Tetra Tech Inc (TTEK) 2012 Q4 法說會逐字稿

Good morning. 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 we'll 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 future actual 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 Investor Relations section of Tetra Tech's website.

At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Great. Thank you very much, Eva. Good morning, and welcome to our fiscal-year 2012 year-end and our fourth-quarter earnings release conference call. While Steve Burdick, our Chief Financial Officer will present the specifics of our financials, I will start with a brief overview of some of our key financial metrics for both the year of 2012 and the last fourth quarter.

First, I would like to start with the fourth quarter. We ended the year with a very strong fourth quarter to the year. In the fourth quarter, we set all-time record highs for each of our key financial metrics.

Revenue was over $700 million for the first time at $719 million for the quarter. Our net revenue was $536 million for the quarter, which was an increase of 13% year-over-year. Our EBITDA operating income and our diluted earnings per share for our shareholders were all up 12% year-over-year, and even with a very high revenue quarter that we had this last fourth quarter, we continue to add to our backlog, setting a new all-time record of $2.14 billion of funded and authorized work, which was up 10% year-over-year.

I would like now to review our performance by customer because that's where all of our work comes from. In the fourth quarter, work for our international clients grew by 21% year-over-year. This work continues to be dominated by our Canadian-based clients, but it also includes our international operations in Brazil, Chile, and Australia. International work is now 32% of our revenue, slightly exceeding even my own estimate for where we would be at the end of fiscal year 2012.

In the US, commercial revenue continues to grow rapidly. We were up 15% year-on-year driven by work from a very broad base of our commercial clients that included oil and gas, industrial manufacturing, energy, commercial utilities, and even mining. This is the eighth consecutive quarter of double-digit growth for our US commercial clients.

Our federal work -- it was also up slightly. Just slightly, up 2% year-over-year. It was supported by the book of orders that we had already had in place and remains as a very stable client for us. I will speak more to the Outlook here later in the presentation this morning.

Our state and local work was 11% of our business at the end of the quarter. It was up due to a few larger projects and some localized pick-ups and some select municipal orders. But overall, was relatively stable. Before we move to the next topic though, I would like to point out that at the close of the fiscal year, almost 60% of Tetra Tech's revenue is now in our fastest growing and highest margin markets of international and US commercial projects.

Last quarter, three of our four business groups grew. The ECS, TSS, and RCM were all up significantly. The ECS and TSS business groups, which represent our front-end segments, grew this quarter by 9% and 21%, respectively. These are the segments that are focused on the earliest studies at the beginning of our projects and deliver our highest margins. They are the segments that are leading our international and commercial growth for this past quarter and really for most of 2012.

Our third and smallest front-end segment, EAS, shrank by 9%. They represented in the fourth quarter less than 10% of our business for the quarter. Based on their performance, I initiated a realignment of the EAS operations, which I will describe a bit more on the next slide.

Before I get there, I do want to speak to our RCM group. It grew the fastest of all at 25% with a continued focus on US commercial projects, and that represents 19% of our overall business. Together, the ECS, TSS, and RCM business groups had a net revenue organic growth rate of 9% in the fourth quarter, showing the strength of our international commercial business across both our front-end work and our back-end services.

Beginning the first quarter of 2000 -- fiscal-year 2013, which for us started at the beginning of October, we will run and report our operations as three business groups. As you can see if you are following along on our webcast, the EAS operations are now being aligned into the ECS and TSS business groups. Those are our front-end business segments. Our water infrastructure and design services that were within EAS are being aligned into the complementary water resource services that have been existed in our ECS business group. And, our buildings and facilities design services in EAS are being aligned into their related energy efficiency and international development infrastructure services in TSS where they have been working very closely together for a number of years now.

Our new organization will even better support our key differentiator as a Company -- to lead with science, focusing on taking projects from the earliest stage -- from conceptualization -- all the way to completion. This new organization still provides water service-related -- water-related services across all three business groups. It still remains a key core capability and competency in all three groups. This realignment did result in some charges in the fourth quarter related to this restructuring of some of the operations to position the Company for further growth in 2013 and beyond. Steve Burdick, our Chief Financial Officer, will present the financial details of the charges associated with this realignment in just a few minutes.

For the full year, we generated over $2.7 billion in revenue. Our net revenue was over $2 billion for the first time, which was up 13% from 2011. Net revenue is a very good indicator of the progress that we at Tetra Tech made this past year. It represents an increase in our head count, more staff, more professionals, more internal capability. It means we have more clients. It means we have more contracts than ever before, and based on our good project performance on all of these contracts, it allowed us to grow our operating income and earnings per share even faster. All of that was achieved while increasing our book of business for new orders, which resulted in a 10% increase in our backlog over just a year ago.

We'd like to present a quick overview of our backlog. This past quarter, our backlog was up both year-on-year at 10%, and it was up sequentially, resulting in this all-time record of $2.14 billion. We had a good balance of orders this past quarter, including both strong orders at year-end from our US federal government base and orders from our international and US commercial clients. In the United States federal market, we received very strong September orders as the federal government obligated its funding prior to the end of their fiscal year. This was a key quarter for us to generate federal backlog, especially as the government is struggling to address the budgetary uncertainties that we anticipate over the next several quarters.

In the fourth quarter, we also received over $300 million in new project awards for our commercial clients. These awards were associated with a broad base of projects that I listed earlier, but included several new awards in the oil and gas midstream services area, which was primarily design of piping systems for delivery of oil and natural gas.

At this point, I'd like to turn the presentation over to Steve Burdick, who will provide us some more details and discussions of the financial results for the fourth quarter and for the fiscal year. Steve?

Thank you, Dan. I will begin with the fiscal 2012 fourth-quarter financial overview in a bit more detail.

