Tetra Tech Inc (TTEK) 2012 Q1 法說會逐字稿

Good morning, and thank you for joining the Tetra Tech earnings call. By now you should have received a copy of the press release. If you have not, please contact the Company's corporate office at 626-351-4664. 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 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 up the conference for questions and answers after the presentation. With that, I would now like to turn the call over to Dan Batrack, please go ahead, Mr. Batrack.

Great. Thank you very much, Nicole. And good morning and welcome to our fiscal year 2012 first quarter earnings release conference call. Steve Burdick Chief Financial Officer will present the specifics of our financials. I will start the morning off with a brief overview of some of our key metrics for this past first quarter. We had a very strong start to fiscal year 2012. Both our revenue and net revenue grew to record highs during the quarter,quite proud of. Our revenue was at $683 million for the first quarter, or up $72 million, or 12% year-on-year. And our net revenue was up at $492 million, an increase of 21% over the same quarter last year.

Our earnings before depreciation and amortization, our operating income, and our earnings per share were all up between 5% and 8%, and these increases are all inclusive of about a $3 million, or about $0.03 of earnings, of planned investment that we made in back office systems, to support the international operations that we acquired at the end of last year. Without this investment our operating income grew at 14% year-over-year, a rate faster than our overall revenue growth.

Our performance by segment. This quarter all four of our business groups grew. With our net revenue as I mentioned just a moment ago being up 21%,up over the same quarter last year. The growth in our international and commercial markets drove a 13% organic growth rate, one of the fastest that we have had in the past several years. Our largest group ECS which now represents about 41% of the Company's net revenue grew at 23% year-over-year. This is the group that focuses on the earliest phases of the project, and it has been driving our growth in the US commercial markets, and the international work that we have in Canada, Australia, and in Chile. Both our Test and our EAS groups who provide front end and technical service staffing and design services, they also grew this past quarter.

And our fourth business group, RCM who provides the implementation of work that we do the studies and designs on grew significantly this past quarter, and it was partially due to our ability to accelerate work into the first quarter, due to favorable weather conditions that allowed to us complete for field work during the quarter. In fact, we were able to accelerate about $20 million of self-performance net revenue work that we had expected to perform in the second quarter. Overall, during the past six months RCM has improved their performance in revenue, the backlog in that group is up, and their margins have increased. While I expect seasonally a little bit lower revenues in this group during the second quarter, because of slowdowns in field work during the center of winter months, I expect the performance in RCM to continue to improve throughout the year, and I expect a good performance for all of 2012 in this group, which is really a big turnaround both in the group internally, also I think it also portends an improving condition in the marketplace.

Overall, we had strong performance in the first quarter across all four of our groups. For our customer mix, when we look at the Company overall now, the majority of our revenues are now generated by international and US commercial work. This is a big change for Tetra Tech. Work for our international clients grew at 41% year-over-year. This work is dominated by our Canadian operations of course, and includes some revenue contribution from areas that we are just expanding to geographically in Australia and in South America. Our international work overall is about 30% of our revenue, compared to 13% just back in 2010, and it is consistent to the 30% revenue contribution is consistent with my projections for this fiscal year. I do expect that this is going to continue to grow and increase in line with our longer term goal of about 40%.

In the United States commercial revenue also increased, up 25% year-on-year driven by work from projects supporting industry, manufacturing, mining and other Fortune 500 clients. This is the third sequential quarter where the US commercial work for us, has grown at a rate faster than 25%, and for us this has been a very good indicator of a strengthening US industrial sector. Our US federal work now provides about 35% of our net revenue compared to 38% a year ago, and didn't seem too long ago in 2010 it was up to almost half, 44%. Although this is a smaller percentage of our overall business, federal revenue for our first quarter is actually going up in dollars. It is up from $153 million a year ago to $171 million of net revenue year-on-year, or a 12% increase, and 9% sequentially. I do want to point out that while US federal as a percentage of our overall portfolio is smaller, it continues to grow as part of the overall revenue contribution.

Our US state and local work remains close to 10%, and absolutely in line with our projections. All four of our customer groups that we track were up this past quarter, and as a result of our investment these past few quarters in higher growth markets, mostly international and in the US, our customer mix is now about 55% if you take US commercial, and you take our international it is just about 55%,a great majority of our work. It has been really great diversification into higher margin and higher growth marketplaces.

For our backlog this past quarter we received about $635 million in new orders. And more than 50% of these new orders this past quarter were are from our commercial clients, mostly in the United States and Canada. We received about $350 million during the quarter in major orders for industrial and manufacturing clients and for projects doing environmental management, and balance of plant infrastructure which is mostly water infrastructure work. We also received about $50 million in new alternative energy projects, primarily wind in the US, and we expect the wind market to be very stable, and actually should contribute about $100 million in revenue during fiscal year 2012, which is very much in line with what we did in 2011.

In the public sector we won new contracts with US AID, or Agency for International Development, including a major IQC, or an indefinite quantity contract, for a $750 million contract ceiling for water and energy work that significantly expands the scope of services and contract capacity we have with that client, so we felt very good about this last quarter. Across our entire US federal client base we received additional task orders to support their priority programs.

