Tetra Tech Inc (TTEK) 2011 Q4 法說會逐字稿

Good morning and thank you for joining the Tetra Tech earnings call. By now, you should have received a copy of the press release, if you have not, please contact the Company's corporate office at 626-351-4664. With us today from management are Dan Batrack, Chairman and Chief Executive Officer and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results, and then will open up will call for questions. During the course of the conference call, Tetra Tech management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These include statements concerning future events, and Tetra Tech's future financial performance. The statements are only predictions and may differ materially from actual future events or results. Tetra Tech's Form 10-K and 10-Q reports to the Securities and Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements. In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the Appendix to this presentation and in the Investor Relations section of Tetra Tech's website.

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

Thank you very much Christine. Good morning and welcome to our fourth quarter and fiscal year 2011 earnings release conference call. Steve Burdick, our Chief Financial Officer will present the specifics of our financials during this morning's prepared remarks but I would like to start off with a brief overview of some of our key financial metrics for the fourth quarter and for all of fiscal year 2011. We had an excellent fourth quarter and an excellent completion of 2011.

I'd like to share with you our year-on-year comparisons for some of our key financial metrics, but I want to note that I'm going to be showing some of the percentages on a pro forma basis to provide a more accurate comparison between our fiscal year 2011 and fiscal year 2010 performance. By adjusting the difference in the number of weeks for Q4. Just quarter 4 for the quarter comparisons. We did have an extra week in 2010, so that's what the differences accounted for and really nothing else. With that adjustment our revenue for the year for the quarter $676 million for the quarter, up 16% year-over-year which was the highest revenue for any quarter ever in the Company's history.

Our net revenue was $476 million, 22% up year-over-year, and operating income was at $43 million or up 26% year-over-year, which was also a record high for the Company. Our EBITDA, which is actually a very relevant metric, because it takes the amortization and non-cash charge out of the comparison, was up just over 29% and our diluted earnings per share for our shareholders was at $0.42 for the quarter, or up 20% over the same quarter a year ago. Each of these metrics for earnings beat the high end of our guidance for the fourth quarter. It was a very good quarter for the Company. Now one of Tetra Tech's biggest differentiators is our strength in providing engineering and science based solutions at the very beginning of our client's projects. Our ECS group, which is the Engineering Consulting Services group that focuses on the earliest portions of a project grew at 57% year-over-year, and in 2011 consistently represented about 0.5 of the Company's net revenue.

And I'll talk more about this later in the prepared remarks. This is a group that is leading our international expansion into Australia, and to South America markets by providing front end services in water related infrastructure, mining, oil and gas and hydro-power projects. Both our TSS and EAS groups, who provide front end technical staffing and design services also grew this past quarter. And collectively the 3 front end service groups represented about 80% of our net revenue for the quarter. Our fourth business group, the construction management activity that we have, was down slightly year-over-year as we completed projects at the end of the summer.

Our international work, which is dominated by our Canadian market and more recently includes our initial expansion into Australia and South America is our fastest growing area. International work now represents about 30% of our revenue compared with just 15% a year ago and it's actually ahead of our own projections for about 25%. I think at the beginning of the year we'd projected by the end of fiscal year 2011 we'd be about 25%, so I'm very happy with the progress we've made there. We've ahead of even our own projections. We expect this trend to continue and our international revenue to increase in line with our longer term goal of about 40%. So we think we're well on our way to that number. Our US commercial work is also strengthening. It was up 25% year-over-year driven by work for global mining customers, and project supporting manufacturing, aerospace and other Fortune 500 industrial clients here in the United States.

For the fourth quarter, our revenue from the US Federal work was essentially flat. And represents about 0.33, 33% of our net revenue compared to over 42% a year ago. As I've mentioned before, on many of these quarterly calls, we do work for the Federal Government, which is focused on essential services to support water-quality, environmental management, climate change and energy efficiency programs all very high programs for the government. These programs do continue to remain a priority for the government in spite of the ongoing budget negotiations and budget tightening that's taking place in our US Federal marketplace. So we think that they'll remain very resilient.

Our US state and local work is now, and I've said this before, it's right around 10% this last quarter it was 11% and it's in line with our expectations and I would expect it to remain stable being primarily focused on regulatory driven requirements at the state and local level. Overall, our business mix today is almost evenly balanced between the public and private sectors, which gives us an excellent combination of growth and stability in today's market. For 2011 we finished the year with nearly every metric up at an all time record. We delivered record performance for net revenue, our operating income was record high, our EBITDA a record high and our diluted earnings per share.

