Tetra Tech Inc (TTEK) 2013 Q3 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.

Thank you very much, Regina. Good morning and welcome to our fiscal year 2013 third-quarter earnings release conference call. I will be starting this morning with a few brief comments on our financial performance, followed by a more detailed report from Steve Burdick, our Chief Financial Officer for the Corporation. I will then provide some insight into our outlook and our growth plans and our guidance for the fourth quarter and for all of 2013.

During the third quarter we addressed recent issues in a few of our end-markets including, as many of you may know, Eastern Canada, especially in the province of Quebec, and in our mining operations. To place this in context, the restructuring actions primarily affected a portion of the ECS business group within its Eastern Canadian and international mining operations that I just mentioned. But the remainder portion of the ECS I would like to make clear right out of the start, and in particular the US operations, continued to provide solid performance in line with its target margin range and really has been completely unaffected by any of these issues.

We also took action on fixed-price projects and claims primarily within our RCM business group. Now I am not happy, and I would like to share with you I am very much not happy with our performance on these projects or the charges that we took during the quarter. And I have taken action to change out staff and to bring on outside counsel to pursue recovery of these disputed amounts wherever it's appropriate.

However, these actions did significantly impact our third-quarter performance across several metrics. I would like to share all of you that I personally and the Tetra Tech management team have been very focused this past quarter on addressing these issues and to returning these units to their historic performance levels. I expect that these actions will result in returning Tetra Tech to our industry-leading performance in this coming year.

As you have seen our GAAP numbers reported in the press by now, both in our press release and in the investor presentation, but in order to give you a better understanding of our overall business I will be presenting some of our results on a pro forma basis that exclude certain charges associated with the actions that we took in the third quarter. Now Steve Burdick, our Chief Financial Officer, will describe these in much more detail later in the presentation, but I would like to get started now.

Our financial results for the third quarter and fiscal year 2013 are as follows. Our revenue on a pro forma basis was $644 million, sequentially up from our second quarter. Our net revenue was $505 million for the quarter. And we did have a $0.47 loss per share this quarter and that's exclusive of a non-cash goodwill impairment charge. Again, as Steve Burdick will go into more detail shortly.

We continued to generate strong cash flows in the Company and in the third quarter we generated $53 million in cash from operations, the highest in fiscal year 2003 so far, and we did finish the quarter with our backlog of just over $1.9 billion.

In the United States, our commercial revenues continued to grow year on year, driven by work for a broad base of our clients. This is the 11th consecutive quarter of year-on-year growth with our US commercial clients, which now represents about 27% of our business.

Our state and local work was up. It was up 20% from last year and now represents 15% of our business. This growth was supported by an increase in our municipal water and infrastructure work in cities all across the United States.

As expected, our federal work declined slightly and now represents about 27% of our business. This is generally consistent with our expectation and now represents a slowing in the federal government's discretionary spending. At the same time, we've seen consistent orders for our front-end studies and priority programs for the United States Environmental Protection Agency, for the US Agency for International Development, and the Department of Defense, especially in areas associated with water and energy where we are one of the nation's leaders.

Our international work was 31% of our business this quarter, down slightly due to slow down in Eastern Canada in mining, but our other international work, especially in Western Canada, has continued to grow very fast driven by work primarily for our oil and gas clients. When we look the Company overall, the majority of our revenues, or now about 58%, is now generated by our International and US commercial work, which is the higher margin activities we have performed within the Company.

On a segment basis, our front-end segments, the Engineering and Consulting Services, the ECS group, and the Technical Support Services business groups are where we provide higher margin and technically differentiated consulting services. And combined they now represent about 77% of our business.

The ECS group, our largest segment, represented about 44% of the Company's revenues this past quarter. The ECS segment includes Tetra Tech's signature front-end water and infrastructure services, including our municipal water work in the United States, our water treatment for industrial and commercial clients, and large-scale studies for federal government agencies, such as the Environmental Protection Agency where we are doing work at the Chesapeake Bay program and other similar programs across the country.

Within the ECS segment, though, are also our Eastern Canadian and mining operations. In this past quarter, we took specific steps to restructure these operations to address the current market conditions. Now the restructuring we initiated included actions to close and consolidate offices, reduce staff, and actually reorganize the operations.

The new resulting organization in these two areas is now both more cost effective and better sized for the current market opportunities in mining and the regional markets in Canada. Again, specifically in the province of Quebec.

Our TSS business segment is delivering stable performance with our commercial client base increasing and growing, which is actually offsetting some of the slightly lower revenues that we are seeing on the federal client markets.

Our RCM segment is now 23% of our business. With the addition of substantial new revenues associated with oil and gas and solid waste that we've brought on over the past year, both of these markets are in higher growth and higher margin for us, and so they are good drivers and contributors for RCM.

However, RCM also performs work for the federal government and state projects here in the United States, where this quarter we had to address issues with specific change orders in claims and charges. As a result, as I had mentioned earlier, we will be aggressively pursuing the claim resolution and recovery process.

I would now like to turn the presentation over to Steve Burdick, who will provide a more detailed discussion of the financial results for this past third quarter.

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

Overall our third-quarter results met our June 18 guidance that we provided relative to both the range of our net revenue and EPS. Now, comparing the third-quarter results this year to last year, revenue decreased by about $70 million, or about 10%, to $614.8 million, primarily as a result of the slowdown in operations focused on Eastern Canada, global mining, and parts of our US federal government work. In addition we did have several project adjustments that negatively impacted our third-quarter revenue.

