Tetra Tech Inc (TTEK) 2013 Q1 法說會逐字稿

Good morning and thank you for joining the Tetra Tech earnings call. By now you should have received a copy of the press release. If you have not, please contact the Company's corporate office at 626-351-4664.

With us today from management are Dan Batrack, Chairman and Chief Executive Officer, and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results and will then open up the call for questions.

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

In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the 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. And good morning and welcome to our fiscal year 2013 first quarterly earnings release conference call. I have Steve Burdick here with me this morning, our Chief Financial Officer, and he will be presenting the specifics of our financials. But I would like to start today's call with a brief overview of some of the key first -- first our key financial metrics for the first quarter.

We began this year with a solid first quarter of 2013, both with revenue and income coming in line with our expectations. As we anticipated coming into the quarter, we did see our revenues decline with many of our US federal clients, both with the rate of their spending and the issuance of their new orders. This was a direct outcome of the uncertainty associated with the US election and the pending sequestration, which in fact is still pending and just pushed out into March.

In the early part of this past quarter, we also experienced some revenue impact on our East Coast operations associated with the Hurricane Sandy event that took place during our first quarter. As a result, our revenue in the first quarter was at $659 million, with a net revenue of $497 million which was up 1% year over year. However, with the reduction in our federal revenue in the quarter, more of our revenue was associated with our higher margin commercial work. As a result, our EBITDA finished at $54 million for the quarter and our operating income was $42 million which was up 16% from the same quarter last year.

Our diluted earnings per share was $0.41 or up 14% year on year. Overall the quarter was really in line with our guidance that we had provided coming into the quarter.

Our international work continues to be the fastest growing area in the Company. Our international work was up 7% year-on-year, based on growth from a broad base of customers primarily in Canada, Brazil, Chile and Australia.

In the United States, our commercial revenue also grew. It was up 3% year over year supported by growth primarily in the oil and gas and with our industrial clients. Of the growth in these two areas, oil and gas industrial clients really offset some of the slowdown we saw in our mining work. Our mining activity had gone from double-digit growth, we saw it slow down at the end of last fiscal year to sort of mid single-digits and this first quarter we saw it flat, not shrinking but really no material growth.

As expected, our federal net revenue was down. In fact it was down 13% year over year due to the fiscal uncertainty with the US government. Our state and local work continued to be strong. It was at 13% of our overall business this past quarter. And it was up due to a few larger projects and localized pickup in our municipal or city orders really across the country. That was actually a bright spot for us.

All three business groups were affected by broad-based reduction in our federal revenues during the quarter. However, each of the three business groups have a much broader balance of services and clients than just with the federal government. And each have specific growth markets that offset the federal market reduction that we saw in the first quarter.

In the first quarter, our ECS group, our biggest one, grew slightly, supported by international growth, primarily in South America and Australia. Those were our strongest areas, and we also did see growth in infrastructure work in Canada, primarily associated with oil and gas markets.

The TSS group was flat during the second quarter. It was really two items offsetting each other. We saw growth in the US oil and gas pipeline design permitting and environmental assessment work, and the growth in that area offset a slight reduction or weakness in the US federal work.

And for RCM, which includes a lot of our US state and local projects and commercial cleanup projects, strength in that area saw our CME retain its revenue during the first quarter.

All three of these groups, though, during the quarter did adjust their resources in indirect costs in anticipation of the market changes we saw primarily on the federal side. So we are moving quite quick on the indirect cost as we see changes there.

At the end of fiscal year 2012, we achieved an all-time record-high backlog of just under $2.2 billion and received over $600 million of orders in the fourth quarter of last year. As we've grown our commercial workers both in the United States and international -- internationally, we have seen the average duration of a project become much, much shorter which is typical of our commercial work. And it now comprises a much larger part of our backlog. In fact, in some of the areas we've become much closer to a book and burn business. We will book a project and will actually complete it within the 90 days of the quarter, and so any order would be burned up.

Now it does mean that we have a much higher margin embedded in our backlog as a larger portion of our backlog is associated with commercial work. However, in the quarter, as we expected, orders were slow from our US federal agencies as they waited for the election results, the budget resolution and decisions on sequestration. This fiscal uncertainty also did have, in the first quarter, some impact on our clients actually moving forward with orders also. So that did have a small impact.

Overall, this did result in a sequential reduction of our backlog to $1.938 billion. However our backlog is up from the same quarter last year by 2%.

We have been successful this past quarter in winning many large not only commercial but federal contracts, but I do expect orders to be slow with the US federal government over the next quarter or two as both the sequestration and the budget for 2013 get resolved.

I'd like now to turn the presentation over to Steve Burdick who will provide us more details and some discussion of the financial results for our first quarter.

Thank you, Dan. I would like to begin with the first-quarter fiscal 2013 financial overview in a bit more detail.

Overall, as Dan said, our first-quarter results met our previous guidance. Comparing the first-quarter results this year to last year, revenue decreased by about $24.1 million, 4%, to $658.5 million, primarily as a result of our reduction in our federal government markets. This decrease was somewhat tempered by increased revenue related to our oil and gas and our commercial markets.

