Tetra Tech Inc (TTEK) 2013 Q4 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 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 up a conference for questions and answers after the presentation.

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

Thank you very much, Justin, and good morning and welcome to our fiscal year 2013 year-end fourth-quarter earnings release conference call. While Steve Burdick, our Chief Financial Officer, will present the specifics of our financials, I will start with a brief overview of some of our key financial metrics for the fourth quarter.

We ended the year with a solid fourth and final quarter of the year. In the fourth quarter, we delivered results in line with guidance for all of our financial metrics.

Our revenue for the quarter was just over $698 million, and the net revenue was $532 million for the quarter. Operating income was $41 million with an associated EBITDA of $56 million, which calculates out to an earnings per share of $0.39, which was at the very high end of our guidance.

We ended the quarter with just over $1.9 billion in backlog, with a book-to-bill of over 1 for this last quarter. Overall, this quarter represented a very solid completion to the fiscal year, putting us in a very good position as we begin fiscal year 2014.

I would now like to review our performance by customer. In the United States, work for our commercial clients was up 11% year-over-year, driven by work for the oil and gas industry.

International work was down about 6% from last year, mostly as a result by the downturn in mining. However, we did have very strong performance in the oil and gas in Western Canada and a return to stable performance from our Eastern Canadian operations. For us, our international work is not just Canada; it also includes a very quickly growing base of operations in South America where we have about 700 staff right now.

As expected, we ended the year with about 30% of the work in the company generated from clients outside the United States, and most of that work was primarily for the private sector.

Our federal work was down about 15%. This is very consistent with the reductions that we've seen over this past year due to sequestration and delays in funding from the federal government.

Our state and local work, though, was 14% of our business for the quarter, which was up 22% year-over-year due to a very broad-based recovery in the sector and a pickup in activity primarily with our municipal infrastructure and water-related services here in the United States.

Now, between the US international and US commercial, together they represent about 60% of our revenues, another 14% with the US state and local. And in the coming quarter, the combination of these three will represent about 75% of our business, and we think that all three of these sectors will be strengthening for us during 2014. Federal work is now about a quarter of our business, making us less dependent on federal work than any time for us over the past decade.

When we look at the three business segments, they each reflect the impacts of changes that we've seen over this past year. Our ECS business segment is down 17% year-over-year as a result of reductions in our mining and Eastern Canadian operations. In the United States, our operations within ECS saw very good performance, mostly in the front end studies and engineering work, and most of that was associated with water-related programs. ECS on a sequential basis is essentially flat, which I take as a very good indicator indicating that they are returning to stable performance across that business segment.

The TSS business group was essentially flat year-over-year, but up 13% sequentially, driven by strength in their US midstream oil and gas engineering work. And our USAID program, which is the dominant federal client in the TSS group, also remains strong in spite of budgetary pressures with the federal government.

Our RCM group grew 40% over last year driven by the oil and gas and solid waste work. Collectively, the three business groups were essentially flat year-over-year, but sequentially we were up 12%. It's actually a nice finish to the year.

At this point, I would now like to turn the presentation over to Steve Burdick, who will provide a more detailed discussion of the financial results for the fourth quarter and fiscal year 2014. Steve?

Thank you Dan. I'll begin with the fiscal 2013 fourth-quarter financial overview in a bit more detail.

Overall, our fourth-quarter results met the guidance that we provided relative to the range on both net revenue and EPS. Comparing the fourth-quarter results this year to last year, revenue decreased by about $21 million, or 3%, to $698.4 million, primarily as a result of a slowdown in operations focused on Eastern Canada, global mining, and the US federal government as Dan had talked about earlier.

Similar to the revenue, the net revenue also decreased but less significantly to $531.5 million. And as I mentioned, the net revenue results were within the guidance range that we provided on our last earnings call.

Our operating income was down about $8 million, or 16%, to $40.6 million. The lower operating income was primarily driven by the same factors that caused revenue to decrease.

And regarding our EBITDA, we did experience about an 11% reduction. Our EBITDA did decrease by a lesser amount than operating income because our intangible amortization and depreciation was about $1.5 million more in the current year compared to last year's quarter.

For those following on the webcast, I would like to address other specific line items relative to our income statement. First, our SG&A was about $48.2 million for the quarter. This is a decrease from the prior-year quarter of about 15%. And the majority of this decrease was due to a reduction in discretionary and incentive compensation expenses, and these actions were taken in direct response to our decreased earnings this year.

The tax provision resulted in a net tax expense of about $12.4 million. The effective tax rate for the quarter was about 34%, and this rate is within the expected annual range of about 34% to 36%.

The earnings per share was $0.39, and this EPS is at the higher end of our guidance range, which was $0.30 to $0.40.

I'd like to point out a few more of the significant balance sheet items. As a result of our lower revenue, we did experience 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 fiscal 2013 acquisitions of both AEG and Parkland earlier in the year.

Now, our net debt position was positively impacted by a solid cash flow generated from our operations in both the fourth quarter and for the entire fiscal year. And as most of you are aware, we did implement a stock repurchase program during the year, and we utilized about $20 million of cash. Further, this stock repurchase program was amended by our board to be effective on November 18, 2013, extending this program through fiscal 2014 and revising the pricing parameters to enable repurchases at a higher stock price.

As noted in the discussion of our balance sheet, we did have a solid cash flow from operations. We generated about $22.5 million in the quarter, and we had previously expected the operating cash flow to be about $130 million to $150 million for all of fiscal 2013. As a result, we, for the fiscal year, we did generate about $138 million.

