BMO Capital Markets.

Hi, good morning. Thanks for taking my questions.

Thank you.

I am not sure if you said this, but how much backlog was acquired in the quarter?

Not much backlog was acquired in the quarter. All of the backlog had come in with, that were layered in going back almost a year ago, so the Canadian operations were added many quarters ago. The two major acquisitions, go back to last summer so a year ago, so the incremental addition was essentially none, just representative of their ongoing operations and there was no acquisition that joined the Company during the third quarter.

And referring to Min's question where you were talking about RCM large projects, any way you could specify, did some projects complete in the quarter?

Yes. That is exactly right. A number of the largest civil construction projects for levies, T walls or flood wall protections, and even big sector gates, which were big access gates in the New Orleans area were completed during the quarter. The US government had a priority to complete this before, quote, hurricane season, which officially starts on June 1st as a designation. So these were completed, and not replaced with additional projects in the back end group.

Great. Thanks for that detail. EAS margins were pretty exceptional in the quarter. I am trying to understand it kind of what drove that if it is sustainable, if there were any one-time items in the quarter?

There were a few one-time project closeouts. They were up over 11%. I think that we have historically indicated that an operating range of 6% to 8% would be sort of what we would expect them to run in. The reality is because of the transition to more international and commercial work, I believe that range is going up. You will see us come out here as we look into 2012 to move that up a point or so. So on both the low and high end, but the 11% is not, should not be used as a modeling number. They did have exceptional performance in the upper single digits, kind of 7%, 8%, 9%, but the difference of the additional maybe 200 basis points above that, were really associated with excellent performance and project closeout recognition.

So excluding those closeouts you were back within this kind of normal range? Have gotten back to normal in that segment, or as close to normal as one could be right now?

Yes. They have actually done very well. We transitioned from being predominantly state and local, which is municipal work for water, waste water, and we have transitioned over to water supply treatment for industrial clients, like mining and some manufacturing and some international work. So margins up, revenues look very stable, and in fact growing, and I feel pretty good about that group.

Great. And regarding your international expansion, does it get harder to continue to drive strong operating and free cash flow as you move overseas? I guess how do you do that?

Well a couple of ways we do it. Some clients, because there is such a high demand for engineering support of some of these largest energy and mining projects, that we have actually seen some of the clients lock up their engineering contract, or our consultant, and one way of locking up are very large advance payments, prepayments, items that ensure them dedicated support and continuity of the technical engineers and staff. So in some instances, you can actually have prepayments, and so I would say it is possible that it is almost the opposite. It could be a favorable reduction in our Receivables.

And also regarding the Australian markets, your SG&A when you back out the amortization, it looks to be down quarter-over-quarter and year-over-year. Despite what you talked about, the expensive travel to Perth, can you continue to maintain these SG&A levels as you grow overseas, or should we expect them to expand?

I would like to see them remain stable. But I actually think we will spend more on SG&A, because as we go overseas we are adding a new dimension of complexity to our business. I do believe that we have a very strong execution culture here. We run our business very well. Many of these things are having common platforms, and different accounting and control systems, as well as collaboration with our engineers, so I think on a percentage basis we will be similar. But I expect we will add more dollars there, to manage a much larger and geographically diverse business.

And finally also looking to next year, any sense of what the amortization is going to look like, either on a per share or absolute basis?

Right now without adding any new acquisitions, we expect that amortization to be about $21 million.

Super. I appreciate it. Thanks for the detail, and thanks for your questions.

Sure, thank you Avi.

Your next question from Andrew Whittman with Robert W. Baird.

Hi, guys. Good morning. Wanted to just dig in a little bit more on the bidding activity kind of overall maybe since the end of the quarter, Dan how would you quantify or qualify the bidding activity out there maybe versus maybe earlier in the year? What segments, how much of it, dollar amounts involved, things like that would be helpful, I think?