Net revenue increased by a modest 1%, about $497.2 million. I do want to point out that our net revenue is growing as opposed to our gross revenue because we are involved in more self-performance work, especially for our commercial and international-related projects. The self-performance work has benefited our bottom line, and in fact income from operations increased by about 16% to $41.8 million.

As opposed to the change in the revenue, we did experience a substantial growth rate in our operating income. We benefited from better project execution in our tests and RCM groups and we recognized less intangible amortization expense in the quarter.

Also, EBITDA increased by about 6% to $54.1 million, and this improvement resulted in an EBITDA margin increasing to about 10.9% for the quarter.

Looking at the income statement in a little bit more detail, SG&A was $46.4 million for the quarter. This is a decrease from the prior year first quarter, as I mentioned, the majority of the decreased resulted from lower intangible amortization. Tax increased to about $14.2 million due to the higher income that we recognized. The effective tax rate is about 35% for the first quarter and this rate is consistent with our previous guidance and similar to the prior year's effective tax rate.

EPS of $0.41 met the high end of our guidance and we hit the high point of this guidance as a result of solid project performance and lower SG&A costs.

I would like to point out a few of the more significant items in the balance sheet. Accounts receivable increased by about 1% to $674.9 million. Virtually all of this increase related to the change in our revenue mix, which is now weighted more towards commercial and international work. Accounts payable decreased as a result of our lower subcontractor activities, and in fact, this lower amount is reflective in the gross revenue also decreasing.

On a first-quarter year-over-year basis, our net debt transitioned to a net cash position. We had a very good cash generation from our operations for the quarter. And speaking of this good cash flow, I would like to share the following on it.

The Q1 operating cash flow was $17.8 million in the quarter. This is less than the prior year quarter. However I do want to point out that our first quarter is typically lower than other quarters because of year-end bonuses and other payments that occur, and a slowdown in collections around the Christmas holidays. Even with that said, we expect our operating cash flow for the year to be between somewhere $150 million to $170 million for all of fiscal 2013. And this translates to cash generated on a per share basis from $2.31 to $2.62 on a per share basis.

The CapEx is about the same as the prior year and in line with our previous guidance. We do expect our CapEx for the year to be in the range of $25 million to $30 million for the year, which includes a plus up for the second quarter acquisitions that we just completed. Overall, our CapEx amount represents a ratio of less than 1% of our annual revenue.

Days sales outstanding of 79 days are slightly higher when we compare it to this year or last year at this point. Even with the higher DSO, we had very good operating cash results. The higher DSO relates back to what I mentioned earlier in the presentation which is our revenue mix, which is weighted more towards international and commercial clients. These commercial payment terms are less optimal when we compare it to our federal government work, but offsetting this, we do recognize higher profit rates.

The next graph is the net cash position. And this graphic shows the impact of our positive operating cash results generated and the cash used primarily for acquisitions and other investments. As you can see on the graph, our net cash position has remained in place from the end of the last fiscal year. I do want to point out that even though we were in a net cash position, our interest expense for fiscal 2013 will be approximately $8 million as it includes interest on debt outstanding, debt facility fees, deferred debt costs, and a significant amount of imputed interest on the earnout liabilities.

In addition, due to the completion of our AGM power plant acquisitions that we've announced in the second quarter, we will be in the net debt position as of the second quarter now, and it's about $150 million. However, we do expect to bring this back into a net cash position by the end of calendar 2013, and furthermore if we do really well, we could even see ourselves back in a net cash position by the end of the fiscal year.

With that said, the management team is so committed to leveraging our balance sheet and looking for growth opportunities that will provide high profit rates and access to new markets to further enhance our shareholder value.

And with that said, that concludes the first-quarter financial review and I'll turn it back over to Dan.

Thanks, Steve. I'd like to introduce you all to two new acquisitions that joined Tetra Tech just in the past 30 days.

In fact the first one I would like to introduce is AEG, or American Environmental Group, who joined us at the very beginning of second quarter. In fact it's been just about 30 days exactly today that they joined us.

AEG is a top-tier solid waste or landfill consulting engineering and construction firm headquartered in Ohio. They complement the front-end design capabilities that we have in the Western United States right now and they bring us a solid waste presence in the Central and Eastern regions of the United States. And I believe reviewing the industry literature that together, Tetra Tech together with AEG, now makes us collectively the largest solid waste consulting design engineering and construction firm in the United States. So we are quite proud of that.

We expect that AEG will be accretive on a GAAP basis in the first year. We did include this in a press release here roughly 30 days ago. And they should contribute between $0.01 and $0.02 on a GAAP basis during fiscal year 2013, with that contribution probably being a little closer to the $0.01 level and being back-end loaded. And that is after taking all expenses associated with intangible amortization.

Most recently, second acquisition that joined us was Parkland Pipeline. In fact, they just joined us on Monday. We closed the acquisition just three days ago. And they've added pipeline design, engineering and construction service capability in Alberta, Canada. The addition of Parkland expands our presence in the oilsands and is very complementary to the work we are currently doing in the -- for engineering work in the region, primarily Alberta.

Since Parkland just joined us, we are still looking at some of the details of the purchase accounting. We will point this out in just a moment on the intangible amortization, but we have not completed that again. I will repeat that we are only three days into this, so we are going through the accounting implications of the different non-cash charges, but we do expect them to be accretive in the first year, we expect that they will contribute sort of a similar level to AEG, $0.01 to $0.02, but again this has not been completed and we will provide more details on our next quarterly call on this part.

