Tetra Tech F2Q09 (Qtr End 03/29/09) Earnings Call Transcript

May. 1.09 | About: Tetra Tech, (TTEK)

Tetra Tech (NASDAQ:TTEK)

F2Q09 (Qtr End 03/29/09) Earnings Call

April 30, 2009 11.00 am ET

Executives

Dan Batrack - Chairman, President and CEO

David King - EVP, CFO and Treasurer

Analysts

Michael Cox - Piper Jaffray

Debra Coy - Janney Montgomery Scott

Richard Eastman - Robert W. Baird

Corey Greendale - First Analysis

Richard Paget - Morgan Joseph

Will Gabrielski - Broadpoint AmTech

Chip Moore - Canaccord Adams

Jeff Beach - Stifel Nicholas

Operator

Good morning and thank you for joining us. By now, you should have received a copy of the press release. If you have not, please contact the corporate officers at 626-351-4664 and we will give you one to you right away.

With us today from management are Dan Batrack, Chairman and Chief Executive Officer and David King, Chief Financial Officer. They will provide a brief overview of the results and we 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 with the Securities and Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech’s undertakes no duty to update forward-looking statements.

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 the 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.

Dan Batrack

Thank you very much and good morning and welcome to our fiscal Year 2009 Second Quarter Earnings Release Conference Call. I am very pleased to present our financial results for what was a very strongest second quarter for Tetra Tech and while David King, our Chief Financial Officer will present the specifics of our financials, I will start with the brief overview of some of our key financial metrics for this past second quarter.

In a very challenging environment, our focus on water, environment and infrastructure and alternative energy programs resulted in double digit growth in every one of our key financial metrics. For this part quarter, our total revenue was up 13%, our net revenue was up 16%, which represents an increase of about 1400 more full-time staff than we had the same quarter a year ago.

Our operating income was up 12% and our earnings per share was actually up 37% over last year, which did include a favorable resolution to an IRS claim that contributed $0.05 to our earnings for the quarter. And David King will speak specifically about this later in our call. And finally our backlog, which is a compilation of our new orders was also up 10% year-over-year around same quarter last year.

In the second quarter we accelerated our growth with our federal government clients. In fact, we grew our net revenue at 18% over the same quarter year ago with the federal government and that was Tetra Tech putting people to work on US Federal jobs.

In fact in the second quarter 47% of the work we performed was directly for the US government and that's close to a 10-year high for us. And this is actually a focus we had some time ago and we feel very good about this.

We have seen the revenue from our state and local clients stabilize at about 15% of our overall work, that's about the same numbers we had last quarter. Now most of the projects that we had at the state and local level are that were discretionary or at risk are now gone for us.

And it's really leaving us concentrating on our core state municipal clients working on their water projects. And so regulatory programs, watershed program really are serving as the basis for most of the state and local work that we are doing.

In the commercial sector, we saw mixed results, which reflected diversity in our clients. We saw further reduction in our commercial land development work where we are doing soil mechanics work, stability foundation and vertical design work. And with some of our industrial clients we saw additional reduction.

But we saw continued growth in other commercial sectors, such as alternative energy work for wind, solar and transmission line clearance. So that portion of the commercial sector we actually saw growth.

Our international growth, which on a percentage was by far the highest was driven by the integration of Waldrop Engineering, which was an acquisition that we completed after the first month of last quarter. I am very pleased to say that 8% of our net revenue is now contracted for outside of the United States.

And while 8% is a big increase, its just a start to our international growth plans. So I feel very good about moving on this sector.

As I presented a just moment ago, earlier we did grow our net revenue at 16% this past quarter. But our growth was not equal in all four of our segments. The three segments are focused primarily on the federal government grew the fastest and they grew at rate between about 18% and 28%. So we had very strong growth in those three segments.

But our engineering and architectural growth, which is the segment that performs most of our state and local and the commercial land development work, where we actually saw a decrease of 5% in their new revenue this past quarter. In that area we saw under pressure and it really reflected the softness directly in those markets.

But we are doing and we are continuing to transition more of their workload to our federal contracts that we have and we are looking to provide more architectural and engineering services to our existing federal clients across the board. So going back to our same clients, the largest contract capacities we have and taking the services and moving it across there.