Over the past year we raised our guidance 3 times and our final year-end results beat the high end of guidance for net revenue and earnings per share that we provided coming into 2011. But maybe even more important we delivered this type of results while expanding into new geographies and adding new clients, not only in the US and in Canada but around the world putting us in an excellent position going into 2012. We finished the quarter with our backlog at almost $2 billion. It was up about 5% from last year and sequentially up about 4%.

This quarter we are awarded several large indefinite delivery, indefinite quantity contracts, IDIQ contracts as they're referred to, the Federal Government. Such as the recently announced $225 million US Army Corps of Engineers contract with the Louisville district for environmental support activities. These wins add to our large contract capacity that we have with the US Federal Government and a strengthen our position for future orders going into 2012. And we received new orders across all of our top US Federal customers. US AID, Army, Navy, Air Force, Federal Aviation Administration, EPA -- across the board we increased our contract capacity. But it wasn't the only area.

Commercial client orders were also very active for the quarter. Especially from our senior mining customers and Fortune 500 clients so we had a very broad evenly balanced growth across our backlog. Now, if you're following along with the webcast, you should be on page 8 now. And on page 8 of our webcast, we show our growth history over the past 4-years for revenue, net revenue, operating income, and our earnings per share for our shareholders. Our 4-year trends on these charts show that we're delivering at 15% average growth rates for both revenue and income with our profit margins growing faster than our revenue rates.

These results are all in line with our long-term goals for the Company to meet or exceed the 15% annual growth rate. And I want to point out one thing here that may not be readily evident, that this growth is through 4-years of one of the most difficult recessions the world's seen in generations. So I think this is, an excellent demonstration of the resiliency of our business model and the services that we provide. I'd like to now turn the presentation over to Steve Burdick who will provide us some more detailed discussion of the financial results for the quarter and for fiscal year 2011. Steve?

Well thank you Dan. I will begin with the fourth quarter financial overview. I want to point out that all amounts are presented, are on a GAAP basis, and no pro forma data will be presented for the 52, 53-week fiscal year that Dan had mentioned. First, our revenue increased by about $48 million or 8% to $675.7 million as a result of growth in our mining and energy business in both the United States and our international markets. And secondly, revenue from our recent acquisitions in Canada, Australia and Chile also benefited from that growth. Our net revenue increased about 13% to $475.9 million, which is at a higher rate than our revenue increase for the same reasons I noted. We're involved in a lot more self-performance work and this increase also resulted in Tetra Tech hitting close to the top end of our net revenue guidance. Income from operations increased by 17%, or slightly more than $43 million, the operating income grew at a higher rate compared to our revenue resulting in a 9.1% operating margin.

This margin was the highest in the quarter in the last 5-years, despite being impacted by higher intangible amortization expense this quarter, which is about $7.2 million versus $3.8 million in the prior year, and the slightly lower margin in our back end business. The EBITDA margin was better than our top line revenue also because the amortization and depreciation was higher in the current year by about $5 million compared to Q4 of last year. And even with the increased costs, our EBITDA margin was our best since we began tracking it. On the income statement, first, our SG&A increased by about 20% or $8.9 million to $53.8 million for the quarter. About 0.5 of this increase was due to higher intangible amortization and depreciation associated with our fiscal 2011 acquisitions. If we exclude the depreciation and amortization, our SG&A costs have been growing at a smaller percentage, when compared to our revenue growth.

We've been a very cost conscious Company and efficient in our overhead spending, however, let me talk a little bit about 2012. In addition to our normal SG&A increases that are generally below our growth rates, as we've moved towards international expansion, we've made decisions to invest in both IT and risk management areas to support our growth. Specifically, we will incur more next year for financial systems to support our foreign exchange, our cash management and our ERP project systems, human resources to provide policies and procedures in our foreign languages, legal and tax compliance, and corporate development to enhance our M&A and marketing activities around the world. As a result we will incur about an additional $5 million in SG&A in fiscal 2012 over fiscal 2011.

We started to incur these costs in Q4 this year, and we will see much of these additional costs in the first half of fiscal 2012. We don't expect to see the same spike in SG&A growth after fiscal 2012, but instead there will be similar sustaining costs that can be leveraged through our current and future growth rates. Dan will talk a little bit more about these impacts for these increases in fiscal 2012 in our guidance later in the presentation. Next, tax increased to $14.6 million primarily due to higher income. Our annual effective tax rate was 33.8% for fiscal 2011, and the rate we expect to be in fiscal 2012 is at 34.5%. EPS of $0.42 exceeded our previous guidance by $0.01 on the top end.