On the next slide, if you're following along on our presentation materials, if you take a look at the slide, our customer outlook, as you can see on this slide is focused on driving growth in the international and commercial markets while we are maintaining the public sector revenues that we have here in the United States, both for our federal and state and local clients. They're focused on their priority programs. Our growth projections for our customers over the next year are going to move the percentages shown on the slide here.

If you don't have the slide I will note these. We expect that over the next 12 months we are going to continue to grow both our international and US commercial markets so on a combined basis to about 65% of our overall revenues. That's broken into about 35% so we expect our international work to go from just over 30% to 35% over the next 12 months and our US commercial to grow to 30%.

We do expect a [re]balance of our revenues, about 35% to be comprised of the US public sector. And that would be comprised of roughly 25% or we see our federal revenues declining over the next 12 months, slightly, to represent about 25% of our revenues. And we expect our state and local to remain constant or stable at just about 10% or slightly over.

Each of our three business groups are going to contribute to the growth model shown on this slide, which means growth on the international and US commercial markets.

And I'll start with ECS. We expect our ECS or our largest business group to grow in the oil and gas markets in Canada supported by engineering and infrastructure work, especially in Western Canada along the oilsands and the oil and gas corridors through Alberta and to the West in British Columbia. With the near-term declines in federal and a slowdown in mining starts, as I had mentioned earlier in this call, our mining work has remained relatively flat this past quarter. I do expect our margins in ECS group for the second and perhaps early third quarter will likely be at the lower end of their target range -- again, because of pressures or headwinds on the federal market and a flat market in the mining for the immediate future.

The TSS group includes growth markets and oil and gas in the United States, supporting engineering and environmental work in the major shale regions across the US, and pipeline design work for interconnections. Now, the TSS has relatively stable US federal client base. These are regulatory mandated projects or very high priority projects with the US State Department, so I expect TSS group to continue performing at the high end of their margin range. So I would expect them up at near the 12%.

I will note they were above that, they were over 13% this quarter and that was associated with exceptional performance and project closeouts. And so for those modeling, I would model it closer to 12%, not materially above that.

In RCM, our remediation construction management business that focuses on completing our full-service capabilities, with the addition of Parkland and AEG, RCM is going to be working across North America in oil and gas and solid waste commercial markets. The shift to this more commercial business is going to cause our margins to go to the high end. We not only move their margin target range up materially coming into this fiscal year, but I expect RCM this next quarter and for the rest of the year to be performing at the top end of this target range. In fact, I have challenged the Business Group President of RCM to not only match but to exceed that contributing from the ECS and test group. So we will see how that goes here.

But I expect in the future RCM is going to be a major contributor to our operating income at a similar margin level as ECS and Test. So that will be a big change in the contributor to the Company.

Let's take a look at this for a moment on a consolidated basis. Again, if you're following along on the webcast, you can see on this graph we are projecting continued improvement of our EBITDA margin toward our long-term goal of 13%. At the midpoint of our guidance, and I'll get to that on the next slide, but the midpoint of our guidance represents about 11.5% EBITDA margin which will be the seventh consecutive year of margin improvement for the Company. And with a larger percentage of our revenue coming from commercial clients, both in the United States and internationally, and the improved performance in our RCM business group, I expect 2013 to continue the trend of the margin improvement toward our long-term goal.

With that, let me move to updating our guidance, both for the second quarter and for all of fiscal year 2013. So based on our performance of this first quarter, we've increased both our EPS and that revenue for the year, but I'll start with our second-quarter guidance for net revenue and earnings per share.

Second quarter, our guidance is from $500 million to $550 million. The midpoint of that range on a year-to-year basis would represent a 10% increase in our net revenue. With an associated earnings per share range of $0.38 to $0.42, if you calculated the midpoint, the midpoint would represent a 14% increase in our earnings per share over the same quarter last year.

For the entire year, we did move up. Our net revenue to $2.15 billion to $2.35 billion, the midpoint of that range would represent an 11% increase with an associated diluted earnings per share of $1.85 to $1 96, the midpoint representing a 17% earnings per share increase. And I will note if you went and compared this to our guidance from last quarter, we did bring the bottom end up $0.05 and we brought the upper end up $0.01.

The reason for bringing the bottom end up more, at a larger level, is we do think that a lot of the uncertainty associated with the federal budget and some of the federal uncertainties have cleared up. The election is behind us so it's very clear where the administration is going to be. It's clear with respect to what departments will be in place. The production tax credits have been determined so we have more clarity on our renewable energy work, so we are seeing much more certainty there. and actually for our commercial clients, the tax rates have also cleared up. So we've seen all of those clear up, so it's given us much better visibility on the bottom until we move that up by $0.05.

Now we still do have a couple things outstanding, we still have sequestration coming up in March and the budget, so we haven't seen the top end completely clear up, so we've been just a bit more cautious or judicious in bringing the top end up. But even with this, we did bring it up.

Some of the assumptions I do want to point out and reiterate one more time that, if you're following on the webcast, we do estimate at this time $0.37 intangible amortization expense during 2013, but this is preliminary in nature. We have not completed a final purchase price accounting of what that number will be precisely, and we will update that next quarter. But it is a substantial increase of intangible expense for 2013 and this was about a $0.19 or $0.20 increase over the prior year.