Our backlog: Our backlog was actually very interesting this quarter. While our backlog was up year-over-year 10%, it did go down sequentially from last quarter by 6%. This is first sequential drop that we have seen in backlog in more than two years. And normally at this time we would have seen an increase in our federal orders in the second quarter. But due to the confluence from what we see as three factors, we have seen a slowdown in our federal orders this past quarter.

And the three factors were, first the change in the new administration. This is a first change we’ve seen in a country of administration in eight years and so you think two terms, but its actually eight years. This is the first time we’ve seen that, number one.

Number two, the recent passage of the Omnibus bill which actually authorize the funding, the full funding for fiscal year 2009, which we were here mid-year for the federal budget and that was passed just in March. And finally, the passage of the recovery act in mid-February.

This all took place at generally the same time and these had the effect resulting in a lag or delay in our overall federal orders. And if you take a look at the slide if your are following along, that our second quarter federal orders were comprised of mostly small maintenance funding on contracts that we currently hold, no new large, new programs or major new phases were actually issued to us during the second quarter.

Now that was the second quarter. In April, we’re already seeing indications of orders that we would have expected in the second quarter and I would like to mention just the few of these awards that we received in April that were recently announced by our clients. We will make a formal announcement, both in our press releases and it will show up this next quarter but I would like to mention a few that that are already out in the media and we received a number of calls for clarity on this.

Our first and perhaps the most visible is this week, we signed a contract for the removal of contaminated sediment from the Fox River up in Green Bay, Wisconsin. This is the largest project of its kind currently underway in the United States and with a value of between $400 million and $600 million over the next ten years. A big program and that just took place here in April and in fact this week.

Are also in April, we were selected for a $95 million infrastructure project in the State of New York for the Department of Transportation. It’s a large program that was press released by our client. We also received over $30 million in New Navy task orders during the month that were released by our clients.

And just this week we have received the USAID award, Agency for International Development Award for work in Haiti for around $20 million.

And the reason I mentioned this is; one, they have been released by our clients already and it actually does provide the data that actually confirms what we are seeing out in the field with more proposals and more activity on the front and this is what we are seeing starting up in the third quarter.

At this point, I would like to turn the presentation over to David King, our Chief Financial Officer who will present the details of our financial results for the second quarter. David?

David King

Thank you Dan. Again, Q2 is a quarter with a strong results. Revenue grew 13% to $522 million with particular strength in our federal business as Dan mentioned.

Net revenue grew 16% to $332 million, which was at the high end of our guidance. Operating income grew 12% to $27.8 million with operating margin at 8.4%. This 8.4% is a respectable margin for a couple of reasons.

One, we integrated Wardrop into Tetra Tech and Wardrop did not contribute during the quarter any operating margin. In addition, we pick up $1.3 million of additional amortization expenses from acquisitions.

Number two, we continue to monitor our projects and receivable portfolio throughout the company. And critically assess the impact as a result of today's environment, market conditions for example accounts receivable for certain commercial clients.

And we provided additional reserve in the quarter to affect this risks. Last on the page, EBITDA grew 20% to $34.6 million.

Now, let me spend a minute or two on this page, a look at income tax page. This is a great news on top of a strong quarter. Given the technical and detailed nature of this subject, I will be happy to answer any question you may have in the Q&A session or preferably just give me a call at your convenience after the conference call.

There were two types of claims we made in our tax returns going back to fiscal ’97. First one was our e-credits our commonly referred to as R&D credits. The second one was a tax accounting method change, it was a deferral of revenue recognition for tax purpose. For example, we will defer recognizing revenue of our unbilled accounts receivable until they become billable.

Two important points on these two topics, one R&D credit have ongoing or sustainable benefits on our tax rates and tax expenses. Tax accounting method change is effectively one-time items, it is a deferral. It benefits only timing and cash.

In the second quarter we successfully settled with IRS, for our fiscal ’97 to fiscal 2001 claim. The settlement also provided us the basis to estimate our claims for fiscal 2002 to 2004. Very importantly, we also received cash refund from IRS for approximately $40 million at the beginning of our third quarter.

As a result, the P&L benefits for the second quarter 2009 was $3.3 million in the form of tax expense reduction. We also reduced our tax rate by 12.3% and added $0.55 to EPS.

For the year’s post fiscal ’04 up to fiscal ’08, we continued to claim [R&D-credits]. Currently, we are conducting study to support those claims and the study will be expected to be completed in the next few quarters. If we are eligible for the credits we will report those benefits then. For 2010 and beyond we will provide estimate in our future tax rate guidance.