We anticipate our fiscal 2014 cash from operations to be in the range of about $150 million to $170 million. And that puts the midpoint for 2014 cash EPS at about $2.45.

CapEx is less than the prior year, but still in line with the previous guidance that we had given for 2013. We do expect our CapEx to be in the range of $25 million to $35 million in fiscal 2014, and this amount continues to represent about a 1% ratio of annual revenue.

Days sales outstanding of 75.6 days are slightly lower when compared with last year at this point in time. And further, our DSO did decrease by about five days sequentially when compared to the end of our third quarter. Our expectations going into 2014 is that our DSO will be in a range of 75 days to 80 days with an ultimate goal to be well below 75 days.

The next slide on our presentation is a summary of our key financial metrics for the entirety of fiscal 2013. First, our net revenue was about $2.025 billion, and these results were within our most previous guidance that we had given. Our operating income and earnings per share are substantially lower than fiscal 2013 because of the third-quarter charges as we discussed in our previous earnings call.

Now, in contrast to our earnings, the cash from our operations for fiscal 2013 was a solid $138 million, and this translates to a healthy cash per share amount of about $2.11 for the year.

Now, for those following on the slides, the next graphic shows the impact of our positive operating cash generated and cash used for both acquisitive investments and stock buybacks. As you can see on the graphic on the webcast, our previous net cash position has transitioned to a net debt position due to the borrowings for the recent acquisitions in the second quarter of fiscal 2013.

Now, from the end of the second quarter, our operating cash flow allowed us to pay down net debt from about $106 million to about $78 million at the end of this year. In addition, this cash flow provided us the opportunity to initiate a stock repurchase program during the year, and thus in the last half of fiscal 2013, we purchased about 855,200 shares for about $20 million.

Now, assuming no additional stock buybacks or acquisitions, we expect to be back into a net cash position sometime in fiscal 2014. With that said, this management team will continue to leverage our balance sheet to really focus on managing our working capital, invest in growth opportunities both through acquisitions and organic means that will provide high profit margins and access to new markets, and fund the stock buyback program initiated in the third quarter. These three priorities are of equal focus and are meant to further enhance our shareholder value.

And with that, that concludes our fourth-quarter and fiscal 2013 financial review. And I will now hand the presentation back over to Dan.

Great, thank you very much, Steve. As we enter fiscal year 2014, we are focused on our core services across the United States and international markets and are committed to the generation of strong organic growth.

I'd like to first talk about oil and gas. As you know, this has been a focus for us over the past couple of years. For us, oil and gas is primarily upstream and midstream services in the oil sands and the shale basins across North America. We completed last year with over $300 million in revenues for our oil and gas clients, and I expect this work to continue to grow organically at a more than 20% pace.

We were recently awarded several large pipeline projects that totaled over $100 million, giving us excellent visibility as we enter this winter season. And we see many new opportunities for acquisitions in this market that will provide us access to the developing oil production areas in North America and build out our service offerings to the oil and gas industry. And this, by giving us more expansion, will give us expanded presence and capability that we are looking forward to leveraging our industry-leading water and expertise and environmental practices for these clients.

Since our founding, Tetra Tech has provided water related services to our clients. Over the past decade, we've expanded these services internationally, including to new clients in the mining and oil and gas industries. Over the next three to five years, we will be orienting the growth of our water related services to expanding work for private sector clients, specifically for industrial sectors such as manufacturing, chemicals, food and beverage, utilities and other Fortune 500 companies. Where in the past we have primarily provided this sector with studies, especially for environmental assessments and remediation projects, in the future we will be expanding this into the design and water supply and specialty treatment systems. We believe that, with investment in organic and acquisitive growth, this market will expand from our current roughly $90 million a year to about $500 million a year and will add long-term stability to our commercial sector revenues.

Our third growth driver is solid waste, which is now well above $100 million a year and where we were recently ranked number one by Engineering News Record for North America. We believe that increased regulation and disposal requirements will continue to create new demand for solid waste landfills and associated facilities over the next decade. We have a strong base of operations in solid waste with municipal clients, especially in the Southwest and central regions of the United States and we will be looking to expand our geographic presence across all of North America.

In addition, we have providing disposal solutions for mining and oil and gas and commercial utilities and we've also been at the forefront of developing landfill designs for powerplant operations who will be addressing new requirements for the disposal of coal fly ash and coal residuals as these regulations get finalized.

Our track record in full-service capabilities in this field put us in an excellent position to provide sustainable solutions for waste disposal and solid waste management. This will be a good growth area for us.

I would now like to share with you our customer outlook. Water and our science-based approach will continue to differentiate us in the market and both of these provide excellent stability and new opportunities for the company. We expect three customer sectors to drive our growth in 2014. The first is US commercial. It's about 30% of our revenue now and I expect it to grow organically at more than 10% in 2014. Our international work will also be about 30% of our revenue with organic growth rates in the upper single digits, between the 5% to 10%, but we expect it to be toward the upper end of that range with both our US commercial and international growth being driven primarily by our industrial manufacturing and the oil and gas markets.

Our state and local work, which is a combination of municipal solid waste and water work and water services, should continue to grow organically at a rate of about 5% to 10%.