As we grow our commercial and international work a larger portion of our orders are coming from these clients. And one artifact of this is that the commercial clients tend to bring projects that are awarded in smaller shorter duration. So as a result, we have seen our backlog increasing more slowly as our revenue increases at a faster pace. These projects are coming through in smaller task orders. The overall size of the projects are roughly the same size, but the fundings are getting smaller and being burned up in the same quarter, so we are not seeing the backlog grow at the same rate, but the backlog does support the revenue growth of the Company.

I would like to now turn the presentation over to Steve Burdick, who will provide us more detailed discussion of the financials for the first quarter. Steve?

Thank you, Dan. I will begin with the fiscal 2012 first quarter financial overview. Revenue increased $72 million, or about 12% to $682.6 million, primarily as a result of growth in our commercial and international markets, and secondly revenue from acquisitions in the last half of fiscal 2011. Net revenue increased 21% to $492.1 million which is at a higher rate than revenue increases for the same reasons I previously noted. We are involved in much more self-performance work especially in our commercial and international markets, and this increase in net revenue resulted in Tetra Tech hitting close to the top end of our guidance.

Income from operations increased 5% to $36.1 million. When compared to the revenue and net revenue growth, we did experience a lower growth rate in operating income which is consistent with our guidance previously provided in our last earnings conference call. The operating income has been impacted by the increased SG&A costs, which I will cover on the next slide. However, I do want to point out that income from operations would have increased 14% on a proforma basis if we exclude the additional SG&A costs incurred. This increase is greater than the 12% increase in revenue on a year-over-year comparison. The EBITDA margin increase is better than the operating income because the intangible amortization was higher in the current year by about $1.5 million when compared to Q1 of last year.

The SG&A increased about 18%, or $7.3 million to $48.6 million for the quarter. As I stated, about $1.5 million of the increase was due to intangible amortization associated with our fiscal 2011 acquisitions. In addition, we did incur nominal SG&A increases relative to supporting our ongoing operations. Furthermore, as we move further into our international expansion, we have made decisions to invest in IT and risk management areas to support this growth.

Specifically, as we discussed in our last earnings conference call, we incurred more for financial systems to support FX, cash management, and ERP systems,Human resources, to provide policies and procedures in foreign languages, legal and tax compliance, and corporate development to enhance M&A and marketing activities. As a result, we incurred an additional $3 million of SG&A in the first quarter of fiscal 2012 compared to fiscal 2011. I want to point out that we do not expect to see the same spike in SG&A growth after fiscal 2012. Instead we will continue to incur sustaining costs that can be leveraged through our growth in the foreseeable future.

Tax increased $12.1 million due to higher income, and the effective tax rate will be about 34.7% for fiscal 2012. Earnings per share of $0.36 met the high end of our previous guidance. On a proforma comparative basis our EPS is up about 15%, when you take into account the $3 million of SG&A that I noted in the slide as well as the previous year's tax benefit in the first quarter of last year. As a reminder we did have about a $0.02 benefit in the prior year due to the catch-up of our R&E tax benefits in the first quarter of 2011.

Looking at the balance sheet, our Accounts Receivable increased about 11%, or about $65 million to $665 million. The majority of this increase related to the increase in revenue. Secondly our DSO decreased from last year. Accounts Payable decreased slightly due to lower subcontractor costs, and on a first quarter year-over-year basis our net debt position was lower. We have had very good cash generation from our operations, and as we continue to generate cash from operations we will continue to pay down our debt. Our line of credit as always will be used to invest in growth and increased shareholder returns.

And looking a little bit more into the detail of the cash flow, our quarter one operating cash flow was about $38.3 million. Historically in the first quarter operating cash flow, we see an amount that is close to breakeven as we pay our funds for year end bonus payments, 401-K distributions, and we make a lot of our annual insurance premium payments in the first quarter. However, we experienced strong cash collections at the end of the first quarter. As a result, our operating cash flow is much better than anticipated. Our forecast for 2012 remains, we estimate that it will remain at between $130 million and $150 million, and this translates to cash generated on a per share basis of $2.03 to $2.34. Overall, we continue to be very efficient at converting our revenue into cash flow.

Our capital expenditures are consistent with the prior year, and in line with our previous guidance. We continue to expect our CapEx to be about $20 million to $25 million for fiscal 2012. Our days sales outstanding of 75.4 days is an improvement when compared to last year at this point. And as this graphic shows, the impact of our positive operating cash generated and cash used for acquisitions, as you can see, our net debt position has improved sequentially from the end of the fiscal year, and assuming that we make no further acquisitions, we would expect to be in a positive net cash position in quarter three of this year. With that said, this management team will continue to leverage our balance sheet to invest in growth opportunities that will provide high profit margins and access to new markets to further enhance our shareholder value.

And with that, that concludes our first quarter financial review, and I will now hand it back over to Dan.