So what does this all means and what is the takeaway? Number one is, as part of our core competency; we are entitled to R&D credits in the past, now in the future. Our tax rate is expected to be lower than what it has been reported in the past and what will be reported.

And Tetra Tech today is a larger more complex company, comparing to five or ten years ago. We will need to complete our study to know how much we can claim in the coming quarters, in the coming years.

Number two, the $40 million in our cash of fund received will substantially strengthen our liquidity and reduce our net debt; I will come back to that.

Income statement page, SG&A cost grew 17% to $38.5 million. This is higher than what we have expected and we are very sensitive to it. There are three main reasons for it. One is, as I mentioned earlier, intangible amortization was $1.3 million higher incrementally due to acquisitions, number two there were almost one time legal fees of about $700,000 to settle a legal claim during the quarter.

The number three point is Wardrop acquisition added about $1.8 million in our SG&A cost structure. We believe it is too high and there is potential synergy in SG&A cost structure and we have already begun the effort.

Tax, as I discussed 20% reduction of tax expense had to with the IRS settlement and due to EPS. Without IRS settlement EPS was over $0.26 was at the high end of the guidance.

Balance sheet: Account receivable increased 19% to $560 million. Accounts payable increased 27% to $182 million due to business growth and better payable management.

Net debt increased 54% to $62 million, due to acquisition during the quarter. Again $62 million exclude IRS refund received in Q3. Our debt to equity ratio is 18.7% and debt to capital ratio was 15.8% at the end of second quarter without IRS refund.

We have an excellent cash flow from operation in the quarter. We have received during the quarter a couple of large payments from wind projects. In addition, we have as you recall significant revenue in Q4, '08, in Q1,'09. These receivable got liquidated and contributed to our cash flow in the quarter.

Our revised forecast for the year with IRS refund of $40 million, our cash flow from operation will be $95 million to $105 million for the year. CapEx expenses $6.6 million and for the full year we expect to be – we will continue to be $20 million - $25 million.

DSO went up by 3% to 79 days. We are seeing our commercial customers paying more slowly. Given our great cash flow in Q2 and the pattern we are seeing in our commercial clients of late, I would not be surprised to see our DSO break into low 80s before they come back to high 70s to finish the year.

Net debt: And with excellent net cash flow for the quarter in IRS refund of $40 million in Q3, I expect Tetra Tech to be debt free by fiscal year end. Even in light of current challenging economy and market conditions, I am confident our liquidity and strong cash position will provide the engine for us for further growth in the second half of fiscal 2009 and beyond. Back to you Dan.

Dan Batrack

Thank you very much David and great job on the cash and cash generation from all of our accounts.

At this point, I would like to present our updated guidance for the third quarter and for all of fiscal year 2009. I am going directly to the numbers here. I would like to note that our guidance does not include any special anticipated funding from the stimulus bill. That’s such a large topic of speculation or any contribution from future acquisitions that we would complete during the reminder of fiscal year 2009.

The guidance for the third quarter for revenue net of sub-contractor costs is $330 million to $350 million with an associated diluted earnings per share EPS of $0.29 to $0.31. With this guidance for the third quarter we have updated our entire fiscal year 2009. Revenue, net of sub-contractors and we in fact narrowed our guidance for net revenue to $1.35 billion to $1.4 billion for the entire fiscal year.

We have also increased our earnings per share guidance by $0.05 to reflect second quarter IRS settlement that David King just spoke to increasing both the lower and upper end of our previous guidance by $0.05 to take us to a $1.17 to a $1.23 for the entire fiscal year. I will make a note here for following along on the slides.

Please note that again this does include the contribution of the $0.05 from the IRS settlement. It does, it include $0.09 of intangible amortization, which does not affect cash but it is factored into our earnings and does assume, and David who certainly could answer questions on modeling for the third and fourth quarter, but it assumes a 41.1% effective tax rate for both the third and fourth quarter.

Now, I do want to make a note that the low end of our guidance, we have assumed no appreciable increase in the United States federal spending from our federal customers in either the third or the fourth quarter. The faster the federal government issues new orders, the bigger impact we would expect to see in the third quarter, fourth quarter and especially in fiscal year 2010.

