Tetra Tech Inc (TTEK) 2012 Q2 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 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 productions and may differ materially from actual future events or results. Tetra Tech's form 10K and 10Q reports to the securities and exchange commissions 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 investor relations section of Tetra Tech's website. (operator's Instructions). With that I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Great. Thank you very much, Mike, and good morning and welcome to our fiscal year 2012 second quarter earnings release conference call. While Steve Burdick our Chief Financial Officer will present the specifics of our financials for this past quarter, I would like to start this morning's presentation with a brief overview of some of our key financial metrics for the second quarter. We had a very strong second quarter. Our operating income was $36 million for the quarter, up 20% year-over-year. Our diluted earnings per share was $0.35 per share, up 25% year-over-year exceeding the high end of our guidance for the quarter.

This was the highest second quarter earnings in the Company's history. Our revenue was up to $624 million and our net revenue was $477 million for the quarter, an increase of 11% year-over-year. It was a very good quarter for the company. But maybe the best metric of all for the quarter was that we set a new record for our backlog exceeding $2 billion for the first time in the Company's history. We feel really, really good about that.

This quarter, our ECS business segment led our growth again with their focus on commercial and international markets growing at 17% year-over-year. Our ECS business segment is now 44% of the Company and is a significant driver for the overall growth rate for Tetra Tech. The test group, our technical support services group grew at a double-digit rate almost as fast as our ECS group. They grew at 16% year-over-year for the quarter, driven primarily by our international development related activities. So test group was quite healthy, growing well.

Our EAS, this is where we do much of our design construction work, constructible design activities, and it was essentially flat. They did have within that strength in commercial-related activities, but it was offset by slower state and local markets. So the two sort of offset each other, leaving them flat year-over-year. In our RCM group, remediation and construction management group, while it was down slightly in the second quarter due to timing of projects, it is up 19% over last year's performance for the first six months of the first half of the year and I am very, very pleased with the RCM's performance. In fact I will speak more to some of the orders that they brought in the quarter.

Overall, the three front end units where we do our consulting, staffing, and design work represents about 86% of the Company with RCM about 14% of our net revenue. Organically, we grew the Company's net revenue at a pace of about 4% in the second quarter and for the first half of the year, we grew organically at over 8%, over 8.4 for the first six months of the year.

Let me give you a bit of a breakdown for the actual clients and who we are working for and where we are seeing strength. When we look at the Company overall, the majority of revenues are now generated by our international and our US commercial clients or work which is just under 55% of our overall revenues. Work for international clients grew by 23% year-over-year, and this work is dominated by our Canadian operations, but it does include a little bit of revenue that is being contributed from our recent international acquisitions in Chile and Australia and as I will talk about later in the fourth quarter, we will have some revenues contributed in Brazil, and I am looking forward to sharing that with you all.

International work is currently at 31% of our revenues which is very consistent with our projections where we expected it to be this fiscal year, but we could expect this percentage to be increasing as we move into 2013. It is actually growing at a rate, I will speak a bit more to that later in the call to achieve a long-term goal of 40% within just the next few years. With that would be associated with our international revenues. And the US commercial revenue, it is also growing quite nicely. It was up 14% year-over-year driven by work from a very broad range of multi-national clients.

This is the sixth sequential quarter of double-digit US commercial growth within the Company. This quarter our commercial revenues were up in all four reporting segments, all of our business groups. It was not just studies. It was not just consulting. It was not just full-scale turnkey implementation. All four actually saw an increase sequentially with our commercial revenues. That is a very good thing.

Our public sector work in the United States was essentially flat. Now we are focused on priority programs for our federal and our state and local clients. Some of the revenues are up, some of them we have seen go down. But on a collective aggregate basis, it was flat.

Our US federal work, now provides about 35% of our net revenues. That is compared to 40% just a year ago and 44% in 2010. Our state and local work remains stable at about 10% of our business and is absolutely in line with our expectations coming into the year. Our net. Our backlog, this past quarter our backlog was up year-on-year and it was up sequentially resulting in all-time record high of over $2 billion.

Now we have gotten up close to the $2 billion mark in the past, but not been able to breakthrough that. And I am especially pleased with this accomplishment for the Company since as many of you we hold ourselves to a very very high standard on backlog. We only include projects that we have been awarded. They are fully funded and we are authorized to complete the work right, now, and I believe this is the most stringent definition of backlog in the industry.

There is no factory backlog. There is no contingency contract. This is contracted, funded and authorized. Within this if you are following along on the webcast, we actually listed some of the largest orders.

You will note here that we received two new infrastructure transportation projects on the East Coast of the US, and these are both RCM projects, and I am particularly happy with this because RCM, which does a lot of our implementation or turnkey work which includes the construction management, has been very, very challenged with workload associated with implementation or construction activities. And this is the first time we have seen a material move or contribution of large orders within RCM. Over the past eight quarters, The three front -end groups have essentially driven our backlog with orders for all front-end services, and I am very pleased with RCM now contributing that all four of our units are contributing collectively.