And our US federal revenues I actually expect will be down slightly this next year, especially on the year-to-year comparisons as the effects of sequestration and budget reductions continue to impact the government's discretionary programs. However, as much of the work that we do here at Tetra Tech is performed for regulatory mandated programs and essential infrastructure, we expect the impacts of the budget reductions to be relatively small for us.

Now, if you're following along on the slide presentation, you will see we have a range here. The bottom end of our forecasted reduction for the federal work assumes that sequestration continues through all of 2014, so we have incorporated that into the range of our guidance.

On a consolidated basis in 2014, I expect the company to grow organically in a range of 2% to 8% which is consistent with our long-term growth objective. And as I presented previously, we target a 15% compounded annual growth rate which represents approximately half of that from organic growth and half of it from acquisitions.

Our segment outlook for 2014 shows that our EBITDA margins should be in a range of about 11% to 12% for the year. I'll start with ECS.

Our ECS business segment is expected to be in the 9% to 11% range with stabilizing revenue and profitability in Eastern Canada in mining, higher margins in Western Canada in the oil-producing provinces of Canada, mostly British Columbia and Alberta, and stable margins in our federal work, albeit with slightly shrinking revenues in this segment.

Our TSS business segment, which is about a third of the company's revenues now, continues to have very strong margin performance and the range is expected to be in the 11% to 13% range for fiscal year 2014.

And our RCM business segment has had the most significant transformation of its business and its clients mix this last year. With the addition of AEG in solid waste and Parkland in oil and gas in Canada, it's now dominated by private sector in oil and gas work. And I expect their margins to make a significant improvement, increasing to a range of 8% to 10% for fiscal year 2014.

Now, you can see, with the three of these, it does represent a larger percentage of our overall revenues coming from commercial clients, and increased performance within the business segments. I expect that 2014 to put us on our track toward our longer-term goal of a 13% EBITDA margin.

I'd like now to present our fiscal year 2014 and our first-quarter guidance for the performance of the company. For the first quarter of 2014, our net revenue guidance range is $440 million to $500 million with an associated diluted earnings per share of $0.35 to $0.40. For the entire year, fiscal year 2014, the net revenue range is $2.1 billion to $2.3 billion with an associated diluted earnings per share of $1.60 to $1.80.

Now, this year coming into 2014, we've introduced a new metric that we will provide for the annual cash EPS with a guidance range of $2.30 to $2.60. There are many different definitions of cash EPS and I don't think there's a standard one. We define it as the cash flow from operations divided by the diluted shares outstanding.

This guidance for 2014 and for the first quarter do have a number of assumptions, first that our intangible amortizations, which is a non-cash charge, it's approximately $27 million or $0.28 per share.

We were impacted in the first quarter by the government shutdown. And that was -- on an earnings basis, it was about $0.02 of earnings per share that impacted us in the first quarter, and that has been included in our guidance both for the first quarter and for the year. We assume a 34% tax rate, 65 million shares outstanding. And as always, we have not included any contribution of acquisitions that have not been completed as of this telephone call. So anything else that's added during the year would be incremental contribution toward our guidance for the year and performance.

In conclusion, we delivered fourth-quarter results in line with our guidance and earnings per share at the high end of our forecast. Our margins are increasing. We expect 11% to 12% for 2014. And our water and solid waste expertise is driving our industrial and private growth sector. Oil and gas is now a significant market for us and is growing organically at a pace of more than 20%. And with all of this together, I'm overall very pleased to report that we are in an excellent position as we enter fiscal year 2014.

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

(Operator Instructions). Jim Giannakouros, Oppenheimer.

Good morning. Good quarter and outlook, so congratulations on executing through a tough 2013. On that, can you address the problem areas of last year, specifically mining in Eastern Canada? Give us a sense for what your exit rate is from I guess from a gross or net revenue perspective and your expectations for those two markets in particular for FY 2014?

Absolutely. Both mining in Canada are down on an annual run rate. We expected that mining was about $350 million at a run rate during 2013 on a gross revenue basis. On 2014, we expect it to be much closer to $250 million, so close to a 30% reduction. We have seen it on a year-to-year comparison. We will have a very difficult comp on mining for Q1 and Q2. And in fact, the first quarter of last year, mining was one of the biggest revenues we had. It was -- I don't want to call it white-hot but it was very strong for us. Second quarter, it brought down a little bit, but we had been relatively flat. The reason I point that out is we've been relatively flat, and I'll call it stable, from Q3 and Q4 to what we've seen here in the first quarter of 2014. So, on a sequential run rate, I see mining running at about a $250 million twelve-month run rate, and I expect that the comps in the second half of the fiscal year will be much more favorable and in fact perhaps even up.

With respect to Canada, there's different drivers. There were -- it's primarily politically driven. They can put a hold on procurements and other items temporarily, but ultimately that work has to get done.

So Eastern Canada also was very strong for us in Q1 and Q2 of 2013, and so the first two quarters will be difficult comps. But they have actually been increasing. They are not just stable, but we've actually seen them begin to build a bit here in the past few months. And so I think that the second half of 2014 will be positive with respect to comps. And in fact, we've seen some support for that in slightly building backlog in that business.

The run rates were around $250 million on a twelve-month period for 2013. On the gross revenue, it will be down to probably around $200 million. Now, in the case of Eastern Canada, most of that revenue was also net revenue, so gross to net is pretty much the same.

Great, that's helpful. And you highlighted growth areas, specifically solid waste and industrial water, in your slides and in your prepared remarks. You have, in the past, given your sense of how you will get to your three- to five-year goal bringing down organic growth expectations versus acquisitions. You did so specifically for oil and gas maybe a few quarters ago.