And one thing that is very clear to us here is, the clear priority of this administration and the majority party here in the United States are to support programs for clean water and water infrastructure, cleaning the environment and energy efficient buildings and energy independence while reducing CO2 emissions. And these are the markets that Tetra Tech is primarily focused on. So when their funding goes up, we are exactly in the right spot.

I do want to say a word about the stimulus package and the recovery bill that has been passed. That still remains the number one news item on the front page of most newspapers and continues to be the economy and stimulus funding speculation when it's going to actually arrive.

And while the American Recovery and Reinvestment Act has been passed, we don't know when the funding is actually going to be released and the exact timing from each agency. And in fact, it will vary depending on the agency. It's not just a single answer that applies to everything.

But what we do know is that the recovery act does provide funding in the areas that intersect with the services that we provide and the contracts that we hold.

On this slide following along on the webcast, we have identified four major areas of stimulus funding that are directly associated to the work that we do. First is water programs, second our EPA and the Department of Energy programs.

Third is alternative energy and grid upgrading and the fourth is federal other, which is really Department of Defense and base realignment enclosure, restoration cleanup and the realignment of the Department of Defense facilities.

Just these four areas, which are key clients for Tetra Tech represents more than $34 billion in federal investments in the type of projects that we perform. And from our perspective, the firms that will be the most successful are the ones that have contracts in place today.

I have said this before in our previous call but with two and half months gone by, since the signing of the Recover Act, it is increasingly important to get this into the economy fast. And the only way we see to do that is to go first to those as whole contracts.

We at Tetra Tech hold in access of $8 billion in contract capacity to-date with these key customers and that's mostly in the federal sector and it is with these clients that this work for the stimulus program is going to get done. They are the entities that are responsible for getting this completed.

And as we have indicated before, our project managers are actively identifying projects where we can help our federal clients get the work done and put people to work on federal program right now and that this their mission.

In summary, in this past quarter we continued to grow the company at double-digit rates both in revenue and income. It was a very strong quarter for us. We generated more than $70 million in cash from operations and that is among the highest ever for any quarter that we have ever had here at Tetra Tech.

And I want to reiterate what David King said a moment ago that $70 million, in excess of $70 million did not include $40 million payment we received from the IRS at the first days of the third quarter. That will be reflected in our next quarter or this current third quarter.

We have increased the work that we do directly for the US federal government to very close to 50%, adding stability to our entire company and even the areas in the segments within the company that we have seen some softness, because of the economy with certain commercial clients, and state and local, we are looking to get them involved in federal work.

As I have stated a moment ago, the priorities of the new administration are aligned with the services that Tetra Techs provides. We are at the right place and at the right time for the markets of the future.

And finally when the stimulus funding s released we are in an excellent position to participate in these programs.

And with that I would like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Cox with Piper Jaffray.

Michael Cox - Piper Jaffray

Good morning gentlemen and congratulations on the quarter.

Dan Batrack

Thank you very much Michael.

Michael Cox - Piper Jaffray

My first question is on the margin profile. As you look at the types of projects and contracts that you are looking at in the stimulus package obviously there is a lot of uncertainty there but I’m curious what you would anticipate the margin profile would be of those types of projects. Do you anticipate competition escalating?

Dan Batrack

It’s a question that we get asked frequently and generally its associated with observations that there is an expectation, there will be more competition, more participation and potentially pressure on pricing. We actually don’t expect to see that. And in fact we expect that most of our work is going to be awarded at least initially through the existing contracts that we have in place.

Quite often these are what we refer to as indefinite delivery and definite quantity contracts that we already have in place. That’s what I refer to in reference a moment ago about the $8 billion in contract capacity that we have in place today and both the rates and the time and material, the unit rates for staff, and if its cost plus, they’re already in place.

And so we believe that one, the competitions can be limited, if the contract holders are already in place and typically these IDIQ contracts for a given client are held by perhaps two or three to as many as four or five, and in some locations we’re the only contract holder where it’s a unique service.

So we expect the competition not to increase by the very nature of the contracts we held, but the pricing has already been established and negotiated as part of these contracts and so we think that the rates and the profit margins will be similar to what we have seen in the past.

Michael Cox - Piper Jaffray

Yes, that’s very helpful. Shifting to the wind segment, I am curious to what sort of activity you are seeing there? What you are anticipating through the balance of the year? There seems to be a level of optimism that that will pick back up and is that a segment you could build back up to a$ 200 million backlog level at some point.?