Essentially, we are firing on all cylinders now from a business side, and that is what actually helped us achieve this new record backlog. At this point, I would like to turn the presentation over to Steve Burdick , who will provide us more details into the discussion of the financial results for the second quarter.

Thank you, Dan. I will begin with the fiscal 2012 second quarter financial overview. Overall our second quarter results either met or exceeded our previous guidance.

In particular, our revenue increased $11.7 million or 2% to $624.3 million primarily as a result of our growth in our commercial and international markets.

And secondly, we did have revenue from acquisitions that occurred in the last half of fiscal 2011. Net revenue increased 11% to $476.9 million for the same reasons I previously noted.

This increase in net revenue resulted in Tetra Tech getting close to the top end of our guidance. I do want to point out that net revenue is growing at a faster pace than our revenue because we are involved in more self-performance work, especially in our commercial and international operations. Income from operations increased 21% to $35.5 million.

When compared to the revenue and the net revenue growth, we did experience a higher growth rate in operating income which is consistent with our previous guidance provided. This increase is primarily driven by solid project performance across all of our operations. The EBITDA margin increased to 10.3% from 9.8% last year. The EBITDA margin has improved sequentially each of the last six fiscal years and it will continue to be a financial metric that we focus on to improve in the future. SG&A was $52.4 million for the quarter.

We incurred about $2 million of additional SG&A in the second quarter 2012 to support our international growth in the areas of IT,business development, and risk management. Excluding this $2 million, SG&A increased at a lower rate than our net revenue growth at a little bit less than 11%.

I want to point out that we do not expect to see the same spike in SG&A after this quarter and instead we will continue to incur similar sustaining costs that can be leveraged through our future growth. Tax increased about $11.8 million due to higher income, and the effective tax rate for the year is expected to be at about 34.7%. EPS of $0.35 exceed our previous guidance. We exceeded our guidance as a result again of solid project performance across all of our operations. Accounts receivable increased about 7% to approximate by $43.5 million to $642.4million.

The majority of this increase related to the increase in our revenue and net revenue. Accounts payables increased slightly due to the timing of cash payments in order to efficiently manage our working capital. And on a second quarter year-over-year basis, our net debt position was lower.

We had a very good cash generation from our operations both for the quarter and year-to-date, and as we continue to generate this cash from operations, we will pay down our debt. In the previous quarter 1 call, I did state that we would be in a net cash position by the end of quarter 3, and I just want to tell you that we are after one month into quarter 3, we are actually in a net cash position at this point in time. The quarter 2 operating cash flow was $33.1 million in the quarter. This is fairly consistent with last year.

And our forecast for 2012 is estimated to come in-between about $135 million to $150 million for the year. And this translates to cash generated on a per share basis of $2.11 to $2.34. CapEx is less than the prior year but in line with our previous guidance. We expect that our CapEx is going to be between $20 million and $25 million for the fiscal 2012. We will most likely be at the lower end of the range as we continue to improve on our capital investment approach. Now this lower CapEx not only benefits our cash position this year, but it also will benefit our future EPS through a decrease in depreciation expense in the future. Day cells outstanding was 80.6 days. It' is a bit higher when compared to last year at this point, but we do expect this number to decrease during the year even as we see decreasing revenues over the next couple of quarters. And speaking of how we bring all the cash and the debt together, this next graphic if you are following along in the presentation. This next graphic shows that the impact of positive operating cash generated in cash used for acquisitions.

As you can see on the graphic, if you are following along, our net debt position has improved sequentially from the end of last fiscal year, and as I previously stated, we are now in the net cash position in this current quarter 3. With that said, I believe that our 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 in order to further enhance our shareholder value. And with that said, that concludes our second quarter financial review, and I will now hand it over to Dan Batrack.

Thanks, Steve. Thanks very much. I am very please to announce that we have signed a definitive agreement our first firm of Brazil. It is identified at CRA, Brazil , and we did issue a press release on this yesterday afternoon. CRA Brazil is a mining engineering firm located in Bello Horizonte, Brazil.

This is where many of the mining majors are headquartered and located in the country of Brazil. CRA Brazil will be joining our global mining practice which is located in our ECS or situated in our ECS business. The overall margins of CRA Brazil are quite similar with our overall ECS group itself. So it will be an excellent contributor. They will provide us a key geographic presence in Brazil.

This is a country that is quite difficult because of language and many other items to do a pure organic growth. In other words, putting a few folks there and just growing it organically. CRA Brazil is serving some of the largest mining clients in the world. They are headquartered in Brazil. Firms like Valet and Anglo America and others and those are actually the key clients of CRA Brazil.

They do bring us over 300 staff, most of which are engineering professionals focused on the mining industry. And they will actually add to our overall Latin America/South America presence which started last summer with acquisition in Chile which was Metalica.

Now while this entity, CRA is primarily focused on mining, I do expect that they are going to give us access to many of the other very large industrial clients that are located in Brazil which is one of the fastest growing economies in the world. They are currently the world's sixth largest economy, quickly moving reported to be perhaps by the end of the calendar year, the fifth largest economy, and we expect to close this acquisition next month. So welcome CRA Brazil, and we are looking for them to be an excellent contributor to the overall Tetra Tech. If you are following along on the webcast, as you will be able to see on this graph, we continue to move toward our goal of 13% EBITDA margins or our profit margins as shown by the steady increase over each of the past six successive years.