Similar to revenue, the net revenue also decreased, but less significantly, to about $475 million. As I mentioned, the net revenue results were within the guidance range provided in June.

We had a loss from our operations in the quarter of about $99.9 million. Now, excluding the impact of our non-cash goodwill impairment of about $57 million, the loss would have been about $43 million. The operating loss was primarily driven by the same factors that caused revenue to decrease.

Now for those of you following on the webcast, I will provide the details to the results in our operations and the goodwill adjustment in a bit more granularity on the next slide.

Regarding the EBITDA, we did have a loss of about $26 million. Our EBITDA decreased by a lesser amount than our operating income since intangible amortization and depreciation was about $5 million more in the current year quarter compared to last year.

As mentioned earlier in this presentation, as well as in our June 18 preannouncement earnings release, the third-quarter income charges were primarily as a result of, one, Eastern Canada, global mining, and the charges on four larger programs. I would like to walk through the various moving pieces. And for those of you, like I said, that are following on the webcast or have downloaded the investor presentation, you can follow on the page that's labeled Financial Impact by Category.

Now for Eastern Canada mining, rather than address similar items accounted for in both Eastern Canada and mining, I will address them in aggregate for the two lines of business. The first item pertains to the restructuring activities that resulted in severance and office consolidations. We have reduced staff in both mining and Eastern Canada as a result of our drop in revenue. These actions then resulted in a large amount of severance.

The other restructuring item was for office consolidations and closures. In order to eliminate excess costs, we closed and consolidated several long-term leased facilities. These actions caused the need to take an impairment charge for future lease liabilities, as well as certain leasehold improvements and property and equipment considered to no longer have future economic value for Tetra Tech.

These actions impacted approximately 450 staff and about 30 offices that together aggregated about $13 million in charges.

The next issue we tackled resulted from downsizing these operations and managing the utilization of our staff and resources. This resulted in additional costs to our operations. These costs included an underutilized workforce for both internal staff and third-party staff, and both leased and owned equipment that was not put to a productive means. The cost of this downsizing and underutilization of resources was about $21 million in these two operations.

A third item that impacted our quarterly results was the lower revenue experienced for both Mining and Eastern Canada. From our original plan, we realized about $65 million shortfall in revenue in the third quarter. As a result of the lower revenue, we realized a reduction in profit of about $6 million associated with the loss of work not including the inefficiencies that I previously noted.

In all, about $4 million of the $6 million came out of Mining and the other $2 million came out from Eastern Canada.

Next, I would like to summarize the third-quarter events and impact our operating and financial results due to the four fixed-price programs, all of which were about the same in magnitude. Three of these programs are in the RCM segment. Of these programs, two are with federal government agencies and one is for a state agency infrastructure program.

All three programs have experienced quarter three events resulting in both increased costs and client notification of change orders seeking recovery from both our federal and state agency client programs. For instance, the additional costs and resulting change orders stemmed from differing site conditions, owner-initiated design changes, revised work efforts due to newly enacted regulatory requirements, and revised project schedules.

Management reviewed the recoverability of our change orders and determined that there was a lower profitability of collection than we had previously determined. As such, a charge was recorded in the third quarter.

The fourth program is a commercial development program performed in our TSS segment. The planned development of the site changed in the third quarter and management determined that costs expended on milestone had a high probability of not being recoverable since the contracted milestones may not actually be completed. Although we are evaluating our options to recover the amounts owed, we concluded that the accounting rules required a decrement to our operating profit in the third quarter.

So in aggregate, these four programs had a negative impact on our third-quarter results, decreasing our net revenue by about $30 million and our operating income by about $36 million.

Now when we looked across our client sectors, we did experience some softness in other parts of our federal government and international business operations relative to our plan. The federal government reductions were a result of the slowdown and project delays. As an example, we did experience a significant drop in our FAA business in the third quarter.

Further, the federal government budget announcements earlier in the year were clarified and impacted us in this third quarter. As such, approximately three-quarters of the $55 million impact revenue related to this federal government business. The other portion of the $55 million related to our international business. For instance, flooding that occurred in the province of Calgary during Q3 was definitely not anticipated and was a significant impact.

So similar to the actions we took in Mining and Eastern Canada, we also took aggressive actions to right-size the operations where we saw a decrease in utilization. As a result of these changes, we recognized less revenue and, therefore, on a net basis we recognized a profit shortfall of about $23 million compared to our plan. So for those of you following on the webcast, you will note that this category has both recurring and nonrecurring impact to our revenue and income. And so management's estimate of the recurring amount, or the recurring amount for income based upon our revenue projections was about $5 million this quarter.

Another significant third-quarter P&L adjustment pertains to purchased accounting for prior acquisitions. Many of our acquisitions have multi-year earnout provisions as part of the purchase price and so the accounting for business combinations requires us to estimate the ultimate earnout liability that we expect to pay. Those estimated liabilities are then revalued each quarter based on our latest estimates.

As a result of those determinations and estimates, we recognized a decrease in our liability in the amount of about $8 million in this third quarter.

Now the final item on this slide is goodwill impairment. We had a significant non-cash charge incurred in this quarter for goodwill impairment and this impairment related to our acquired operations in the ECS segment relative to, first, Eastern Canada; second, global mining; and third, an operation focused on the federal government FAA work. Although we were aware of these I guess general trends in previous periods, the negative impact on our actual and projected financial results increased beyond our previous expectations and in the third quarter of fiscal 2013. Thus, it triggered an interim goodwill impairment test for three of our reporting units, which then ultimately resulted in a charge for each.