Our accounts receivable increased 16% or about $91 million to $657 million. The majority of this increase related to the increase in our revenue. Accounts payable decreased slightly due to lower subcontractor costs. And on a fourth quarter year-over-year basis our net cash position changed to a net debt position. Debt was taken on for acquisitions in Canada, Australia and Chile and the cash used in our acquisition related activities for the fiscal year has amounted to over $270 million. The Q4 operating cash flow was $33.2 million for the quarter. For fiscal 2011, we've generated about $132 million from operations. Our operating cash has thus generated about $2.10 per share. Our forecast for 2012 is estimated to be between $130 million and $150 million.

CapEx is lower this year compared to the prior year, and is lower than our previous guidance. Our CapEx is lower as we reduced investments in construction equipment, however, we expect our CapEx to be about $20 million to $25 million in fiscal 2012. And our day sales outstanding is at 73.4 days, which is pretty much the same as it was last year. For all of 2011, our results for the fiscal year on a GAAP basis exceeded our guidance. Net revenue was up 23% over last year, and this is in excess of our long-term growth target rates of 15%. Income from operations increased 18%, and this increase came in spite of an additional $15 million of intangible amortization in fiscal 2011 compared to the prior year. Due to our improved results, our EPS came in at $1.43, which exceeded our previous guidance that we had given.

And finally, EBITDA continues to out pace our revenue growth and improve on a year-over-year basis. For example, in 2009 our EBITDA was 10.8%. 2010 was 10.9%, and in this last fiscal year, we were at 11.1%. This next graphic shows the impact of our positive operating cash generated, as well as the cash used in our acquisitions. As you can see on the graphic, our net debt position has improved sequentially from the beginning of the year through late in Q4 as we closed out several acquisitions. We continue to leverage our balance sheet to invest in growth opportunities that we believe will provide high profit margins and access to new markets. That concludes our fourth quarter and fiscal 2011 financial overview and I will now hand it back over to Dan.

Thanks, Steve for the presentation. I'd like to go to acquisitions for a moment. Acquisitions are a key component of the execution of our strategic plan. We're focused on specific clients, markets and geographies that fit our services and support our growth. Since our last investor's call, we've had 2 new firms join Tetra Tech. I'd like to present them, the larger of the 2, PRO-telligent actually joined us the very last day of the quarter, for the fourth quarter. I'd just like to make a note if you're following some of our investor reports, actually since they joined us, literately the last day. There was no revenue, no income, no financials that were incorporated into any of our results for the fourth quarter or fiscal year 2011.

PRO-telligent does expand our existing international development practice that's been very successful for the Company by adding contracts with the US State Department and they bring over 600 experienced personnel around the world to Tetra Tech and really strengthen this area for us. Second firm we added, and they joined us was Metalica, it's our first South American firm that's joined us. They're based in Santiago, Chile, they provide us an excellent base of operations in South American supporting the continued expansion of our global mining practice. So we welcome both of these. And although PRO-telligent wasn't with us in the fourth quarter, they've now been with us for over a month into the beginning of 2012 and are both integrating very well and making good contributions. Beginning in fiscal year 2012, it was about a month ago, we've realigned and consolidated our environmental and energy consulting practices into the TSS Group, our Technical Support Services group.

In order to accomplish this, we moved a small consulting group that we had in our construction management segment, it was about 3% of our revenues and the domestic environmental consulting practice that was in our ECS group, which is about 6% of our revenues, we moved them into the TSS Group, the TSS segment. We did this to create a critical mass and consolidate our business practice that now represents one of the largest environmental and energy consulting groups in the United States. This group is a technical leader in environmental restoration, sustainability, and energy consulting for both the public and with the private sector and clients in those areas. We did provide a fair amount of additional financial details of the realignment that are available on our Investor Relations page on our website. But this graphic shows what actually moved.

If you're following along on the webcast, we've also shown the margin ranges for each of the business segments that have not changed in the past. As we look forward to fiscal year 2012, we see our international markets continuing to grow both organically and we expect to augment that through acquisitions and create a larger critical mass in some of these geographies. We expect our international organic growth to continue at a level of about 10% driven by a high demand for mining and energy projects. In the United States, the commercial work, is also a growth market for us, supported by the US-based industrial and energy clients, and we see this market area growing organically at about 5%.

As I discussed earlier in today's prepared remarks, we see our US Federal Government and state and local markets as stable based on Federal funding priorities and regulatory programs at the state and local level, that have continued demand and requirements to move forward even through a lot of this uncertainty in the marketplace. In aggregate, we expect overall organic growth rate for 2012 to be in the 3% to 5% range on a consolidated basis. I'd like to now present our guidance for the first quarter of fiscal year 2012 and for the entire fiscal year. For the first quarter, FY 2012 our net revenue, we're providing guidance of $450 million to $500 million for net revenue with an associated diluted earnings per share of $0.33 to $0.36. For the entire year, of fiscal year 2012, a range of net revenue of $1.9 billion to $2.1 billion with an associated diluted earnings per share of $1.50 to $1.63.