So each of the past six years we have continued to increase our EBITDA margins and with the larger percentage of our revenues coming from international and commercial clients and the improved performance within our RCM group, I expect that 2012 is going to continue this trend of margin improvement. You can see this from the chart.

Now at this point, I would like to share with you our customer outlook for the remainder of fiscal year 2012 and really what we see even moving into 2013. First, for Tetra Tech, our international operations in US commercial clients, we expect to continue to drive our growth. Internationally, we see our operations in commodity-driven economies such as Australia, Chile and now Brazil and certainly not to omit Canada which has been really one of our biggest contributors.

I expect these international revenues to continue to grow very rapidly. I expect these international revenues to grow at a pace of roughly 10% to 15% per year, much of that organically. And at this growth rate, within the next two to three years, I expect our international revenues will represent about 40% of the entire Company.

We expect our US commercial markets to maintain double-digit growth rates which we have seen in each of the past six quarters as I had mentioned earlier in this call. If we continue at this rate, it will put our US commercial revenues or contributions at about 25%, Or actually a bit over that within the next two to three years. So overall, a combination of the international and US commercial revenues should increase from its current level at approximately 55% to up at 65% or perhaps a bit more of our net revenues, and I expect to achieve that within the next couple of years.

In the United States, we expect our federal and state and local or our public sector revenues to stay flat on a dollar basis. I think that it will move the overall percentage of the Company from its current level of 45% down to probably 35% over the same period. It is not because we will be doing less work for our state on and local and our federal customers, but it will actually be smaller as a percentage of the overall because of the significant growth in the US commercial and international revenues.

On a combined basis for fiscal year 2012, I expect our organic growth to be in arrange, if you are following along on the webcast, of somewhere between 5% to 8% on an organic basis which is consistent with our long-term growth objective. And as I previously presented on these calls, we have a target of 15% compounded annual growth rate which we expect to achieve approximately half from organic and half from acquisitions. So about 7.5% organic, or sort of 5% to 8%. We are right about there. I feel very good about that. Based on this improved visibility in our performance both in the first and second quarter, I am raising our fiscal year 2012 guidance for both net revenue and earnings per share. Specifically, let me go through the numbers for both Q3 and for the aggregate of all 2012.

For the third quarter, of our fiscal year, our net revenue guidance range is from $500 million to $540 million. Mid point of that would impute to about a 8% growth in revenue. And a range of earnings per share, that is diluted earnings per share to be specific, a range of $0.42 to $0.45 and the mid point of that would represent a 15% growth year-over-year. We have also updated our annual net revenue guidance to $2 billion to $2.1 billion. That represents moving up the bottom end of our range by $100 millionat this point midyear through the year, and as you can see on the chart here, I am referencing, that is a 14% mid point, and I am also moving up our earnings per share for the year. Our Diluted earnings per share up to $1.59 to $1.66, and put that in perspective from last quarters guidance that is moving the bottom up $0.05 and moving the top end up $0.02. I will state that this does not include any contributions from acquisitions that are not closed as of today.

That does not include either revenue or income from CRA since it is not going to close for another month, nor any other acquisitions that we would complete in the year of fiscal year 2012. I do want to note, if you are taking a look at this slide or this chart, at the lower left-hand portion, this guidance for fiscal year 2012 does not include any material drop-off or contribution to the Company from an intangible amortization reduction. That happens primarily next year where we expect a $0.15 reduction in a intangible amortization expense for fiscal year 2013.

So in summary, our strategy is to focus on our international expansion, to follow our clients to the new markets, and to focus on the private sector while maintaining a complete commitment to our US public sector revenue and the clients that are generating that.

A strong performance in the second quarter resulted in a 25% EPS, earnings per share growth year-over-year this quarter, and we continue to generate cash at an even faster pace than our earnings that as Steve had presented earlier, at well over $2 per share. Our backlog has given us the most visibility ever in total dollar amount at over $2 billion and based on this performance, I am very happy that the Company was able to increase our guidance both for net revenue and earnings per share. And with that, I would like to open the call up for questions. Mike, if you could queue up the questions, we would be happy to talk to the

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

Thank you very much, this is Greg [Alec] in for Joe.

Good morning Greg.

Good morning. Thank you for taking my questions. Just had a question in relation to your future bookings. Obviously a very nice quarter. It would be great to get kind of an update on your pipeline of work moving forward. Where your bids outstanding? Are they trending upwards from here and really can we see some additional RCM kind of opportunities from here?

We can see more opportunities for RCM. I would say that the pipeline for the front three business groups looks quite consistent and steady as it has been. They have actually been quite strong, and as I indicated in our presentation, they have actually driven our backlog for the past couple years.

So I would say it remains consistent. We have and not seen a particular pickup or drop-off. So it is been quite steady and strong. But the part I am very encouraged about is RCM, not these two awards and actually a whole host of others that were much smaller actually gave us a lot of confidence and insight that we expect RCM to be coming back. I do believe that the inflection point is behind us with RCM, and as we win more work, it could actually materially drive our backlog up as we go forward.