Can you provide us an update on oil and gas, if anything has changed as far as your expectations on how you're going to roll that out and get to that $1 billion goal in revenue and provide the same expected breakdown for the other two, solid waste and industrial water?

Yes. Oil and gas, our strategy has not changed. Our focus is sort of from Texas, the oil-producing regions from Texas, particularly West Texas, the Permian, on up through the Niobrara, through the Colorado area, through Bakken and then right up through Alberta. So that's our primary area. We already have a significant presence in places like the Marcellus and even a bit more in East Texas. So, we will look to initiate a presence through acquisitions in oil and gas, so I'll just repeat what we've said before. So look for acquisitions in West Texas, perhaps the Colorado area and particularly engineering and additional services in Alberta and British Columbia. So there will be a combination of acquisitions and then augmented by organic growth after. So, that's not changing.

The industrial water business will be quite similar. We do need access to some of these clients. We don't have long-standing relationships with many of those, and you can see their logos and the names of them on the slide presentation. So, it will be accessing these clients in a geographic presence, both here in the US and Europe. I actually see Europe being a big, new market for us that we can move into. We are not only underexposed, we essentially have no presence there, and this is a very good time for us to move into that market, and industrial water will be one of the areas that help carry us there. I think it will be acquisitions somewhat similar to oil and gas, so expect to see that. But we can augment this quite significantly with our existing experts that are doing municipal water and other treatment. So we have a huge resource base to support, small to middle size acquisitions that could cause us to grow.

Now, solid waste we think, for the most part, we have what we need internal. We have expertise with AEG, and some of the engineering capability that we've had for a number of years internally, and so we think we can leverage the internal resources to capitalize on this growth. There could be some regional, small regional acquisitions, but it will primarily be an organic strategy driven by some of these regulations that are pending that could actually get us there quite quickly.

That's sort of the breakdown on where we're going to acquire, how we're going to do it and how it's going to be partitioned between acquisitions and organic.

Great, that's helpful. And one last one, if I may? You gave us an EPS impact from the government shutdown of $0.02 in the first quarter. Can you size the revenue impact in the first quarter, and also if there's any lingering effects that you're experiencing this quarter, or is that dynamic substantially behind you and people are back to work productively?

You've got that backwards. Your last part is lingering effects. No, they actually turned it on pretty fast. I think the importance of getting everybody back to work, including us and civil servants, was pretty important, so it got turned on pretty fast. It actually even surprised us how quickly we got our stop work orders turned back on. So that will happen within roughly just a few days. So not much lingering effect other than the overall sequestration and budget reductions. That's sort of become a persistent issue with the government.

Revenue was about $6 million associated that $0.02 for the quarter. And at this moment, we don't really see that lingering. Although the government is going to have another shot at the country and the economy in the middle of January. So, we have not forecasted, although we hope this not to be the case, but we've not forecasted in our guidance another government shutdown.

Tahira Afzal, KeyBanc.

Thank you and good morning, gentlemen. Congratulations on a great quarter. As we look out to next year, it seems like mining is sort of hopefully troughing. You've seen your muni, state, and local markets picking up after a very long time. And as you exit the year, and I know you've given us the revenue guidance, but should we assume, number one, that the revenue accruals progressively improve during the year and you could be exiting at sort of a close to a double-digit number in terms of year-on-year growth? And could it be potentially the case that when you're exiting around this time next year, that you could see most to all of your markets sort of in an up cycle?

Good observation and good question. I do see our markets building and our performance in year-over-year growing during the year. There's a couple of reasons, and I'll get all of our end markets growing.

But first, we do have a bit more cyclical nature of the work based on the acquisitions and the Canadian presence. The revenue will be the lowest in our first quarter, and you should see it build into Q2. Q3 and Q4 for us are the spring and summer months, what should actually be without any building in the markets at all the most -- the largest numbers with respect to both revenue and of course then income associated with it because of utilization and all the fieldwork and the construction activity that take place in the summer. So, we do have a natural build as far as seasonality.

We also do see, as I've talked about, some of the markets building through the year and I think Eastern Canada is a great example. They got hit quite hard and we see it growing, so it actually does have a recovery and a rebound. We have forecasted a flat mining on a sequential basis from this fourth quarter and late third, so any type of recovery.

And in fact, we did announce some very good wins, including one mining project we announced yesterday in a press release. It is really quite a very nice, sizable project that will carry us well through all of 2014, and it does begin -- we have some indication that mining might have some underpinning. It's not the only project. We've seen many across the board. It has kept our backlog roughly flat, but it's given some encouragement that a flat forecast for mining is a reasonable forecast.

Now, the last question, which is do we see at the end of the year all of our end markets growing? I certainly see the US and international commercial market, which is oil and gas and even mining, could be up. I actually see some early signs. I see some encouraging work on tax credits and other funding for renewables, so wind and other areas, so I think that could be good. Of course, oil and gas I've already talked about and see up. But the one area that I still am very cautious on and do not see an overall rebound or growth is the federal government. I expect that, if things go well, it could be flat, and if not, a slight reduction.

Got it, Dan. (inaudible). I guess even as you've diversified, your strategy has worked out really well. It's rudiment that you have one or two markets down, one or two that are up. Even based on the strategy you're laying out right now, or the alphas you're laying out right now, would you say that really at this time around next year we could potentially see some of the more mature markets headed out, versus maybe perhaps what we've seen over the last five years?