In developing this guidance, we incorporated the investment that Steve had talked about earlier of approximately $5 million of additional. In addition to the growth of SG&A that we have associated with managing a larger platform, a larger enterprise, we expect an incremental addition of about $5 million in development of systems to support this larger international operation and expansion. As Steve had mentioned earlier, this specifically will show up as SG&A on an SG&A line. And it is rating as Steve had mentioned earlier, IT systems, additional tax resources, risk management, financial treasury, project management tools, all of the systems that are needed, not just to support the acquisitions that were completed this past quarter or even this past year, but actually to support a much larger platform as we grow our international geographic presence. These additional expense, let me convert this to its impact on EPS. This additional expense equates to about $0.05 for 2012, that will be much front loaded, Q1 and Q2 will have a larger component of that.

As we look to deploy this quickly, it translates on a margin basis within the business segments to about 30 basis points, and it will show up at the segment level because these SG&A costs get deployed through allocations out to the operating units. Some of the other aspects of our guidance, our guidance does exclude contributions from future acquisitions that we've not yet concluded or acquisitions that we would bring on during the year. As has been our practice as we close them, we'll update the guidance accordingly. Fiscal year 2012 also has assumptions of $0.28 of intangible amortization, it includes $0.11 of stock compensation expense, tax rate will be slightly higher, and Steve can provide more detail on this than we saw in 2011, at 34.5% and it has assumed a 64 million shares of diluted shares outstanding for the year.

In summary, as we conclude this call at this point before questions, we had an excellent fourth quarter and a strong 2011 driven by the growth and performance of all 3 of our front end service groups. As Steve had mentioned, we generated cash at more than $2 a share during the year showing we have a lot of leverage in our base and our international acquisitions have added customers and given us the ability to tap into new high growth markets that we've never had access to before. And finally, overall, across our entire firm, the demand for our water, mining and energy relating consulting and design services remain strong in the US, Canada and around the world. And with that, I'd like to open the call up for questions.

(Operator Instructions) Andy Wittmann, Robert W Baird.

Just to start off, backlog growth was pretty good. I was just wondering if there was any contribution from the large state department contract that you've been certified for but I don't believe any, I'm not sure, if anything, has been let under that?

Yes. The CJPS contract which is the very large contract that we received here just a few months ago, has been signed. It's in play place but no task orders have come out. We've included no orders in the fourth quarter and actually even to date, no task orders have come out for procurement through the contract. It's not that it's being delayed. It's in the normal course of ramping up, and I will note that even though it's one of the largest, if not the largest contract that we currently hold as a corporation, we've not included any revenue contribution in our guidance for 2012. It's a new contract. It's just going to be starting up. It could be a very large contributor, but if it does, and we actually expect that it will, it will be incremental both in backlog, earnings and revenue.

Okay. And then just, you expect that it will, does that mean that you've got maybe a little bit of visibility as to when that first award might come?

Well, what we understand is that the late November or early December is when the first task orders will come out for competition, the contract is held by ourselves and 4 others, 5 others. And so but it is such a very large capacity, we believe that all of the contractor holders will receive task orders. Will contribute revenue, but the timing, our initial look at the first task orders, late November, early December and I would hope on our next investors call 3 months from now, I should be able to give you an update on how that's progressing.

Sounds good. I wanted to dig just a little bit into margins then, if you will. Obviously I think strong performance in the quarter. The, TSS margins continue to be pretty steadily over your long-term ranges here, and I understand that, that segment's taking on benefit from, I guess, ECS and then probably headwind from RCM, but is it time to move that average number up to where you've been performing, or are we continuing to see that you're performing above historical levels?

Well, what's transpiring there, and we have this hallway debate with the head of that group is, there's no doubt the performance has been exceptional and consistently exceptional. But there are a number of the contracts that we have with the Federal Government that are transitioning from time and materials to cost plus. And the timing that the transition's taking place has been -- it's actually got pushed out a little bit longer than we thought. So it will actually lower the risk within that group even farther, it's relatively now, but as you move to cost plus, but it will also move the margins down just slightly. So that's why we're not anxious to move our overall range up, but as the timing of this transition from time and materials to cost plus is pushed out to the right margins, it'll continue to be higher as the performance out the group has been very good.

Okay. That's helpful. Then one quick final question on margins. Down in RCM, I think, obviously, I think it's seasonably better quarter to perform that type of business and I think your margins benefited as a result of that. But going forward, should we expect, because of seasonality and just ongoing more challenging environment there, that those margins might kind of sink back down to the levels that may be we saw earlier in this fiscal year that you just reported?