Overall, our fourth-quarter results met our previous guidance. Comparing the fourth-quarter results this year to last year, revenue increased $43.7 million, or about 6%, to $719.4 million primarily as the result of growth in our US commercial and international markets. Net revenue increased a healthy 13% to $536 million for the same reasons I previously noted for revenue. I do want to point out that our net revenue is growing at a faster pace than revenue because we are involved in more self-performance work, especially for our commercial and international projects.

Income from operations increased by 12% to $48.5 million. When compared to the revenue growth, we did experience a higher growth rate in our operating income. EBITDA also increased 12% to about $63 million.

As Dan mentioned earlier in his presentation, we realigned our segments, including the elimination of the EAS group. Together with this action and others, we had several moving pieces impacting our financial quarter-four results. I will go through those pieces with you now.

Overall, there was a negligible net impact to EPS. Our quarter-four EPS is $0.47 on a GAAP basis. Without these net adjustments on a pro forma basis, our EPS would have been about $0.48 for the quarter. The moving pieces individually did have an impact, and I will go through those as we see on the chart if you are following along on the webcast.

The first item relates to severance and retention. We reduced management personnel in the EAS group segment as a result of eliminating this group. In addition, we did reduce staff, primarily in overhead positions in operating units, that were also affected by the various realignments. Both of these actions resulted in a large amount of severance.

Also, in order to ensure future improvements, we made the decision to pay out discretionary retention bonuses to key staff in the EAS segment and other operations impacted by the changes. These actions impacted several hundred of our employees and totaled about $6.4 million in charges, or approximately $0.06 per share.

The next item was for office consolidation and closures. In order to eliminate some of the excess costs, we closed several of our long-term leased facilities and thus recorded impairment charges. In addition, we determined that some of our operations should move their facilities in order to better serve our clients. As such, we have put certain of our facilities up for sale, and this action resulted in an impairment charge based on the current fair market value of those properties. These fourth-quarter actions resulted in an aggregate impairment charge of about $4.4 million, or $0.04 per share.

Another charge came as a result of the restructuring of our operating units. We had also determined that there were several operations that no longer fit into our long-term strategy for growth and profit. As a result, we determined that we would cease certain of these operations and wind down the projects we had on hand. These actions resulted in taking charges on current projects. The operating unit-related charges amounted to a total of about $6.1 million, or $0.10 per share, which was higher as we determined that the losses were non-tax-deductible.

In addition, we had purchase accounting adjustments. Another significant quarter for P&L issue. All of our acquisitions have multi-year earn-out provisions as part of the purchase price. The accounting for the business combinations requires us to estimate the ultimate earn-out liability we expect to pay. Those estimated liabilities are reevaluated each quarter based on the latest estimates that we have relative to those earn-outs.

In the fourth quarter, we had several earn-outs that came to a conclusion. In addition, we had earn-outs that although were not yet completed, we determined that we had enough information to conclude -- that the Company would ultimately pay a different amount compared to the initial amount accrued for. As a result of these changes in estimates, the earn-outs -- on the earn-outs, we recognized a decrease in the liability in the amount of about $17.3 million in the fourth quarter. As I said at the top of this page, the net impact of these financial results to our EPS is about $0.01 in the fourth quarter.

In order to just summarize the impact of these adjustments on the income statement, I want to just clarify the following -- of the $16.9 million in realignment and restructuring costs, approximately $6 million is included in the SG&A, and the other $11 million is included in other cost of revenue. In addition, the purchase accounting adjustments I referred to are recorded in a separate line item in the income statement referred to as contingent consideration fair value adjustments.

Moving on to the rest of the income statement. SG&A was $57.4 million for the quarter. This is an increase over the prior-year fourth quarter as our SG&A costs continue to increase at a lower rate than our net revenue growth.

Tax increased to about $16.5 million due to the higher income we recognized in the quarter, and the effective tax rate is 34.9% for fiscal 2012. EPS of $0.47 hit the midpoint of our guidance as a result of solid project performance throughout the Company.

I would like to also point out a few more of the significant balance sheet items. First, the accounts receivable increased by 7%, or approximately $43 million to $700.5 million, virtually all of this increase related to the growth in our revenue. Accounts payable decreased as a result of lower subcontractor activities. This amount is reflective of the revenue increasing at a lower rate compared to our net revenue.

Now, on a fourth-quarter, year-over-year basis, our net debt transition to a net cash position. We had very good cash generation from our operations for the quarter and the year-to-date. As we continue to generate cash from these operations, we have paid down quite a bit of debt.

Further, on some of our cash flow details, the quarter-four operating cash flow was $29.8 million in the quarter. This is fairly consistent with the prior-year quarter, but in addition, I want to point out that our year-to-date cash flow is up about 20% over last year. Our 2012 forecast was estimated to come in between $135 million and $150 million. However, we beat the high end of our estimate. The actual results of $158 million in cash flow for the year comes to about a $2.47 per share basis.

In addition, CapEx is above the prior year and in line with our previous guidance. We expect our CapEx be in the range of about $20 million to $25 million in fiscal 2013 also.

Our days sales outstanding of 76.5 days is just slightly higher when compared to last year at this point. Even with this higher DSO, we had a very good operating cash flow result.

As we have completed the year, I would like to point out a few of the highlights for all of fiscal 2012. Our net revenue increased by 13% and was above the midpoint of our original guidance. Income from operations continued to increase at a higher rate compared to our top line growth, and for the year, our EPS of $1.63 hit the high end of our original guidance. Lastly, our EBITDA continues to increase on a year-over-year basis and is now over 220 -- $222 million for all of fiscal 2012.

This next graphic shows the impact of our positive operating cash flow that is generated and the cash used for our acquisition investments. As you see on the graph if you are following along on the webcast, our net cash position has improved sequentially from the end of last fiscal year. Further, as I pointed out earlier, we have generated very good cash flow from our operations in order to be in a net cash position at the end of quarter four.