I would characterize it qualitatively as strong and improving. But I would parse that out into geography and client types. I would say that the client types being mining and energy, and the geography being Canada and Australia, are particularly strong, and you saw the actual results as far as quantification in the third quarter's growth. It is that type of opportunities that are driving that growth. So don't want to put a specific number on it. I would say here in the US, the commercial business on manufacturing has picked up for us. I would say that is every, across from the entire manufacturing sector has been strong. And on the Federal government I call it stable. We have not seen it particularly increase notably, but even in light of this uncertainty with some of the budget, and some of these other items, we have actually seen a pretty stable set of orders and opportunities across our client base. So I don't attribute that to complete stability across the entire Federal sector. I actually attribute it to the types of projects and the priority programs that we are supporting. I do think we are in a very good space.

And you kind of alluded to it but can you just give us kind of your philosophical take on what we know of the recent budget agreement, if you saw that as kind of a net positive from what could have happened, or maybe a net negative, obviously the details haven't been hammered out exactly with the programs, but in aggregate what is kind of your take on the budget agreement?

I took it as sort of a net neutral. The budget agreement was just adding a ceiling. The 2011 is already locked down, and we are well into that year, and that will carry us through funding in our project the end of the fiscal year, and really through the end of the calendar year on the projects. 2012 already given an indication that we expect very little change, with respect to the programs that we are working on. Earliest we could see any type of change at all, would be 2013, or maybe even later. One thing I note, they talk about a lot of headline risk, a lot of headline attention being provided to very large numbers that are, you just can't miss these numbers when they have that many zeros behind them. But a lot of these are with respect to reduction of forecasted increases. If you have an increase of the overall budget at 2% or 3% GDP, and then they take a trillion off here or there, you still have stable or increasing budgets in selected sector, with respect to this year, compared to next year. What we have actually parsed out, doesn't look like an impact to the programs that we are supporting.

Thanks. And I just want to dig a little bit into the recent acquisitions. Clearly you are very pleased with those. You mentioned one of them was growing, has been organically at 30% or so. Is that indicative of all of the recent acquisitions in Canada, or how would you say the organic growth maybe on a blended basis has been for the businesses? Or maybe if you don't want to quantify that, just as it related to your initial plan going in?

They are better than our initial plan going in. I would say you are right the 30%-ish organic growth had been with us a few years. Let's say on a blended rate it is probably maybe 15% to 20%. But some of them in sectors of their business are growing even far in excess of that. And I think that it will actually have a leveraged benefit to the Company because supporting companies, our supporting operations up in places like Fort McMurray with the oil sands, there is more work that can be provided by Tetra Tech on a consolidated basis, than our Canadian acquisitions were providing just on their own.

I think that Tetra Tech is providing better solutions, more responsive engineers. New alternatives that haven't been available up in the oil sands. And there is a new player that maybe allow some of the existing incumbents to raise their game and do better for the oil sands, and give us a chance to actually compete, and increase the service levels and solutions for those clients. And I will say in Canada one thing that is interesting is the softening dollar, with over 3,000 people and 30% of our work in Canada, there has been a benefit from the US currency fluctuations, that is not a bad thing for us.

Great. Thank you very much.

Thank you, Andy.

Your next question is from Richard Paget with WJB Capital.

Good morning, everyone.

Good morning, Richard.

Dan, I wonder if we could just get back to your international expansion plans. For Australia you said you wanted to use Canada as kind of a blueprint, and have already got enough foothold in there, and want to ebbs and over the rest of the country. We have heard about engineering shortages in Australia. Is that going to be more difficult at this point in the cycle relative to how you did it in Canada? Are you going to be more expensive, are you going to have to rely possibly more on organic growth there?

I think that for sure let me come back to an underlying issue, is a shortage of staff engineers and technical staff in country no doubt that is the case, but I believe that makes Tetra Tech the ideal partner for firms in Australia, Tetra Tech has 12,000, getting close to 13,000, some have asked me to round up to that number for this call. But we are very close to 13,000 technical professionals. The US will be a low cost outsourcing center of very highly talented, very capable engineering that is very cheap. The Australian dollar as an example has gone from about US$.80 to the Australian dollar, and even less than that here just a couple of years ago, in fact even less than that, to approaching $1.10 of US. So huge swings, makes the US individual much cheaper, on an exchange rate. The actual dollar amount they are getting paid is much less here.

