Tetra Tech Inc (TTEK) 2015 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 Act of 1995. These include statements concerning future events and Tetra Tech's future financial performance. The statements are only predictions, and they 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 at Tetra Tech's website. At this time I would like to inform you that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

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

Great. Thank you very much, Ginger. And good morning and welcome to our fiscal-year 2015 year-end and fourth-quarter earnings conference call. While Steve Burdick, our Chief Financial Officer, will present the specifics of our financials, I will start today's presentation with a brief overview of some of our key financial metrics.

In the fourth quarter we had solid performance and concluded the fiscal year firmly focused on our differentiated water and environmental services. In the fourth quarter we had a profit margin of 13% from our ongoing operations of the two segments of the water environment and infrastructure group and the resource management and energy group, achieving our profit performance goal and delivering the highest margin that we've had in 15 consecutive quarters.

Operating income was up 29% year-over-year from our ongoing operations in WEI and RME segments. And our diluted earnings per share was $0.50, which is up 44% from the prior year.

Our ongoing operations generated $561 million from revenue and $422 million in net revenue, down slightly from the prior year due to lower federal spending and headwinds in our mining and upstream oil and gas areas. Operating cash was $29 million for the quarter, up 120% from the prior year.

The ongoing operations also increased its backlog by 4% year over year, with over $660 million in new orders for the fourth quarter. The wind-down of our remediation and construction management segment is proceeding well, with the RCM backlog down significantly from last year and with now only $61 million remaining in additional work to complete as we entered this fiscal year, which began on October 1.

While we had a solid fourth quarter and a strong fiscal year 2015, we were not immune to the headwinds in the industry -- especially in the mining sector. As a result of the prolonged downturn in the mining sector and the absence of any near-term catalysts in commodity prices, we took a non-cash goodwill charge of $61 million at the end of our fiscal year, removing all of the remaining goodwill associated with our mining practice.

For fiscal year 2016 we have reassigned our underutilized mining staff and resources to focus on more diversified environmental and water-related services, in addition to continuing supporting our mining projects such as regulatory-driven mine closures. For our RCM segment that we're winding down, we had $17 million in revenue for the quarter and a loss of $5 million in operating income for the fourth quarter.

I would now like to present our performance by segment for this past quarter. The WEI segment had net revenue of $179 million, which is down 5% year over year, with an operating margin of 17% that generated an income of $31 million for the quarter. WEI's strong margin was supported by seasonally high margins in our Canadian field operations and favorable project closeouts in our federal and commercial business in the United States.

RME's net revenue was $243 million, or down 2% from the prior year; while operating income was $25 million for the quarter, up 52% from the prior year. RME's midstream oil and gas business continued to win new work and grow throughout 2015. And our midstream oil and gas pipeline work now comprises about 85% of all the oil and gas work that we do throughout the Company.

Now I will address our fourth-quarter performance by customer. Revenues from our US commercial claims was up 11% and represented our largest customer segment, at 33% of our business for the fiscal year. US commercial is up 9% sequential as well. Revenue from our state and local clients was up 12% year-over-year in total revenue due to an increase in the use of specialty subcontractors and our management of grants for our clients. Our net revenue was also up, although a more nominal number, at about 1% year over year.

Our US federal revenue was down 11% year over year due to slow orders, primarily from the Department of Defense. The civilian federal work that we do for agencies like the Environmental Protection Agency and the Federal Aviation Administration was relatively flat, as these budgets were more stable and their orders came through on a more consistent basis throughout the year.

Our international work was down 10% for both gross and net revenue as a result of the downturn in mining and the upstream oil and gas markets in our Canadian operation. International work for the year represented approximately 29% of our overall business.

I would now like to provide a brief recap of our performance from ongoing operations for the full fiscal year of 2015. For the year our revenue from ongoing operations was approximately $2.2 billion, and net revenue was $1.7 billion, essentially the same as the prior year. Our operating income, however, was $154 million, up 12% from the prior year, resulting in an earnings per share of $1.63, up 30% from the prior year.

And our backlog, which is our best measure of future performance, was up 4% from last year. And finally, operating cash from ongoing operations was $134 million or up 5% year over year. However, we did resolve certain outstanding claims that contributed another $29 million to the Company, yielding $163 million in operating cash, which would put us up 28% from the prior year.

Backlog for our ongoing operations was up 4% year over year and up 5% sequentially on a constant currency basis. The increase was driven by strong orders from both our public and private-sector clients in the fourth quarter. In the quarter we added $600 million in contract capacity with USAID -- that's the US Agency for International Development -- and we were awarded over $660 million in new orders just in the fourth quarter, which included $112 million from the US Department of State and USAID orders; $231 million in new orders from our commercial clients; and $128 million in new orders from the Department of Defense, including our clients with the Army, Navy, and Air Force, for a broad range of projects addressing water and environmental issues. Now after a challenging year in the federal markets, especially the Department of Defense, here at Tetra Tech we see it very encouraging to see our Department of Defense backlog trending up as we enter fiscal year 2016.

Now I'd like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to review the details on our financial performance. Steve?

Thank you, Dan. So as Dan talked more about the full-year 2015 performance, I'd like to focus a little bit more on the Q4 results. And before I discuss the result, I'd like to briefly mention one accounting adjustment for the quarter.

So as Dan had mentioned, during the fourth quarter we took a non-cash goodwill impairment charge of approximately $60.7 million. This write-down relates exclusively to our global mining group and takes the mining-related goodwill to zero.

So upon the completion of fiscal 2015, we decided to move portions of our mining practice into other operations to better align our environmental and infrastructure business on a go-forward basis. And as such, we wrote down the goodwill associated with that mining practice.