As a side note and for fiscal 2013, I want to note that even though we are in a net cash position, our interest expense for fiscal 2013 will be in the range of $4 million to $5 million as it includes interest on the debt that is outstanding, our debt facility fees, deferred debt costs, and imputed interest from the earn-out liabilities that are ongoing.

With that said, this Management team will continue to leverage our balance sheet to invest in growth opportunities, provide high profit margins, and access to new markets to further our shareholder value. With that, that concludes our fourth-quarter and fiscal 2012 financial review. I'll hand it back over to Dan.

Thanks, Steve. In 2012, we made good progress in both our geographic and market expansion in accordance with our strategic growth plan. We acquired two companies in Brazil. We now have permanent operations on five continents, and we actually worked in 131 countries last year on different projects.

Today, our international business is the largest client sector in the entire Company. It's been just quite a move for us this past year.

In 2012, we also added a pipeline engineering design services firm with the acquisition of Rooney Engineers, and we leveraged all the different capability we had within the Company internally, mostly across North America, to begin building a midstream oil and gas engineering practice. We've made great progress with that. In fact, as a result of these combinations, oil and gas is now the fastest-growing service line in the Company. In 2012, it grew at over 30% internally.

In October, we announced the acquisition of ASA Brazil. That was our first one -- first month of fiscal year 2013 and one small acquisition done. While it may be small, about 50 people, they are a great technical fit. They provide expertise in oil and gas, water, oceanography, and other marine-related expertise areas. ASA Brazil brings to us a technical expertise in the offshore marine environment and local client relationships in Brazil that complement our existing water and environmental skills and is just what we were looking for in a smaller acquisition.

As I have said before, they are not only a great technical fit, but I will tell you they are a great cultural fit. They are led a US-trained PhD, who specializes in coastal and oceanographic computer modeling. They have an excellent financial track record. In fact, something I would like the rest of Tetra Tech to aspire to.

Probably most importantly, they not only are going to bring us into Brazil and into the oil and gas offshore market in South America, but they have a strong desire to continue to grow this technical capability along with Tetra Tech's similar capability on our other projects. While ASA Brazil was a small addition to the Company here this past month, we do have a very full pipeline of additional acquisition candidates, particularly in the oil and gas industry that are putting an emphasis on water, water treatment, and environmental activities associated with their work, which is absolutely the hallmark of Tetra Tech.

I would now like to share with you our customer outlook as we enter 2013. Our water-related strategy is no doubt the key to our past and our future growth. Water and our science-based approach continues to differentiate us in the marketplace and provides us excellent new opportunities and stable funding. We see very little variability for most of our clients in these areas. If anything, growth.

Our international and US commercial clients on the top half of this page, if you are following along on the presentation, are now about 60% of our business. These markets are now at a scale. They are big enough to actually drive the overall growth of the Company, even if we have other areas that are not growing very much. I'll talk about the US federal and state and local in a moment.

I expect our international revenues to grow at pace of about 10% to 15% per year. That would be organic. That's going to be augmented by additional acquisitions both in 2013 and out in the future. At this growth rate, I expect that our international revenues to be about 35% of our business by the end of 2013 and to trend up to 40% or greater over the next two to three years.

Another growth area. I expect our US commercial markets to maintain double-digit growth rate, which has been for the last two years growing at this pace. Which should put our US commercial revenues at about 30% of the Company's overall base of revenues by the end of 2013.

In the United States, we do expect our public sectors to be challenged, including the federal and state and local markets and clients. Collectively, it should stay relatively flat on an annual basis.

The US federal government I actually think will slightly dip for us this fiscal year as the various budget controversies and challenges are resolved and funding priorities are put in place. I think that will be mostly early in the year. I think it should actually sort itself out and become a bit more stable in the second half. I'll speak to that in a moment.

At the state and local level, I think it will be essentially flat. I do expect that we will have some growth in water and waste management services supported by recovering tax revenues at some of the better funded states. User fee programs at the state and local level, I think, should also be strong, and we should see some very isolated growth there.

On a combined basis in fiscal year 2013, I expect the Company to have between a 5% to 8% organic net revenue growth, which is consistent with our long-term growth objectives. As I presented previously and in most every one of these quarterly presentations, we target a 15% compounded annual growth rate with about half of it coming from organic basis and about half from acquisitions, and it's exactly where we are at entering into 2013.

Now, that talks about the growth on the top line. Let me share with you the growth on the bottom line. Or, our earnings before income tax depreciation and amortization, which takes out the non-cash charges.

As you can see on this graph, we're projecting continued improvement in our EBITDA margin toward our long-term goal of 13%. I've included on this graph -- you've seen this before -- but I've actually updated and modified this a bit this time. I have updated ranges of expected margins for each of the three business groups that we have going into 2013.

I'd like you to note that we've increased the target margins for the TSS group to reflect the expansion of our front-end oil and gas services business. Rooney Engineering and the other work that we are aligning for our front-end oil and gas services, which is primarily in the midstream right now, has been placed in the TSS group. We have moved them up to 9% to 12%. I'm sure Ron Chu, who leads that group for us, would say I'm being conservative We will start there.

Second, I've also raised the target for RCM in light of their improved project performance. I'll say leadership and their entire team, not just Frank, who runs it for us, and also the changing business mix. We moved them up actually quite materially from where they have been historically. We've moved them from 6% to 10%.

I'm quite pleased that all three of our business segments -- internally, we refer to them as business groups -- have the upper end of their performance range at the double-digit level. (Technical difficulty) -- and with the improved performance of the business group, I do expect 2013 to continue the trend of margin improvement that we have maintained over the past four years.

Now with the revenue growth I've just shared with you and the margin increase, I would like to at this point provide you guidance for 2013. I'd like to start with the annual guidance.