Dan Batrack

We hope so. We hope that’s just the milestone or way point to even a bigger number on our backlog. We currently have about $50 million in backlogs roughly. We have incurred revenue or incurred billings and so far of about $150 million. So we are still on track or on target to hit the estimated revenues for alternative energy.

We did see very slow first and second quarter but here in the past 30 days and actually some of those seen in the federal government, we have actually seen an increase in proposal activity, primarily associated with payable tax incentives and grants that were included in the Recovery Act.

Most of the proposal activity we are seeing is at the front end of the project cycle. So it's for services like feasibility studies for some of the wind locations; alternative analysis, determining a distance and access to the grid;, environment clearance and evaluation; and some preliminary engineering activities.

We think this is the best place. In fact, we had hoped that every project will go this way, because we are one of the very few firms that actually offers from the very front end all the way through the backend on turnkey basis. So we are seeing this front end work proposal pick up a lot, but we really think this would translate into larger revenues in early 2010 and 2011.

We have been spending time with our clients and it's the large utilities, and it's interesting. They have identified cost analysis, as to the feasibility of wind and some of the other alternative energy sources, including solar and these tax credits make it particularly attractive in 2010, 2011 and with completion by 2012.

And so some of the estimates by the largest utility show adding significant capacity in these alternative energy or zero CO2 mission technology is here over the next two years.

Michael Cox - Piper Jaffray

Great, thank you very much.

Operator

Your next question is from Debra Coy with Janney Montgomery Scott.

Debra Coy - Janney Montgomery Scott

Yes, thanks, good morning guys.

Dan Batrack

Good morning, Debra.

Debra Coy - Janney Montgomery Scott

Question on just organic growth outlook, organic dipped a bit in the quarter and if we look at your revenue guidance for third quarter and layering the acquisitions, it looks like actually, probably we have a temporary decline in organic growth. You also mentioned that the low end of your full year guidance assumes no real pick up in the federal government.

If you can just kind of walk through the segments or the end markets and look at kind of how you are seeing the underlying organic growth trends and then what gets you to the top end of the guidance, since you said haven’t included any stimulus impact in those numbers.

Dan Batrack

A good question, organic growth for the third quarter, if you take out contributions from the acquisitions is flat to slightly declining on the third quarter and is flat to slightly increasing in the fourth quarter. And so I would call for the second half organic growth on our guidance is flat between the two.

The third quarter where we see our primary driver is, a year ago and this is going year-on-year growth, we had a very, very large contribution from Iraq and in fact in our remediation and construction group during the entire year on a gross revenue basis we did about $300 million worth of work in Iraq and in fact a year ago on a gross revenue, maybe almost a $100 million [per quarter].

And to translate that to the third quarter to show you what type of -- I would give a example of what type of head wind on a revenue trade out or how, what we need to replace. We will do something less than $10 million and on a net revenue basis it will be de minimus, $1 million or $2 million. So with that amount of revenue falling off, we have replaced it across the board, to leave the organization as a whole for the quarter on an organic basis, roughly flatter or even declining a percentage or two.

So we actually feel very good about that, it always was our contention that as Iraq ramps down, we would see the US base realignment enclosure. And so cleaning up of military bases, design infrastructure work and preparation for the new alignment bases to pick up and to have relatively an even offset.

I still believe that would have actually been the case and in fact an increase if we hadn’t had this confluence of these three factors of the federal government that just slowed down the federal funding and even with that taking place, we are still in a good spot.

So we expect, with respect to the rest of the markets, we see them actually increasing. Let me talk about, what we see at the end markets and I’ll speak primarily to the federal sector since it represents half of everything and then I will go to state commercial and touch on them.

At the federal level, exclusive of stimulus, we have seen most of our key clients, and our US EPA is an example. Their annual funding budgets go up 30% and in fact just yesterday, they first that outlined of a bill for the 2010, fiscal year 2010 task at over $3 trillion and with our key end clients and markets Environmental programs, water programs and alternative energy being the key benefactors in the proposed budgets for next year.

So instead of a continuing resolution through the middle of the year, and a tug-of-war to determine if any thing could be passed and ultimately not be, we actually see with the majority party along with the President being on the same side of the isle, this should be a much more streamlined process.