So beginning in fiscal 2016 we will no longer maintain a stand-alone mining business, although we will retain our capabilities in our operations. So the goodwill impairment charge, as I discussed, is a non-cash charge. And the financial figures I will discuss today for both the fourth quarter and some of the fiscal-year numbers exclude any goodwill impairment for the year-over-year comparison purposes.

So overall in the fourth quarter, we saw solid performance from both our WEI and RME operations. Net revenue and EPS for ongoing operations fell in line with management's expectations for the quarter. In comparison to last year, gross revenue for the fourth quarter was $578 million, or down about 7% or about $44 million. This decrease was primarily related to our decision to (technical difficulty) interest rates negatively impacted revenue for the quarter. So excluding (technical difficulty) for the same reasons that gross revenue declined.

On a constant currency basis net revenue for ongoing operations was down about 4%. So although lower than prior year, our net revenue results were within our expectations and the guidance range, due to the strength of the water and environmental business -- specifically, our US commercial business, where net revenues improved about 9% over last year.

Our operating income was $40.7 million for the quarter, which was up about 64% from the fourth quarter of 2014. So overall, our operating margin was about 9.5%, but our operating margin was close to 11% for our ongoing operations. The improved operating income was primarily driven by solving project execution in both our WEI and RME groups.

So turning to EBITDA, EBITDA for the fourth quarter was about $50.4 million, which was an improvement of 37% on a year-over-year basis. The EBITDA margin for our ongoing operations was a strong 13%, and with a full year of our segment realignment in place, we are now in the fitting from an enhanced margin profile, which we expect to continue to be strong in 2016.

So I'd like to now review some key measures in our income statement. So SG&A was about $44.8 million for the quarter, which is down $3.7 million or about 8% from last year. This decrease in SG&A was consistent with our planned decrease in overhead and back-office costs as a result of winding down our non-core construction markets. In addition, intangible amortization costs for the quarter were lowered by about $1.2 million.

The tax provision for Q4 resulted in an expense of about $9.2 million, and the effective rate for ongoing operations was 32%. The tax rate was 42% in Q4 and 50% in fiscal 2015, which was impacted by the nontaxable nature of the goodwill impairment that we spoke about earlier.

Diluted earnings per share was $0.43, which is up 21% year over year. And for the ongoing operations, diluted EPS totaled $0.50 per share, which was an improvement of 44% on a year-over-year basis.

So looking at some highlights of our working capital and balance sheet items, with the continued wind-down of our RCM business, we saw a 9% decrease in our accounts receivable balance. By the same token, our accounts payable balance decreased 14% to $150 million, due to the lower subcontracting activities for the year compared to 2014.

On a net debt basis, net debt decreased about $24 million to $57.6 million, which is down 29% from the previous year. So we remain fairly unlevered at about 0.3 times on a net debt to EBITDA basis, providing us the opportunity to continue to invest in our organic business as well as make strategic acquisitions.

So in addition to our reduction in net debt, we saw positive cash from operations; and, as I will explain in a few slides, we maintained our balance capital allocation strategy by allocating about $118 million of capital to shareholder returns through dividends and share buybacks in fiscal 2015. In addition, we have $100 million in approved share repurchases remaining under our current buyback program.

So turning to the cash flow statement, as noted in my discussion of the balance sheet, we had positive cash flow from operations for both the quarter and on a full-year basis. For the quarter, cash flow from operations totaled $28.7 million as compared to $13.1 million in the previous Q4. On a full-year basis, cash flow from operations improved 28%; and cash flow from operations for the year was $163 million, which translates into $2.65 on a per-share basis.

CapEx for the quarter was about $4 million, which is a decrease from last year. And so for the full year, CapEx spending totaled $24 million, which is in line with our initially forecasted range of $20 million to $25 million for 2015. And total CapEx spend continues to represent about 1% of our total annual revenue, which we anticipate will continue into 2016.

Days sales outstanding of 85 days is lower from last year by about two days. And so excluding RCM and some of the claims that we are continuing to manage, the aggregate DSO in our two front-end segments was about 76 days. Our overall DSO is not yet in line with our expectations, and we are continuing our efforts to reduce that days sales outstanding to below 75 days, with an ultimate goal to be closer to 70 days.

So before I turn to call back over to Dan, I'd like to take a few moments to revisit our capital allocation strategy and the value that we delivered in 2015. So we continue to focus on improving our capital allocation by also maintaining a balanced strategy between acquisitions that would accelerate the growth of Tetra Tech as well as paying out quarterly dividends and making share repurchases that deliver value to our stockholders.

So in order to achieve this balanced strategy in 2015, we paid $18.2 million in dividends, and we repurchased $100 million in share buybacks. And on November 9 our Board of Directors approved Tetra Tech's seventh consecutive quarterly dividend of $0.08 per share, which will be paid on December 11 to shareholders of record as of November 30. And based on our current stock price, this dividend payment represents a 1.2% yield.

I'd like to again emphasize that our commitment to continue to pay a quarterly dividend and repurchase shares will not in any way impact our growth strategy from either an organic or acquisitive standpoint. Furthermore, in addition to strong cash flows that we have received out of our operations, we now have increased borrowings under the terms of our amended credit facility.

These enhanced terms will provide us even greater flexibility to increase our borrowings at lower and more competitive rates as we need. And as Dan will discuss momentarily, our focus continues to be on investing in long-term growth markets that promote our organic growth and sustain our market-leading positions in water, environment, and the energy sectors -- both with our public infrastructure and commercial industry clients.

And we will also maintain or remain active in the M&A market. We recently announced our intention to acquire Coffey International, which is world-class consulting and engineering firm headquartered in Sydney, Australia. So ultimately, when making acquisitions, we look to acquire leaders in our space and in their space, such as Coffey, who will supplement and expand our consulting and engineering capabilities in the water, environment, and infrastructure and energy markets.