For 2013, our net revenue for the year will be from a range of $2.1 billion to $2.3 billion. The midpoint of that range represents a 9% growth over our actual 2012 performance. For diluted earnings per share from that revenue, we are providing a guidance range of $1.80 to $1.95. The midpoint of that range represents a 15% increase over 2012.

For the first quarter, providing a net revenue range of $490 million to $540 million with an associated diluted earnings per share of $0.37 to $0.41. I will note that for the first quarter, I am tempering the guidance due to the short-term operational disruptions that we, and others that are located on the East Coast, incurred associated with Hurricane Sandy. We did have several hundred people in our offices in lower Manhattan that were affected for the better part of a week and for short disruption in other eastern seaboard offices we've had. We're still looking into that.

And, budgetary uncertainties in the federal government taking place right now, largely associated with the election as we go forward. We are providing a bit cautious guidance in the first quarter due to these items.

I do want to point out the notes here. I think they are actually significant and should be taken into account. I will point out that we are, number one, excluding contributions from any future acquisitions.

Our guidance for 2013 does not include revenue or income that would be associated with acquisitions that will take place during the year. It does include a $0.19 non-cash charge for intangible amortization. It continues to decrease but still significant. It also does include a non-cash charge of $0.11 for stock option expense, a 35% annual effective tax rate, and assumes 65 million shares of stock outstanding.

Last item I do want to point out, and this is sometimes not understood clearly by some of the analysts, so this is primarily focused for the analysts. We do have a seasonal business now because of the very large presence we have in Canada.

Our first quarter, because of the holidays of Thanksgiving and Christmas and New Year's, is a somewhat low with respect to revenue and income. But, because of the very cold weather and the less field activities taking place in Canada, the second quarter of our year is our lowest revenue and income and margin quarter of the year.

Our third quarter and fourth quarter then increase substantially. Third quarter being better than either the first or second, and fourth quarter, of course, being our very best during the summer months, fall where our productivity and revenue is the highest across all of our operations. So, for those of you on the phone actually running models and timing revenue and income -- first quarter a little low, second quarter lowest, third up, and fourth, the highest. Please take into account for your models the seasonality.

In conclusion, our strategy is to focus on our international expansion to continue that in growth in the private sector such as oil and gas. I think oil and gas will be probably -- continue to be the largest growth or the fastest growth area in the Company as we are in 2013, but we are going to continue to support our US public sector clients. They still are long-term, loyal, and in some instances, some of our best clients that we had and will continue to have.

Our strong performance in 2012 did result in a 14% earnings per share year-on-year growth. Even as we generated that type of growth in our EPS, we continue to generate cash even faster than those earnings. Ending up the year, as Steve had mentioned, at nearly $2.50 per share in cash. Our backlog is at a record $2.14 billion, and based on this performance, we have great confidence that we are going to see continued growth and performance in 2013.

With that, Eva, I would like to now open the call up to questions.

(Operator Instructions)

The first question comes from Tahira Afzal with KeyBanc.

It's actually Aleena Khan. If you could talk about your guidance. Clearly, the fiscal cliff is baked into the lower end. Could you talk about what gets you to the high end of guidance, or even upside?

Well, first of all, we have not baked in the fiscal cliff at the low end. We have baked in a slowdown in the federal orders, a lot of disruptions and gridlock, if you want to refer to it, but we have not specifically baked in the fiscal cliff. I think most have just put that out there with an asterisk. That's almost a non sequitur. We have to see what transpired from that.

At the high end, just take a few things to actually touch the high end or even, in fact, move through it. On the federal side here in the US, if we actually saw reconciliation of the different parties in the US, if we actually saw them move forward with their funding. We aren't necessarily looking for a plus-up in the budgets. We are just looking for clarity in the programs that we have in place. We are pushing $10 million in federal contract capacity. If they just access that to move programs that they have already identified, that would allow us to move toward the top end.

I also think an overall economic recovery should -- if it drove increase in commodity prices and minerals would help us in our mining sector. I think that our oil and gas is going to continue to grow quite nicely, although an increase in prices and commodities of oil and gas would help also.

So, to touch our $2.3 billion in net revenue and the $1.95, a little bit of clearing up of the federal budget. State, I think is doing fine. I don't think that will actually grow our numbers. It represents a small part, and a little bit of economic recovery in the minerals and strength -- continued strength in oil and gas, and I think we are good for the top end.

Thanks for that clarification. My second question. In terms of your markets, you had 19% organic growth in international during the quarter. Could you walk through your Canadian markets and the 2013 opportunities you might see you there?

Well, I want to start off with mining. I hear a lot about -- I hear, and I'm asked quite frequently that there is a presumption that our Canadian business is all mining. That's not the case. In fact, it's far less than half. It's probably around one-third of it.

So, let me start with oil and gas. We are active in the oil sands. It's growing at a very fast pace, and I expect that it will continue, and we can actually expand the work we are doing, not just from the waste handling, from the piping, from the tailings, but also into some of the process end. We actually are making process there, and we are working with most of the majors. That will be a key market that we expect to grow.

We expect, if you move down from the exploration or the production, down to the midstream which is the piping, we've had some very nice midstream piping design contracts. I expect there to be a lot more. With the Canadians looking to substantially increase their oil production, primarily out of oil sands, they need more pipelines to move that.

They do have upgraders that are turning it from the [syncrude] to actually usable product. That needs to be moved, which is new product. That also requires new pipelines. We expect to materially participate in that. Right now, we have a very de minimis presence. That will become a good contributor.

In the far east, hydroelectric power is growing, and the expansions in Hydro-Manitoba, Hydro-Quebec -- particularly, Hydro-Quebec being the largest grower. We expect there to be more hydroelectric production opportunities for us. Everything from siting of new facilities to transmission lines. New orders there, and that helps meet the United States' requirement for renewable energy portfolio requirements. That's a big growth.