So if we can have front end experts that have relationships with clients that are resource constrained, and there is a natural resource limitation in Australia, because of immigration restrictions, and many other items, and high demand for work to be done, having someone who has excellent upfront technical capabilities, relationships with the clients, but can get the work executed real time from here in the US where we have capacity, and very top end engineering and scientific staff, is actually I think the perfect marriage. The individuals is in country, it is a win, they can offer more. They can get resources that couldn't possibly be accessed in Australia, and there are very few firms that have our level of capacity at the front end. So they are going to do the construction has to be done in country, that is not where we are going. Where we are going is front end. We are going to get the front end studies, feasibility, environmental evaluations, resource assessment, permitting, the final engineering work. Even some of the oversight, but that can be supported from here, so I think all of this plays very well into supporting our acquisition strategy in Australia.

Okay, great. And then just getting back to that slide 12 where you talk about the transformation, and the EBITDA margin impact. I mean I guess if you go from the 13% to the 31% EBITDA margins were kind of flat, but then that incremental getting to 40% gets you up to 13. Is some of that burned off amortization? Is it the integration? What kind of drives that bump up in margins that you didn't get in the kind of first ratchet up?

Richard, I am really glad you asked that. If you wanted to know the one item on our slide that I don't like, I don't like that. I don't like that a year ago that we are expanding into higher margin geographies, we are getting better clients, we are going more international. And again our international is Canada and Australia, but my margins look the same from a year ago to today. Let me comment on that because I also want to point out one other item. If you take a look at the incremental increase in the revenue was about $110 million on the same quarter a year ago of net revenue, but we added about $6 million on net income. So I did have an individual here in Tetra Tech say we added $100 million and we added $6 million of income. Is this 6% business? The business that we are adding is double digit, it is 10, 11, 12 and the actual incremental addition of the firms is about $12 million on a $100 million. So about 12%.

The reason we didn't see that was a year ago, and this goes to the 11% comparison one year over, because this is very accurate, I mean the data is the data, but we had 11% margins out of the RCM group, or 10.1% a year ago, and this year 4%. And so when you are talking a 600 basis point change in RCM that is what makes it optically look as if it hasn't changed. So as we take and normalize RCM back to a more favorable margin, and if the growth occurs in the other areas, that will result in this increase in the overall margin of the Company, and I think it makes a somewhat unfavorable EBITDA comparison of one year ago to today, because of just that back end segment.

Okay. Got you. And then just finally, with the CJPS contract, I mean how should we think about that? I guess you can't really just divide it by the years, divide it by the other contractors, and then try and get an annual run rate. Is there some kind of historical framework that you can look to see, A, the potential size of the orders that you will get? And B, is it going be kind of steady order flow? Might there be some big projects that kind of lump in, and just trying to get my hands around it?

Well, we are looking at somewhere to what you have just indicated. The reason we have not put it into our fourth quarter, or to our guidance or forecast at this point, is it is a new client for us, it is a new program for us, but we can take a look at what was executed on similar projects with the State Department in the past. We have done the linear math if you divided up puts it at roughly $200 million a year. That is actually pretty significant. By looking at the types of orders that have come out of these contracts from the State Department in the past, first of all and most importantly, these types of vehicles have been fully funded in the past by the State Department so they are not empty buckets, or hollow contract vehicles. So first of all, that is most importantly the first thing we look at. Number two, I expect that as the projects begin to come out on the contract, and it is my understanding to date essentially none have to any of the contractors, so it is just getting started, but that will probably represent a large initial order, so they will show up in backlog and then represent a very steady execution over a longer period of time. You will see a big impact to backlog, and then a steady execution over a multi quarter basis.

Alright. Thanks. I will get back in queue.

Thank you, Richard.

Your next question is from Chris Wiggins with Oppenheimer.