Thanks, Steve. I would like to share with you our customer outlook for the remainder of fiscal year 2012, and actually out into fiscal year 2013. Throughout the next several quarters. We expect our growth here at Tetra Tech to increasingly be driven by projects in the private sector, both here in the US and internationally. The international demand for our water related services in commodity driven economies like Canada, Australia and South America, continue to increase at a rate even faster than we had expected. Overall we expect this is going drive about a 10% annual growth rate organically in the international. So if you are following along on the slide, you can see it is about a third of our business, and we expect it to grow at a rate of 10% or better.

The United States as I mentioned earlier our commercial revenues have been growing very quickly. I will repeat that we have seen more than 25% growth over each of the last three quarters, and what is noteworthy for us this is after our seeing the US commercial work shrinking in 2009, 2010, and 2011, and so this is really quite a marked turnaround, and I wouldn't forecast this turning around as being sustained unless we see multiple quarters. Three in a row I think is a pretty good trend for us.

Although we have been coming out of a declining US commercial market, we expect this market to continue to grow at better than 5% organically for us through the rest of this fiscal year and out into 2013. We do see the US public sector revenues as remaining stable for us. Primarily based on our focus on economically driven priority programs at the federal level, doing projects that will actually in the long-term save money for our federal clients, and they have support on both aisles of the political landscape.

At the local level our support for critical infrastructure needs at the local level will leave our program stable also. This is providing clean water, not going turn that off, treating wastewater and the environmental priority programs. Those will go forward at a stable level. Taking into account our business mix and the overall organic growth rate, again primarily on international and US commercial, we expect the organic growth rate to be at better than 5% on a consolidated basis, even with stable revenues coming out of our US government sectors.

With our move into Canada following along on page 13, I think this is very illustrative of a change in Tetra Tech's business mix, and it is primarily because of our move into Canada. Our move into Canada over the past three years have resulted in two primary aspects of our business has changed. First, we increased the margins each of the past five years. I know we have been in Canada for just a little over three years now, but before that we had project offices up there that we began to drive this business also, and I expect and we have a dotted line here on this particular slide, forecasting based on the mid point of our guidance that our margins are going to go up here in 2012 also. First again moving to Canada has moved our margins up. A lot of that is because of the high content of commercial work there.

But the second action, the second aspect that has changed our business is our operations are no doubt more seasonal. In Canada in the summer they are working longer days, but in the winter they are just not working as much, and you will see that a little bit in the first quarter of our fiscal year, which is December where you begin the winter months, but most notably and acutely the second quarter will be our low point for the corporation in both revenue and earnings and I will talk about that in a moment.

With that I would like to move back to our guidance for the second quarter, which are the fiscal, our second fiscal quarter of 2012 which are the months of January, February, and March. I do want to note those month, I do want to note those months because those are the dead of winter months in the northern Canada. For net revenue for the second quarter, our revenue guidance is $430 million to $480 million. I will note that the mid point of that range represents a 6% growth in revenue over 2011 same quarter. For the year, for the earnings per share associated with the second quarter, a range of $0.32 to $0.34 per share, and the mid point of that range represents an 18% growth in our earnings per share year-over-year.

We have updated our annual guidance on earnings and I will start with net revenue. We have left our net revenue guidance for all of fiscal year 2012 unchanged at $1.9 billion to $2.1 billion. The mid point of that compared to 2011 represents a 12% increase, and diluted earnings per share based on the strong performance in the first quarter, and actually the work that we have in hand and the outlook for the rest of the fiscal year, we moved up both the bottom end and the top end of our guidance. The bottom end from $1.50 to $1.54 for the year, or $1.54, and the top end we moved up from $1.63 to $1.64. The mid point of this range represents an 11% increase from our 2011 performance and the diluted earnings per share.

I do want to note there are few notes on this slide that I think should be taken into account with respect to our guidance. Our guidance does include the expense of intangible amortization, and we have included this time a forecast of how the intangible amortization will be reduced in the coming four years, and also 2012. It is a five year look forward. We only had a modest reduction in 2011 to 2012 from approximately $0.30 to $0.28, but our forecast in reduction if we do no further acquisitions is from $0.28 noncash charge of intangible amortization down to $0.13, or a $0.15 contribution next year from the reduction in intangible amortization.

Our guidance also includes an $0.11 stock compensation expense, which is noncash, and as Steve indicated earlier a 34.7% annual effective tax rate on our earnings, and that also assume approximately 64 million shares, diluted shares outstanding.

In summary, we had a very strong performance in the first quarter, particularly with the 13% organic growth rate, and the 21% overall net revenue growth year-over-year. Our international and commercial work is picking up and represents just under 55% of our total business, and it is growing, both of these client sectors are growing at the fastest rates, so that number is going to go up. We continue as Steve had outlined in good detail, we continue to generate cash even faster than earnings and we are quite proud that we are generating well over $2.00 a share in cash. And based on this performance, and our outlook we did increase guidance both on the top and bottom end for the quarter and for the year.

With that I would like to open the call up to questions. Nicole?

(Operator Instructions). Your first question comes from the line of Joe Ritchie with Goldman Sachs.

Good morning everyone.

Good morning, Joe.