So if they fund only out of the annual funding budgets and we see a plus up and the dollars actually come out here late in the year that would move us to the high-end and anything on stimulus should push us above and beyond that, Debra.

Debra Coy - Janney Montgomery Scott

Okay, that’s helpful. And then just following up on the earlier question on margin profile. Again with the dip or at least organic slight dip in revenues and roughly flat sequentially that we are looking at or up a little bit for Q3 to get to the guidance, we clearly have to see some margin expansion.

And I guess my question is, if we are talking moving EBIT margins backup on a overall basis, call it into the high [eight], as the federal government business comes back would that be sustainable or would we see the mix just again, as you go back towards some of the cost plus contracts and may be the EBIT margin move up and then move down a bit. How should we think about that in terms of business mix?

Dan Batrack

I think David covered this or touch on it pretty well on his first slide and I thought he made a excellent point. This is what we’ve seen. We brought on $20 million of net revenue this past quarter with Wardrop. In the sense they had no contribution to zero from operating income. And in fact it wasn’t zero it was minus because we had take on intangible amortization as part of our operating income -- expenses.

And so if you actually take and normalize that, and by the way it's not a surprise that from first comes in go through the integration process, we begin this -- begin bringing them on. This is very typical. Wardrop being a bit larger well in excess of a $100 million it had more accentuated effect. So when you normalize the Wardrop for its contributions and you eliminate some of these legal expenses, I think you will see that our margin -- I hate to, I don’t want to sound like everything’s easy. We are in a challenging environment but it is very achievable.

Debra Coy - Janney Montgomery Scott

Okay. It’s all right, that’s helpful. And then just one final housekeeping question. I think David when you gave the updated cash flow guidance for the year that excluded the $40 million for the tax credit is that correct? The 95 to 105 exclude, does the operating cash flow exclude the tax credit or tax refund?

David King

In my entire presentation that’s the only one was included.

Debra Coy - Janney Montgomery Scott

So the 95 to 105 does include the 40?

David King

Yes.

Debra Coy - Janney Montgomery Scott

Okay. All right. Thanks.

Operator

Your next question comes from Richard Eastman with Robert W. Baird.

Richard Eastman - Robert W. Baird

Yes good morning.

Dan Batrack

Good morning Rick.

Richard Eastman - Robert W. Baird

Dan could you just spend a couple of minutes digging a little bit deeper into the commercial piece of the business. We saw again a modest decline in net revenue, kind of broke a trend there. I know that you mentioned land development and industrial environmental that seems pretty straightforward as being down.

How did the wind bookings actually look in the quarter versus last year? Also just the billings?

Dan Batrack

Okay. I will call bookings and then second half will be billings or revenue recognized. Bookings from a year ago were down substantially.

Richard Eastman - Robert W. Baird

Yeah I understand. Okay.

Dan Batrack

We had nominal new bookings or new orders during the second quarter. We saw very few proposal opportunities. We saw most of our clients certainly the commercial developers had difficulty with accessing capital, so that was turned off and the utilities pulled back both in the first and second quarter. So bookings were down materially.

Revenues or billings were up substantially over last year. A year ago, we booked well in excess of a $100 in new orders or bookings for new work that ultimately was design and construct it, late in the year, it is in the first quarter of this year and so the bookings -- the billings and the actual revenue recognized were up substantially from a year ago.

Richard Eastman - Robert W. Baird

And so net revenue, I think we were -- we must have did above -- did we do above $30 million or $50 million in net revenue in wind in the quarter? Is that too big?

Dan Batrack

That’s too much. We did about, that would be very close to the gross revenue number. The net revenue number would be about $15 million.

Richard Eastman - Robert W. Baird

Okay. And when we talk about the wind -- well I’m sorry -- just to finish our thought, the $50 million that you have in backlog now in wind is that a gross revenue number?

Dan Batrack

That’s correct.

Richard Eastman - Robert W. Baird

Yes, okay and most of that should ship by the end of the fiscal year?

Dan Batrack

Yes, we would expect to complete all that work by the end of our fiscal year.

Richard Eastman - Robert W. Baird

Okay, and then also when we talk about the alternative energy piece of commercial, we have the wind, the solar and the transmission line business up. Can you just give us a sense of kind of an annual, may be net revenue run rate for that alternative energy piece? Its kind of hard to do here with wind moving around, but how much of the piece did that alternative energy stuff make up?