Other assumptions, $0.11 stock compensation expense, 34% effective tax rate and 65 million shares diluted shares outstanding.

In conclusion, our strategy to focus on international expansion and growth in the private sector with our industrial and commercial clients has actually been working very, very well. We continue to expand our services to our North American oil and gas customers, and our change in this customer mix has resulted in a material increase in our margin. In fact the first quarter we saw 15% year-over-year increase in our operating margin in the first quarter. And based on this performance, we raised both our earnings per share and our net revenue guidance for all of 2013.

And with that, operator, I'd like to open this call up for questions.

(Operator Instructions). Corey Greendale, FirstAnalysis.

So first of all, I wanted to ask you a little bit more about the post-Hurricane Sandy effect. I know you said that there was a little bit of an impact in the quarter, I was wondering if you might able to quantify that, and then talk a little bit about what you think the future opportunities may be around kind of the post-Sandy prepare, and making sure that sort of thing doesn't happen again.

Let me start with the first part of that question is what was the impact in the quarter. We have between 200 and 300 people located in an office just above Madison Square Gardens, so we are sort of mid- to downtown area in Manhattan. Just like everyone, they closed that entire operation down so we had a few hundred people out for about a week. So it was -- I would call it it wasn't zero, but it wasn't significant and that's why we didn't actually quantify it. But if you want to back into our very high-paid engineers in New York Times a couple hundred people for a week, that was the impact.

With respect to the opportunities, we actually look at this as very closely paralleled in some respects to a New Orleans but even better for us. (inaudible) that have been allocated for Sandy, we've had the Congress and the federal government passed roughly $60 million here in the past few weeks, including $50 million of it here just this week.

Now typically it has a slow ramp up. The money is primarily going to be spent by the Corps of Engineers for coastal protection and starts with long-term studies. The difference I see between New Orleans and the East Coast is we are much better positioned in the East Coast. We have large offices in Northern New Jersey in places like Morris Plains, we have offices in downtown New York and really across the Seaboard. The client that is going to be leading is clients that we have led with for many years in the New York District, Philly district, the Baltimore district, the New England district. These are long-term clients with us.

And we do have a large presence that we can co-locate or co-join the monies and funding given to the local entities that then do cofounding with the core and other overall entities such as FEMA. So we think we are well-positioned. It typically takes a few quarters, this is only a few days in now. It will take a few quarters to initiate the studies, and then it would convert to actual solutions, design and then ultimately construction.

We did approximately $300 million to $400 million worth of revenue in New Orleans and most of that began anywhere from 3 to 5 years after the largest part of the revenue. And I would expect depending on what the final solutions are it to be somewhat similar to that. So that is sort of our initial look at what this might represent to Tetra Tech.

That is all helpful detail. My second question, you were fairly clear about what you're viewing on the federal government segment, but could you just give us a little more sense of what is included in the guidance that you're assuming, kind of a Q2 post-election hangover and then things pick up in Q3, are you assuming continued weakness throughout the year?

No, I think you said it well. I would call it a hangover, probably not bad. The hangovers associated with still the budget and sequestration, so I expect that the individuals that are leaving these federal programs are really looking for certainty both with the budget for what they can spend, either on a continuing solution which is similar levels, and what if anything sequestration will represent for their programs.

So I expect the federal to be somewhat similar during Q2, that's why I had expressed some caution on orders during Q2, and I expect it to abate early Q3. Now technically the date is March 27 for the budget. If they hit that to the day it will be a Q2 event and things will clear up quite quickly in Q3, but I'm still waiting for them to hit one of their scheduled budgets or scheduled timing at all. So if you push it out another month, and in to your month into Q3.

So I expect this to be a front end of 2013 impact, Q1 we just saw, Q2 will be somewhat similar and I think it will actually abate quite quickly for Q3 and not be an impact in Q4.

If I could squeeze in one more quick one. You are clear that you thought there was the potential for outside to the RCM segment margin. Just looking at the guidance and given the impact on intangible amortization, I'm having trouble getting to estimates that assume those acquisitions are accretive unless the RCM margin is above the 6% to 10% range, so can you just give us --? Most likely should we be expecting not only the high-end but it could actually be north of that?

I do think that depending on revenue, revenue would help drive it to that, and it is possible they could be above that level. And in fact, the more and more of the work coming out of RCM is on the commercial side and much, much less of it is on the federal side. And even some of the work at the state and local is on a fixed-price basis; so the margins, even on the state and local, is higher.

So I do believe that the -- I do believe the segment margin could test the upper end and in fact be above that. So if your models show that we would have to be above that, that is not outside an expectation that we would have for the RCM group for the Q2.

Thanks very much.

Andrew Wittmann, Robert W. Baird.

Good morning. I just want to build on that last question a little bit and just be more specific. On those deals, are the margins on Parkland and AEG, are the substantially higher type EBITDA margin businesses? Are these kind of high teens margin businesses? Can you give us a sense about how those businesses [earn]?