I do think so. The part that I am very encouraged about for the company is the diversification into these new markets. And what we started many years ago, and it seems like forever ago but it was only four years ago, was to follow our commercial clients internationally. And we've gone from 0 to 30%. That's given great diversification.

We've really not wanted to abandon or to pull back from any of our federal clients, and we haven't done that. They continue to be important to us. But the reality is the growth in our commercial, US commercial and international, has put us at just over 25% of our revenues with the federal government. And I think as other areas grow quicker, that number is going to go even smaller. And so our exposure to the one market that I think will have headwinds will become by far the smallest and in fact in more than a decade as I had mentioned in my prepared remarks. This is the lowest percentage of federal work that we've had, percentage of revenue in the company's last decade. And so I feel quite good that the growing areas at the end of this year will far outweigh the one headwind area we see. So, we should see growth rates increase even more than what we are forecasting for this year as we move out in the future.

Great. And last question from my side, as you look at your utilization levels on aggregate, could you talk a bit about how much topline growth we can sustain organically? As we look out the next few years, can you see sort of (inaudible) sort of 10% organic growth rate, do you feel your work force is really ready to handle that?

We can handle a pretty significant organic growth rate increase. I think we can handle probably a 10% to 15% organic growth rate increase. We are running at about -- our goal is around 70% utilization currently. We can handle probably to the upper 70s% before we actually get into a labor shortage situation, so high 70s%. And that really drops to the bottom line. We don't need more offices. We don't need more trucks and cars or other capital equipment. And really other than the direct labor costs, the rest of it drops to the bottom line. So organic growth going up will mean a disproportionate increase in income. So, I think we are good for a 10% to 15% organic growth rate for at least a year to two years before we would have to meaningfully come into a staffing augmentation, meaning large hires, although I will say this economy has put a lot of people available, some excellent talent. And like in the downturn of the housing, we were able to get excellent engineers to move them into our federal and state and local. The downturn in mining has made excellent engineers available for support of our oil and gas and other markets.

Thank you very much.

Noelle Dilts, Stifel.

Thanks. Good morning. First, I just had a housekeeping question. I was wondering if you had the contribution from Parkland versus AEG in the quarter.

We had a total contribution of about $40 million. And if you went back and looked at the press releases at the time they joined the company, it would be about 2-to-1 from Parkland over AEG, so probably two-thirds/one-third roughly.

Okay. If you could talk for a minute just about you're kind of changing the pricing on your repurchasing matrix, but can you talk a little bit just about maybe some of the reasons you didn't repurchase more shares in the quarter? I think that was related to the pricing on the matrix, and also where that ranks going forward in terms your capital allocation priorities.

We put together, when we put this stock buyback in place here last quarter, so a little over three months ago. We actually put it into a blind trading with a grid established, so a 10b5-1 trading program.

We did establish a pricing grid in advance, which we've not disclosed. And the reason more wasn't purchase is the stock didn't trade through these alternative pricing points that would've triggered more buying. So, that's a good and a bad thing.

The bad thing is that we didn't exhaust all of it here at the last quarter. The good thing is it didn't drive the stock to the price points that would have triggered that. So that's why it didn't buy more. It was not a decision -- I want to make this very clear -- it was not an elective decision by anyone in management to either buy or not by. This was all a function of the automated trading set up through the blind trading of a 10b5-1.

Now, we do recognize that it is our intent to spend or to use those funds to buy the stock back. That is the goal. And so we did adjust the grid across the board. it has many different grid points and we did increase them all. And so it will be filed. We did schedule for November 18, so it's after the blackout period for the company, so we are not changing a during a blackout period. That's why the date was set here in just a few days in advance and after this information is public. And at this moment, I can't predict exactly how it will trade based on the new grid, but the goal has been to put the grid in place such that we can expend those funds.

Okay. And then you did a nice job walking through some of your growth expectations by quarter as we move through 2014. But can you talk a little bit about margins? It looks like your first quarter-margins are actually footing the impact of the government shutdown. They're going to be pretty strong. So can you just talk about kind of seasonally what you are expecting in terms of profitability?

I expect the profitability to be very strong in the first quarter. I will say that there is one item that's going to help the company in the first quarter, which actually drives the quarterly margins. If you take the midpoint of our guidance for Q1 and compare it to the midpoint of the earnings per share, you'll see it's a little bit elevated. I want to thank our technical support services, our TSS group, for that in advance. And for those members on the phone, thank you for pushing hard. But there's a lot of work that they do for renewable energy that have production tax credits and other items that require permits to be in place and other items, so there's a big push at the end of the calendar year to get these in place and drive additional revenue utilization and project closeouts associated with the renewable energy market. So we are actually going to see a higher contribution on operating income to drive through EPS, so look for a relatively high margin coming out of tests in this quarter.

Second is -- that's one contribution in the first quarter. Second is actually RCM. RCM had a tough fourth quarter, not unexpected. Sort of the low 5% was not a good performance, but the projects that we took the charges for in the third quarter, we move the accrual rates on all of those to zero. And so we ran revenue through with no margin, and that's why you saw RCM's margin in the fourth quarter down a bit, in fact more than a bit. A lot of these projects will be complete early this first quarter, and so you're going to begin to see margin then the remaining work flow through to RCM and that's going to help our margin also in the first quarter. Now, I do think that it will come back just a little bit in the second quarter, and then build through the rest of the year.