I do think that mining is going to continue to be strong for us. No doubt as economic slowdowns impact base metals -- things like iron and others. A move to gold and others with respect to counter-cyclical with respect to more economic uncertainty gold is being driven by. So, our diversity into other minerals has actually helped us. I expect it to continue to be strong.

So, those are just some of the areas. Of course, that is the one area and right now the only area of our international operations that we have government work. It's still a small part, but the actual municipal infrastructure, water supply, waste water, and solid waste continue to be strong really across Canada from British Columbia all the way out to Quebec province.

Thank you.

Your next question comes from Corey Greendale with First Analysis.

First of all, the margins. If you look at the fiscal '13 guidance, it does -- there is some margin improvement assumed there. It looks to me, just my back of the envelope calculation, like that margin expansion is coming from the decrease in amortization relative to '12? Other than that, it looks like you're modeling flat at the midpoint?

Can you just speak to what's going on with the underlying margins? Is that conservatism? Otherwise all else equal, I would think margins would be better even without the lower amortization next year just given the mix shift toward commercial and international?

Corey, you've got it right. That is the right -- if you take amortization out, the contribution from the reduced IA going into 2013, I will say it's roughly flat. Some of that is embedded in our first quarter, if you want to call it conservatism. I will just call it caution. But, I will say that we have a year-on-year comp that was really quite competitive.

While we did see some of the highest margin work, for instance in mining growing very fast last year. It is still growing but at a lower rate. You are correct that we have essentially an in-line margin. But, I do think that depending on how you model the different combination of revenue growth on the net revenue and the different points on the EPS, you can actually see that it is going up more markedly, depending on where you pick the points. So, we hope to hit that and actually go up.

Okay. And then, just had a mechanical question. In the fiscal '11 Q4, I think organic growth was hit by a calendar discrepancy. Was there any -- was the calendar apples-to-apples this year? Or, was there some benefit from an extra week or something like that?

This year, it was apples-to-apples. Last year, we were actually shorted a week. The previous year, we had 53 weeks instead of 52. Our double-digit growth that we reported in 2011 was actually even higher than that, but the comparison this last year was actually apples-to-apples.

Okay. So then, you went through all the drivers of growth, but can you elaborate a little bit more? In Q3 of this year, organic growth was 1.7%. Q4 was 7.2%. If it wasn't calendar, what drove the acceleration?

It was just timing. Some of the projects starting up in early July instead of late June. If you wanted to take the combination of a 7% and essentially a 2%, that puts us about a 5% organic growth rate between those two quarters. The best representation is probably to take the year. We do have some seasonality because of the different timing of weather in the north. We were 7% for the year. If you want to take the quarter [figarities] out because of weather and climate, that put us at 7% for the year, and we were slightly higher than that for the fourth quarter.

Okay. I think historically you used to say that the backlog was maybe representing nine months of revenue. I realize with the change in mix, it's probably shorter now. Could you help us -- give us an estimate of what the duration of the backlog is now?

I used to say it was about 75% in the first 12 months, the remaining 25% over the next roughly 6 months. In 18 months, essentially, all of it would burn up. This does not represent long-term construction or O&M projects. This is a front-end consulting and execution work that is relatively short, and because of the shift to more commercial and more international, which is commercial, it is even shorter.

I would say we are going to burn 80%, maybe even slightly more than that, in a 12-month period, and the remaining 20%, oh boy, for sure over the next 6 months. But, at the nearer term than that. So, it does represent a quicker burn them before. The percentage of a given year has actually gone up compared to historical rates because of it being shorter duration of the projects.

That is helpful. Thank you.

Your next question comes from Andy Wittmann with Robert W. Baird.

Just on the purchase accounting adjustments, on the earn-outs. Just want to get a look at more perspective on that. When we think about that, obviously, not earning your expected earn-out seems like maybe some of the acquisitions underperformed. I guess it's also possible that the way you've accounted for it may have been conservative. Can you just give us some color as to how to think about the lack of recognition of these earn-outs that resulted in a gain in the quarter?

Absolutely. That's a really good question, Andy. When a firm joins Tetra Tech, typically, we pay two-thirds of the purchase price up front, and the remaining one-third over the next two or three years. The recognition -- or let me use the word, the receipt, of those earn-out dollars to the firm joining Tetra Tech are directly linked with their commitment, or the presentation of their operating income they will make in a given year.

Like all people that feel quite proud and quite high-performance with our Company, we use their number. So, if they tell us they are going to make 20% operating income margins, that's what I believe them to be. Now, if they produce 15% -- by the way, that 20% hypothetically is the number then that is tagged to their earn-out.

Of course, they grow every year, so it goes 20% on a bigger number. It grows, as you would imagine, through the three years. If, in fact, they produce 15%, it's quite higher than Tetra Tech's average. It's quite what we may have put into our plan for the Street. That's why we wouldn't miss the number. We may temper it with respect to what we would present to an AOP, or an annual operating plan or a guidance. So, they can miss the earn-out number.

In fact, there were multiple companies -- in fact, many, many companies that fell into this category that actually aggregated to the number -- the $17 million that Steve presented. Yet, their performance was really quite well. In fact, in most all instances, their performance was better than we had either anticipated or better than the Company's average. So inferring that a payout means that they didn't contribute meaningfully, or aren't successful is not the right correlation.

Okay. That's very helpful. I guess on the other side of some of the charges here. On EAS, what -- as you look ahead, obviously, you did this to be more efficient in the operation. What you think is the go-forward impact to the cost structure? Either in annual dollars or margin basis points that you think that you can receive as a result of the restructuring actions?

I will start with your very last question. I think it is 1% to 2%. It is going to help move us toward that 13%. I'd say in the short term, about 1%. We do have some -- like any time you move something from one location to another, you've got a little bit of administrative work and getting them integrated. That's going to take place over the next couple quarters. I'd say you should see the impact of that toward the end of 2013.