The solid waste business is lower than that, it's probably as double-digit, but it's right around 10%. It's a bit of a more mature business, as we are well entrenched, some of that is associated with receipts of waste that come from utilities or even municipalities, so it's a strong business. It's higher than the margins that have been in RCM in the past, so that is accretive with respect to margin basis. But it is, I would say not in the teens, but sort of right around 10% level, right around double-digit.

Now oil and gas work is quite seasonal, and they do a lot of work in the winter and they do work in the late summer. So sort of when it's dry and stable or frozen and stable. So probably 40% or more is late summer, 40% or slightly more in the winter. So you are going to see, we will see quite high margins, and they would be in the teens or even upper teens in those seasonal periods with lower margins in the spring and fall when things are soggy or when you'd sink in and so the work is much less with respect to field activities.

But on an aggregate basis, with respect to the oil and gas work there, not just Parkland, I would say overall I would put it more in the low teens, low to mid teens. But there is a seasonal aspect of it because of the revenue flow in the winter and then the late summer months.

Got it. And specific to Parkland, can you give us a sense of how much of that business would be more design-like versus construction-like? It sounds like there's more construction component here, and if that's the case, can you talk about how that fits in with what is traditionally, really avoided a lot of that in the Tetra Tech strategy? How you got comfortable with that?

I can. Let's go to the first part. Most of it is construction, there sort of 20% design upfront and other type of work and planning and prep work, and 80% construction, so they are much, much more predominantly the back end of the construction end. That's why it's going into RCM group.

Now how we got comfortable with it, in the United States, in the Lower 48, in order to do pipeline work we brought in Rooney, which was design. A lot of the work performed in the US is you will do design, which then gives us access to permitting, environmental clearance, right-of-way assessment and it brings in all the other services and leverages all the work Tetra Tech does.

The goal is to do something quite similar in Canada. But generally speaking, the work for the large midstream, the piping firms are you need to have the ability to do design and construction. They are not hiring just a pure constructor or just the design, so for us to actually asset access an awful lot of work in some of these clients, we needed the backend capabilities.

So having the backend capability, Parkland, which is absolutely best in class, does have some front end design capability, opens up access for [Franson] who joined us a couple of years to get involved in this, Rooney to get involved, in fact for Tetra Tech to take turnkey bids on very large projects. So to get access to the environmental, the design, the right-of-way, the clearance in Canada, we needed to have some more backend capability.

If you can afford me one more question, I want to just touch base on mining as well. You mentioned that it's softened a little bit since last year's growth rates. How do you get comfortable, what are you seeing in the marketplace that makes it feel like it really is flat rather than something that might go negative here for the balance of the year?

We have seen some areas, very specific metals that have caused us to go negative, we've seen gold in Canada as the specific metal, be under pressure, so we've seen it go slightly negative. We've seen some other precious metals actually go negative on us. We've seen even some pressure on some of the energies, uranium pressure; on the other side we've seen strength in potash, so what Canada and portions of the US for us have been under pressure that have been flat, we've actually seen quite good strength out of Australia, Chile and Brazil.

And so the iron has continued to be strengthened, including in fact building orders seems true with copper with [Kadelko] in Chile. So we are actually -- it's not just one single number and we are not dependent on one move. So I would say in an aggregate we have some visibility that does look like it's flat, and if we see a macro uptick even a little bit we can see this actually could move favorably on us. But we got there pretty fair visibility out the next quarter, too, to see that it would indicate that it would be flat for us.

Thank you.

Tahira Afzal, from KeyBanc.

Had everyone, it's actually [Sal Duran]. How's it going? So first off, real quick on your second-quarter guidance in terms of the range that you've provided. What gets us to the bottom of that range, what gets us to the top of the range? What are the different parts that are part of that? And along with that, you mentioned Parkland was closed on Monday. How much of Parkland is included in guidance, and what's included of Parkland in the backlog?

And backlog that you see there, I'll answer that question sort of from your back forward. In our Q2 backlog chart that we presented, not $1, not $0.01 is included from either AEG or Parkland. Nothing. AEG was closed on the first day of Q2, so nothing was included. And obviously Parkland which was closed three days ago was a month into the second quarter, so nothing was included. So there is nothing in there, that was essentially a purely organic presentation. That's number one.

As far as contributions, from Parkland and in fact I'll say AEG, on a revenue basis for the year, for both of them, and again I'll mention that the Parkland is sort of we had two months of them here, what I will call winter, so February and March. So it's a little bit more heavily weighted and then late summer, but we expect probably $65 million to $70 million on revenue basis from Parkland for the year. And you can divide that up on a pro rata basis between late summer and this winter, so you can do that.

AEG is a little bit more linear with winter being slightly a slower part of their business. But around $50 million. So on a combined basis, $100 million, $110 million of net revenue for the entire year. Take the AEG and you can do it in a relatively linear basis, for three quarters, a little bit lighter on Q2 because of the winter. And then divide again Parkland on a winter summer, if that's helpful.

Now with respect to the earnings, AEG -- because this is a slower period -- will have essentially no contributions on an EPS for Q2. It's a slower period for them, and so their contribution of $0.01 to $0.02 will be backloaded so Q3, Q4 as far as contributions, so really nothing for Q2. Almost nothing for Q3 and that will show up mostly late Q3 and Q4.

Parkland -- sort of divided between the contribution, again we are still finalizing this so I do want to one more time add caution that we have not completed our purchase price accounting. But it would be divided up between this winter quarter Q2 and Q4.