So for Eastern Canada, as we have discussed, poor economic conditions including budget deficits, reduced customer spending, and ongoing government investigations into political corruptions in Quebec slowed the procurement process and business activity in that region. That goodwill amount came up to about $28 million of impairment charges.

Our work for Mining customers continued to slow in the third quarter of fiscal 2013. For example, it wasn't until early in the third quarter that commodity prices slid even further, thus impacting our clients' willingness to start new work or even complete ongoing projects. This amount of the goodwill charge came up to about $12 million of the total.

Next, we experienced reduced performance from an operating unit with a concentration of work with the FAA as a result of budgetary constraints. This amount came up to about $17 million. So in total, we recognized a write-down of our goodwill by about $57 million in the third quarter.

Now, if you add back all of these nonrecurring charges that occurred in the quarter and added back the estimated cost of our underutilized resources, the net revenue in the quarter would have been approximately $517 million and the margins in each of these three segments would have been within our previously published target range.

With that said, I would like to address the other specific line items in our income statement and how these charges impacted the third quarter. So SG&A was about $56.7 million for the quarter. This is an increase from the prior-year third quarter of about 7%.

Now the majority of the net increase was due to higher intangible amortization that was just under an additional $3 million in the quarter over last year. In addition, certain G&A costs resulted from actions to restructure areas of our business where one-time costs were incurred in order to realize future lower costs.

The tax provision resulted in a net benefit of about $23.8 million. The taxable benefit results from the fact that we did have losses in the quarter. The effective rate was about 23% for the quarter and 4% year-to-date. Now this rate, or this effective tax rate, is less than the expected annual rate of 34% since a portion of the goodwill impairment charge that I talked about is not deductible for tax.

The loss per share of about $1.21 includes the impact of the non-cash goodwill charge, and excluding the impact of goodwill, our loss per share would have been about $0.47.

Next, I would like to point out a few of the more significant balance sheet items that are up here on this slide.

As a result of our lower revenue, we experienced both a decrease in our accounts receivable balances and a decrease in our accounts payable balances when comparing the current year to the prior year. We did experience an increase in our net debt. The primary driver for this was our recent acquisitions of the AEG and Parkland.

Our net debt position was positively impacted by very good cash flows generated from operations in the third quarter.

So as I noted, despite our losses in the quarter we did have a very good cash flow from operations. In fact, we generated about $53.3 million in the quarter. Most of the losses that I've been talking about in the presentation stem from non-recurring and non-cash items. As such, there was less of an impact on our cash from operations.

We do expect the operating cash flow to be about $130 million to $150 million for fiscal 2013, and this translates to cash generated on a per-share basis of about $2 to about $2.31. CapEx is the same this quarter as in the prior year and is in line with our previous guidance. We expect our CapEx to be in the range of $25 million to $30 million for fiscal 2013, which includes the plus-ups from our second-quarter acquisitions. This amount continues to represent a ratio of less the 1% of our annual revenue.

Days sales outstanding of 80 days are slightly higher when compared with last year at this point, but even with that higher DSO our cash from operations was very good. The higher DSO is impacted by the lower revenue base used in the calculation. So even with these operational issues that I've gone through in the third quarter, we are continuing to work hard across all of our operations to really focus on decreasing that DSO to 75 days by the end of the fourth quarter.

Now the next graphic, which is our net debt position, shows the impact of our positive operating cash generated and the cash used for our acquisition investment. As you can see on the graphic, our previous net cash position has transitioned to a net debt position due to the borrowings of our recent acquisitions. In addition, due to the completion of the AEG and Parkland acquisitions in the second quarter, we now have a net debt balance of about $66 million, which is less than the balance at the end of the second quarter, which was about $106 million.

Now on June 18 we did announce our stock buyback program. In Q3 we purchased 175,700 shares for about $4 million during the last six trading days at the end of the third quarter. So looking forward, assuming no additional stock buybacks or acquisitions, we would expect to be back in a net cash position by the end of the calendar year 2013.

With that said, I would just like to reiterate that this management team will continue to leverage our balance sheet to, one, focus on managing our working capital; two, invest in growth opportunities through acquisitions that will provide high profit margins and access to new markets; and, three, continue to fund the stock buyback program announced in the third quarter. These focus areas are meant to further enhance our shareholder value.

With that, that concludes our third-quarter financial review. I will now have the presentation back over to Dan.

Thank you, Steve. Just a year ago we initiated a growth strategy focused on the expansion of work for our oil and gas clients. We added midstream engineering design services, including the acquisition of Rooney Engineering, which took place in June of 2012, so just over a year ago. Rooney, in collaboration with Tetra Tech's environmental engineering and water experts, we are now winning new and larger projects for a really broad range of midstream pipeline services.

Work for these clients is growing organically at more than 25%. It is now just beginning to reach the scale where they will be a significant driver for our overall growth.

At the same time, we have increasingly focused on expanding our traditional water-related services to our industrial clients like the steel industry, pulp and paper, and other manufacturing areas. In the international markets we are continuing to also expand our oil and gas work for our clients, especially in Canada, for pipelines in the vicinity of Alberta and especially up in the oil sands region in Northern Alberta.

In the US public sector there has been a significant increase in opportunities for city and municipal projects to address their pent-up demand that have actually languished over the past several years. Over the past quarter we have won additional work in major markets such as in California, Texas, Florida, and the East Coast in Georgia.