I hope not. I don't think you ever heard me last quarter with a smile in my voice when I was talking about those RCM margins. And what I had talked about last year, last fiscal year was, our moving to right size the business for the revenue we've had, and so I do believe we've caught up with that. So the increase margin had a little bit to do with seasonality because revenues are stronger and you've got more field work, but a lot of it had to do with us right sizing the business. I believe that will carry through into 2012, so I would hope we're going to, and expect that we're going to be in the ranges that we've shown on the slides here earlier today and those that I've presented on earlier calls.

Richard Paget, WJB Capital.

Dan, I wonder if you could talk a little bit more about the realignment and perhaps give us some specific projects that you've switched out of the various segments just so we get a clear picture of exactly what's changing there?

Yes. I'll do that. In the construction management, I'll talk, I'll give an example both from construction management that we moved up to TSS and then also from ECS. I'll start with the RCM group or the construction management. They had actually developed a very strong, actually strong margin business on the consulting side of doing the environmental permitting and some of the initial right of way clearance for environmental and engineering work for renewable energy projects.

So before a wind project would go up, like a wind turbine, they would have to clear it for environmental impacts to soils, so for any chemicals or hazardous waste issues, environmental permitting for endangered species, classic environmental consulting support work. It had developed in this group because of its close alignment with the construction activities but it actually created enough of a critical mass that the synergies that we had in our TSS Group is where it really belonged. That's where our practice leaders were, that's where the largest consulting and an environmental scientist group were within the Company. So that's the piece that we moved over. In fact, its margin are absolutely in line with the numbers that have come out of TSS, so it's not going to change the numbers down. I know that Andy had mentioned on the previous question, made a comment, that it may represent a headwind for TSS, actually that's not the case.

Now moving up to ECS, the environmental consulting practice is where a lot of our hazardous waste and environmental investigation assessment and treat-ability study work is done for our government clients and commercial clients. So this is where we'll do chemical evaluations, geologists. This is where our consultants and our scientists also are, also plenty of engineers. We moved that component down into our TSS Group, where we also had a very large capability that was working for both commercial clients, DOD clients, and for EPA. And so by moving these together, we now have consolidated essentially all of the US domestic environmental hazardous waste and the environmental consulting practice for energy, which are the examples I've given. And those margins also are in line with what TSS has, so TSS didn't get any weak sisters. In fact, I think the ones coming in have challenged the TSS Group to pick it up to their pace. I think it just made total sense and puts it all under a single management and focus. I hope to be even more competitive in the marketplace with this move.

All right. Great. Then just to be clear on the $5 million for 2012 and let's call it the international infrastructure back office investment, now is some of that one-time and some of it re-occurring? Because I wasn't exactly clear on that.

Yes, I'm going to ask Steve talk about a few details, but I'll tell you, a lot of it is re-occurring. So, for instance, we have added staff for international tax. We're not going to add the international tax and then take it away next year. But what it will represent, I think this is very important, it, I see our growth has been somewhat modest in our SG&A, certainly been well below our growth rates. The increase in the percentage for 2012 on our SG&A expenditures, will not continue at that rate in 2013 and out. It will move back to what I'll consider more normal rates or lower rates. But the systems and the project management and the treasury functions we have all will remain in place, but we won't have to add those again in the future, so I'll call them incremental, but they're not one-time and non-recurring.

Right. Okay. Just when you said they were kind of front half loaded I just wasn't sure if there was some start-up costs. But, okay. That makes more sense now. Okay. Then just finally, it looks like in Australia, they passed the carbon tax, is that going to have any impact on your clients and would maybe some assessment of carbon on be an opportunity for you guys?

It is an opportunity. It's something that we don't have work or revenue under contracted today. But we do believe it's going to represent a new market opportunity, and that fits in very well with what we do here in the US. These energy consulting practice. We do a lot of that work here. You've seen a number of press releases for US AID where we're doing climate change and climate studies for governments around the world. So it's a natural fit for us, and this is an excellent example where leverage of the capability we have in other areas of the Company can be brought to Australia to actually capitalize on that opportunity.

Corey Greendale, First Analysis.

Couple questions. First of all, just picking up on a similar -- I just want to make sure I understand on the SG&A. I understand there's a $5 million incremental invested in first half of fiscal 2012. I'm looking at the quarter you just reported SG&A was up about $10 million from Q3, excluding amortization. So is -- I just want to get a sense of what the right run rate is to use for SG&A excluding that $5 million incremental?

Right, if you take a look at the whole year -- the whole year for our SG&A was up about $20 million year-over-year. And so in the fourth quarter, we were up a little bit, and some of that had to do with starting those investments in the fourth quarter that will continue into fiscal 2012.