So a great job obviously you had the solid organic growth that you booked this quarter. My question, and I really appreciated actually outlining the growth trajectory across each one of your businesses. Federal government was particularly strong, up 12% this quarter. Out of curiosity was that driven predominantly by US AID, and can you maybe tell us a little bit about you highlighted stable growth going forward in the federal government business. Is there potentially upside to that number?

Well, it was not, let me go to the first part of your question. It was not driven by US AID. It was actually broad-based, and some of it was driven by federal work that we performed within the RCM group that we moved forward which was Army work and Army Corps work. I would say it was broad-based, not US AID, number one. Number two, we said it will be stable. What I indicated by stable is I think that our revenues are going to be relatively consistent with last year with respect to the federal government. I think we have some areas that we expect will be strong and growing, and others that will actually be under some pressure, and I think overall our revenues from the federal government and even the state and local here in the United States will be stable or consistent.

I do think that we have some upside. I think that there are programs like the water and energy IQC contract with US AID that is incremental. We have not included that in our guidance in 2012. We are well early for 2013. We have not included any contribution from the big CJPS contract that has yet to solicit any of the task orders. That is incremental upside. I think there are many catalysts that could actually represent upside in the federal government, but right now we are forecasting when we say stable or flat revenues year-over-year as we look out into the end of this year and early 2013.

That is helpful color. Following up on the CJPS contract. Is there an update on timing? I think last quarter you mentioned that the contract you were hoping you could book a task order by the end of the year. Has there been any update on timing thus far?

A little bit of updating. I did expect that we would be able to compete and be successful on that task order right about now. I thought the first ones would come up close to the end of the calendar year, and the awards would have been sort of January early February. There were two primary solicitations that took place. One was full and open , which we were successful on with a limited number of other large firms, and there was also a parallel solicitation taking place for small business satisfied.

The small business satisfied has gone through a protest process, and so the client has taken and postponed solicitation of individual task orders until the small business protest is being resolved. We expect that in roughly the end of February, although these processes are a little uncertain, so that is what is purchasing pushing out the solicitation of task orders. It is not funding, it is not need for the work to be done. Really just a contractual process. I expect this here in the next, I hope the next quarter, push out one more quarter, that we will see the task orders but we did not include that in our guidance, and anything that would come from that would be incremental upside. So I am not overly concerned about its short-term impact on our business, because I didn't incorporate it into it but I do hope the next order to see the first task

That is helpful. One last question, could you just give us an update on your expansion plans in South America and Australia, in particular any M&A opportunities, and your expectation for 2012? I know that you have given a diagram on your slides relating to your intangible amortization declining in 2013 and beyond, which would imply not much M&A, but I know that M&A historically has been a core part of your business. Any color there would be helpful?

Thank you for the question, because I do want to highlight or clarify one point. I did not, and I do not intend to send respect to a slowdown in our acquisition and list of opportunities or timing. That as we said each quarter we outline the intangible amortization for the year assuming and we have provided information on a forward reduction in IA based on no acquisitions. That is simply because we don't preannounce any acquisitions or provide guidance with respect to acquisitive contribution in our guidance. I do not expect our acquisition list of opportunities to slow down. We are focused on select buildout in Canada. There are some areas that we can add additional capability on the highest growth areas.

Australia continues to be our number one geographic priority area, along with South America because of the mining, the water infrastructure projects. We have plenty of opportunities. Pipeline is quite full. But we don't want to set false expectations because of timing until we actually close one of these acquisitions. But do not take the forecast of reductions in IA as any indication of the opportunities or timing of an acquisition.

Okay. Thanks. I will get back in queue.

Thank you. Thanks, Joe.

Your next question comes from the line of Michael Gaugler with Brean Murray and Carret.

Good morning everyone.

Good morning, Michael.

Congrats on a nice quarter.

Thank you.

Most of my questions believe it or not have already been answered. One thing I did notice though, on the DSO improvement I am guessing part of that is being driven by quicker payments as international grows? Correct me if I am wrong there. And then secondly, I would expect that improvement probably slows down once the CJPS contract begins to hit and federal becomes grows a little bit more on the back of that. Trying to get my hands around where DSOs are probably headed over the next three or four quarters?

I will let Steve talk about the timing of individual clients that are paying quickly in international. Let me give some insight into our expectation on CJPS. The federal government large contracts that we have that are cost reimbursable that we have performed in the past for the Department of Energy, and others that are these very large baseline support contracts, actually have some of the lowest DSOs in the Company. They get paid quite quickly. They are quite often prebuild in the case where we expect to incur expenses before, so that it can be concurrent, or we can electronically invoice very quickly in some instances in the past it has been as quickly as every two weeks.

So while we don't have any individual projects that have come out, no task orders have been bid we do have an expectation that will not adversely impact our DSO from that particular project. But Steve, if you want to provide some detail on payments on international and others, that help contribute to a good cash quarter.