In addition, our ports and harbor work has also seen an increase activity to address the dredging acquired to accommodate the larger ships that are expected when the Panama Canal expansion opens here in the next year or two. So, for example, we just announced a $20 million Miami Harbor deepening project and this is really an excellent application of our expertise in the water and ecological restoration work for large-scale port upgrades. And I expect there to be many more of these as we get close to the Panama Canal opening up.

And in the federal work, we are maintaining our focus on the government's highest priority, non-discretionary programs that have resulted in major orders from the EPA for modeling in different specialized studies, new contracts with US Agency for International Development for their clean energy and climate change-related work, and new contracts for flood protection studies in the New York and New Jersey regions. These are some of the first federal contracts in the region -- for the work in the region that were affected by Hurricane Sandy and we expect many more of these in the coming quarter and coming year in 2014.

I would now like to share with you how I expect this strategy to affect each of our business segments' performance in the fourth quarter of this year back to the period we are in right now. The expected business and client mix will result in our three business segments trending to the target margins identified on this slide, if you are following along on the webcast, and I will briefly go through these target margins for each of the business segments.

For the ECS business segment, it's expected to be in the 8% to 10% range of operating margin with strong performance in the United States and in Western Canada. I also expect a return to a more stable performance in Eastern Canada markets and with our mining operations. I do expect that these margins will trend up in 2014 to their historical target range as they have in the past.

The TSS business segment, I expect it to remain steady. They've been very consistent and in the fourth quarter I expect them to be in a range of 11% to 13% operating margin. And with the increased revenues from our oil and gas and solid waste clients we are feeling more confident in the performance of RCM business segment. However, after the charges we just incurred in the third quarter, we have provided a very conservative margin range forecast of 5% to 7% for the fourth quarter.

But similar to ECS, I do expect the profit margins in RCM to increase in 2014, up to the range that they have been in earlier target ranges. And in fact, they will update that in the coming quarters.

For our guidance for the fourth quarter and for 2013, specifically our guidance for the fourth quarter is for net revenue in a range of $500 million to $540 million with an associated diluted earnings per share of $0.30 to $0.40. If you take the actual performance in the first three quarters and add our guidance for the fourth, that will give us a guidance for the entire year of fiscal year 2013 of $1.99 billion to $2.03 billion for net revenue. And with an associated diluted earnings per share of $0.62 to $0.72.

I do want to note that this diluted earnings per share guidance for the entire year does exclude the impact of the non-cash goodwill impairment that Steve went over earlier. It also assumes intangible amortizations of $0.09 per share in the fourth quarter and there are other assumptions, such as does exclude the contributions of future acquisitions that may take place during the fourth quarter.

It does include $0.11 of stock compensation, which is a non-cash item. You should assume a 34% effective tax rate for your modeling for the fourth quarter and with an outstanding number of shares at 65 million average diluted shares.

In conclusion, our strategic focus is on water and environment-related work for the rapidly growing North American oil and gas markets and in the United States in the resurgence of our long-term commercial and state local markets. Through the third quarter our oil and gas work has continued to grow, as I had mentioned earlier, organically at more than 25%. And these revenues have tripled for us in just the past three years.

Our oil and gas operations are consistently delivering some of the highest margins in the Company and that's why this is one of the highest focuses for the organization.

In solid waste, and that include landfills, we are winning new work for the disposal of coal ash and other energy residuals. This work is being driven by emerging regulations here in the United States and we expect this to be a very strong market for us in the coming quarter and coming year.

In the municipal market in the United States, for the first time in five years all of these operations for us have seen a significant increase in their backlog. They are up about 30% with double-digit margins associated with them and a strong pipeline of opportunities currently in hand.

We do believe the restructuring actions taken in the third quarter, combined with the strengthening of our core markets and our rapidly expanding critical mass in the emerging oil and gas market here in North America, have positioned us for a solid performance in the fourth quarter and a return to our industry-leading performance in fiscal year 2014.

With that, I would like to open the call up for questions. Regina, if you could please transition us to questions from our callers.

(Operator Instructions) Andrew Wittmann, Baird.

Good morning. I guess I wanted to kind of dig in a little bit to kind of how you are feeling about for next fiscal year. Can you just talk about some of the puts and takes that you are going to have as you clean up the organization here for right-sizing the business?

If you look at the fourth-quarter guidance at the top end of $0.40 in what we would normally see as a seasonally strong quarter, that can get us to something in the $1.60 range if we just go 4 times $0.40. But there's probably more to that and maybe, Dan and Steve, if you guys could help us kind of walk through some of the areas that were tough in 2013 that might not be as tough or areas that you expect to be tough in 2014 that weren't so much in 2013 to try to help us think about next year that would be helpful.

Good question, Andy, and let me start with the fourth quarter. We have not included in our fourth-quarter guidance a specific expectation of any charge on any project. We believe we have addressed everything that we evaluated and we try to evaluate everything in the Company in the fourth quarter, so it's not included anything.

I do recognize that the $0.40 upper end, $0.30 to $0.40 is a low -- it's a wide range, number one, and, number two, the bid point would be considered low. However, it's simply a function of being conservative going into the fourth quarter after the third quarter, and so it does not reflect a specific softening in any individual project or any individual end market. So let me go to that for 2014.

Certainly, before I leave Q4, it is our goal and objective here at the Company to focus on operations and ensure that we not miss what we are committing to the Street as our guidance. Now with respect to 2014.