So with that said, I will now hand the call back over to and to discuss our 2016 outlook and growth strategy in a bit more detail. Dan?

Thank you, Steve. Almost 50 years ago Tetra Tech was founded on the delivery of science-oriented services in consulting and engineering, with a commitment to fiscal discipline. And by delivering these services, we've evolved the Company into a global network of 13,000 scientists engineers, with projects in over 100 countries, and an impressive track record of cash generation and financial performance, some of which Steve Burdick just presented. These are the services that have propelled Tetra Tech to its number-one ranking by Engineering News-Record in water for the past 12 consecutive years and environmental management since back in 2008 -- and, most recently, a number-one ranking in solid waste, which actually we achieved in 2012.

Our approach here at Tetra Tech of leading with science differentiates us significantly in the market price (sic), and it provides us higher margins, less competition in the markets we serve, and provides return on investment for our shareholders both now and into the future. Now, we look very carefully for firms that we can add to our team that advance our strategy to be the premier worldwide provider of consulting and engineering services in the markets that we compete in.

Now, we just recently made an announcement that we've made an offer to acquire Coffey International Limited, who I expect to be an excellent addition to our team. We're really excited about this and looking forward to it.

Now I'd like to tell you a little bit more about Coffey and our rationale for the acquisition. Coffey is a well-respected based firm in Australia, founded back in 1959, with over 3,000 staff and an annual revenue of $400 million -- in fact, just a bit more than that. Their addition to Tetra Tech will increase our annual revenues by approximately 20% on a full annual basis.

Now, technically, Coffey is known for two key services in two areas. The first is international development; I'm going to speak a bit more about that in a moment. And the second is geo-services or geotechnical engineering, where they have an excellent reputation in this area; effective market leadership in those geographies; and a network of offices that are highly complementary to our own -- especially in Australia, Asia Pacific, and the United Kingdom, giving us significant new reach for our services.

Now, our acquisition strategy is to identify and acquire firms that provide complementary skills and resources -- which Coffey does -- adds new geographies, and promote our number-one position in the markets we serve. And Coffey meets all three of these criteria. The addition of Coffey propels the combined entities of Tetra Tech and Coffey as an organization into the number-one position as a provider of international development services worldwide.

Put together, Coffey and Tetra Tech will be able to pursue work across multiple international development funding agencies, like USAID -- that's the United States Agency for International Development; UKAID, and AustralianAID, with a combined annual budget of over $90 billion from those three entities. That's what their annual spend rates are.

Coffey also provides us with a platform to provide our engineering and consulting services in Australia in the Asia-Pacific region. As I mentioned earlier, since they were formed back in 1959 Coffey has worked across all these regions to provide geotechnical engineering services. And today this geotechnical expertise is a fundamental requirement that has to be complete in advance of infrastructure planning and design projects.

Now, Australia itself, where Coffey is the strongest, is expected to enter into a new era of infrastructure investment, estimated at approximately $100 billion over the next decade through a combination of federal and private investments. This is an excellent time for Tetra Tech and Coffey to join forces to provide a much broader set of services to Australia to support this infrastructure development.

Now, if you are following along with the webcast, I've summarized here the four key markets that we are focused on as a combined company. The growth plan is targeted to where there are changes in the marketplace, such as markets where there's new regulations, or new technologies, or just new investments by our clients. These are areas where the payoff begins now and continues into the long-term. These are markets where our lead-with-science approach differentiates us and provides us with projects that have both high margin and low risk.

Water and environment are the markets where we are already well established. And together we can leverage Coffey's presence and position in the geographic locations of Australia and Asia Pacific to cross-sell Tetra Tech's differentiated water and environmental services.

International development combined with our strength in our respective markets and together will allow us to provide an opportunity to leverage the billions of dollars that Tetra Tech has in existing current contract capacity that we hold today and utilize our worldwide staff resources and experience to win new programs and increase revenues even further.

And in oil and gas we continue to focus on successful midstream strategies that we've employed here at Tetra Tech, both in the United States and Canada, during this period of low oil prices. Now while we are also increasing our services that are supporting the early investigations and feasibility studies in LNG terminals, Coffey does bring us new additional expertise in LNG. And they have long-term relationships with these clients, which will add up and open up a new market for us.

Now I'd like to discuss two of these growth areas in a bit more detail. Tetra Tech's biggest differentiator is providing support to both our public and our private clients in solving their most important and complicated water problems. Our clients have two primary issues concerning -- or concerns that we support.

The first is where they have too little area, too little water; and that's in areas where there's primarily droughts. And the second is in areas where they have way too much water, and that's areas where they have floods. We provide an integrated water management solution which identifies new water supplies by treating and reusing wastewater, capturing stormwater and adding water to local aquifers, and even treating contaminated groundwater to provide new water supplies.

We also provide flood management services such as assessing and updating designs for flood management structures, like dams and levees. And in the event of major hurricanes or storms, we assist communities both before and after those events.

Now, smart water is rapidly emerging as a way to address both extremes. That's where there's both too little water or too much. Smart water systems can be used to monitor, manage, and control entire water systems. Smart water is where we are introducing emerging technology, with our long-term experience and institutional knowledge, to provide our clients with the tools they need to efficiently control their water systems on a real-time basis. And this is a very fast growing area for us.

In our environmental business we help our clients to address new regulatory requirements with innovative solutions built on our high-end science and decades of experience. This is where we are helping our clients to address new regulations such as the coal ash waste management regulations. And we're preparing for some new recently announced water treatment requirements for leachate that's being discharged from energy-producing facilities.

In urban areas, especially in the United States, a resurgence in inner-city development is restarting and creating new opportunities for us in remediation and restoration. So, for example, we are working on privatization of military facilities. This is where we are restoring land so that it can be returned to local communities for multiuse redevelopment. We are also working on greening of our inner cities, and this is where we are combining addressing regulatory water programs with community redevelopment, such as the deployment of green infrastructure in Detroit, Michigan.