What we have historically experienced is new acquisitions have come on especially in the international area. DSOs were higher with those acquisitions. However, we have worked with them and worked together to bring the DSOs down, and we continually see improvement, and that is what we pin continue to experience. In addition, we have had a lot of our commercial clients and even some of our federal clients that paid a lot of our invoices at the end of the quarter, that we actually expected them to pay in January. So we continue to see improvement and we continue to see our DSO stay at or get better than where it is right now.

Very helpful. Thank you, gentlemen. That is all I have.

Great, thank you, Michael.

Your next question comes from the line of Andrew Wittman with Robert W. Baird.

Hi, good morning, guys.

Hi, Andy.

Hi. I wanted to ask a little bit about the general administrative implementation costs that you have been incurring. First of all, Dan, any surprises either positively or negatively as you have made some of these investments? Anything come out of the woodwork that may have changed your view, or how is that whole process going?

Going pretty good. This last quarter I indicated I thought we would spend around $5 million. The finance department and back office came to me with a request, because I had indicated last call with an increased investment, and I like investments where I am going to get a return but I don't like to spend money, so I made them give me all sorts of detail as to what we are going to do, how we are going to do it, how it is going to contribute to the business, and that is why we had a fair amount of visibility into the actual number. That is around $5 million, or $0.05.

If we are going to do it, why wait, let's move on it right away, because if there is the necessary to create HR systems in Spanish and French and Portuguese, let's move on with it. We need risk management. We have moved quickly. About 60% of that has been incurred in the first quarter. That is about $3 million. I am actually very pleased. We have not had any negative surprises.

We have not seen importantly to me and the Company, we have not seen that increase or balloon as we have seen happen in some others in this industry, we have been quite fortunate that hasn't happened, and so I guess I would say if anything it would be a positive surprise in that it has met its budget, met its timing, and I expect the remaining amount of the expense, the other $2 million roughly to be incurred in the second quarter, so I think we will be pretty much finished here within the next 90 days. Most of it will take place in the second quarter, so roughly $2 million. After that it will be a very de minimus amount in we Q3 and Q4. So I would say on time, on schedule, on budget and the outcome of it has been as expected. So maybe no surprise is a good surprise, Andy.

I think so. And then just in terms of some of that investment. How much of that, if any, would you consider not recurring in nature, or one-time?

That was the one thing I see you spend it once, and it has to go away. As explained to me when we hire a Treasurer who is going to focus on FX, are you going to hire them and let them go next year so that it is a reduced cost. I think Steve if you look at his remarks, he was quite precise to me and I think on this call, that it is going to represent not an additional increase at the same rate, but these systems that we are putting, a lot of it is in labor, and a lot of them are going to be ongoing costs. I don't expect it to actually come back down. I just don't expect it to increase at this rate in the future. Steve?

I agree.

Okay. Sorry, did you --

Oh, no. Just to reiterate what Dan said, we will see an increase this year but we won't see the same spike next year.

Got it. And then on the $750 million contract vehicle from US AID, Dan, just hoping for a little bit more color on that one?Can you give us how many hands are in that vehicle, and what your expectations for maybe timing for that large vehicle could be?

Well, it is ourselves plus two others. Total of three. A much smaller pool of awardees, so just three of us. Of the three and I will let you do your own homework who the other two are. We are the only firm of the three that is focused on the water and aspect of energy.

From a technical standpoint we really are a standout. However, after watching what has happened with the CJPS and we didn't expect the delay with respect to the small business protest, I am going to be really cautious with respect to forecasting revenue or timing on this one. As we begin to get orders and I have a little bit more clarity on it as it comes out, I will certainly update everyone on this next call. But I think I am going to remain a bit cautious until I see the actual task orders come out. But as far as the capacity, the client, and the type of work, I couldn't be more closely aligned with what Tetra Tech is.

Okay. I think I will leave it there. Thank you very much.

Thanks, Andy.

Your next question comes from the line of Tahira Afzal, KeyBanc.

Good morning, gentlemen. Congratulations on the strong quarter.

Thank you very much, Tahira.

First question, could you elaborate a bit on your personnel and utilization on some of your mining work? I know that is a very strong end market in general. I would love to get a sense of where you stand there. And then perhaps if you could provide an update in terms of cross-selling opportunities, and how those are working out with some of your new acquisitions?

In labor utilization within mining, I don't have the precise number here. We don't track is per sub category like that, but I do know qualitatively it is very high. And in fact, if there is one area that we are looking to add additional staff, and where there is a shortage really across the globe for certain aspects of mining, it is in the mining support, particularly the engineering aspect. Our utilization is quite high. There is one area again that we may be resource constrained, it is beginning to be in the mining area, so that is a good thing we have quite a large staff there, but they are fully utilized.

Okay. Great. And cross-selling opportunities, you talked about Canada and how that has opened up markets for you. Could you talk about some of the other acquisitions, if you are seeing something similar there?