I do think that we have cleaned up, so to speak, or made adjustments in the restructuring for Mining and Eastern Canada such that they are viable, profitable at the current low levels of ongoing market conditions, which means revenue. I've actually seen and been quite pleased in the short term with some new wins in Canada and believe that it may be a shorter duration as we enter 2014.

As a quick comparison, we really were very strong in the first and second quarter of 2013. So those two quarters on a year-to-year comparison will be a bit of the headwind; however, sequentially I think they will be flat or up. In fact, the comparisons on the second half should be quite favorable and show positive indications across the board on Eastern Canada.

Now Mining it's also true; it's very similar. We had a very strong Q1, a very strong Q2, and it was only moving into Q3 that we had the impact. So again the year-to-year comparisons on Q1 and Q2 will be difficult on the Mining and then I expect, even with no increase in the amount of work on Mining, it will be quite favorable on the second half of next year.

So I think the first half will be difficult, second half will be favorable, so on an aggregate those two should be sort of, I will call it, neutral or flattish. Now we are seeing -- I do expect to continue to see slight decrease in federal as discretionary spending gets more pressure from the federal government. It's unclear at this moment what 2014 brings us with respect to sequestration, but I do believe any reductions in the federal government, which I do expect some in 2014, will be more than offset by increases in our US and other Canadian and international commercial work.

Now the trade-off that will make the margins much more favorable and make the $0.40 that you indicated -- it's easy to take $0.40, multiply it times 4 and get $1.60, but that would not take into effect that we are trading out lower margin federal work for much higher margin commercial work, including oil and gas. And so if you actually take a look at that, in some instances, the commercial work, the margin on it, may be as much as double that of the federal government work. So I think if you take that into account as we look into 2014, you will actually find there to be a much higher increase in our earnings per share than you will see in the revenue growth.

Now we are not -- it's not our practice at this point to provide specific guidance for 2014. I expect to do that in our next call, which addresses the fourth quarter, all of 2013, and our guidance. But I did want to share with you, and I'm glad you did ask, what we are looking at into the marketplace. So that's a quick overview of how we see the different end-markets playing out for us.

Great, thanks. I guess maybe just one kind of follow-up question here. The repurchases is new, a new tool for you. It sounded like it's a little bit lower priority increase of where your capital might flow.

Did we hear that correctly? And do you feel like, with the balance sheet deleveraging the way you suggested here in the presentation, that maybe you can do an all-of-the-above strategy?

Well, I will let Steve address the specifics on how we have set aside and what we might look at for the buyback, but I do want to make one thing, with respect to our capital structure, make very clear. That, first of all, a buyback is a priority. We did put in a grid structure such that we can trade right through blackout periods and other items.

I do want to make it very clear -- and I know Steve mentioned this, but I want to reiterate -- the amount that we acquired in stock, approximately $4 million, was only for six trading days at the end of the third quarter, so it was for a very brief period. And so that should not be representative -- should not be considered representative of what we've done in total at the end of this fourth quarter. And on our next call we will give an update on what transpired for the current quarter.

So I would not characterize it as not a priority or not a high use -- high intended use of our capital. But with that said, it will not detract or deter the deployment of capital for acquisitions to give us access to new markets, new geographies, and new growth areas that we are focused on. It is not a trade-off of one or the other in our capital structure, and the ability to generate cash actually allows us to facilitate both.

With that, maybe I will have Steve say a word or two about our ability to continue and, in fact, fund acquisitions at our current or even greater rate than we have this past year.

So as we put this plan into place, we believe we have put a fairly healthy amount of about $100 million into it. So we consider that to be a large priority. Then going forward, we believe that our capital structure and our cash from operations and everything else that we are looking at, will allow us to do all three, as I mentioned in my remarks, which is fund our working capital, do the acquisitions that we believe are strategic and important to the Company, and just as important, to make sure that we do the stock buyback.

In fact, we made sure that once we put the stock buyback in place that we were actually going to be in the position to purchase. So we wouldn't have put it in place if we didn't think we were going to utilize it.

Great. Thanks very much, guys.

John Rogers, D.A. Davidson.

Good morning. Couple of follow-up things. First of all, Dan, as you kind of look back at the quarter and think about the business, and given your comments about increased private and commercial sector work, are we heading into a period where we will see more volatility in margins than what Tetra Tech has experienced in the past, both up and down? In other words, more project risk?

Yes, I think that the project risk has largely been associated with, interestingly enough, in the volatility in the third quarter specifically. And actually the types of variability you've seen in previous quarters has actually been with federal government work, largely not our commercial work, interestingly enough.

In fact, one observation I have made and we have made here collectively at the Company is things that appeared to be quite stable, quite predictable, quite mundane in the past have actually become quite interesting. For instance, the ability for our federal government clients to have funds and monies available to fund change orders on things that otherwise would have been really quite standard and usual.

And so we've never heard of the word sequestration here at Tetra Tech prior to this last year, unless it was carbon sequestration on one of our environmental programs. So there is a new paradigm shift, so to speak; mandated reductions, mandated leaves for procurement officers. I think those things have made the fixed-price construction work on the larger projects and that has been primarily, actually, on the government side.

A lot of the work that we are doing for the commercial sector, and I would use oil and gas as an example, a lot of it is on a time and materials basis, unit rate basis. And so that, in and of itself, doesn't portend higher volatility or margins. In some instances it means what they call lower risk but more predictable margin bookings, and so I don't make that direct correlation of more volatility because of moving to commercial.