Understood. An so within the RCM business, do you think that there could be over the next couple quarters as you start to burn through that backlog, start to see some operating leverage in the business?

What is interesting is the RCM work typically has a longer burn period. I have commented on the previous calls our backlog has been a shorter burn, more commercial work and has been turning over. RCM work because its actual implementation is a bit longer. So the two contracts that the -- the two large ones that were included in our presentation actually have almost a two-year execution. So that revenue will not push through the books either through RCM or convert to revenue in 2012. A lot of the up-front work is permitting and engineering which is the smallest portion. It is really a 2013 contribution.

Got it. Thank you. I just have one follow-up question if I may. Thank you for giving me an update on CRA. In relation to a acquisition pipeline, it would be great to hear now that you are potentially in a net cash position, where you might be deploying that cash geographically and market-wise. You do have a very small exposure at this point from my understanding to kind of the shale opportunity. How do you expect to kind of gain greater leverage there moving forward?

Well, let me start geographic and then let me move to service. Geographically, we continue to look to add additional resources in Australia. That is an extremely competitive environment, or we would have already transacted more there, but it still remains one of our priorities. Brazil, we think has an excellent marketplace for the services we provide. So this move in Brazil with CRA is not our only move. It is our first move of many more to come, and I expect that our presence there will be quite significant, both in Brazil, Chile, and so really primarily to those two. And then third geographic area, I do expect some incremental expansion in niche areas in Canada. We actually have a full plate of work in the oil sands and other areas on some of the resource support, and we can add some niche areas that will help us even accelerate our growth in Canada.

But here in the United States, I am looking to redeploy some of the technical staff that we have that are working in slow markets like water, waste water for municipalities, business is quite slow, but the expertise they have in pipelines, in water conveyance, liquid conveyance is a natural move for us to oil and gas and particularly shale gas to move from where we have been focused which is the back-end environmental portion which has been quite slow because of the lack of regulations.

I will speak to that just in a moment, but to the front-end. And I am going to look to actually bring a firm on that has long and deep relationships in the oil and gas industry, particularly shale that will be focused on the midstream which would be pipelines. I think if we can get a small entity that would come in with 100 to 200 engineers, strong relationships, preferably located in places like Wyoming, the Bake, and North Dakota and Montana, and we could use those resources then to leverage them where we have big resources in Pennsylvania for Marcellus and in Texas for the Eagle Ford. I think that could be an excellent move that could drove us into a whole new market and open up a big fast growth area for us here domestically. That is an area we are focused on in services. So there is a quick overview on geographic and in service focus.

Thank you very much for taking my questions. Great quarter.

Thanks, Greg.

Your next question comes from the line of Alex Rygiel from FBR. Your line is open.

Good morning, Alex?

Alex, if you press star 1, your line is open. Your next question comes from the line of Tahira Afzal from KeyBanc Capital Markets.

Hi, guys, this is[Ardrion] for Tahira.

Good morning (inaudible).

Good morning. First of a thanks for take my questions and congrats on getting over the $2 billion hump for backlog

Thanks you.

First off, looking at those RCM projects with the New Jersey Turnpike, Transportation and then North Carolina Department of Transportation. Could you kind of walk us through what Tetra Tech's role is with those projects over the next few years?

Yes, actually we will be leading those projects on a complete turnkey basis. It is a complete full implementation. Here at Tetra Tech it is our focus to compete on projects where we have either a technical or a pricing advantage. And on these particular projects, we actually had both. From a technical standpoint, in case of New Jersey, we are actually working on the project immediately adjacent to it and in many respects, this is a natural extension, and it is both for upgrading the transportation roadway, bridges. So it is a geotechnical work, civil work, and as I mentioned before, a lot of the up-front work is all in our permitting and engineering aspect. So that is where they fit, and they are actually an excellent leverage of what we are doing now tot he next phase with these clients and work in these two transportation areas.

All right. Great. Second question. Looking at your mining business, you guys have expanded tremendously there into Canada, Australia, and South America Based on the work you guys do on the front-end, how much risk is there related to your business if mining firms start cutting down on CapEx for whatever reason, if it's related to commodity prices or whatever the reason might be?

Most of the projects, we are not as part of the generally of the capital projects themselves. So the processing facilities is not what we are focused on. We are focused generally on the overall resource evaluation and what we often call the preferred or the prefeasibility study work. So a lot of the work we perform, first of all is on a time and materials basis, and it is for the portfolio of the existing properties they own and evaluation of new resources that they may be looking at. So it is generally not associated with turning on or off a capital project. Those are really the ownership grounds of the big EPC contractors and that is not what we are.

We are much, much earlier in the process, and they are there are always through good times and bad times are looking for where is the next pool of resources, whether or not it is finding a lower capital location where they can extract it for cheaper, go find me a spot or take a look at these where we can get our resources less expensive, and when the prices are high, find me more of them so we can get it out now. So we are really different phase of the project saga.