Great, thank you. It's great color. And then, last question related to your 2Q guidance, the topline. How do you get to the bottom layer, what gets into the bottom range of the $500 million and what gets into the top, the $550 million?

Absolutely, and thank you for bringing me back to that. Really it's the same two items, it's just depending on which way they swing for us. The bottom end would indicate a more accentuated delay at the federal level, and also continued softness on mining, and maybe some other economic areas that would represent softness on the commercial side. That would represent our performance at the lower end. And conversely if we actually saw some type of clearance or some type of opening up on the federal work and rebounding on mining, there are a number of proposals out there and many things that are pending moving forward.

So if we saw those open up on mining, and if we saw oil and gas just continue as it has, that would move us to the top end, in fact it could move us through the top end.

Great, thank you.

John Rogers, D.A. Davidson.

I just wanted to follow up a little more on the pipeline business and how you would expect to position yourself in that market over the next couple of years. I guess start -- how big a project now can you go after from a whole EPC point of view? Is that the strategy, and also in the US if you have spreads to work down here?

Well, first of all let me start with Canada, because we do look at them slightly different. In Canada they take them on a design build or an EPCM or even an EPC. So they do take them on more of a turnkey basis in Canada. So I would say the type of project we could take on would be a $200 million project, would be quite comfortable. And a typical burn rate on that project would be roughly about one year. So they move quite quickly, 12 months certainly not more than 18 months. These are not $200 million projects that go many, many years, so it's not spread out.

We are not going after the very large main trunk lines, we're going after the small to mid-size typically a 20- to 36-inch diameter delivery system. Now whether or not it's a very large diameter or a small diameter, the other systems that we are going to bring in -- the other services which is engineering, which is right-of-way clearance, which is the environmental permitting, which is dealing in Canada with the First Nations, all that type of work we can do across the board and we expect those projects will be smaller and much broader but the actual turnkey projects in Canada probably $200 million, could be slightly larger. And I would expect that we should be able to pursue those here in 2013.

In the United States, most of the work we are doing is actually on the design side. Environmental permitting, clearance, wetlands mitigation areas where you have touchdown points for your crossing environmentally sensitive areas. These projects typically will be mostly design, permitting and construction management or oversight as the owners engineer for 2013. I don't actually expect in the US our role to move to EPC or turnkey or design build here in 2013.

Now it is possible that could happen, we are exploring that, but that's generally not the model that we've seen as much here. And so that's why we focused on our professional services, environmental work, permitting and other professional services work. So I think the average size project will be slightly smaller in the US.

Okay, that helps. I just wanted to understand that strategy there a little bit. And in terms of acquisition, your pipeline -- it sounds like you may look for something more in the pipeline construction business in the US. But what about the rest of your markets? How does the pipeline for potential acquisitions look, not only US but Australia and Brazil? (multiple speakers)

The number of opportunities out there is really quite strong. As you've seen, these acquisitions of AEG, about $100 million of revenue, Parkland at roughly $140 million a year, these are a nice size for us. On a combined basis they actually do move the needle and meet our requirements for half of our growth coming from acquisitions.

As Steve had mentioned in his remarks earlier, I do want to state again, so it's really clear, with both of these acquisitions, and we can still do a few more, and just the cash from operations will pay it all off. So as far as the ability and dry powder, if you want to refer to it or access to capital, it's not an issue. We could do what we just did two, three, four more times this year and still be very comfortable within the limits we have.

Now the areas we're looking at in Canada, I would like more design capability in the oilsands. We want more plant engineering work, we want more water treatment, water processes, waste on the water and environmental side, more restoration work, and more pipeline work. Because there is a huge deficit of pipelines to transport both the oil and gas, oil and gas in Canada both to the US or out to the West Coast to ships. So that's what we will be looking for in Canada. In the United States more oil and gas on the design side, again, midstream is what we're going to be focused on. There are some niche areas for cleanup of [blind tailings] wastes. That continues to be strong.

We are going to expand in Brazil, as I had mentioned before. We now have with ASA last quarter, very small coastal engineering firm, look for us to expand there, so we've got 300, 400 people down in Brazil, I'd love to take that and increase it maybe double that number here this fiscal year, and to the environmental areas, and again more mining and oil and gas. Again, for who? For Petrobras, for Valle, for the very largest multinationals in Brazil.

In Australia, I continue to be interested in it. And as price points come into the areas that we feel are reasonable, we will remain disciplined, but when the right opportunities come we will move there. So that's a more likely Canada oil and gas, US oil and gas in commercial, and then Brazil commercial with primarily oil and gas and mining.

One other if I could. State and local government grew relatively significantly in the quarter. Is that all organic, are we finally seeing state start to spend again, or just --

It's all organic. In fact the state and local work has been all organic for -- organic on the way down and organic on the way back up here. We are back to 13%, it's primarily being driven by two or three larger infrastructure projects we have on the East Coast, and that's why I have been cautious to say that this is a rebounding high-growth area, but I will say that even if you take out these single large projects, we still saw growth and it's very broad-based at the municipal level for wastewater treatment plants, wastewater supply side, so we are seeing orders looking up really across the country.