Okay. But what about just more volatility because of the change in environment and whether we are going to see more (multiple speakers)?

Well, I hope we never see another volatility like the third quarter, that's for sure. We need to be as much -- I think it's not so much client driven, although it is to the extent that we take contracts that don't give us provisions to stop work or take other actions.

So we do need to be, and we are moving to be, more aggressive on future contracts that give us different provisions than may have had it in the past. And that will decrease the volatility. But to the extent that we just move and assume some of the risks within contract that would result in this volatility, we're looking to move away from that.

Okay. Then, lastly, you touched on the oil and gas business and the pipeline business being better. What about -- are there other aspects, I'm thinking of some of the fracking water, and anything new there to be thinking about in opportunities for Tetra Tech?

The fracking water, we've talked about that. It certainly has some of the largest promise of market expansion and creating a market that doesn't exist today, primarily by regulatory drivers. I have spoke to this before. There's no doubt that either a state and local regulatory drivers or a national regulatory driver in the United States would create a very large market that doesn't exist today for us and would be an incremental contribution.

We actually are seeing that at the state and local level. We've seen some pretty material moves across the country in that respect. It's not clear to us and -- well, it is clear to us in the next few quarters we are not likely to see a national standard, but I do expect that it's going to just trend at the state and local level to increased requirements. And it's going to begin to unfold slowly unless there is a particular catastrophic impact and then when you could watch it move overnight.

But I do think that it's only incrementally upside and we don't have any of that built into our fourth quarter and at this moment into 2014. We are already there. We have the capability. We know the clients and as it unfolds we are ready to be there. So we don't have a lag or really an investment to be had in order to capitalize on this opportunity.

Okay, thank you. Appreciate the help.

Tahira Afzal, KeyBanc.

Good morning. This is actually Saagar on for Tahira. First off, thank you for the commentary, the detailed commentary was very helpful.

But looking more into the federal side, is there a way to -- if you look at your fiscal 2012 EPS of around $1.65, you look at where it is, potentially your range for fiscal 2013, what would you say is the approximate decline year over year on an EPS impact basis from the federal slowdown?

Well, Saagar, what I would lead you to is if you discount the third quarter one-time charges associated with projects and other specific charges we took, we've seen roughly a 15% reduction in our revenues on the federal side. And I've spoken in the past that we have about a third of our federal work is essentially regulatory-driven, some would refer to that as nondiscretionary; a third is high priority; and the last third is discretionary programs. So let's call that 33% of our federal work.

And I have indicated in the past I felt that perhaps half of that would be at risk because of budget shortfalls, so half of 33% is 16%. I actually believe that the reduction in margin, ex the one-time projects charges, is roughly similar to that. So about a 15% reduction.

The federal work has been sort of 7% to 10% margin, slightly below the Company's average, so the EPS impact would be slightly less than that 15% reduction in revenue. But they would be generally in tandem, but slightly less, on EPS basis.

All right, great. Thank you. Then you have been talking a lot about your oil and gas business, the growth opportunity there, and how high the growth has been. What percentage of revenue approximately is oil and gas now for you guys? Where do you see that going over the next couple years?

I think at the end of this year it could be trending up quickly with the addition of Parkland and the growth internally of the other entities we have. We have trended over the past couple of quarters from 10% to 15% of our total revenues and I expect that to grow quite quickly. I think this year we will be at just over $300 million in revenue in our oil and gas business. For 2013 we should finish that.

And we have stated on -- in fact, we stated on the last conference call, and I will reiterate this here, we do have a goal of building $1 billion oil and gas practice and I expect to do that in the next several years. In perhaps two to three years. I would like to do that on the nearer term than that, of course, but that will depend on the market and opportunities.

We do need to bring in some new acquisitions that give us access to certain geographies and certain additional skill sets and clients, but I will tell you it's not just the acquisitions that are going to benefit that join Tetra Tech. It's also going to be our water, environmental, and technical professional modeling in front-end services that will be big benefactors of moving into these markets. So it was 10%, trending to 15% of our revenues here in 2013 and growing rapidly toward $1 billion over the next few years.

And that is a double-digit operating margin business?

Yes.

Perfect, thank you.

Corey Greendale, First Analysis.

Good morning. Dan, you've given a bunch of detail on some segments, so this may be slightly repetitive. But on the federal government side, can you just speak to what the second derivative is there? Are things still getting worse or is it starting to stabilize now that we are past the uncertainty of the sequester?

It's actually -- our year-on-year comparisons have been down 15% pretty much across the board on fiscal year 2013. If I take you back, to me it seems like 100 years ago, but it was about nine months ago we had election of a new president, a new administration. We had continuing resolution and we had a sequestration in Q1. And so that was our year-on-year comparison of Q1, Q2, Q3, and now Q4 to 2012 all have about 15% reduction.

Now if the government doesn't do any further significant reductions and they sort of stay where they are from 2012, or in other words the funding stays stable with the reductions they've made, I expect that it won't get worse, and in fact, the comps will start getting better. In other words, we should be flat because it will have already baked in the reductions.

However, I certainly am listening, as many in this industry do, to the current state of proposed reductions, budgets for 2014, and what I will call it is murky or less than clear at this moment. And so I don't know that I would call it worst case, but a reasonable case would be to anticipate a similar type reduction, which would make it not worse but just sort of a consistent glide slope from what we've seen in the last year, until we get more clarity from our legislators.