With that, I would now like to provide our guidance for the first quarter of fiscal year 2016 and for the entire year of fiscal year 2016. Our guidance is as follows: for the first quarter our net revenue guidance is a range of $400 million to $450 million of net revenue, with an associated diluted earnings per share of $0.35 to $0.40.

For the entire year of fiscal year 2016, our guidance is a net revenue of $1.65 billion to $1.85 billion, with an associated diluted earnings per share of $1.70 to $1.90; and our cash earnings per share for the entire year, a range of $2.70 to $3.00 per share. Now, as in past years, we do have some assumptions that our guidance are based on. We do estimate intangible amortization of $15 million for the year or $0.17 per share, our effective tax rate of 32% for the entire year, an estimated 60 million shares -- diluted shares outstanding.

And our guidance excludes -- and that includes Coffey -- it does exclude any contribution of revenue or income from any acquisitions that would take place after the -- would take place subsequent to this phone call. It also does assume that we have no material fluctuations in our foreign exchange rates of currencies where we perform work overseas.

So, in summary, we've delivered solid performance in the fourth quarter and for all of fiscal year 2015, achieving a 13% EBITDA margin for this past fourth quarter. We've returned $118 million in buybacks and dividends to our shareholders in fiscal year 2015. And our US commercial end markets are improving, and we have continued strength in water-related services all across North America, both in Canada and the United States.

Now, our strategic acquisition of Coffey, when complete, will propel Tetra Tech to a number-one market position in international development and significantly extend our geographic reach. And finally, our growth in backlog for services aligned to our future growth strategy are going to support our confidence in our 2016 guidance and our future prospects.

And with that, Ginger, I would like to open the call up for questions.

(Operator Instructions) Tahira Afzal, KeyBanc Capital Markets.

Hi, guys. This is Sean on for Tahira today. So I guess fiscal-year 2016 guidance looks pretty good, but I was hoping you guys could give us a little more color on the end-market outlooks embedded in that guidance?

If we could start with oil and gas in particular, what's embedded in there on the midstream side? And any granularity we can get on what you are seeing in the US versus Canada would be very helpful.

I'll start with oil and gas. We've actually seen a bit of reduction in 2015 overall in oil and gas, but that slight reduction was almost completely attributed to the upstream reduction in upstream oil and gas in the oilsands in Canada.

Our midstream was actually up in 2015, as I had mentioned in the prepared remarks. And we see with both the backlog we have now and the new opportunities, we expect it to continue to grow into 2016. So our guidance was based on a slight increase in our oil and gas work, and we expect that increase to be all associated with midstream, both in the Canada and US, with a flat to continued soft, maybe even slightly declining in the upstream.

I say only slightly declining because we saw significant reduction in 2015, and we expect it to sort of be working off of the low point. So oil and gas should be flat to up slightly for the year.

Our US commercial work is actually one of the strongest areas, along with our US state and local. Both of those will be up quite materially year over year.

Our US federal -- that was really one of the big headwind areas for us in 2015. Our assumption that our guidance is based on is a flat federal business from 2016 from 2015.

I will say that I didn't speak about contract capacity in my prepared remarks, but we do feel a bit more encouraged there. So I'd like to say that are guidance is a bit conservative. Some things that could drive us to the top end of our range would be a pickup in federal. We did add almost $1 billion in federal contract capacity in 2015, particularly late in the year. So I think it positions us quite well.

And I think as I mentioned just briefly in my prepared remarks, that includes the Department of Defense work for really all three branches in the Corps of Engineers -- so Army, Navy, Air Force, and the Corps. So we do -- our guidance is based on flat federal, but I think we have some good opportunity there.

Okay. Thanks. And I mean, in terms of the next level of detail, what are you guys expecting from the California water infrastructure opportunity? Has there been any change on the timing or scope of those growth opportunities?

Well, it's typical of these types of projects. It has increased -- revenue has increased, but it's been slow. And most of it is associated with studies, and permits, and the upfront work. Typical work to detailed design and even construction oversight or owners' engineer work typically trails by anywhere between one to two years, so forward eight quarters.

But the number of projects has picked up significantly. But I will say that the upfront feasibility studies alternative work is relatively small dollars. And generally speaking, about half of the dollars have been set aside for the funding from the bond issuance, or set aside for stormwater or capturing water that comes down during storm events.

So that's a lot of work with: where can you put recharge basins? How can you capture it? How can you divert it into a retention basin? So there is it lot of geospatial work, which is a fancy name for a lot of mapping, and planning, and floodplains. It's a lot of mapping work, but the big dollars come later when it moves to design work and actually implementation.

Okay. So basically it's a pretty modest contribution in terms of growth into 2016 on California water infrastructure?

Yes.

Okay. And then last one for me, and then I'll get back in queue -- what would you guys anticipate Coffey would do to your guidance in this fiscal year? Would it be accretive end-of-year, or how are you thinking about that?

Well, we are going to provide details when we close Coffey. We expect that to happen sort of in the early part of Q2 for us. We do expect it will be accretive on a GAAP basis in the first year. But we will provide specifics, both on the revenue and income and EPS contributions, when we close. And I would expect that will be in our next conference call.

Okay. Thanks a lot, guys. Appreciate it.

Andy Wittmann, Robert W. Baird.

Great. I wanted to talk a little bit about the margins. Dan, can you just talk about maybe a couple of different aspects of this? Can you talk, one, about the mix of business -- how that's shifting in 2016? Can you talk about -- where was I going with this -- yes, the mix as well as just basically the comparison that you have versus last year's margins, and any opportunity you see to improve them, I guess, would be the core questions there.

Let me work and answer that with your second aspect first, and then I'll address the business mix.