Well, cross-selling has been one of the best stories, or one of the best outcomes we have had particularly in Canada. I would say that in Chile and Australia they have only been with us for a few months, and that is beginning to pick up. What I will point to is the organic growth is at 13%. A lot of that we are seeing out of growth year-over-year out of the Canadian activities have that have all been with us now except for the very small Fransen, which is now just approaching one year. But the rest are growing quite quickly. And it is almost exclusively because of cross-selling. We have taken the contracts and clients that we have had previously in Canada with the original Tetra Tech in the US and we have moved those clients into our Canadian activity, and we have moved up people in the US where we used to just do just planning up there, planning and engineering, and now we are doing design work, so it is growing. We do track a metric internally, not something we report on the call, but we do track intercompany work. So it is actually the definition of how much work do we have internally within Tetra Tech, do we hand from one unit to another for the same client. We actually track this in our Company. Steve Burdick gets to eliminate it so that we don't internally count it twice, and that number is up almost 100% from last year, and the year before it was up at even more than that. The number is probably almost $200 million, or getting close to 7% of the total revenue of the Company that we move back and forth by leveraging work with our existing clients, and a lot of that is coming out of the new acquisitions in Canada.

That is great news. I guess just two quick follow-up questions, follow-on questions. Number one you talked about water and the energy side of the business. I have been getting several questions on fracing, and is there a way that we can play the E&C space. Could you talk about your positioning there, I know you have talked about it a bit in the past, but an update would be appreciated. Second you talked about acquisitions remaining of a key part of your business strategy going forward. Could you comment on whether these acquisitions you are looking at are largely going to be accretive, because clearly amortization falling off next year helps, and I am just trying to see if they are not accretive could that take away from some of your amortization accretion going forward?

The first one is the fracing process which has been primarily a natural gas technology, but has had an offshoot of a lot of liquids coming out. The areas that we have been focused on as a Company have been the environmental aspect and handling of wastewater and treatment water supply. We have been very small in our revenue in this particular field, because most of it has been in the water supply as permitting has been required.

They require very large amounts of water. The numbers range from 4 million to 7 million gallons per frac, per well. They require lots of clean fresh water, and that has been most of our revenues. I mentioned before in this area in 2011 we were maybe $5 million. We have been looking for if there is a regulatory move to either report, or more importantly if it ever regulates the waste coming out, the very large water quantities we think this market will go from zero to quite large very quickly. And in fact, in states like Colorado here just recently in the last month, they now require reporting of the actual chemicals being used, and there is even a component as to the percentage. It is these types of regulations in reporting requirements that are precursors and in fact drivers of what could make this business much larger.

Another area we are looking to expand that represents a very large opportunity and they can play Tetra Tech as an area close to zero, and we believe will be a material contribution both late 2012, maybe Q4-ish and certainly into 2013. The fracing process with the regulatory side on the back end, you are not going to just truck it. You are going to treat it, handle it and manage it as a waste. And the other is the pipelines with respect to both supply and taking water, and we are moving Tetra Tech into the design aspect to support the oil and gas and natural gas aspects in the market. We have some people that do that, but we don't have enough. So this is an area that we are looking to have others join us, which is I will go right to the M&A is one of the areas that we are looking here in the US to fit for our acquisition strategy, and I will go right to your question as far as accretive.

We have not made, we have been quite acquisitive we have brought in some excellent partners, but to date we have not brought in a firm that has been dilutive on an EPS basis which is a very high standard. You hear others say it is not dilutive on a cash basis or while proforma is something unusual. On a GAAP basis for EPS it has not been dilutive. Now unfortunately, the intangible amortization does create quite a high hurdle, and so on the first year or sometimes two years that is neutral.

So that is why really the performance of the underlying business has been so strong, because we are bringing revenue on, and we are still growing EPS at a level faster than our growth rate, an example of 14% if you just take out the SG&A and the tax. Even given no contribution of EPS from the acquisitions that have come on, so if you look at it a little bit deeper the performance of the underlying business is actually exceptionally strong. I don't expect that to change at this time. It is not that we will never do a deal that is not EPS accretive, but it would have to be quite special and strategic to move us into some new areas, and I know that I am hitting this point a lot, but on this particular point to here we have not had a dilutive EPS acquisition certainly in the last seven years.

Got it. Okay. Thank you ever so much for the details, Dan.

Great, thanks, Tahira.

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

Hi Dan and Steve, it is Chip Moore for John. Wondering if you can give us a little clarification on the near term outlook for RCM, just given the full forward of construction activity in the quarter?Sounded like maybe you were talking about a slight sequential decline, just a little more color there?

Very perceptive Chip,that is exactly what I was saying. Because we moved up, there are two things happening with RCM. Because of the winter months and a lot of the field activity slowdowns, so there is a natural and always has been a natural decline sequentially between Q1 and Q2, and then you see it pick-up in three and four. You will see that this quarter and even this second quarter you will see that. We will see that, but it will even be slightly more accentuated because of the pull forward of the Q2 work. So Q2 we will watch RCM come down both in revenue, gross revenue and net revenue, and income.

And then it will move right back up in Q3 and Q4, and on my prepared remarks that is why I wanted to point out clearly, if you take a look for the year they are going to be strong, and I think a way to take a look at RCM's performance even in the first half is to take Q1 plus Q2, and take a look at the first six months compared to last year and you will see it up organically, you will see the margins up, and you will see very good performance. So I will inform you that we do see because of both the winter months and the acceleration of the revenue RCM itself will be a little bit softer sequentially.