All right, that's helpful. I realize with some of the contract adjustments that some of that stuff is related to sequester and there's not much probably one can do about it. It comes with being a service provider to the federal government. But can you put it in perspective relative to years ago when there were the issues with doing the construction work and you instituted new practices to make sure all contracts were reviewed at a very high level?

Do you think there was something that kind of fell through the cracks there with these contracts? Or is it no matter what your processes were this was going to be an issue?

You know, I think to a certain extent -- I hate to say regardless of what had happened with hindsight that there's nothing anybody could have ever done. That makes me feel like a victim and I and we at the Company don't feel like victims. We know exactly what we are doing.

Every one of these contracts had been reviewed at the corporate level. They are reviewed very carefully through our risk management system, and so these were not projects that were unknown to us. Work we had done, in many instances, had already been approved with respect to merit and so we did the work with knowledge, cognizance, and approval, so to speak, by our clients. Then you hand them a bill for a big number at the end and go this is too much.

Of course, we here refer to it has two components merit. Is do you have merit to do it? And the answer has generally been yes. And quantum; do you agree to the amount? And that's where we have really run into a disagreement.

We will pursue it. I do think it's possible that it's associated with new budget constraints. If you don't have the money, how can you pay someone? But there is a legal process by which to go through that and it was during the quarter that we had clarity. We will look to engage this process much earlier.

Typically the quantum or the total dollar amount is submitted at the end when you actually know how much you spent, but there is process and contract changes that we can make where we can force that process much, much earlier. Those are some of the things we are looking to do to upgrade our risk management contract process.

Got it, I appreciate it. Thank you.

[Stephen Folst], Stifel.

Good morning. I guess I will go back to the oil and gas theme for a second here. It was nice to hear you guys reiterate the $1 billion target within a few years. Is the midstream sector still going to be the primary point of emphasis to get you to that target, or are you looking to downstream as a material opportunity?

And then kind of on that downstream space, we hear a lot about petrochemical and refining boom that is happening on the Gulf Coast. Many large projects there that I'm sure require a lot of environmental and regulatory permitting to work through. Is that something that you guys are working on now and is that an opportunity in the future, and how would you kind of size that opportunity?

Great question, because oil and gas is such a very large field and has different components. Our primary focus is going to remain midstream. We do think that whether the price goes up or down they still have to get it for where they are producing at the wellhead so to speak or where it's being produced to the downstream. And so midstream will be our focus. It's where most of our investment has been and where it will continue to be.

But it's funny you mention petrochem. We do think that that will be an increasing opportunity and contributor to us, especially down in the southern US in Texas and the surrounding areas. We have a pretty good presence there and expect to grow that.

And we do think there's work that can be done especially -- you're right. Before you add a petrochem, the environmental permitting, citing, clearance, especially the safety requirements, reporting requirements, and all the chemicals that are produced as byproducts from health and safety issues, all the way through just reporting and tracking of the chemicals, including the engineering work that we would do as may be part of the process, that would be directly associated with waste management, reprocessing, recycling, all the things that are core to a water and environmental experienced firm like ourselves.

So I would say midstream the primary focus, but petrochem in Texas, Louisiana, and sort of the Gulf Coast locations are emerging here and expect to see that in 2014.

Great, thank you. Then I guess real quick on the state and local. It's nice double-digit growth there again for the third consecutive quarter. Are we seeing a wholesale pickup in municipal spending or is it still pretty isolated and targeted?

Then with a couple of the wins that you've had with the Miami Harbor and others, is that a run rate that we could expect to continue for the near future?

Miami was nice but it's single project. And it wasn't really a single driver; it was very broad-based. But it has been the big cities that have driven it. We haven't seen individual little cities.

But as you can see from our presentation, it goes to the East Coast in Georgia to Texas in the Midwest and California out here on the West Coast. So it has really been geographically very broad-based and has generally been where the large population and the large budgets are that they have the funds to turn this up.

I really believe that this has been a lot of pent-up demand where little or nothing has happened over the past several years and you are sort of seeing a backwash of the things come through the system now. But not one city, not one state; very broad based for us.

Thank you.

David Rose, Wedbush Securities.

Good morning, I have a couple questions. Trying to get a better sense in terms of the acquisitions and just the goodwill write-down. So we have a goodwill write-down for BPR, is that correct?

Yes, it is the --

And PRO-telligent for the FAA contracts?

No.

Okay, that's --. So just BPR?

What it is, Eastern Canada was primarily BPR and some other operations that were part of our Eastern Canada operation. Mining, which is our whole global mining practice, and the FAA was related to one of our DC-based companies, AMT.

Okay, that's helpful. When we think about amortization where there any intangibles that were changed, customer lists, etc., that would change the amortization outlook for 2014?

No, there wasn't.

Okay. Then on the share count for what we are seeing after the buyback, what's the share count when you file today or when you file for your Q? What should we look at? How many shares did you buy after the quarter is my question.

We are not going to disclose that until we get to the end of the fourth quarter.

Okay, but we can interpret it from the filing, right?

Well, in the filing what we have is we have reflected in our balance sheet the new share count. But then on a go-forward basis we won't have that final share count for the end of the year until the end of the year.

Okay, that's fair. Maybe I can step back in terms of trying to better understand the risk management, how you are bracketing the risk around your most recent acquisitions. If you think about Parkland, what sort of issues are potentially there for us to think about or do you see orders pushed out?