Great. One last question. Any update on the change order issue that you've been dealing with or any type of resolution there?

It hasn't been resolved. Our project managers are eternal optimists. They still are meeting with our clients asking for change orders and that they're going to have handshakes and have it done. I am less optimistic, and so we're moving in parallel.

Our goal is to have all of the legal claims filed in courts, the appropriate legal jurisdictions, by the end of this calendar year, which means in the next six weeks. And I expect that will be a 12- to 24-month process of resolution. Nothing was resolved as of this telephone call, and it was not resolved in the fourth quarter or contributed anything to our income. And I think if it resolves, comes out to resolution in 2014, it will be at the very end of the year at best. So we'll announce that as it comes through and you would see it as an unusual pick-up and it would be noteworthy and we will keep you updated on that. But I think it's likely not a 2014 resolution item, probably 2015.

Okay, great. Thanks.

Corey Greendale, First Analysis.

Hello, good morning. This is David Warner for Corey. I just wanted to dig in a little bit more on your revenue guidance for next year. So if you look at this point in time a year ago, you were guiding to a similar guidance range as you are into 2014. So, as you sit today with backlog 10% below where it was last year, what gives you confidence that you are going to -- you can hit this guidance range, especially given the Q1 midpoint revenue guidance range implies fairly strong back half revenue growth? So can you just -- what gives you confidence in this revenue range?

I'll address each of those subcomponents. Number one is that the guidance is on a lower backlog, as you had indicated, about 10% lower. You can watch over this past year our commercial and international work, US commercial international work as a percentage of our revenue go up. And by definition, that backlog is lower, and in fact we believe at even these backlog levels, we can sustain a 10% to 15% growth rate without this backlog going up at all, because the commercial book of orders come in at a much quicker book and burn, and so when you saw higher numbers in our backlog before, it represented more federal work. And as I had mentioned on this call a few times, that's down to a decade low level. And so this is a backlog that is actually quite strong.

You might take another look at it if we had book-to-bill that were sub-1, but we were at just over 1 this last quarter. That gives us additional confidence that it's sustainable.

And finally, the areas that we think that are most vulnerable a year ago were mining in Eastern Canada, which of course we didn't see until the midyear. We think we've taken our beating on those, and actually it's now seen almost two quarters consecutive of it being flat. So we do feel pretty good about that.

This quarter, the midpoint of the revenue, if you took the mid-quarter -- the midpoint of this quarter and multiplied it times 4, that would not be an appropriate measure of the forecast for the year. This quarter has -- there's 13 weeks typically in a quarter, and this quarter, we have Christmas and New Year's, which is pretty much much of our workforce is off. So you can knock out 1.5 to 2 weeks there. Certainly in the United States, half a week for Thanksgiving. So if you add that up, you can easily end up with two weeks, so two out of 10 is 20% reduction. And you should expect that type of adjustment. Plus you will actually see the winter months not fully come in for a construction period during this first quarter. That will pick up dramatically in the second. So doing this linear extrapolation of guidance from the first quarter would really not be appropriate. I think you do need to look at seasonal effects of our business. So, I actually think this range is really quite modest.

And to some extent, after taking a very difficult third quarter, I will say that myself, the three business group presidents and the corporate management have a dose of conservatism in the estimates, both for revenue and even income, because it's only been 90 days since this last call we had with you all on the difficulties we had in Q3. So it's not that distant a memory. So we have added a bit of conservatism even in this guidance that we've provided.

Great. And just an update on maybe Sandy-related remediation contracts. I know, last year, you had mentioned that could be a $300 million to $400 million revenue opportunity. Are you starting to see some of those contracts being put out to bid, or any changing -- any change in the thinking of what that opportunity might be?

No, our long-term view on it has not changed. Timing is about right. We just passed the one-year mark here just a month ago when Sandy actually hit. As I had mentioned earlier on earlier calls, typically the first six months is emergency response. The next three to six months is actually preparing RFPs for the long-term identification of solutions, so feasibility studies, alternative analysis, and we're just seeing those come out now. So we have several millions but measured in the $1 million, $2 million, $3 million, $4, million, $5 million coming out from the core and for work that we've actually been successful on. So we are working on some of this.

The larger dollar amounts will come out after these go from alternative analysis, they'll pick an alternative, they'll then do a design and then it will move to turnkey implementation. So, we think that the bigger dollars, if you want to look at a bell curve, are still measured out at another year or two. But you will watch the feasibility study and design work start to ramp now, and that's what we're seeing.

Okay. Great.

Andrew Wittmann, Baird.

I want to dig into the acquisition strategy a little bit. The businesses that you highlighted today are doing just over $500 million of revenue exiting 2013. Your target is to get up to $2 billion. So you need $1.5 billion of revenue.

I guess the question is what is the capital deployment needed, and can you just talk about kind of the math in funding all these deals? And then probably more important, can you talk about the health and the quality of the pipeline to support that level of M&A? Maybe I'll follow up after that. Thanks.

Well, we anticipate somewhere to the upper single digits, sort of 8%, 9%, 10%, even up to double-digit contribution from acquisitions. So, as you can see, we are sort of a 2% to 8%. To pick the midpoint, that's 5-ish%. We expect that should get up close to another 10% of acquisitions. On a net revenue basis, our guidance is $2.2 billion, 10% of that, so about $200 million in run rate.