Sounds great. Well, thank you all very much and cong rats on a great quarter.

Great. Thanks, [Auger].

Your next question comes from the line of Avi Fisher from BMO capital markets. Your line is open.

Good morning and thanks for taking my questions. Nice quarter.

Thanks.

Two questions. One has not been touched on -- I do not think it has been. Can you update us on the status of the CJPS contract?

Yes, seed CJPS. It is a state department contract that was awarded to ourselves and a few other individuals, or we were selected, not signed last summer. It has been a matter of a protest for the small business set aside or this. It was actually resolved here just a few weeks ago. So the state department resolved it by awarding a few more contracts to the small business entities, and so it has been resolved, and it has actually opened itself up now for becoming active.

So I expect that the first half quarters will come out for competition here probably early summer and give us an opportunity to bid and hopefully convert these opportunities to work for the Company. But I will note, we have not included any revenue or income associated with CJPS into our guidance. If it comes out, we have certainly watched this for some time. I am glad we were judicious and not included in any of our forecasters even coming into this year. So anything that would come out of this would be an incremental contribution to the company.

How come it is not in guidance?

It is a new contract for us. It is a new client for us, and we do not have any history for it. So I have not included any contribution from a client or project that we have not worked on that we do not have high confidence in.

Sounds like just being conservative.

I think so.

On pricing,a few of the calls (inaudible)have reported even more diversified larger than yours, and it seems like pricing has been an issue. I wonder if you can talk about it in the large verticals that are driving earnings.

We have not seen that. In fact, if you take a look, you will see that our cost reimbursable work is down to maybe one of the lowest points we have seen it in some time. In fact, we do report that in our investor report, I believe we are down at, was it high teens. So it is a lowest level. Clients have been going to T&M a lot. It is a front-end research, and we have not found that front-end research where its technical qualifications awarded, and in most instances it is a single award because they do not duplicate much of the work, and so we have and not seen any type of pressures on our cost reimbursable work.

I do think that -- again if you take a look at our pyramid that we have used in many presentations in the past, it is for the very up-front work that the cost reimbursable is not seeing pressure. There are cost reimbursable contracts out there if you are looking for others in the industry, particularly if they are much larger and focused on a base operating support contract or boss contracts. Those are being perceived as commodities, are being extremely competitive but, that is a completely different market than we are involved in.

Gotcha. And finally, the other people that have preceded me in the queue have asked about the RCM margins. I just wanted to talk about the margins in mixed calculation relative to your sort of EBITDA target as RCM grows. In 2013 and perhaps into 2014 as well.

Well, I hope our RCM business leader is on the phone with me, but I actually expect in the short term, meaning in the next several quarters that growth in RCM will actually increase our EBITDA margins quite nicely. The year-on-year comparisons are very favorable. If you take a look at last year's performance out of RCM, they were down at the 2%, 3%. So performing at the current range of sort of a 5% to 7% is a significant increase. So it will contribute to the overall year-on-year margin comparisons.

But as we continue to get more work in the commercial sector within RCM, I actually am going to share with you all, our shareholders and investors, that I expect to move up the range coming out of that group higher than what you see here, and I actually believe that that group once that we move the shift a bit more to commercial, we can hit a double-digit EBITDA margin rate out of that group too. So short term, the year-on-year comparisons are going to be very, very favorably and a little bit longer as we add more commercial work. The actual margins will be very favorable

So commercial construction work?

I call it implementation, yeah, implementation, construction management, but I will tell you areas like energy, so hydro, TND work that we will do, and then most of all, we have essentially no presence whatsoever in the oil and gas industry particularly shale, and if we can go get design work up-front for the midstream on piping and do some implementation there, you will watch both the revenue and margins grow quite nicely.

Thanks for your time and nice quarter.

Thanks, Avi.

Your next question comes from the line of John Rogers from D.A. Davidson. Your line is open.

Hi. Good morning and nice quarter as well.

Thank you.

A couple of things. Dan, just as it relates to the CRA acquisition, $20 million and 300 employees, with that many employees, it seems like the revenue level is low. Have they been staffing up?

They have been staffing up, and a lot of them are very junior positions, and because we are doing a full design and consulting, a lot of them are junior. So the hourly rate or compensation for individuals in that geography are substantially different than they are in Canada and Australia and the US.

Okay. But so the $20 million, is that the current run rate, or is that a trailing?

It is actually trailing, and the number is actually growing quite quickly.

Okay. I mean that is what it seemed to indicate. And did you say that it is not your guidance?

It is not in our guidance. However. as you have seen from the details, most of the first year of an acquisition, they are from an earnings per share basis, are quite nominally because the intended amortization sort of offsets it. I am happy you have given me an opportunity to point this out. We continue to achieve EPS accretion on a full GAAP bases on the first year that a firm's joined us. Again I talk about our backlog of being the highest the standards. I believe that standard's acquisitions also is among the highest certainly anywhere in our industry. But the revenue is not included, although we will have roughly one quarter. So it will be quite negligible.