Dan Batrack

Well, I think in the net revenue for the year we will be, may be in the range of $50 million to $75 million.

Richard Eastman - Robert W. Baird

Okay, for this year? And then last question on commercial. The Fox River project now, you got some nice press on that Fox Valley here in Wisconsin.

Dan Batrack

That’s good.

Richard Eastman - Robert W. Baird

How do you think of that project billing out? Is this kind of more or less of a net revenue annuity every quarter. Presumably that would be less revenue in the winter up there but should we think of that as being, in terms of net revenue may be $20 million a quarter or something or how should we think about that project?

Dan Batrack

We think that on a quarterly basis and you’re right it will be a little bit seasonal about $10 million a quarter on net revenue and on a gross revenue about double that probably about $20 million. So we think that it’s around $70 million or $80 million a year total revenue generation project and roughly half of that would be net revenue.

Richard Eastman - Robert W. Baird

I see okay. Is the German firm that was kind of quoted in this press videos, are they subbing to you? Is it a sub contract to you or is that a separate piece of this contract?

Dan Batrack

They are sub contract to us. We have been working up there prior to execution of the contract this week for the actual removal and remediation of the river itself for the contaminated sediments. We’ve spent the past more than a year getting ready with the project, not on the regulatory and permitting, but in engineering, design and construction of the largest sediment dewatering process in the world. And so that’s what we’ve been doing and that being up in your neck of the woods in Northern Wisconsin.

This all was put indoors, so it wasn’t only constructing of that but was also constructing a facility to contain it indoors, so that you can work over a much longer season.

Richard Eastman - Robert W. Baird

It was always actually easy to catch those sturgeon, as they work their way -- they were glowing in the dark. So as they work their work to Lake Michigan down to Milwaukee it was fairly easy to catch them. So I guess you can [pick] that up properly.

Dan Batrack

As we do the dredging, we will chase the sturgeon up into one corner for you.

Richard Eastman - Robert W. Baird

Perfect. All right thank you.

Operator

And your next question comes from the line of Corey Greendale with First Analysis.

Corey Greendale - First Analysis

Hi. Good morning.

Dan Batrack

Good morning Corey.

Corey Greendale - First Analysis

First question is just about how you are kind of balancing -- with some of the federal works slowing, it sounds like generally with the stimulus, there is a very good chance that it will kind of all these systems go in full speed ahead but are you doing anything in the mean time to kind of manage cost down or position yourself for the potential that there could be some near-term weakness.

Dan Batrack

Absolutely we are being very aggressive on the cost side. I think David talked about some of the reasons why our SG&A appears to be higher, driven by accounting charges like intangible amortization and bringing on new acquisitions. But our goal is to keep our back office cost down. While our headcount from a year ago is up 1400 heads approximately.

We actually are seeing underlying a lot of moving pieces. We have taken a lot of staff out of the portions of the market where work is slow, like the commercial development we have seen reductions. We have seen reductions in some of the geotechnical or soils work that we down in the Florida area for example. So another good example.

At the same time we have been staffing up in areas where we see strength such as the Louisiana Golf Coast restoration along the Greater New Orleans area. The soils work for levee evaluation and other projects. USCID has been a very strong client for us and we have had very good success and been a good partner for them and so we have seen staffing up there.

So, at the surface, it looks like our head count is up both attributable to organic growth of hiring folks and acquisitions. But underneath the surface there is a lot of moving pieces and we are being very, very aggressive on making sure that we keep our cost structure and our operations aligned with the work.

Corey Greendale - First Analysis

Okay and roughly what’s your utilization running at and how does that compare with what it has been recently?

Dan Batrack

Our utilization has been in the low 60s, we do have -- I consider set lots of room for expansion of that. So certainly indicating to our federal client, if you’ve got the work, we’ve got the people. So but we think we have several points of expansion there but its not a simple task obviously to downsize in an area where work is slow. We do have the cost, that are non-recurring like severance cost that if just staff down in one area and then you have ramp up in others. So we say the low 60s but expect that we can get up many points.

Corey Greendale - First Analysis

Okay and David, sorry, I return to the cash flow but I think you said that there was a question that the revised guidance does include the $40 million refund. Is that correct?

David King

Yes it does.

Corey Greendale - First Analysis

So you effectively raise the range by $35 million. So if that does include the $40 million, does that mean that you’re actually would be lower in the guidance by $5 million excluding that refund?