To go through your math with respect to the capital structure -- and I'll ask Steve to step in here just to talk about the amount of facility we have available -- but that would mean if we are committing what we buy for, if you want to do it that way, at about 70% of revenues, if you wanted to use that, that's highly variable, but that's not a bad point, so $200 million, 70%, so about a $140 million deployment plus stock buyback. It's not that much, and in fact it's barely above our cash generated from operations per year. So, using that as a benchmark, that actually could be supported in perpetuity. But in the event that we actually want to move up, we have good candidates that are transformative to the company, or we want to move quicker to execute that strategy on a more near-term basis means we're going to grow at much more than 15%, which means we actually use our credit facility. Steve, maybe you can share with them do we have credit facility to support this?

Yes. I think our total bank credit facility right now is about $660 million. That's made up of both a about $200 million and $500 million term loan plus a revolver. And at this point in time, none of that revolver is outstanding, so we have all of that available. And as you can see from the past couple of years, we've never fully utilized that revolver, and if we had to, we could based on our balance sheet, based on our credit agreement. And if, like Dan said, if there was a transformative type of acquisition in the future, we would still have access to other financings beyond our bank facility at this point in time.

We don't hear you guys talk a lot about transformative deals. It really hasn't been something you've done really at all. Is this increasingly likely today, Dan? Do you do something measured in hundreds of millions of dollars?

I think we have done acquisitions measured in the $100 million to $200 million, and I would say that and if you went back almost exactly ten years, one was up at $300 million a year, which was the Foster Wheeler USA. So I would say those have sort of been the upper end. But increasingly, the very large multinational commercial clients are looking for scale because they need geographic coverage at multiple locations, not just in the US and Canada, which can be spread out pretty far, but also in Europe and Asia. So some of the firms that are closer to transformative are looking for consolidation, and so we continue to run those.

I'm not signaling for those on this call that we have an imminent transformative transaction, but it is important for us to look all the time, do we have the capital to do that if necessary so we don't have to take that off the table as a consideration.

Now, with respect to the amount of acquisitions we have, and I've talked about 7%, 8%, 9%, 10% acquisitions this year, as we acquire into these markets that are growing, they will grow organically. I'll tell you, the firms that we've brought in in oil and gas have been the highest organic growers that have been with us over the past two or three years. So I expect, in the next year or two out, the organic levels to grow even faster, meaning less pressure on the requirement for acquisitions.

The last part of your -- I'll keep this brief. The last part of your question was what does the pipeline look like. It looks good, just for the reasons that I mentioned just now, that a lot of the biggest multinational oil -- especially oil and gas. I'm not saying other areas too, mining, are looking to consolidate their service providers. They don't want to have to administer 20, 30, 40, 50 service providers. They want to go to a one-stop shop that can provide it, especially coming out of this last economic recession where a lot of small guys just didn't make it. And so the last thing they want is to lose continuity by having a bunch of small folks, and so it does put additional emphasis on consolidation, especially from the smaller folks to join during firms like Tetra Tech, especially if you are an expert in water, environment, and environmental permitting.

Okay, so it's just kind of reading through some of your commentary here, and this kind of dovetails with the prior question that I don't think was fully addressed. But in terms of priorities for capital allocation, it sounds like there's a definitive timeline on the share repurchase you've kind of extended. It sounds like you're pretty committed to that. Would that be number one with oil and gas kind of the second of these key end markets that you want to inquire into. And then with solid waste, it's kind of more of an organic story, so I guess that's really not really a candidate for acquisition. So, it sounds like share repurchase, oil and gas, industrial water, solid waste. Is that a fair way to think about priority?

I'd say priority number one is organic, so I would put those a clear priority number one.

Yes.

And I would say share repurchase and acquisitions are tied for number two, because one is not exclusive of the other. And we have zero constraints from a capital or a cash flow generation that would cause us to say I'll select item number one or select item number two. It's not an either/or unless we voluntarily elect it to be. And we elected not to be. They're to be done in parallel and with equal emphasis.

Maybe a final, final question then to Dan, the state and local, that is really a big change from what we've seen in the last couple of years. What's the sustainability there? Is there something one-time that happened in this quarter, or is that book of business looking like it's going to deliver here substantially in 2014?

I talked, I think it was last quarter I talked and said we were at an all-time high backlog within our infrastructure work at the municipal level. Now, we are up at over 20% growth year-over-year. That is not what we are forecasting. I think we are forecasting between 5% and 10%, and I think it's at the upper end of that range. We do have some transportation projects that we announced a year ago that are coming through that help drive that number up for the quarter, but I do see it sustainable, and I think it was pretty simple. It's not just us. It's many of the others in the E&E industry and others that have seen this that no spending five years ago, four years ago, three years ago, have actually left a pent-up demand for wastewater, regulatory compliance and key wet infrastructure projects. Whether or not it's levees or whether or not it's flood protection or whether or not it's water recycling, it's all been pent-up demand that's coming through. And I think that it's going to grow at between 5% and 10% for the next several years. So, I expect that to be a continued strong market for us.

You are not seeing risk after these larger transportation programs burn off, I guess would that be late this year or early next year?

Yes, probably early next year, early next calendar year, early to mid next calendar year. But I do expect the growth then to go from a 20% down to 10%, which is what we forecasted. So I have built that into our guidance for the year.

Great. Thank you very much.

John Rogers, D.A. Davidson.