First is the comparable to our past margins. And I know that if you take a look at our business and see that we have 13% EBITDA in the fourth quarter, that's quite a high mark for us. I commented that that was the highest in several years for us -- in, I believe, 15 quarters consecutively. But I'll tell you that that's what we expect.

Now, the first part, when you take a look at the two operating business groups -- you look at 17% from WEI. At one aspect you look and think that that's quite high, but in 2014 the fourth quarter, we were at 16.5%. So essentially the same number. Now, it's both excellent performance on existing work we have; but when we finish work and close out projects, we quite often will have pickups in the event that we finish the projects ahead of schedule or the below budget. And those would contribute.

Typically that's done in the fourth quarter. That's where work is completed at the end of the summer or the end of a government fiscal year. So that number is not unusual; and in fact, I would expect that we continue in similar levels.

The resource management and energy margins were actually below our expectation for the fourth quarter and, honestly, for fiscal year 2015. That was because of the very acute headwinds in upstream oil and gas that really started sort of in the second quarter and continued through Q2, Q3, and Q4.

And the mining work continued to be difficult for us. As we continue to downsize that work based on the amount of revenue we have, I expect that R&D will come up. So the business mix, I think, will -- we are doing more commercial work within WEI; it's not just government. We are doing environmental work for large commercial clients, which would help improve the margins we have there.

And I think RME -- as these headwinds, very acute headwinds, of upstream oil and gas in the oilsands particularly get more normalized, I can expect better numbers out of RME. So while it was a good year in 2015 -- some say a very good year -- I think we can do better. I mean, I think it's a combination of the business mix, of decreasing the amount of headwind work we are doing in oilsands and mining, and increasing that in commercial work within WEI.

Great. That's helpful. And then just kind of going back to the top line a little bit, as we went around kind of your end markets -- US commercial, state, and local, you said, it sounded like, strongly up; federal, flat. International is the area you didn't really touch on, but that sounds like it's flat to down, with ongoing mining headwinds and some of the other resources. Is that a fair way to break down the end-market distribution of your growth outlook?

It is, it is. Although I will say that the municipal work in Canada has continued to be strong. We've actually seen some stimulus programs in Alberta that are being passed. So we do have headwinds in mining and upstream oil and gas in Canada, but I will say the mining work has come down for us dramatically. So the amount of impact of shrinking mining work is relatively de minimis and will be equal or offset by the strong work at the provincial and city levels in Canada.

Okay. So when you boil that down versus the relative importance of those things, you have got about 45% of the business that you think will be quite strong, and the rest of the business kind of roughly flattish. That's probably is, what, about 3% to 5% constant currency organic growth rate that's implicit in your guidance, then?

Yes, that's a great calculation, Andy. If you take the midpoint of Tetra Tech's guidance for Q1 and adjust it for constant currency -- and Q1 will be the most difficult foreign-exchange constant currency calculation for us. For Tetra Tech almost all of our foreign exchange is affected by Canada. That represents essentially all of it.

And we've seen a 15% to 20% reduction in the valuation of the Canadian dollar. When you normalize that, the midpoint of our guidance for Q1 would impute a 2.9% -- so round it off to 3% -- organic increase. And for the year you actually see that up at just under 5% for the year. So we expect, as it abates with the FX comparisons after first quarter, the organic will actually show a little better. So your calculations are exactly on.

All right. Then I'll just finish up with one kind of technical question, maybe circle back later in the queue. But Steve, can you just remind us -- the implications that the RCM wind-down and the $61 million that's left in that backlog has on your cash flow? Are you at a state where you are kind of pay-when-paid? Or is that $61 million a cash drain, where your cash flow will improve more materially in 2017, when those projects are largely complete?

I think as we see the completion of those projects, we will be collecting the receivables that are outstanding at the end of this year. And that will offset a little bit of the additional cost growth that we saw. So it should be relatively flat for the next year coming up.

So these are already incurred receivables; the receivables that you have are for work that's already been done. Is the $61 million basically incremental cash burn that's out of your pocket? Or is it pay-when-paid type of work?

Yes, our -- that $61 million in backlog represents the revenue to go as well as the cost to go.

Okay.

Andy, just a note on that -- most of this work -- the $61 million is gross revenue or total revenue. Most of that work is subcontracted out. So only a small part of it is self-performed. That's the part that we're going to be out of on a cash basis as we go.

So during the year it's probably only 20%, 25% of that number. The rest is pay-when-paid on subcontractors. So the cash impact only is equal to when we get paid by the clients.

But I want to make a note that we had $163 million in cash from 2015, and you can see our number for 2016 appears to be nominally up. We did have about $30 million -- and I talked about this briefly -- in cash that came from settlement of claims.

Now, the amount that we would receive on claims in the future could actually drive that number well over $200 million, depending on the timing and resolution of these claims. So if we are successful, it will show up in cash during the year. If we are not successful and none of it happens, we've already spent that money. Those are dollars in cash that were expended back in 2013/2014 and last year in the reduction in the backlog.

So I think that, with respect to cash, you are focused on this: the outcome of our forecast -- while we have $60 million to go, most of that is sub. The potential of cash generation from RCM could actually be quite substantial for the Company in 2016, and we've not incorporated that into our forecast.

Got it. Thank you.

Mike Shlisky, Seaport Global.

First, a quick one -- in fiscal 2016 and going forward, does any overhead come out of your costs by not having a stand-alone mining business?

It does, Mike, a little bit. We actually had -- we called it GMP internally, global mining practice. We consolidated the units. We tracked the goodwill, which you saw in the past quarter take place.

So what we did is by reassigning the resources into other operating divisions, where they can actually utilize and work on backlog we have, we were able to take out the overarching management. But I will say, we've been pretty aggressive on that over this past year, in the costs have been -- of downsizing that were incurred incrementally through the quarters.