Sure. Okay. And the -- in terms of the -- just back to the construction side of the business for a second. Large projects that you referred to in the commercial projects that you implied might be out there in the future, how are you managing the construction risk related to those projects? What are your thoughts on that?

Well, our thought is --

I mean is the business going to become more volatile on a quarter to quarter basis I guess is what I am wondering?

Well, I hope it is not going to be become more volatile, and that is not what I would expect. First of all, a lot of the work that we do in that group is on a T&M or even a cost reimbursable basis. So first of all, it has its natural lack of volatility because of the type of contract we signed. There are contracts that certainly are a fixed price and that is inherently the domain of construction or construction management. We are not doing full self-performance. So the risk part of the self-performance which are both commodities and some of the big self-performance portion, we do subcontract. We are RCM largely construction management, and so we do push that portion of the risk off, and so it will be largely a bastion of the people who take those types of risks which are the true constructors, but since we are taking the profound fund on an overall turnkey basis, that would be a component of us underneath.

Okay. I just wanted to confirm that was still the plan. Okay. And then you talked a little bit mentioned some of the acquisitions, but relative to maybe where we were, six months ago, a year ago, what is the acquisition pipeline look like? Bigger, smaller, same?

Well, a year ago if you about to a year ago, year-and-a-half ago, no doubt we had 1600 engineers. We had five, 600 in Northern Canada. We had these very large $100 million, $200 million acquisitions. That is what we would like to focus on. But we have really moved to a primary goal of adding resources in Australia and in Brazil and other fast-growing areas, and some of these because they are smaller economies compared to either Canada or the US, are naturally a bit smaller. So they have been sort of the $20 million to $50 million range which you just saw CRA here yesterday, you should look for others like that. But we do have a focus on these larger ones, and I really do not want to comment on the timing and location, but certainly that is our goal, and I expect that that will transpire.

Okay. Thanks very much.

Your next question, comes from the line of Andy Wittmann from Robert W. Baird. Your line is open.

Hi, guys. Good morning. I just wanted to touch base a little bit more on the acquisition strategy and specifically around Brazil. It has been a market that many firms have wanted to get involved in. You guy are taking your first small step with more to come. I guess my question there is it really how you manage risk in a country which can be somewhat I would say unfriendly maybe to foreign engineering firms just given the local dynamics of those marks. What is your strategy to manage some of those local dynamics that often come into play in Brazil? Who are the customers that you will be working with that maybe help you manage that risk?

Well, you are being kind about it when you were say a little unfriendly. They can be extremely unfriendly to outsiders, and that is why we need to grow by bringing resources and firms that are located, have grown there and are local. And CRA is one of those with 300. The clients that we are going to be focused on are the large industrials. So the mining, I have identified Valet,I mentioned, Anglo America. On the Petro side, I think Petro Bros, obviously some of the larger industrial clients. I think we are a natural fit for a lot of the accessing of such as oil and gas. It is an off-shore marine environment which is the actual heritage of the Company of Tetra Tech. That means more ports, harbors, access, dredging, sub bottom profiling off-shore for the work that they do for the geotechnical foundations for the rigs and for the drilling. All of that work is exactly where Tetra Tech has its technical strength.

So if we can get the technical resources, and I do not want to call it a storefront because it is not that, but if we can have the individuals with the relationships and the heritage of being Brazilian, but then provide the technical resources that reside in North America, in Australia, especially Canada, we get the best of all worlds. We can have an upfront presence, bring in some technical experts, bring these client in and then leverage the technical expertise that we have here in other parts of the world. So that is our plan and those are the folks we are going after.

And so just as you look at the last few years at CRA, then you feel like those kind of multi-nationals, that that has been their client base, they have been working for local companies?

Exclusively. That is all they have worked for. They are not working for any of the governments or any of the infrastructures. They are the Brazil industrial majors, not even the juniors.

I wanted to recap just a little about what is kind of out there in terms of wins that you have had but have not been contracted to task or just have not been issued. Just a little bit from the last couple of quarter. I just want to make sure that we are missed anything. We already talked about the CJPS going out there and hopefully going into a bit more formal discussions this summer. We have got the USA program in Afghanistan with the water. We have the navy program as well. And then there is the legislative USA aid work as well. In the last few quarters, are those kind of the big contracts vehicles that you guys are part of that you still really have not seen any work out of yet or is there something I might be missing?

No, those are them. I would say the US aid, water and power, that' you have identified. That is one that we have not seen a task order. Not for Tetra Tech. It just has not come out of the administration or out of the contract vehicle. So that is one that still has upside potential. I also mentioned I have not incorporated any contribution from that. Navy you have mentioned. There are also a few army vehicles that have just been put in place, we have press released, that are actually quite sizable, and these all have $100 million plus contract ceiling. So they could actually be prematerial contributors, but you have caught most of them there.

Is there any progress -- the CJPS is clearly I think notable at becoming more visible. Are any of these other vehicles having that same kind of progress on them where you think that opened biding is going to be happening in the next quarter or two?