We did -- I don't want to use the word eliminate, although that's probably the most accurate word -- we did reduce the overall administrative costs that we have embedded by having a fourth unit. So, as we move that into the other -- really EAS went to ECS and TSS. We didn't take those costs and just re-embed them into those units. The structure, the management, the systems that we have in those two are capable of handling a substantially larger operation.

While we did put some more risk management and contracts in there, it's a relatively small amount. This actually ended up with larger operating units -- our business groups. It ended up in less unit overhead or support cost per dollar of revenue or per person, and it will be more efficient. I think maybe 1% in 2013, and longer term, I think it could be up to 2%.

Okay. I will leave it there. Maybe I'll hop back in with a follow-up later. Thank you.

Thank you, Andy.

Your next question comes from Alex Rygiel with FBR.

As it relates to the acquisition pipeline in the oil and gas market. What geographies are you talking about? And could you also then transition and discuss Brazil following those two acquisitions down there? What is the market potential for your services? Is it more attractive today now that you've been on the ground for a number of quarters, or less attractive?

Let me start with oil and gas. We are looking primarily in oil and gas in North America. For us, that's really United States and Canada. We have got our first material foothold in the design to midstream. We are going to be primarily focused on midstream.

Our strategy and logic is pretty simple. Oil and gas can drop in price, so maybe exploration will slow down. But, the capacity that exists at the wellhead, or the production area, still has to get to a place where you either can export it to a consumer or to where it's going to be utilized for a consumer like a power plant. That means pipelines because it's not going to go down the road in trucks. There is a huge deficit in pipelines both in Canada and the United States. Certainly, you can look at the Canadian oil sands production increase rates. They are enormous.

Whether or not a Keystone comes through the United States down to Houston, or whether or not it goes out to the Pacific Ocean and British Columbia -- for export, they got to put it through a pipeline. We are focused on the midstream. Again, in the United States, in Canada. Take a look for that.

I would like to see that movement happen on the acquisitive side to help move us even quicker in 2013. For Brazil, we've been down there a short time now. Our first acquisition was a long time ago. I think it's 90 days now. Our data set is pretty limited still. So far, we have been very happy with it. It is a big market for us.

Now, we are going to be focused primarily on the commercial side. I don't want to completely pin ourselves in by saying no government work down there, but primarily commercial. Clients like Vale, which are one of the world's largest miners, Petrobras, one of the world's largest oil companies -- these are really our primary focus to support those clients. We think we have a service capability that is second to none in the areas that they need.

So, it has been good now that we have been on the ground. It is important for us to acquire in-country. Brazil, so far has probably been the only country that we felt an absolute necessity to add resources that are commensurate with a revenue increase. In other locations like Australia, like Chile, like almost any other country, we can add project managers that do a lot of the work back in the United States with our workforce.

But Brazil, certainly, you have the language. You have the culture. But, they have national laws that require national content. In some instances, up to 90%. If you don't do it in-country, the taxes could actually be greater than the revenue. So, that's why we need to add more capability. We are up at about -- we are getting close to 400 people in-country. I would expect we could well be during 2013 over 1,000. Lots of work, but we need to do a lot of it in-country. It's looking good, and I'm very optimistic on Brazil as we go into the year.

And lastly, as it relates to Sandy, can you talk a little bit about longer-term opportunities that could develop? I know you were very active following Hurricane Katrina. I suspect that there are some longer-term opportunities because of Sandy. If you could comment on that, that would be helpful.

After the emergency response is complete, the adaption -- the adaptive planning process begins. That will go through several budget cycles for many, many years. So, for us, in order to address this storm, it's really two things. It's the upfront science, and it's the follow-on engineering, taking the ideas and the solutions and turning them into actual designs that can be implemented.

For us, that means modeling, forecasting, planning, design of structures, and I will tell you a great example is like the award-winning design that we had done in New Orleans for the Inner Harbor Navigational Channel that worked great through the last hurricanes that hit. I will tell you that having done it, and then having it proved in real life through a storm, you can't get better than that.

So, we do both. We are going to do the earliest science that will actually start, I believe, in the coming quarters. The first quarter or two, our emergency response, pumping the water out and actually getting the city and the coastlines back to work. But then, it's going to move to science-based studies, which is absolutely in our center of our wheelhouse. And then, followed with the design engineering and actually the implementation.

I think New Orleans is a great example of where that actually was implemented in the country by the federal government, and it drove several hundreds of millions of dollars for Tetra Tech, not only in design, but in implementation. I would expect over a longer term -- over the next year or two or three, it to be somewhat similar. And, it's not a one or two quarter issue for Tetra Tech. It is a multi-year issue. In fact, in New Orleans, it was five, six years. I would expect, just given the geographic expanse of the eastern seaboard that's been affected, it could actually be larger and longer in duration.

Great. Thank you very much.

Your next question comes from John Rogers with D.A. Davidson.

Dan, just a little bit more on acquisitions in the business mix. The areas that you see growing, particularly the commercial and the international. Are those businesses potentially more volatile from a margin point of view? I know when you've done a lot of government business in the past, it's been, essentially, pass-through work. I just wanted to think about how we should be thinking about quarters ahead in terms of potential volatility?

I think that to the extent that you would infer or that it could be inferred that -- and I'm not going to go to -- I can go to acquisitions. But actually, let me go to the underlying issue, which is actually decline of the work. So, if you are referring to mining, mining is no doubt more cyclical, and there is less margin at the trough when there is less funding. Because you can't shut down your back office as quick as you can the revenue could be turned off potentially.

Oil and gas is similar. If oil dropped to $30 per barrel, there is no doubt that, again, the revenue drops quickly, and you can't shed your back office costs and impacts your margins. We have been quite quick. We have moved quickly on this. I would point to state and local as cut by 50% [pry] us, to give an example. Did it compress margins? Yes, but it didn't take them too much.