So you probably see only about $1 million or $2 million of overhead. It's generally in our overhead, not our G&A that was in the global mining practice. So, yes, we will see a reduction in our indirect cost reduction; but on an annual basis, it's only like $1 million or $2 million.

Okay. Great. I also want to touch on your infrastructure-type business. We are coming close to a potential highway bill that could open up some funding for some federal dollars for some roads and bridges. I was wondering if some of the road builders out there that we have talked with are thinking 2017 might be when they start seeing actual work. Does this mean that your fiscal 2016 might be seeing some elevated traffic study work or design work? And maybe secondarily, is there any high-margin work in there when you get into things like crossing water drainage and stuff like that?

Mike, there is -- the work that we do is primarily around the environmental permitting. So it's clearance of right-of-way; in the case of transportation, an extension of highways for the interstate systems; some bridgework with respect to monitoring and evaluation of sediments through the waterways.

But generally speaking, I have had a few questions on what's the impact of the highway bill either passing or not passing? It's relatively de minimis for us. We do not have a significant transportation practice here in the US.

Now, we do do very early work that was relatively -- oh, I hate to use the word immune -- but not affected by it passing. Most of the big dollars on the highway bills don't cause the environmental studies to go forward or not, because they still want to get these projects in a position to go forward. They have a big impact on the detail designers and the constructors. And that's not really our marketplace.

So passing or not passing the highway bill is relatively irrelevant to us. We sometimes get a bit more monitoring work for stormwater pollution prevention while they are doing excavations and field QA/QC work of our engineers. But overall I'd say it's a very minimal impact to our business.

Okay. Great. And then I'll just throw in one quick Coffey-related question here. In the past, Dan, you have said in the US, the environment politically on aid funding is generally not a huge deal -- whether it's one party or the other in charge; most of these programs generally stay stable through time. Is that different? Are there major swings in the funding in either Australia or the UK, to the best of your knowledge? Is there anything we should expect as far as things being a little more volatile in that business versus the US?

Actually the UK has -- the UK has actually become more stable than even the US. So the United Kingdom has actually targeted 0.7% of the GDP. So they've had to go from a very low level, and you saw sequentially quite a few projects ramp up there as they committed -- as their commitment to this funding has increased to actually hit that percentage. So I guess you can say that number could move with respect to the volatility of the overall GDP.

In the case of the UK, things have actually looked quite good and things have actually been growing. So there's been sort of this double positive impact: one, they've been moving up to 0.7%. They are getting quite close to that now; but then it's also compounded with the growth of the GDP. So you have had this multiplicative increase in the funding and opportunities.

So we feel pretty good about that. Tetra Tech itself does very little work -- we are a subcontractor to some of the UK Aid agency there -- they call it DFID, but I'll refer to it as the UK Aid. But Coffey is a top 10 player there. And I think that our technical capability and international reach and with their top 10 position, we expect to move up several ranks there.

With respect to Australia, it's moved up and down based on sort of the economic challenges. And with a very heavily based commodity economy, they have seen some headwinds there. But we think that they've largely been put in place. Coffey has been either the number one provider of services for AusAID or tied for number one for many, many years.

And what we've seen is multiagency and multilateral funding of large projects in the Asia-Pacific -- and what I mean by that is this is where USAID puts money in, UK Aid puts money in, and AustraliaAID puts money in -- sometimes matched with Asian Development Bank, JICA out of Japan, and even World Bank. So it's these very large collective programs. And they will be in Tetra Tech through -- I believe we will be the largest water infrastructure supplier to USAID. We will with Coffey move to number one in AusAID, and we will be a top 10.

I think there's no other firm that can say they are either number one or are in the top 10 in all three. So this should situate us very, very well for these multilateral programs that we expect to have funding, primarily through the Asia-Pacific.

Nice. Thanks. I will hop back in queue. Appreciate it.

John Rogers, D.A. Davidson.

One follow-up on Coffey, and I know you are going to give us more update when you close, but in terms of the way they report their business -- the geo-services project management -- is that almost or primarily what you would consider WEI work?

Yes and no. I would say about half. So they work that they do for transportation and for infrastructure for cities would clearly be water, environment, and I -- the infrastructure work. So the one thing that's if you are in this business, it -- I know those listening that are actually in the engineering and consulting field would be insulted for me to spend a moment on this. But geotech work or geo-services work is required on every infrastructure project, whether it's a building; a bridge; a road; a water treatment plant.

None of those can be put in place without a foundation. And the more complicated the geology and the foundation, the more extensive the geotechnical or geo-services work. So, yes, it would be on the infrastructure side for cities and municipal work, or roads, for water treatments, for buildings. And again, Coffey is a world leader in this.

But they also do that work, and where their biggest revenues had historically been is on the commodities side, which is for resources -- natural resources. So resource management. And that is: you don't do mining work unless you know a lot about slope stability. How hard is it to dig out? What type of tunneling? What type of shoring protection that has to take place?

So historically, if you went back to the mining super-cycle, the demand for their services were just off the chart. So I would say today more of the work and we see that the near-term opportunities are more in WEI, but I would say historically very acute demands exist in resource management work, and even in energy with respect to foundations for power plants, pipelines of that type. So I would say both.

Okay. So when we think about the way Coffey will flow in -- I mean, the 75% of it is going to end up in WEI for the way you think about it?

Well, I think because of the your aid work -- so let's take a step back. 60% of the revenue approximately is in international development. International development resides within our RME group, because a lot of the work that we've been doing for aid is on the energy side in infrastructure.

So that leaves the geo-tech being kind of evenly split. We are not going to split Coffey up, and I think our initial thoughts are because of the historical large support for the commercial side of the business, our resource management and energy is likely to go RME, since the international development is clearly and exclusively RME. So we will make this final decision when we close, but right now we are actually thinking the entire entity will go into our RME group.