Okay. So, all right. I think I understand. And also, Steve, can you give me a sense of what interest expense you're assuming in the guidance?

In our guidance?

Yes.

Our guidance shows interest expense will be up a bit more next year. To about $6 million to $6.5 million. And, so that's within our range.

Okay. And then, Dan, I know you talked about the areas to the Federal Government that you focus on tend to be relatively stable. There has been some talk of potential cuts in the US AID budget, can you just talk about your outlook for that particular segment.

Well I think if you look at the slide on backlog and new orders and contract vehicles that were put in place this past quarter, and I think if you'd even look to the previous quarters of fiscal year 2011 you'll see that the US AID has been as strong or stronger than any of the Federal departments. I know that, it continues to be -- I'm very sensitive to the headline risk with respect to proposals by different aspects of Congress and different positions. But my personal position and the position of the Company is that as reductions in Department of Defense and the very, very large budgets of the Federal Government are put under pressure, the one area that should be a benefactor should be the state department and US AID.

Because the dollars are so much significantly smaller and $1 that's spent in prevention of international conflict and all of the rest of the aspects from trade treaties, all come out of, as an artifact of US AID and state department. So we continue to feel strong and bullish on this group, and I think there is a disconnect between the headline risk and what actually is transpiring on the front line with the budgets.

Okay. And one more, just real broadly. The 3% to 5% organic growth that you're looking for in fiscal 2012, I think that's a good performance given the state of the economy, what do you think it would take to get to the 7%-ish long-term average? Do you think you can get there even without more of a recovery in the US as more of your international acquisitions transition into the organic comp?

Well, I think we've -- one thing about the organic growth rate, if you, and I'm sure many of you have run these numbers. In the fourth quarter, we had about 1.5% organic growth rate that you will impute or calculate for this last quarter. But this is 2 aspects. One I want to address briefly, that number, and Number 2, I want to address what will cause it to go higher. We immediately upon bringing firms to join us, our goal is to offer the other capabilities where we believe we're Best-In-Class world leaders in water consulting and a number of other technical areas and leverage it to their clients. That process has actually caused the organic growth rates within the acquisitions that is reported under acquisitive growth to be substantially higher once they've joined Tetra Tech.

So we've seen firms that have joined Tetra Tech that are growing at 5% or 10% organic and by our bringing additional capabilities and engineering we've watched that number go to 20%, 30%. We're moving Tetra Tech staff into those groups and the contract's signed with the acquisitions. So it inherently makes the number that's reporting as organic growth, well understated because actually our staff, our people and the work that's being performed within those units are being brought by Tetra Tech, the parent Company. And I'm going to look into that in this first quarter. But the more we can do that in the high growth areas of Canada, Australia, the fast growing areas of Latin America, as those continue to be strong and the more that we can leverage our services into those markets, that will cause it to be at the upper end and maybe even eclipse without a material recovery even here in the US.

John Quealy, Canaccord.

It's Chip Moore for John. Good to see the first move into Latin America this quarter. As we look at emerging markets going forward, should we be looking for similar sized targets or is there opportunity to pursue something a little larger ala the Canadian model?

Well, I think the Canadian model has just been ideal for us, I'd look to do something along the Canadian model both in Latin America and in Australia. Those are our top 2 geographies that we're focused on. The one thing that I will state is that the current moves we've made with Western Australia and Santiago, Chile are only our first moves and the investments that we're making clearly, I hope, we've been able to convey are intended to support a much larger platform, so we wouldn't be doing that just for the firms that have joined us. We're actually expecting larger opportunities in both of those geographic areas. So yes, larger, although if we have folks of similar size that fit a strategic position for us, we'll certainly not overlook those either.

Great, then I guess bigger picture back to the Federal side. As you look up past 2012, how do you think about the risk of significant cuts to Federal programs in terms of timing of when that would trickle down potentially to customers and then is there any related contingency plans on a worst case scenario, thanks.

Chip we've talk about this a bit in previous calls. I think the Federal Government that you talk about the government and they talk about single top line holding expending or even reducing it, but if you look underneath the surface, there are a thousand or I'm sure the real number is hundreds of thousands of moving pieces. Some budgets will be up and some budgets will be down as the priorities shift within the Federal Government's expenditure area. Our focus is to get to the areas that are not only stable but in fact growing, and we're making those changes and moves now. You can see Tetra Tech having moved from our Federal clients being primarily Department of Defense here, 3-years to 5-years ago, it was overwhelming, the largest percentage and we've moved to the state department.

You've watched us move from environmental clean ups from remediations associated with BRAC and Base Realignment and Closure you've watched us move to energy consulting which has economic drivers for the US Federal Government and will reduce cost as they get more efficient in their building base across all of the properties owned by the government. So we're going to continue to support our clients but we're going to move where their priorities are. Our contingency plans are actually being put in place today for the Federal Government.