We are primarily in Tier 2 cities, so cities between 100,000 and 500,000 in population, and the tax receipts have actually strengthened and we've seen that -- really underpin our orders growth in that area.

Now I am not yet willing to translate that into that being a big growth area, but I don't feel at risk in that area at this time.

Thanks, appreciate it.

Nowell Dilts, Stifel Nicolaus.

Good morning, this is actually Stephen on for Nowell. How are you guys doing? I have a question about -- could you talk a little bit more about margin weakness in ECS? I know that some of that's just at the federal spending coming down and a little bit weakness in mining, but I think there's also some severance charges in there. Could you maybe give a little bit directional or quantify the impact during the quarter from that?

Yes. We did see federal weakness. Primarily it was concentrated in our ECS group. So more of the discretionary programs that we have at the federal level, whether it's energy efficiency studies or even research work we do for EPA, a lot of that was impacted in the ECS group. And so we did move quickly to make sure we are right-sized so that we have the right number of staff for the projects we had, we did do reductions. In mining we were very aggressively growing and staffing up as we were growing at a double-digit level and we watched it flatten out. Because of the timing of mining projects we actually adjusted staff which is we laid staff off. And we did take severance costs, we did take downsizing costs associated with giving the computers to other people and all the rest of that.

I wouldn't classify that as restructuring, but overall it was just cost of keeping our business the right size, and I would say during the first quarter it impacted us maybe 100 basis points. About 1%. So it's -- and by the way, we are going to continue to be very quick and very fast in making the adjustments based on the workloads that our clients have. And that's why I indicated that I expect ECS margins to stay at a lower level as we take these charges and these adjustments here through the second quarter, and maybe even into the third quarter. And where I came with the third quarter is when I see the budget actually open up and the workload begin to flow better go through the federal and perhaps mining, then I will expect that to rebound right up to its historical levels.

Okay, great. Thanks. And do you think that some of these actions, you say could be a little bit weakness through 2Q maybe into 3Q, I think that there would be material savings over maybe 4Q into 2014.

I think it's going to bounce back. I think what will happen is that we'll keep it right-sized, but as the revenues increased and come back from some of these clients we're going to bring staff back on which will give us leverage in the back office, which will bring the margins back up so especially with the mining as that becomes commercial work increases its percentage that will drive the margins back up. So I think that we'll go from an 8%, we can even test the lower end of 8% this next quarter, but I think will move back to historical 11% to 12% here, I expect that perhaps late Q3, so I don't think we will fully be back in Q3 but I do expect Q4 and into '14 to be right back to those levels.

Great, thank you.

David Rose, Wedbush Securities.

Just a quick follow-up to another question I had earlier. On the USAID awards, you just announced these two combined awards that are pretty significant. And I'm just wondering about the timing of this. Is this something that was -- the awards were provided to you just in the last week, or is this something that happened just after in early January, to get sort of a sense of what the State Department is doing in terms of releasing awards.

You know, it's interesting. These are -- if you take a look at our press release, let me come to the first part. These are awards that we were notified here in January and we signed, just received approval, that's why we just released it here yesterday. So these are very recent awards, but if you do take a look at the backlog page from a presentation, what's noteworthy, they are very good contract vehicles, they do allow us to continue doing work for USAID in developing countries in priority areas around the world.

However I do want to differentiate an award of a contract versus release of funding. And so for instance, the US agency's USAID Clean Energy contract does have a ceiling of $350 million. But they did not issue individual task orders for it. Yet. And I actually expect that to begin flowing here later in the second and third quarter. We have not seen -- I will say that USAID, we have not seen any material disruption in the funding or levels, you can see that in the test margins. They continue these priority programs very much as we anticipated, continue to move forward and this gives us just more contract capacity to move forward.

So I do expect more wins to come out of USAID, but they haven't yet translated this material increase in our contract capacity to increase in the revenue. I think that still yet to come in Q3 and toward the end of the year for the budget gets cleared up.

Great, that's helpful. Thank you.

Jim Giannakouros, Oppenheimer.

Thanks, good morning. Can you just give us a little bit more color on the seasonality that we should be expecting from, I guess Parkland is the one that should swing most dramatically from 2Q to 3Q, and just thinking how things progress. And also, just given your comments on the profitability, given the differing revenue levels -- does it swing to a breakeven in the slow quarters, or is it still a profitable entity let's say in 3Q -- of your 3Q?

Parkland, first of all, I hope they are on the phone here because we're just so glad to have them on board. We see them as the best in class in Alberta for the Midstream pipeline. Now from -- let's forget about accounting impacts and just talk about their business just for a moment. From a cash basis or from a project basis, they are quite profitable in the winter and summer. I would say that 40% to 45% is done in the winter and a similar number in the summer, and 5% to 10% is done in the spring and 5% to 10% in the fall.

So now they are in and of themselves very adept and they fit Tetra Tech quite well this way, very adept at adjusting their costs associated with the volume of work. So if you took a look at them on their own, they would actually be profitable, very profitable during the winter and summer, and they are breakeven or slightly profitable in the spring and fall. The difficulty, though, when we introduced the accountants to our world, is that they have intangible amortization, or they actually are going to take charges on a more even basis on a quarterly. So where you have high profit in Q2, and it's not just Q2 but kind of the winter months, in Q4 mostly summer, we're going to find they're going to contribute on a GAAP EPS basis.