Great. Thanks for all the details, guys.

Great. Thanks Chip.

Your next question comes from the line of Ryan Connors with Janney Montgomery.

Good morning.

Good morning, Ryan.

I had two questions. First just a quick one on kind of the guidance and the dynamics there, and second I just wanted to follow up on an earlier question. First off, just on the guidance, the range is reasonably wide. I am showing you at the low end representing 8% year-over-year growth, and the high end roughly double that. So can you just talk about some of the swing factors in your internal model that would drive you toward the high or low end of that range, be they external factors like new business or internal things on the margin line?

Well first of all, the range for revenue is about $50 million on net revenue. That is the same number we provided in our previous quarters. In fact, that is exactly the same range we provided on the first quarter.

Right, I mean I am talking EPS.

Our EPS as far as a range is also similar with respect to a cent range. Let me give you some of the items that would impact either the high or low. If things are busier, utilization is higher. If we have favorable weather, and we are able to pull in the case of RCM work that we would otherwise do in Q3 and rev things up, we could actually see margin be a bit stronger. That would drive us to the higher end. We do have other projects that if we are able to where we are doing studies and evaluations, if we are able to get permits in place and initiate design, that will also accelerate revenue utilization, and then drive margin as far as utilization.

So those are really the two factors. There is no single project just to go to perhaps an underlying implication. We have no single project that has to be awarded or single performance that we have with respect to risk factors on an individual project that will drive that number. Just really broad based, based on utilization and the revenue. If we are at the high end of the revenue, we should be higher on the margin.

Okay. Super. Then just revisiting this issue of hydraulic fracturing, and the water and environmental aspects of that. I mean your comments earlier seems to focus on kind of the commercial side of that. But there are some pretty large environmental studies that the government entities are undertaking. I know the EPA is doing their study. The Pennsylvania DEP here in Pennsylvania is studying the Marcellus shale, and all of those studies are we hear fairly big ticket, and that would seem to be ideally suited to your skill set. So I mean is that something that those contracts just aren't as big as we maybe think they are, or are those just not necessarily your top client relationship, so you have just not really played there much, or what about that side?

That is a great question, Ryan. In fact, our relationships and our technical position with those clients are maybe some of the best that we have in the entire Company, and I believe between any technical consultant and their client. But, if the projects for the government agencies are science, research, technical in nature, we want to support them and in fact we are doing some of those. Some of those that are coming out that have visibility, first of all, the revenues for those are probably depending on how you characterize it, I would say misrepresented because they are much smaller, and would represent a conflict of interest for our doing the work for the actual providers.

We made a decision not to support the regulatory clients where there is an enforcement aspect or a regulatory precedent that is going to be on the opposite side of the existing clients, or those that we are beginning to grow with on the private and commercial side, and so that is why where it has visibility, and a consultants name is being used in concurrence with a regulatory agency or a governmental agency that will enforce it, you are not likely to see Tetra Tech's name on that particular. Rather we want to work for the government on the science, technology, research, underlying science. We do that a lot and we are doing that now. More equally importantly, I don't want to say more importantly, because they are both equally important to us, we want to work with the commercial clients to actually take these technologies and put them to work out in the field.

Okay. Well, we certainly understand Chinese walls in our business, so that makes a lot of sense. Thanks for your time.

Great, thanks, Ryan.

Your next question from the line of John Rogers with D.A. Davidson.

Good morning.

Good morning, John.

Just a couple of things. Going back to the investment in your international systems. Does the completion of this, Dan, make it easier to do international acquisitions? Just a couple of things. First of all, just going back to the investment in your international systems. Does the completion of this, Dan, make it easier to do international acquisitions? And I guess I am wondering did it affect the timing of your pipeline at all?

No, it didn't affect the pipeline. It wouldn't make it easier. I don't expect that it is going to make it, it makes it a little bit easier because we have a lot more systems and we become more knowledgeable in some of the details, but it is really they are on parallel paths separately. But what it will make it a lot easier it when they do join us, the ability to track, monitor, onboard, go through the orientation, and to just move them right on with Tetra Tech. So the time from joining us to the time on being fully integrated. But that process would become significantly shorter and more robust with respect to risks and that whole process. As far as the pipeline it is really independent.

Okay. And then secondly, you mentioned a little bit but can you give us a little more color on the strength in what you referred to as the US commercial business? More specifically, what types of projects that you are seeing the strength in?