John Rogers, DA Davidson.

Just wanted to follow up on a couple of things relative to the outlook. First of all, in terms of depreciation, what are you assuming there? You gave us the amortization number.

The depreciation should be similar next year as it was this year. And that's somewhere between $25 million and $27 million.

Okay. Okay. And, and I'm sorry, did you say what your CapEx was?

Our CapEx that we expect for 2012 is somewhere in the range of $20 million to $25 million for next year.

Okay. Then, Dan in terms of market outlook, one of the things that you've highlighted in terms of expectations was growth in the commercial area. And you've talked about the mining, and I think I understand that, but the US commercial market, where are you seeing that growth, because it's somewhat different than what we see in the headlines and I just want to understand that?

Well, I'll give you a couple examples. The energy, the new, the fracing process of the new technologies that have been put in place and have now come to market have actually created a new oil recovery market through the fracturing process, in a number of areas of country. Natural gas of course, is in the headlines with the fracing process that has essentially created a natural gas surplus in the US that hasn't even begun to be addressed. These are commercial clients that are -- I don't want to call them the Juniors, but the smaller independents on the oil and gas side, the larger majors are beginning to move into it. It's creating infrastructure work.

Everything from roads, to pipelines, to environmental permitting, water supplies to the fracing process is right at the center point of what Tetra Tech can provide. And while there's not a national standard yet, but there are a number of regional standards set for requirements for handling the waste and water and other items as that moves forward, those are all opportunities that we can get ahead of in supporting our commercial client base here in the US. And these are, I don't want to call them small now, because it's not small, but they're growing very quickly and there's some examples on the commercial side.

Okay. And on the, you didn't mention renewables but I am curious what you're doing there or if there's any opportunities?

Well, renewables, most of our renewable market has been in wind in the US, although we have done some wind projects commissioning both on a full service in Canada. But the one area that we've done studies on solar, so on wind turn key so everything from feasibility study, sighting, resource evaluation permitting and then we've actually done the design and construction, including the transmission to the grid. So that's on wind. Solar, most of our work, in fact almost all of our work has been on the upfront study and evaluation.

Everything from the cultural evaluation, from habitat destruction or impacts to endangered species, to permitting; so we've done a lot of that on solar, but the area that Canada brings us and BPR is certainly one the biggest pieces, has been hydro. And the hydro-power capability on renewable we're looking to expand both across Canada and take to Latin America and maybe even Asia but certainly those 2 on renewables are an area that we think we can grow quite well.

And are those areas that you're seeing growth in 2012? Substantial growth or above average?

Hydro, yes. Solar, I'd say the studies is still growing, but it's small dollars because it's just the upfront consulting. Wind overall we're seeing flat.

Okay. Okay. And then just last question, in terms of your acquisition strategy, you mentioned the pipeline out there, are you pretty comfortable with sort of the markets that you've bet on, are there other markets that you're looking at or --

I'm very comfortable with the markets we've selected, and you say bet on, where we've actually completed it, put our investments in, I'm very comfortable with those. I would expect to see us, I don't think there's anything that's, there's no new revelation that you're going to see us do a big expansion into Antarctica or some area that you haven't heard us talk about. I think we're going to be very methodic, and we're looking for the right partners to round out our capabilities in the markets that are growing. Right now that's Australia and South America I think there is additional niche areas in Canada that we can still add, that will add capability in areas that are growing fast there also.

Okay. And that applies, not just to the geographic market but I was thinking more in the market segments, the end markets?

I'm really happy with, I think we can do more diversification in the commodities. I think we've got fair coverage across the different commodity types in metals, but I think we can do more diversification, so I think we're going to move tangentially mining commodities. Energy we've talked about today, and then as they transition from mining commodity energy providers, we will become a in-country supporter for watershed management and other areas that we're most well-known for. So you're going to see us actually round out their capabilities there. So I guess you could say we'll be tangential to what they're doing in-country today, but it will be absolutely in alignment with what we do as an overall corporation.

Tahira Afzal, KeyBanc.

Congratulations on a strong quarter and outlook.

Thank you, Tahira.

Most of my questions have been answered. I did wanting to a little deeper into something you talked about broadly. You've talked in the past about how you've been able to really rely synergies beyond what you thought in a sense, or in terms of the customers that you've gotten for example in Canada where you've been able to open your books in terms of your capabilities and there being a lot of cross selling opportunities which have excited you.

Could you talk a bit about how much these cross selling opportunities beyond what you might have originally anticipated and have played out in your ending fiscal year and really what your expectations are embedded in your guidance for that in 2012, and then as you look at, Chile, Australia, if you've seen a similar approach or similar opportunity with your clients there?