We have not seen a distinct event like we saw in CJPS such as resolution of the protest that had existed. We just think it has been a slow ramp-up, but let me make one-- share one observation from our experience. We have worked with the US federal government for over 40 years. And we think we know them pretty well. They are an excellent client. Whether or not they go Democrat or Republican, we do not see that normally as an issue at all with respect to funding and moving forward with priority programs, but the one thing we have seen is moving up to the several months before an election, sometimes the agencies actually get freeze-ups so to speak, or actually become less proactive until they know whether or not they are going to go left or they are going to go right.

It doesn't really matter if they go left or right. There is a lot of work to be done. It is just deciding with this fork in the road what you do. This moment, I do not want to call it indecision, but this moment of valuation by the folks that are actually at the front line, does sometimes see a slow-down in task coming out. I would not say that it is categorically that has caused the slow-down over the lack of task quarters(inaudible) coming out, but certainly that would be consistent with what we have seen in the past. We are seeing a bit of that now. So I would put on the good news. That has been happening now for a quarter or two. I expect that to actually to clear up as we move forward through the summer and into the fall.

That is really helpful color. Thank you very much.

Thanks, Andy.

Your next question comes from the line of David Rose from Wedbush Securities. Your line is open.

Good morning. I am just trying to get a better idea, this is a fantastic quarter for you folks on margin side. Globally, was there anything in the quarter that maybe -- let me rephrase it. About everything simply go right and nothing went wrong in the quarter?Your business is about execution. So you are always anticipating some sort of miss misstep. Were there some push backs against margins in quarter or was this just the perfect quarter, and the secondly if you can go into NSF margins, what drove those margins better than what I would have expected?

First of all, we didn't have any one-time single big event, like a big award fee or something that just drove our collective numbers up. On the other hand, we did have a handful of head-winds. It was not a perfect quarter by any means. We did have our normal - -You have some areas of strength, some areas of a little bit less than optimal. So I would call it a good quarter, but I would not characterize this as good as we can do. Not by any means. Now with respect to tests, they did have a good quarter. They do have a number of contracts that continue to roll off.

We are -- they do have award fees or different areas where we are able to close them out and actually recognize an incremental upside, and I had mentioned before, if they run as they should, they would be in the range that I provided before, sort of a 97/11ish-type of number, but that is a closeout with favorable performance, then you will see incremental up-size which you saw this last quarter. But it is not a representative of a shift in their business to higher margin work or something else that represents it should be 11, 12, 13, that is not the underlying business, sort of a 9/11, 9% to 11% with project closeout and extraordinary performance pushing it above that. So they continue to do a really good job.

So a follow-up, do we expect additional project close outs? Is there a sort of a big group of projects that are coming through as well in the third quarter or no?

No, what happens is we have a set of task orders depending on the timing that we complete them where they get closed out, and so it is not linear. It is not that we have "X" amount every single quarter, but we do have more projects obviously that are underway as they close out. You will see margin but there is no particular big contract or project that will close out in the third quarter that will move that number materially up at a test.

Okay. And lastly, as you move up your guidance, you are more conservative or more comfortable raising the bottom end higher, you looked at guidance, what factors would you see as potentially disruptive to your target?

Well, as we are well into the second half of the year now for us, in fact we are five more months after today left, I am seeing the risk on the downside getting much less. That is why we moved the bottom up disproportionately more than the top. moved it up $0.05.A disruption could be something very unusual at the government that there is something that there was some type of impasse. I mean something that would be quite extraordinary. I do not really see that. Or some type of unusual economic gains that would drive economic investments across a very broad geography now. And I do not really see that. So there really is no single event. The one thing again I have shared in this call in the past, we do not have single concentration with a given project.

We had 55,000 projects in 2011. By the very nature of that, 86% of our revenue which is up front studies, consulting, technical valuations, science and some design. They are very disaggregated, very small, and so we do not have concentration of one project in a if that project is turned off. So if somebody decides to leave Iraq, well we are not doing any work in Iraq. So that is not an issue for us. So they do not build one power plant. We do not have a large revenue with one single project. We are very broad spread. So on the downside, it is actually a pretty diversified portfolio that we have.

Okay. That is helpful. And lastly, if I may, with the CRA acquisition. Will you be able to leverage the acquisition on the international platform, the ERP and the back office platform that you just rolled out? Or should we expect incremental SG&A to come out of that.

I am telling our human resources since they translated it into French and Spanish, why didn't they do Portuguese at the same time, and I expected it to be included. We still have to have that debate. There is to doubt Brazil is a little bit different. But at this moment, I do not see any material incremental increase. I do not think you are going to see out of us some number that would impact our earnings. Certainly not for 2012 and I do not even see it for 2013. We have gotten better at that process.

Okay. Great. Thank you, Dan.

Your next question comes from the line of Jeff Beach from Stifel Nicolaus. Your line is open

Good morning, Dan, and congratulations as well.

Thanks, Jeff.

Maybe it was a long time ago you used to talk about maybe a total potential contract backlog or something of that sort and bringing up some of these new vehicles where you have not got task orders yet. When you look more broadly at that total backlog that you can participate in, and then you need the work orders? What is happening with that? Is that growing faster than your formal backlog by your definition?