Oh, okay. Okay. Thank you. And then just in terms of how you are seeing the market play out for federal opportunities -- I know in the past, Dan, you have talked about specific programs that you were going after or whatever. Can you give us a quick update, and especially where we are in the political cycle and what programs we should be focusing on relative to Tetra Tech?

Well, I think we've had a -- I would -- so there's some things in 2015 I feel really good about with the Company. I feel good on the progress on the revenue side, with the reductions with RCM as one of the things we feel really good about. We feel really good about the margins coming out of WEI, feel really good. We feel really good about the work coming out of the midstream oil and gases I've talked about. We feel we've done extremely well.

One of the areas that I think we've done very well -- but you don't see it yet, but we hope to see it in 2016 -- is we've done exceptionally well in winning very large contracts. And that's why I talked about the $2 billion in new contract capacity. That's like a 20% increase -- just a little under that -- in contract capacity with the federal government, largely in international development for USAID. And actually, you have seen some announcements, and I think there are more to come, with respect to new large contracts being awarded for Department of Defense.

So I think that with respect to the federal government, we should see conversion of contract capacity or contract value. And I just want to say one word, because I think we are quite unique in this aspect -- we win a contract, but we do not put contract capacity either as factored or any other manner into our backlog. We actually have to have a task order.

So we don't just unilaterally say our backlog is up because we have a factored component of a new contract that we win. I know that's a common practice in our industry. For me personally, I can spend and put people to work on task orders we've been delivered. So I think both having larger contracts and -- what we've seen here at Tetra Tech -- I don't know if I'll say this for the industry, although maybe, is we've seen a election phenomenon. When the Presidential election comes up every four years, typically the year leading up to it we see more federal spending. Not just contracts -- spending.

And it goes back to they may be successful or unsuccessful based on their political platform; that's up to them. But they don't want to be excluded by having put people out of work or put an economic hardship on the economy. So this is typically the old proverbial a chicken in every pot -- spend money, make people feel good. And then if we can convince them based on our political position, it will stand on its own. So this is typically where we see better spending. So we're hoping to actually see that starting right about now over the next year.

Okay. And then last thing is just in the quarter, and maybe it's the way you have classified some of it in your inner segment and other, but it looks like the overhead costs were up a little bit in the quarter. Was there anything unusual there?

No. I think overall, if you look at our overhead and G&A cost this year compared to last year, they are actually down on an overall Company basis. And that was a result of us deliberately taking those costs down as we decided to come out of RCM.

Yes. And one thing I'll say, John, if you do take a look at Q4 versus Q3, Q2, and Q1, you will see an incremental increase. But what we do is a lot of these costs actually get -- I don't want to use the word accumulated, but we actually true-up at the end of the fiscal year. So I would say what you need to look at is -- take a look at our fiscal year 2015 G&A expense, not just Q4, to see whether or not it's higher or lower.

Sometimes it's just timing or when we apply it. But we true all of that up before we close for all of our rate packages and everything else. So I did see that in Q4. I'm aware it appears to be a bit higher, but I'll tell you, that's just truing it up for the earlier quarters in the year.

Okay. Great. Thank you.

David Rose, Wedbush Securities.

Thank you for squeezing me in. Just -- I'll try to do it real quickly. The Coffey acquisition -- I know you don't want to go into detail just yet until it's done, but is there a potential for it to be dilutive in fiscal 2016, given seasonality in the business or some aspect of the business?

Great question; great question. I don't think so. Our plan is for it to close in the second quarter. And we believe that based on -- that would give us 2 1/2 quarters, roughly. So you would have all of Q4, all of Q3, and a good portion of Q2. And based on our evaluation of that, it should be accretive on a GAAP basis.

Now, if something unforeseen happened, and we closed the last week of the fiscal year, there are maybe different perturbations there. And that's why we will report what we anticipate at the time we close. But no, that's actually not in our -- within our forecast at this time. We don't think that's going to happen.

Okay. And then just one other aspect on Coffey. Given the deceleration in this business, and we've discussed the closures and how they've been managing the downsizing of their business. But the revenue trajectory still is downward.

How do you get comfortable that you start to turn that business around? I think you've outlined what you plan to do in terms of cross-selling, but on a stand-alone basis, can that business recover? Or do you think there's still another leg down in that business?

You know, I'll try to give you a perspective that we have on this. I think that the reduction in their revenue is the best thing that I've seen -- that I could have possibly seen coming out of Coffey, and what actually made myself and Tetra Tech as a company interested in them.

And let me run a quick parallel for you on this. A year ago -- a year and three months ago I met with our Board, and I proposed to our Board that we close down our remediation construction management division. We were sitting at about $2.7 billion, and I said we had a division of RCM at about $600 million. And my prospect to the Board was: I'd like to close this down. I'd like to bring Tetra Tech's revenue down by $200 million, $300 million, $400 million. And as a result of that, our income will go up, our margin will go up, our risk will go down.

And so those that have looked at Tetra Tech (technical difficulty) and I'll go back to today's presentation. If you take a look at just the first page of the presentation: revenue for Tetra Tech year-over-year down; operations down 3%; income up 30%, 29.5%; diluted earnings per share up 44%; operating cash up 120% with the declining revenue base.

So let's take that analogy to Coffey. If they -- they have done, and what I hold them in very high regard for, and I think they did exactly the right thing -- and, in fact, I will inform the group here I have been in talks and teaming with Coffey for some time and was looking forward to their proactive reduction of their operations where they were losing money and investing in areas of headwinds, such as upstream oil and gas, mining areas -- I'm at the exploratory portion.

In this past six months they have closed down their Canadian operations associated with mining. They've closed down their Western Australia associated with mining exploration. They have closed down Peru, Chile, cut their Brazil operation in half. All of those actions are actually what made this business attractive to us.