Well, it's interesting and this is, I mentioned this earlier I'm going to look into this a bit more detail as to quantifying this and determine how we can quantify it and share it transparently with all of our analysts and shareholders. I would say that in 2011 it was maybe around $50 million and I expect that to go up and that was from different firms that joined us during the year.

We do have, you used right word a cross selling program here that is actually the fabric of what we use to, for orientation and for indoctrination of the firms that join us. So while we introduce them to our finance and accounting systems more importantly we introduce them to our practice leaders and the different technical areas across the Company. We actually ask them to lead these technical areas and so we have growth on their part by bringing our technical capabilities, but we have growth on our part within the base Company by their leading us, so it really is a very reciprocal arrangement, but I would say 2011 probably $50 million. I expect that to be up materially even in 2012.

Christopher Purtill, Janney Montgomery.

Just going back to the M&A strategy. You've talked in the past about an expansion into Europe through a larger acquisition in the UK. I'm curious if those plans may have been put on the back burner given what's going on in Europe or if you're still focusing on resources and see opportunities in Europe there?

Well, I think if you went back 3-years, 4-years, there's no doubt that we identified commonwealth countries of UK Europe, Canada, and Australia were our Tier 1 areas. Now I don't think we've, you've heard, I'll have to go back and double check my own transcripts but I don't believe we've talked about Europe being a top priority now for probably a year. We have had some opportunities, I'm not going to say that we would not move into Europe, but it is a lower priority because of the business outlook in the economies and the marketplace, so I'm not going, we're not taking it off the list.

We have partners over there that we work with, and certainly if the right fit came along with the right marketplace, that wouldn't be susceptible or caught to the macro trends in the economy of Europe both at the government and commercial level, it's something we'd move into. But I do feel very fortunate. I don't know if our crystal ball is just lucky but it's an area that we didn't move into and it's moved down the priority list and we are clearly focus on additional technical areas in Canada, Australia, South America, and Europe would be, I guess I would put it a distant third or fourth.

All right. Helpful. Then looking at the backlog, I don't know if you can talk about kind of a rough breakdown of what that backlog looks like by segment. I assume a solid percent of the backlog is ECS work, I'm just kind of curious if when we look at subcontractor costs as a percent of the gross revenue and they've come down really nicely this year, I'm curious if that kind of improvement or run rate is sustainable or if you think you see yourself kind of settling out in this 29% range?

Well, I hope that subcontractor number goes up. And let me say why. But let me go back to your first question, is what percentage of the backlog is represented by each of the business groups. Now we don't break it down by business group, but I will say that a disproportionately larger portion of the backlog is in the front 3 groups, because we have not added construction projects, almost none, very, very little in our RCM group. We've talked about that. We've talk about the declining revenue. We've talk about the declining backlog in that.

You can see in our quarterly reports there are few or no large construction projects that have taken the top spots on our awards during the quarters. Now with that said, the reason our subcontracted portion of our revenue has dropped from low 40%s to down in the high 20%s or around 30% is because we're doing less construction work. That's one reason why you're seeing that the RCM group shrink. You've seen the front ends grow. That's what's driven some of our margins but if we see RCM turnaround. If we see more projects move to turn key basis, which I'm hoping will happen, we can get more of these converted from study to design and then actually implementation, it will drive our top line.

It will drive better margins in RCM and it will expand that subcontract number up. So under today's economic environment, which means less construction or turn key projects, I expect that number to be around the 30%-ish number but when it climbs, it's going to because of the additional work in the RCM group which is going to drive top line, bottom line, earnings per share, and it will actually be a very healthy indicator for the Company.

Okay. And I guess just lastly, a housekeeping question, on the backlog, I assume PRO-telligent is included in those numbers?

Yes. The backlog was included, yes.

Okay. And can you give us a round about number of where that came in? I know they're doing about $100 million in revenue.

Yes they're about $75 million on net maybe a bit less than that and actually, because the relatively short task order duration, it's actually quite a small number. I will say that, while we again don't break down our backlog by segment or individual companies I will say that our backlog did grow both sequentially and year-over-year organically without contributions from PRO-telligent, Metalica, I talk about, and even Proteus that came in earlier in the quarter.

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

Well, thank you very much. That concludes our Q&A section for this quarter's call, for the 4th quarter and for our fiscal year 2011 conference call. I would like to thank you for your questions and your support and I will tell you that this team works very hard to have a very clean set of financials and a very clean message to make it easier for you to understand where we're performing, where we're going, and to do your analysis of our actual performance for the quarter and for the year. With that I look forward to speaking to you next quarter and have a good day and good bye.

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