First of all, just back to the acquisitions for a second, there's obviously a lot of people looking, especially in the oil and gas sector, for opportunities. And I appreciate your comments on rough valuation metrics. But do you believe that you can do current deals and they can be accretive, especially in the first year?

Yes. And just a word of substance behind yes, we have not done -- I just want to reiterate this from my previous calls and I want to make sure it's not lost on our shareholders. We have not consummated a single acquisition in the past 10 years that has been dilutive on an earnings per share basis on a full GAAP EPS basis in the first year. It does hold the company to a very high standard. It's easy to be cash accretive in the first year. But I'm saying GAAP accretive and I don't expect that to change in the near future.

Okay. Yes, no, I mean you've done a great job with acquisitions. But okay. I just wanted to confirm what you're seeing in the market.

And then the second thing, in terms of the growth, especially on the commercial side where the market appears to be much healthier, is there any change in the pricing or risk structure of contracts, how do you get paid, that's meaningfully different than when you're working, especially for the federal government in the public sector?

The commercial work is more fixed price, and there is time and materials for the front end work we do. So that is a bit of a change. Typically, they are -- I don't want use the word smarter, but they are more focused on payment terms. So typically commercial has a slightly higher DSO because it's their own money. It's not the government's money or taxpayers' money; it's their own money. So that's sort of the trade-off, that commercial terms are generally a little bit more favorable. They expect you to jump immediately when they ask projects to be done. Time is often as important as the money, and so that's why margins are typically a bit higher. And in exchange for that, the most sophisticated commercial clients really know how to manage their cash too. And so typically you'll have a slightly higher DSO. So those are sort of the key trade-offs from the federal government to commercial.

Okay. And then the last thing is, in terms of your growth outlook for 2014, and I appreciate all the comments on the acceleration that you're expecting, but the ECS division, my impression was historically it's sort of the top end of your market, that that often leads your other segments. And maybe it depends on by industry. One, is that still correct? And what's that telling us right now about your other operations?

Well, it is true. It still continues to be largely true. It is the very front end of projects. It's where the consulting -- it's what we call the insuring consulting services. It's the evaluation at sort of the C level in the commercial feasibility studies.

Now, it's interesting. You can take a look at it being down 17% year-over-year and flat sequentially, and you can say if it's flat, will it then flow through to impact further down between our tests and our RCM? No, not necessarily. And here's why. The impact to the ECS group has been very narrowly focused on the mining and Eastern Canada. If you took those two out, you could actually see quite good growth across the rest of the sector. So the work that they are doing in Canada for infrastructure work in British Columbia and Alberta and even Manitoba and Saskatchewan is very strong. Work they're doing in oil and gas, since that's where it resides in Canada, is very strong. That's where all of our municipal water, wastewater work, is, up, across the board. US commercial is up. So you've got all this up, and you've got these two very well-defined markets in mining and Eastern Canada that are down. And it's that offset that gives it an appearance on a consolidated basis to be flat. But if you actually parse it out, that's not the case. The other areas that will actually hand work down to TSS and RCM are actually very strong.

Okay. Thank you. That's very helpful.

David Rose.

This is actually James calling in for David. Just going back to your oil and gas business, as I look at the revenues you generated for 2013, it's incrementally higher than what you had previously provided, going from $300 million to $325 million. So can you talk about what drove the incremental sort of growth?

And I know you also talked about maintaining sort of the $1 billion in growth rate for oil and gas. But is there potentially upside to sort of what you guys are building into your model and projections?

The first question is why was it stronger, where did we come from? It really came across -- all the sectors were up a little bit. It was not associated with a single operating unit or a single client or a single project. Our dry gas work in the US on the shale plays picked up. The front end water sourcing actually was up, so for the upstream.

The midstream design work for the Bakken, work we do here was up very strong. Canadian turnkey work was up strong. So it was really very spread very broad, so it wasn't a single area.

Now, as far as our $1 billion goal of achieving a $1 billion business in this we said in the next three to five years, when we hit that number, we will not stop there. We will then reestablish the new growth rate and a new target. But I want to keep that $1 billion as a very clear concrete scale that we want to achieve. And James, I assure you, as we close in or hit this, the management team here has been characterized by our business groups of continuing to move the goal out to them as they get closer. I don't see any reason we would change that here as we get closer to hitting that $1 billion.

Okay. And lastly, I know you answered a question on margin expectations, and I know you guys expect to benefit from favorable sales mix and other improvements. But are there -- and I've noticed also that you guys have driven your SG&A down as a percentage of net revenue. Is that something we should expect going forward? Are there other sort of areas of improvement that you guys are doing to bring sort of your -- improve your margins? Thank you.

Yes, I think, over the long-term and over the last couple of years, we have looked at our SG&A, we've continued to manage that. So even as our revenue has grown, we haven't allowed our SG&A to grow at the same level. So we have been able to take advantage of that and do more with less, and we'll continue to do that.

We are committed, even though we believe that we are the technical leaders, the thought leaders in a number of technologies and technical expertise, that does not mean and does not translate into the highest price. We are the best value. You get the best technical provider at the most reasonable price for a combined best value for your product in every case. So, we will remain efficient and provide our clients the best value for all of the solutions on our projects.

With that, I'd like to thank all of you for your questions and interest in Tetra Tech. And I really look forward to speaking to you again next quarter. It will be at the beginning of calendar year 2014. And I hope you have a great rest of the week and holiday season. Thank you.

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