And to put this in context, they have a $407 million annual run rate in US dollars. That is after they've taken a lot of this down through the first half. And 60% of that revenue is associated with aid work, which is actually growing. So really now you are talking about 40% of $400 million, so you are at $160 million. And they've exited the most risky portion.

Now, I say all those things -- I'm not naive as to the difficulty of exiting those markets. We just are concluding that ourselves with RCM. But I'll tell you, the outcome can be significantly higher margins, better cash flow, lower risk. And that's what we see Coffey has embarked upon as well down the road, and that parallels ourselves quite well.

So I feel quite good about it -- never say never. We have to get through the details of this. But it's those reasons that have made Coffey attractive to us and a good fit with Tetra Tech.

Okay. That's very helpful, Dan. I appreciate it. And then if we can kind of think about the guidance again -- the issues with DOD, and then the first-quarter guidance, which I think is wider than the consensus and in ours as well. I think we are all pretty aware of FX.

But was the DOD business -- the drop-down in the DOD business, the acceleration in that decline, also impacting your Q1 view? Is that maybe, I guess, one of the biggest headwinds that you have in Q1 aside from oil and gas? Because I think we all have that pretty clear. So that's I guess part A of the question.

Then part B: is there any commonality in this slow release of product in DOD? Is there some read-through in what makes you feel that ultimately it gets better? Because you have got this great contract capacity.

Well, it is. We have -- well, we think for the year our federal is going to be flat. We are not overly optimistic on the Department of Defense. So we are a bit more pessimistic on that; we are a little bit more optimistic on some of the civilian programs out there. So on a net basis it's flat.

But I will tell you, you've got it right that we are less optimistic in the first quarter for US Department of Defense. And I will say that when you convert the revenue, though -- and I mentioned this earlier -- the FX in the first quarter -- if you back out the FX, the midpoint of our guidance, and I know I'm repeating myself from earlier on the prepared remarks, but our organic growth is about 3% in the first quarter.

I do know it's lighter than consensus. And I'll take this opportunity to share with both our shareholders and analysts on the phone that Tetra Tech is not a linear business. We do have seasonal FX. Q1 is often our lightest quarter on revenue and income, because we do have here in North America the beginning of the winter season. It's not cold enough that we start working in the winter on our piping work in midstream in Canada, so we don't have a big revenue there.

We do have holidays of both Thanksgiving and Christmas. We do have 13 weeks that comprise a full quarter for Tetra Tech. We lose a minimum of a half a week during Thanksgiving, and we lose about a week and a half between Christmas and New Year's. So you add those together, you are at about 2 1/2 out of 13. So both revenue and income are down.

I think that if you look at the first half of this year, though -- and I'm not providing guidance for the second quarter yet, but I will generally inform you that the first half of this year, maybe Q1 and Q2, should be up quite nicely on last year, although I do recognize Q1 on a year-over-year comparison is a bit light to last year. I think when you take a look at our first half, you will see find that it's quite consistent with our annual guidance to put us on track for that.

And I don't want to extend this, but I just want to get to the heart of the DOD question. What is it about the spending, in your view, that you've got this economy, you've got the awards, but you are just not getting the task orders? Why is that?

Well, I think it's been -- I actually think it's been pretty clear to our project staff that, they inform me, is that the clients at the government haven't had clarity as to whether or not their budgets and funding are coming through. So I think 10 days ago -- 10 working days ago -- having the US the government agree for the next two years on an overall budget is the first time we've heard that many, many years. So that's number one.

Now, on December 11 -- they have between now and December 11 to actually work out how they are going to divide up the pie. So they know how big the pie is now for the first time. So sequestration has been set aside. They have a total dollar amount, which we haven't seen in a few years now. They didn't fight as much last year, but they never actually had an agreement. Now we actually have an agreement on the overall budget; now they just have to divide it up into appropriations. So we are a few weeks out on that.

So I think that once there's certainty on your clients that you actually have a budget, you can start spending. That hasn't existed before. So that's one reason we feel much more confident -- I hate to use the word confident; we feel less concerned than we had in the past year or two. We will see how that plays out between now and the end of the calendar year, but it does look better from that standpoint.

The clients don't want to spend money on contract capacity and convert it to task orders if they haven't actually had the appropriation that they can go spend. This time they should actually have that here before the end of the calendar year, and then they can give it out.

We would look for much more even, regular task orders throughout the year -- not this fits and starts. That makes a huge difference. And it lot of the work that DOD is spending now is actually overseas. They refer to it OCONUS, so outside the continental United States. And we actually have a pretty significant supports infrastructure for work that they are doing outside the US. That includes NATO and Europe and it includes Middle East and other Asia-Pacific regions where they are building up.

So they've got the projects; they've got the contract capacity. And now, hopefully, in the next 30 days they will actually have the money appropriated to them. So I think that combination is what's making us feel a little bit rather going into 2016.

Okay. That's great color. I appreciate it, Dan. Thank you very much.

Okay. Thank you very much, David.

And thank you all very much for your questions and interest in Tetra Tech. I will tell you, we have exciting new opportunities in water and environment. And I think that Tetra Tech in this area, with a very large concentrated focus in these areas, has reinforced our reputation as a leader in these areas with our clients -- not just with the numbers we are producing.

And the announcement, or at least our announcement of intent to acquire Coffey -- we are in the marketplace buying the shares now. Again, I mentioned, I expect that to close likely in the second quarter. Continues to advance our strategy and gives us a very positive outlook to support the existing type of work we do and actually move us into number-one positions.

So we feel quite good about that. And I look forward to us speaking with all of you again next quarter and giving you an update on all these items -- both the federal budgets, and Coffey, and actually our performance in the first quarter. So thank you very much, and I'll talk to you next quarter. Bye.

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