Hi, thanks everyone, good morning. Most of my questions have been answered. Wondering if you could provide any color what or are you doing any projects, what type of projects are you doing around frac water, and if there is any way you could size this opportunity, if you think it as potential opportunity going forward?

Frac water we are doing some work. Most of the work we are doing is in the Marcellus, so on the East. The competition for us right now with frac water, is what we would prefer is treatment, and we are competing with a lack of regulatory environment which the competing technology is trucking and disposing of it. So I believe that as the regulatory environment develops in this area, it will represent a large opportunity for us really across all of the different shale gas producing regions of the country, so not just the East but really throughout the country. We are ready for it. We are anxious. We are interested. Our current run rate on support of, I will call it the shale gas market, and again it is mostly around water supply, with a little bit of tail end water treatment, is probably less than $10 million a year currently, so any type of movement in this area we see as a big upside. I am personally and we as a Company are very focused on the Bakken and that geography, because it has an opportunity not only with the fracing process used not only for gas production but also oil production, and that adds additional complexity, and that fits better with some of our technical opportunity that we can provide to our clients.

That is helpful. That is all I have. Thank you.

Thanks, Chris.

Your next question from Tahira Afzal, KeyBanc Capital Markets.

Hi guys, this is [Sagheer] on for Tahira. The majority of the questions have been answered, but looking at utilization in the quarter, kind of wanted to get a gauge of where that was in what range, and then where you see that picking up in the fourth quarter?

The utilization was up in the high 60%. It was pretty strong. And that is what we usually see both in the third quarter and the fourth quarter.

Okay. Is that pretty, is that probably a couple, a few basis points higher than what you guys were expecting going into the quarter then?

Well, let's take a look at the business overall. We do have seasonality in our first and second quarters because of weather holidays, and that type of thing, so really depending on the project mix, we always expect it to be in the high 60s in the third quarter and the fourth quarter so.

Okay.

Yes, about where, it came in about where we thought.

Perfect. And then looking at gross margins, I know the RCM segment with the work in Louisiana, brought down overall Company gross margins, but with that work in Louisiana pretty much being done now, can we see gross margins slowly tracking back into the mid-18% range now?

The gross margin numbers, we added several firms. Historically we have always been right around 20%. As we have added some of the Canadian firms there, coding or designation of cost either into overhead or into SG&A, does impact how it is calculated from a numeric standpoint, what your gross margin is. I expect that once we get it all in the right similar designations that we had here with our historical operations, I don't think we have really had much change in our gross margins, other than going up incrementally as our overall earnings margins have gone up, so I think if anything the gross margin numbers have gone up a point or two. I do know the optics on it looks like it has come down to I believe the calculation was 17 or 17s. I think that once we get it all on the same classification, the number is actually right in line with historicals of around 20 or 21.

Okay, and if I look at your SG&A as a percentage of net revenue, and if I calculated it correctly I think it was your lowest number in 8 years. So is that more related to that classification too then, and that probably will tick up while the gross margin ticks up?

Yes. That was part of it.

Okay. Perfect. And other than that I think I am good to go. Thank you very much.

Great, thanks Sagheer.

Thanks. Bye.

Next question is from Jerry Barmore with First Analysis.

Good morning.

Good morning, Jerry.

My question relates to the contribution of international business to margin expansion in future quarters. Can you comment broadly on what kind of competition you are seeing in your international markets, and how that might impact pricing relative to your US operations?

Well, we have actually seen, I don't want to use the word minimal, because I don't want to mischaracterize it. There is some competition but it is not around pricing with respect to margin. It is generally around technical solution. I would say that on the pricing front, we have slightly less competition on the international, but it is because the work that we are doing internationally, and again I will classify it for what it is, it is Canada, our Canadian operation, and now where we had a project offices both in Santiago and in Australia, they their front end work. What the clients are looking for is not the lowest price as a commodity buy, but as a value buy as to the highest technical solution for their different projects. I would say there is what we win and where we are successful has very attractive margins, but the competition isn't on a margin basis or a pricing basis. It is on a technical qualifications and solution basis.