I would say that it would affect both acquisitions that are in those commodities and what we have internally. We are attempting to address that, and I will say that in the case of minerals, we are diversifying minerals from agriculture with potash. We are moving to energy with respect to uranium. We are moving to precious metals, which sometimes are currency hedges. So, that's number one.

The second is, most of our work is very front end, which is feasibility studies to evaluation, and it is much more insulated from the big variations in the CapEx projects. So, when you heard BHP -- I will just call it, because it was widely advertised on the headlines that they were stopping $80 billion or putting on hold $80 billion of CapEx projects. Our numbers really didn't change much. We are doing the front-end studies.

Now, the flip side is when they announced $100 billion was going to get turned back on, and people think our revenues are going to go through the roof. No, we are still steady, continue to grow, looking at their overall portfolio of evaluations of the different mining sector clients that we support. We are quite insulated by being removed -- one or two steps removed from the CapEx budgets. That's true with both minerals. It's also true with oil and gas. That's our perspective on the level of volatility that we have associated with this commodity work.

In terms of the actual work, when you have a project or an assignment for a commercial customer, do the margins that you realize on that work tend to be stable, or come in as planned? Is there both upside and downside to that? I guess that's what I'm trying to understand as well.

Most of it is stable. A lot of the very front-end work we do for commercial clients is on a time and material basis. When you charge an hour, unless our engineer gets a huge rate that isn't built in, that's already baked into the project at the beginning. As we move toward the detailed design, and then, certainly, construction moves fixed price, but that's still a relatively small part of our business right now.

Okay. Lastly, if I could -- in terms of the acquisition or potential pipelining out there, it sounds as if you've got at least a decent list of prospects or opportunities there. How quickly do you have to close those to impact '13? Or, would you have to?

Well, first of all, let me go back and refer you to the slide and comment -- I will restate what I mentioned earlier. I've done this every year. Our future guidance does not include --.

Right.

Any acquisitions. So, if I do zero acquisitions unless -- and I do know there are a few analysts -- and I think we have one that actually includes revenue from acquisitions during the year, even though we don't provide it. I think that's you, John.

Yes. (laughter) You've got a good record of doing it.

Maybe we get lucky. If you put the number in there, in order to hit your number, I would have to sit down and go through your model for acquisitions to see what we would have to do. But, even your model actually just has a -- what I would call just a fair pace across the year. It doesn't have to happen in our Q1.

I don't think there was a big bust even in your forecast, but I would just say that for those analysts that include acquisitions at the beginning of the year, they should not, as we make an announcement of an acquisition, then re-increase their guidance for the year. To double us up from the beginning, and then hit us again during the quarters, which some of our people here thinks happens sometimes.

With that said, let me just make one comment. You may hear this from others. It is quite an interesting artifact we've seen in the past 60 days, roughly. Here in the United States, it hasn't been our number one focus for acquisitions because of the economic environment, but because of the administration and the potential tax change for capital gains treatment, it has driven a number of firms to actually approach ourselves, and I'm sure it's not just Tetra Tech.

We have had a number approach us and ask us, how fast can you go? That we've been dating you for a while, Tetra Tech. We like you. We are a good fit. We've known each other. Let's just forget this dating and get moving. Can you finish by December 31? Because it's going to save us owners X amount in capital gains increase based on their perceived tax changes here in the new fiscal year.

So, it is interesting. It has sort of exercised some of our M&A staff and could tax us. It is something that if you asked me 60 days ago, I would say US is materially a less priority, but some interesting things have become available from a purely financial motivation by these owners.

Okay. Thanks. Hopefully, they keep burning the midnight oil. Appreciate it.

Your next question comes from Noelle Dilts with Stifel Nicolaus.

I was hoping you could talk a little bit more about the energy markets and what you are seeing in terms of the mix domestically. We are looking at a pretty significant slowdown in wind next year. I'd just be curious to hear your thoughts on the trend in that market?

Well, I'd say we serve conventional and unconventional. Unconventional being generally renewable. Wind, solar, geothermal, a few others. We've actually seen those be flat. We, internally, see our wind work, which most of our renewable energy is wind. The transmission lines from these different renewable sources to the grid. We have seen it be flat. We have actually seen some of the transmissions lines actually pick up because they can be used not only for renewable sources but also conventional or even coming across the border for Canada.

We've actually seen some of the -- we refer to it as T&D -- transmission distribution, actually picking up. That has actually been strong, but wind -- specifically for us, we think 2013 will be -- I will use the word stable. That is code for flat. Revenue should be the same as we saw in 2012. That's with the same mix we have both on studies and turnkey implementation of putting the turbines in and commissioning them. What we see for the next 12 months is relatively flat.

Okay. Great. And then, can you just comment on the cross-selling opportunities you are seeing with some of your acquisitions in Canada and even with some of your more traditional businesses? I know that was part of the strategy when you acquired some of these operations. Can you just talk about the progress you're making on that front?

Well, it has really not only met my expectations, but it has exceeded it. I know that the folks here internally as we do acquisitions like to use the word synergy. But, what has really happened is the work that we've brought in -- the firms that we've brought in in Canada were primarily front-end firms. People that did the planning, the exploration, and the upfront engineering work. Essentially, when we went to Canada, we had no environmental work. That was just over the past three years.

This past year, we have actually won some of our largest environmental remediation and assessment contracts we have in the Company in Canada exclusively from leveraging the environmental capability we have here in the US -- which is many years, if not decades ahead of any other country in the world on the environmental compliance remediation assessment area.

One of them we press-released openly was the Port Hope mining. It's one of the large uranium sediment remediation projects we've had. We have had a recent announcement on others that we've done in Canada, so the leverage has really been -- or if you want to call it cross-selling -- has been very, very good.