How are you managing the risk profile of this backlog and the potential projects so that it doesn't turn into a BPR? Now I understand they are very different situations, but maybe you can help us better understand your processes.

Well, first of all, the client mix of Parkland versus BPR probably not be different. Parkland is 100% commercial for the oil and gas industry, 100%, and BPR, which is in Eastern Canada, had much municipal government and other mix of business. So there's the two different types of work.

As far as the risks with Parkland, much of the work that they have is on a unit rate. That's unit rate for staffing and hours, for professional services, for engineering; a unit rate for pipeline installation, so X dollars per foot or per linear unit. And so it's not singular lump sum in many instances, so the profile is somewhat different than what we saw in the contracts that were impacted.

With respect to being prepared for immediate turn off of their work, which was similar to what we saw in Eastern Canada with respect to these items that Stephen talked about with budgets, really we watch very closely the outlook for midstream, which is the pipeline demands. And this -- again, Parkland is located in the greater Calgary area and their work opportunities would be anything coming to the oil sands, which is Fort McMurray down through Edmonton and Alberta, Calgary, and then anything moving out to the West Coast.

Actually if you follow the piping opportunities for delivery of both natural gas and different types of crude, including the oil sands, I believe there's an enormous deficit representing many, many years, and some represent the demand going out even farther than that, including the requirements to supply product for proposed LNG export terminals out of Canada. Simply a small diameter for the collection of different oil producing.

So we take a look at the drivers, what's going to drive the workload. It's not a political process. It's not a regulatory process. It's a demand for energy in the oil and gas industry. So I don't see that as a short-term.

The other thing that we saw in Canada, we kept a very large staff on board for a continued workload. Parkland inherently moves its staff up and down as the seasons move, so we have the ability to adjust our cost bases seasonally. And in fact, it's just part of the business of what they do.

This isn't a new thought for them or a new experience. They move that from very high staffing in the winter to very low in the spring, backup in the summer, down in the fall. So it's just the very nature of their business to adjust their cost basis with the amount of workflow that comes through their business.

So implicit in your guidance that you provided, you were talking about year on year and how your comparisons were more challenging the first half. You didn't have Parkland or AEG in the first half. How should we think about the accretive impact of those businesses in the first half of 2014?

Well, that is a great point, David. What I was trying to describe, and maybe I should be a bit clearer, I think that the comparisons in the first half, Q1 and Q2, will be difficult on the Mining and Eastern Canada. That was my reference with respect to difficult comps, because they were really quite strong in those periods.

Our year-on-year comps on the federal government for the first half of the year should be quite more favorable. We don't see any material downturn. And in our US commercial and international work, other than Eastern Canada and Mining, actually expect it to be up quite a bit contributed by Parkland, AEG, and just the general growth in those end-markets. So I did not mean that the year-on-year comparisons will be difficult because of the overall comp, specifically with respect to Mining and Eastern Canada. I think the others actually will be quite favorable.

Okay, great. Thank you. That's helpful.

Alex Rygiel, FBR Capital Markets.

Dan, real quick, you referenced coal ash and solid waste sort of picking up in the US here. Can you expand upon that a little bit?

Yes, there have been pending regulations requiring that the fly ash or the residuals from coal-fired plants actually not be just deposited in surface impoundments. This has largely been driven by the catastrophe that took place on the Tennessee River here a year or two ago. It's actually driven -- and this is an example of sort of a catastrophic event drives an immediate and quick regulatory requirements.

And so all of the fly ash and the coal residuals that come from coal-fired power plants and other energy residuals are moving to regulatory requirements for disposal in lined and specially designed landfills, essentially. And that requires design and a new business opportunity and requirements that didn't exist before.

We are, as Tetra Tech, the largest professional design engineering landfill firm, as reported by the Engineering News Record in the United States. It's our objective not only to remain number one, but to actually distance ourselves from the others as this specialty area grows.

I think we are one of the largest liner -- designer with liner, meaning the material that would line and contain these wastes. So we are one of the largest in the United States and I think technically, we like to say, the most advanced with respect to the techniques and staff that we use to install these. And so when you have that unique position, not too many competitors, and certainly I believe almost none on a national basis -- I think it gives us a good opportunity to capitalize on this new market that's being driven by -- you can say driven by revelatory requirements, which is true, but by a real-life risk that exists by not doing this.

So it's not something being driven just anomalously by a regulatory requirement. It actually is something that's happened. It was an incredible to catastrophe and there's a purpose to protect life, property, and the environment, so that is what is going to drive this. It's just started and there's an enormous number of power plants in the country that generate this type of waste that will require to be handled and put into these receiving facilities.

Very helpful, thank you.

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

Well, I would like to thank every one of our shareholders and others that follow Tetra Tech for both being on this call, following Tetra Tech, and being supportive of this. This is quite an unusual third quarter. We take it extremely seriously.

We did try to let everybody know. We did let all the shareholders and the public know as soon as we had any indication that there was something that was not consistent with our forecast for the third quarter. It is our goal, as it has been for the many, many decades that we have been here, both as individual managers and as a corporation, to perform to the levels that we guide and, in fact, to get back to where we expect to be, which is an industry-leading performer both financially, technically, and from a management standpoint.

I really do look forward to reporting our fourth-quarter performance, concluding fiscal year 2013 after this third quarter, and sharing with you our outlook for fiscal year 2014. I look forward to talking to you in the next call. Thank you very much and talk to you then. Bye.

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