Okay. Thank you. That is helpful.

Your next question is from David Wells with Thompson Research Group. David Wells: Hi, good morning, everyone.

Good morning, David.

I guess looking at the remaining pieces of the backlog that are associated with RCM, how would you characterize the margins on that work, relative to the margins that we saw in the quarter, and should we see some of that margin in the fourth quarter improve, relative to where it has been sequentially up to this point?

I think there will be, it is slightly better. We had a lot of material pass through on the work in New Orleans, so it was not particularly attractive on a margin basis. The remaining backlog in the back end work is slightly better, but I would say generally speaking I would characterize it as similar. So I would say slight improvement, but I wouldn't expect that you are going to see a material change here in the next few quarters.

Okay. That is helpful. Certainly you put more management horsepower around that business. I guess what I am trying to understand is, I get the national expansion and seems like that is a margin additive piece, but looking at the RCM segment it seems like a structurally a more competitive business to be in. Where you are competing against larger firms for that type of work, when the market begins to recover do you feel like that is a business that can be additive to overall margins, or is it more just kind of a gross dollars revenue growth platform, but the margins are always going to be structurally less than perhaps some of your more attractive pieces of business?

I will come at that from the last part of your question to the beginning. I think that structurally it is lower margin business, but I do believe that if we do this right, and as the market recovers that it will have attractive margins, although slightly less than the double digit numbers we have in our front end business. It is going to add a differentiation in the competition landscape. Many of the clients need to get their projects done, and we will contract for it on a turnkey basis. They use words like design build, which means you design it, you build it. They use words turnkey, which you go from the beginning and study it and permit if and design it and build it, and use words in the mining and energy markets, EPCM, you engineer it, you procure it, and you construction manage it, and even EPC, you engineer it and procure it and you construct it.

We need that back end so that we can compete, and not be excluded from the largest most complicated projects in the world. I will tell you Frank, who just joined us, does have that experience. He managed and grew a more than $1 billion operation on the power and energy side, has a lot of oil and gas experience. What I like best about Frank and the additional management that we brought in there, he has an excellent track record of conversion, and what that is not going out into the market and competing for low price on an open unrestricted competitive bid, but leveraging the relationships that we have at the front end and moving it into the back end, and that is really where I think we can do a lot better.

That is really helpful. Appreciate the color there. Thanks.

Thanks.

Your final question is from Alan Robinson, Royal Bank of Canada.

Could you provide a little more context to your revenue growth slide. Given the current global project landscape, where do you see your long-term total revenue growth goals, and where do you see the split between acquired and organic growth?

I think that in the long-term we are going to target a 15% top line growth, and with a margin growth of something greater than that. So that we do have leverage in our model. I do think that the acquisitions here in a slow world economic growth cycle, where we have slow GDP growth in the US, you will see less of it organic, but would actually as these firms roll one year in calculation, I think our organic numbers going to improve because of the larger percentage we have in these higher GDP growth countries, like Canada specifically right now, but also Australia. So overall I would say when you take a look at it on an integrated basis I think about half of that 15% will come from acquisition and about half organic. I think that we are at 4.5%-ish, so call it 5%. We are a bit below where I would like to be, but I think that is because of some of the slower markets here in the US with respect to growth, but as we expand international to 40% I think that number will move up to that range, and I expect to match it with acquisitive growth.

Thank you.

Great, thank you very much. I understand that is the last question. Those were excellent questions. I do very much appreciate the time you all spent to understand the details of our performance, where our growth is coming from, and really where the opportunities are. I do know we call it on many of our slides and our financials International, and sometimes it is confused with different geographies, but our international work is Canada, Australia, and selected areas in South America. We are looking for a very strong fourth quarter, and I look to speak with all of you again here at the conclusion of our fourth quarter, and not only present the results of our fourth quarter, our entire fiscal year 2011, but provide you our guidance insight and forecast for 2012. And with that have a great day, and I will talk to you soon.

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