However, on the spring and fall, so maybe sort of Q3-ish and maybe Q1, we will actually find for the first period for the first year or two as intangible amortization is quite high, they will actually be dilutive on those quarters because of this still very high intangible amortization during those quarters. So the contribution in to -- it's not precisely Q2, this month, these months we are in now, but the winter and summer will actually be quite nice while the intangibles are still very high, and Q3 and Q1 generally speaking will actually be probably dilutive on a GAAP basis. But when you consolidate it on an annual it is accretive on a GAAP basis on the first 12 months or the first annual period.

So -- it's a little bit of detail, but I do want to point out again, the business that you and I would run without accounting charges for amortization, they are making money both in the summer, the winter, the fall and the spring.

That's helpful, thank you. And now with RCM having here, including Parkland and some other entities, could you just remind us I guess the breakout of high-level by and market knowing that obviously RCM you're growing more into higher-margin oil and gas, how should we be thinking about the RCM business just from an end market perspective?

They are moving significantly more on the commercial side and it is increasing, that's what's driving it. It is most definitely the client mix or the end client mix. This is the first international revenue that we will have for RCM, so -- prior to this current quarter, international meeting outside the US, RCM would be zero. And so this is the first move internationally, now it is an international oil and gas, and it's again double-digit, and they are now -- they really almost turned this upside down, they've gone from very large percent government to 60% to 70% commercial. That's what's driving this material change in the margins, and which will bring them on par. I think perhaps even in these high season periods where some construction takes place, they could actually be the highest margin in the Company because of these end markets. So that's really how it transformed 60% to 70% commercial now.

That's helpful, thank you.

Michael Legg, ROTH Capital.

Good morning. Could you comment a little bit about the duration of the backlog from the commercial and international a little bit more detail, maybe you could give us the average time in months versus the federal peace and what percentages in backlog?

Absolutely. First of all, our commercial backlog relatively speaking now represents more than half of our overall backlog. That is an amazing statement for us here at the Company. So more than half. Because even though federal had historic head over the past years trended to be much less than 50% and less than 40%, and now down to 30%, still the size and duration of the federal work had carried a big portion of our backlog, but now it's less than half. So commercial is more than half, with respect to the overall magnitude of composition.

Now as far as duration goes, the front end work which is the ECS and test work within our commercial work is very quick. I'd say the average task order or project is 3 to 4 months. So it turns over quite quickly, 3 to 4 times. Again, as I mentioned almost a book and burn business. The size of the project, the duration is quite similar to a government project, it's just that it gets funded in much smaller pieces. So you don't see it.

I will say that the construction work that's commercial is a bit longer and it may be nine months to 12 months, something like that. But I say our overall -- overall characterization of our backlog, how long it expends still is probably 70%, 80% within the next 12 months. With the remainder of the backlog being finished up within the following six months. So all of the projects we have that are in our backlog will be burned essentially in entirety within the next 18 months or less. With the most of it well within the next year. So this is not a backlog that is spread out over two, three, four years. This is all near-term funding and that's why we have pretty good visibility, and also point out that Tetra Tech is historically had both EPS ranges for our guidance and revenue that are amazingly more narrow than you see from others. And the reason is this backlog funds our next quarter, so we have very high visibility.

And then you mentioned the oil and gas business that we've seen a decline from double-digit growth down to basically flat revenue now. Can you give us a little comment on the outlook for that business?

Actually, I did not say that. If I did say that I misspoke. Let me clarify, that's mining, not oil and gas. Mining. Mining we saw go from double-digit or better to in 2012 we saw it flatten out. We saw that the large EPC or the large capital expenditure projects within the mining is the world's largest mining companies, the BHPs, the Rio Tinto, the world's largest, but their CapEx projects on hold, last spring and summer. Those have focused on that work watch there not only go flat but go quite negative. That's not our business. Our business is primarily the front and exploratory work, the front end support of their overall portfolio.

So we didn't see impact, we sort of ran one to two quarters behind everyone else. And so we saw a much later impact of the slowdown in the mining and much shallower that brought us from double-digit growth to sort of in the early fall, sort of September/October we saw it drop to sort of single-digit growth, and now we've seen a flat. And that's mining. And it's been primarily because of the slowdown across most mining sectors, although I did get some details here a bit earlier as to which ones we are seeing strength versus a bit more weakness. But overall with our visibility, I think we see out the next few quarters as to a flat business. It could turn up though if we see some of these large miners actually put their projects back online.

Great, thank you.

This will conclude the question-and-answer session. I will now turn the conference back over to Dan Batrack to conclude.

First of all I want to thank everyone of you for your questions and interest in Tetra Tech, as has always been the case, we show your insight and understanding of our business quite well. I do think -- I do feel quite good with the business and do want to state openly here, the change in our backlog was not unexpected or surprised and actually the quarter came out quite as expected. I'm very happy with the acquisitions, and I do want to point out, we are sitting here at the end of the first quarter of a four quarter year and moved up our guidance already. We still have three more quarters to go this year, and I am expecting strong performance as we move forward and will provide you updates next quarter on both how acquisitions fared contributing to the company, and how our base business is progressing. And I look forward to speaking with you all again next quarter, and have a great day. Goodbye.

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