Yes, it is great. I called it our contract capacity. Absolutely. Historically we were 9, and the we went up to 10. I do track that. Definitely, our upside. I know that others actually use that number and then do some type of factoring of it and depending on how they are quartering, they are factoring it differently so it looks optimistic for them. Our number, it is about $11 billion net. It has not -- it has moved somewhat in line with the actual backlog, and historically it has moved disproportionately greater, and here is the difference. Before, I am going to say before two years ago, we were primarily being driven by new orders and contract work for the US federal government, and they would give very large contract capacities of which they could use some or all over a multi-year period, but the work we have been getting has been more and more biased towards the commercial and international is primarily commercial.

So the commercial clients, and they do not provide these very large contract capacities. What they give you, they want you to burn now. And so you will receive one quarter worth of work. It will burn off. They give you another quarter, and I talked about this being a much faster churning business now with the commercial or the shorter projects. But it does not have in and of itself the same characteristic as the government contracts which are very large contract capacities and then small pieces that come out. The commercial or international are they give you a small to medium piece, and you burn it now. So that is why it has been -- I have de-emphasized and I do not spend as much time on contract capacity because as the client mix has changed. That has changed.

Okay. The follow-up question, you had mentioned in RCM that you saw some significant opportunity in the oil and gas markets, and you are not there. How easy is it to move in and establish relationships and grow a meaningful amount of revenues in an industry where you are not there now?

Wow, that is a great question. You know what? I myself came from the water infrastructure side, coastal engineer and water is a lot different than oil or natural gas. And so the individual I brought in to run our RCM group or the remediation construction management has 45 years of -- 35 years of experience in that going back with MK joined us. He has brought in an excellent team that they are entire heritage is the oil and gas industry, process engineers, refinery, midstream, upstream. So I have the individuals, but individuals that are among the industry's best that now joined Tetra Tech and been with us coming up toward a year and some of the instances they joined us last summer.

That does not give the Company a resume. I need an acquisition. And I am going to get an acquisition. I have the leadership, and then I am going to get the clients and the work. So I have got piece 1 in place. Piece 2 is coming soon. And then No. 3 will be reporting it on the revenue and earnings, and I will report the new wins as backlog here first. That will be the next piece. But I have got step 1 done, the right leadership in place. Step 2 is going to be to bring an acquisition, and then we will actually report the results to you.

All right. Thank you.

Thanks, Jeff.

Our final question comes from the line of Alex Rygiel from FBR. Your line is open.

Thank you. Nice quarter, gentlemen. I am sorry about the fumble there earlier in the call.

That is all right, Alex.

Most questions -- most of my questions have been answered. You have done an amazing job of transitioning the business away from the slower growth private sector towards a faster growth kind of commercial sector, and could you expand upon how you see your end-market revenue mix in two years? I understand international of 40 and US and commercial of 25, but can you break that down to another level with regards to sort of mining and energy and so on?

It is mostly -- I will tell you mostly the overwriting common theme across mining, oil and gas, energy production. Oil sands, transmission distribution, these are all that we have talked about before. The one common thing that will thread across all of those is going to be water used in energy production, meaning hydro. So hydro. You have got your watered shed evaluation, your floodplain evaluation, your geotechnical foundations that it has to be. You have your transmission to the grid. You have to put in the actual attention lines for the bid itself. All of that work week do. That is right-of-way. That is clearance but it is water impacts across all of those. Oil sands, water used in both the extraction and the case of seg D and the case of action surface mining. It is a treatment of tailings and the waste material. In the case of mining, it is water supply. It is water treatment coming out of the process.

So we do not have a fixed evaluation as to how much of it, and in fact internally, we do spend a lot of time, and you can imagine that in the case of mining, I ask that mining is going to generate all 40% of that international, and in our guys from oil sands, I asked them to generate all 40% of that. So that given us a diversified approach. I can not tell you at this point exactly with detail which of these are going to represent in a case of international 40% or in case of US commercial, but I will tell you that we do not need to hit on all cylinders or be successful in all areas to achieve these numbers that I presented to you.

And last question, how do you see your contract-type shifting over the coming two to three years?

I think it is going to be less cost plus, and there will be -- it is continued to trend down. It is largely an artifact of governments where they have forced account, they have cost-based accounting. I think it will move as we move to more commercial, T&M, we will continue to go up and then as RCM grows, I think they will be fixed price. I think the cost reimbursal will go down, and the net recipient of that will be T&M which you are aware, Alex, we are very low risk, but offers us a better opportunity for margins.

Cost plus is the lowest risk of course, but you have no opportunity essentially for any type of margin. You get no risk in exchange for that, you get no margin. T&M actually gives uses us ability to sort of manage both, and I think that will be the net benefactor. That will be the part that is going to grow the biggest on the cost plus time and materials or fixed price. T&M will grow for us

Very helpful. Thank you very much.

Thank you very much. With that, I would like to thank you all very much for your questions and interest of Tetra Tech and for following us, and I look forward to a good spring and things actually picking up, especially up in the north of the border in Canada as we move forward in this next quarter, I look forward to speaking with all of you on our next conference call. Have a great day. Bye.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day.