With the growth rates that we have had as you can imagine I am quite interested in what specific, and ask the question which project or which client or which type of activity is driving this, and it is very broad-based. We cannot give, I will give you several examples. We have seen an increase in the automotive manufacturing business where they have had plant upgrades. Everything from energy efficiency, new water supply, wastewater treatment. They have expanded in new facilities where we had waste management programs groundwater monitoring, landfill design, very broad there. We have seen it in aerospace and manufacturing similarly. We have seen it on the energy side on the oil and gas with pipeline corridors with respect to where they are going to put the pipelines. We are doing environmental assessments, easement evaluations, engineering permitting. We have actually seen renewable energies from solar and even transmission work. A lot of work with respect to environmental permitting, evaluation, cultural resource work, habitat evaluation. We have seen it really across the board. It has been very strong, and there is no one single standout that I would say that the majority of it is here, and it has been others. Mining, of course, has continued to be strong. So I would say manufacturing, energy, mining, and even other commercial clients, telecom has been strong with respect to buildout of cell towers, and evaluation of right-of-ways, environmental impact assessments, permitting all of the work. It has really been very broad.

Okay. And just I don't know whether this is putting too fine a point on it, but when I look at your comments relative to 5% organic growth going forward, and then your comments that the public sector federal and state and local will be flattish, are you saying that the international and the commercial slows a little bit from the pace you are at now, or are you just being conservative there?

Well, if you take the revenue that we have internationally and you put a 10% organic growth rate on it, and you weight that and then you take our commercial, US commercial work and put a 5% or better weight on that, and then you put a zero on the other two, the overall average puts you at around 5%. So that is really an arithmetic calculation. And so if the rates are actually faster in the international or commercial or the US, which US government work grows, then that number is going to move up. But it is really an arithmetic calculation that has come out.

But your international and US commercial are growing faster than the rates you just mentioned right now?

They are. However, I do want to note two things. Number one, the first quarter is busier. We are quite busy in October and early November, so some of these seasonally are busier in first quarter than second, so the second quarter across certainly Canada and even a portion of the US does slow down. Taking that first quarter and using it as a single point and then extrapolating, you have to take if you look at the margin that we presented during the presentation, there is some seasonality where it is up and down, so we are factoring in a bit lower numbers for Q2, and then Q3 and Q4. On an integration you may say we are being conservative. I certainly hope at the end of the year you say that was quite the case. But arithmetically you can see how we get these numbers.

That is just what I wanted to understand. Thank you very much.

Great. Thank you, John.

Your final question comes from the line of David Rose with Wedbush Securities.

Good morning, gentlemen. A couple of final questions. One is you talked about the SG&A benefits from the new IT spend and the back office and HR. There are benefits that you have calculated I mean as you look on return on invested capital from initiatives, but you haven't talked about the benefits economically that we might see 2013. Can you quantify what you expect those cost reductions could be, or is it simply more preventative than anything else? And then I will follow up with my second question.

I personally look at them as preventative. That these are not to ameliorate or to remediate an issue that we have. They are not intended to address a specific entity. None of this is to address an issue that we have with one of the acquisitions. This is all preventative, or to put the structure in place to facilitate growth and leverage of our international business as we move there. So as we grow significantly in these different geographies, we won't have to put all of this in place. This is doing it in advance to avoid a problem.

Okay. And just a follow-up on that. I sense that it does accelerate the reduction in DSOs. As you mentioned earlier your international acquisitions, and to have higher DSOs than you have in the US at least from your federal. So can we expect an acceleration or reduction in the DSOs?

No, I think what we see is that initially when some of these international operations come on with us, they have got a very high DSO. However, we work quite diligently and effectively and efficiently with them to bring that down pretty quickly, so once they come on with Tetra Tech it comes down. Whereas historically when they were on their own they were higher. We don't expect to see a huge decrease in our DSO from where it is now.

Okay.

But we are going to continually strive to get it lower, but not going to see a huge impact right away.

Thank you. And then finally, with the acquisition of Metalica, and the potential for the desalination market picking up in late 2012, 2013 we are seeing a lot of signs in desal picking up, Metalica is sort of a great fit? If you need mining, many of the mining companies in Chile are using desalinization as a source of water. Are there projects that you have already identified that are tied to it? I know you have had your hand in that market before?

Yes. We have had our hand in it. We have been particularly strong, and in fact we are one of the strongest desal design engineers in brackish water from wells from Florida, Texas, sort of the Gulf states. We have also been one of the leaders on some of the largest plants from seawater desalinization, and mostly on the feasibility studies and in engineering support. We have identified some that are conceptually on the drawing board in Chile. You are right, that is quite an arid country, and water provided through desalinization process is one of the primary sources for some of the mining, particularly copper in Chile for us, but they are all very much early on the drawing board, and none of them that we have included in our, none I will say with absolute clarity for 2012 in our revenue. And for 2013 we are still a bit early, but at this point moving very cautious from the planning stage through anything more material. But we are aware of that. There are other countries, but Chile no doubt is a good position for us. But no, nothing that we have that we are going to do an announcement, or move forward on at this particular moment.

Great. Thank you very much.

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

Well, thank you very much. Those were excellent questions. I think that clearly by the context of the questions the analysts that have participated today understand the business quite well. I want to thank all of the Tetra Tech associates. It has really been an excellent start to this year. I think that we are in good position for the send quarter, and I am really looking forward to coming back here in roughly three months and reporting performance for our second quarter, and giving you an update on how we are going to perform for the rest of the year. Thank you very much, and I will talk to you all on the next quarter conference call. Good bye.

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