I will also say that the cross-selling to our existing mining clients we had in the United States where we were doing back-end remediation and environmental work has been exceptional for us doing the front-end work. So, it's been a two-way street both up to Canada and down to the US

Okay. Great. Thanks.

Your next question comes from Michael Legg with ROTH Capital.

Could you just talk a little bit about the dollar amount of cost savings from the realignment? And, if that offsets any of the reduced -- you mentioned you shut down a couple business lines there. What type of revenue reduction that might be? Just so we could factor into the organic growth rate.

I will start with the back-end. We are not expecting any -- nominal -- very nominal revenue reduction. It was almost nothing. We just elected certain areas and geographies not to continue where we either didn't have critical mass, or it just didn't look promising.

I would say that any reduction we had on an election to go forward with a small business line here or there, and most of it was geographic, would more than be made up in a growth in the other areas we have within the EAS components that went to TSS or ECS. So, as far as net revenue reduction as part of this realignment, I do not expect any. In fact, I expect that to increase within those units that went to the others.

Now, cost savings. There is no doubt that as a combination of 2013 and beyond, we will save far more than we incurred in the fourth quarter as part of this realignment. I think I indicated earlier on a question, maybe we could see 1% of our margin improvement in 2013, and then, more in the future. It will more than pay for itself -- this realignment. And, the efficiency and the linkage for our clients of having these aligned with our front end is even better.

I'd just say a word in the -- I will say in support of the EAS group. They did have a tough road to hoe this past few years because that is where most of our state and local work was. That is where it got hit the hardest on tax receipts, reduction in work. They did have a very difficult client mix to work with. A lot of the work for the EAS was beginning to come from or had been coming from our TSS and ECS units.

So, when more and more of it was being handed down for design from the upfront group, why hand it off to another unit? Just embed it with the one where they're receiving their funding. It just makes so much more sense. Plus, it makes both our ECS and our TSS groups billion-dollar units on scale. So, the back office costs become much more efficient. I expect our RCM unit is going to get up to that same level pretty quick.

Okay. From a realignment perspective in the foreseeable future, should we expect any other costs in the next year or two? Or, are we pretty much set?

We are pretty much set.

Okay. Great. Thanks.

Our final question comes from David Rose with Wedbush Securities.

If you could walk us through the progression of margins in RCM as you work through the backlog. If you could, provide us a little bit more color on the front-end costs you are incurring? Margins are flat year over year, down sequentially. But, it's clear that you believe the business is going to be better.

Let me comment on that. I think that if you saw -- if we at Tetra Tech saw a 25% increase in our revenues in ECS or TSS, you would expect there to be a somewhere between modest to material increase in margin. That would make sense, because we have a bigger revenue base. We have the same back office costs. Therefore, it drops to the bottom line.

That's not true in RCM, at least for Tetra Tech. When we get more revenue, we actually -- when we start a construction project, we only recognize a very small or, in fact, no profit at the beginning of the project. We actually want to embed some caution until we get mobilization complete, until we get some of them maybe through the first material permitting, or through the first major phase.

So, you'll actually see revenue coming through the books. You will see revenue go up, and you will see a natural lag with profitability because we internally inherently are cautious on our profit recognition. So, it's not an hourly basis or a cost-plus where your profit recognition is linearly linked to your revenue. That's not the case. RCM is different. There is a lag.

So, if we complete the project on time, on schedule, we will finish it on budget. Then, you will see an increase in the profitability as the risk begins to abate during the execution of the project. It's not how much better is the RCM going to run, although no doubt we are going to continue to increase that.

You need to look at it as to the phasing of the execution of the individual projects, and then the catch-up on the profitability as we don't run into surprises because we don't want to end up in a position where we recognize a bunch of profit -- we had a problem with weather. We had a problem with something, and then ended up writing it down. You have not seen it coming from Tetra Tech, and we are doing what we can to make sure that doesn't happen in the future either.

To that point, do we see the margins pick up more meaningfully in Q2, Q3? How should we think about that?

I think it's going to ramp up during the year, and I didn't have a chance to share with our business group president that we've moved his upper end up to double-digits. You've not seen that for a number of years out of that group, but I think you are going to see it ramp up to that. You will see it ramp up steadily through the year.

Great. Lastly, given the uncertainty in the environment, what are you doing from a project management perspective to stay ahead of the costs? You've demonstrated that with EAS, but the rest of the business, are there trigger points for flexing the business? What segments of your business are you seeing potential project delays?

Well, we've been pretty good. I know that we, ultimately -- we're not the measure. Our shareholders are the measure if they feel we're doing this quick enough. I will say through the economic downturn of 2008 through -- even through now, we did not show a loss in any business segment, any quarter at all. Now, we have been quite quick with respect to managing the business, the back office costs as it goes down. We do have an enterprise risk management program that we prioritize.

All of our larger fixed price contracts, to be direct, we are very much on top of those. Watch those very closely. You have not seen big project write-offs from Tetra Tech. I want to be cautious to say ever, but not really. We are continuing that. That turns up significantly when we see an economic downturn.

So, most of our issues have been managing the business when we see a decreasing revenue stream, which we saw in RCM and EAS through the economic downturn. I think we've done really quite well on that. As you can see, our margin expansion on a collective Company has increased. I am not going to jinx ourselves and say it will never happen to us, but we are very much on top of that, David.

Okay. Great. Thank you, Dan.

Well, thank you very much for your questions and interest in Tetra Tech. I really look forward to speaking with you again next quarter, and I will tell you for all of us here at Tetra Tech, we are excited to be in 2013 and look for some of the new markets that are just starting for us, becoming headliners for us, and major contributors that everyone in the Company that exists here today can contribute in. With that, I look forward to talking to you next quarter. Good-bye.

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