David King

Well, what we are seeing as I mentioned earlier is in our commercial client sector that we want to be cautious and some of the work that we do today, they are more milestone driven and shorter term cash flow visibility can be choppy and we did a great second quarter. So without that, we want to be on a cautious side.

Corey Greendale - First Analysis

Okay, I understand. Great, thank you very much.

Operator

The next question is from Richard Paget with Morgan Joseph.

Richard Paget - Morgan Joseph

Good morning guys.

Dan Batrack

Good morning, Richard.

Richard Paget - Morgan Joseph

I wondered if you could talk a little bit about the acquisition market. I know as things have come down, may be some of the stockholders expectation have been reined in. But with the promise of a lot of this federal stimulus money, at least in the domestic market, are they starting to say, okay, wait a minute may be we should hold out a little bit. because with all this business coming may be we can get better pricing. So wondered if you could just talk about the dynamics there.

Dan Batrack

Well the first, we typically look at the private firms. So the private firms still -- I’ll say that’s still a little a bit of lag in their realization that their value, whether multiples earnings have come down like the public folks.

But we are seeing more opportunities and we’re seeing more realistic expectations on valuation. Now those that do federal work, you are absolutely right, what you just described, what we are seeing. If they are in the federal sector and a niche player, they would be saying, boy, we just got to hold out a little longer as things are going to be good.

But those that aren’t and there’s a lot of those and they are looking at how are we going to get in to the federal sector. And it is interesting. I have talked with many folks, many opportunities that have come to us and said, wow, we started three or four months ago and we thought we would become federal contractor in three or four months may be a quarter will go out and get some contracts and will be ready to go by the stimulus package, release of funding. And they have come back and said, we’ve made zero progress.

And in fact, the federal government wants things like DCAA Audited Rates. They actually want experience at federal facilities, they actually want to work with people that have experience and, you know what? We need to get teamed up with a bigger brother who actually has those.

And so we have had a number of folks that have selected Tetra Tech because of that and looking to do exactly what you said, the mindset is the same. They would like to get it on their own, with no help. So they can keep it themselves but those that can’t are looking for the right partner. And so that’s actually driven lots of opportunity to Tetra Tech.

Richard Paget - Morgan Joseph

Okay. Thanks I will get back in queue.

Operator

Your next question is from Will Gabrielski with Broadpoint AmTech.

Will Gabrielski - Broadpoint AmTech

Hey. Thank you. Couple of questions, first, are there any other opportunities out there in the commercial side and in general that, does that compare in size and scope to the Fox River project that you guys are tracking right now?

Dan Batrack

Yes and actually one of the focuses of our firm and we think that we have a very specialized, and in some respects unique set of capabilities in sediment remediation. You may hear from our peers in the market place, there are public companies that you have these discussions with that they see that environmental clean up of soil and groundwater is a very strong market.

Another level of complexity beyond cleaning up chemically impaired soil and water is sediment. It’s a much more mobile media. You have additional, they are called receptors so different that you have recreational impacts. You have marine impacts, fishery issues quite often dangerous species and then you have contaminants that once you begin the remediation becomes mobile and can move in the waterways.

And so understanding the science and leading these projects literally with the science of understanding what’s going to happen? What’s going to be impacted? We think its one of the absolute strength and unique positions that we hold, thanks to the work that we have done for the federal government. The models that we have prepared for the EPA and the work we have been doing for really all the way back to our founding of the company, puts Tetra Tech in a much different position.

So we are not looking at advertising because I am sure you would like me to provide the names, the place and the times of the individual projects and while I would love to provide those to our investors and shareholders, I am not looking to provide those to our competitors. But there are large projects around the country and waterways that both are commercial and federal that are associated with ports, harbors and other navigable waterways.

And so we think this is a big market, clearly this differentiates Tetra Tech from many others and we think this will be a big growth area for us in the coming years.

Will Gabrielski - Broadpoint AmTech

Okay, great and you also mentioned ports and harbors there. I was just wondering the Army Corp Engineers just published their list of projects, to be funded with stimulus money. The Panama Canal project is inflated as one that’s going to drive enough recycle domestically on the Gulf Coast and I’m curious if you guys are seeing any activity like that today and what are your expectations are through the core as well as derivative plays off the Panama Canal expansion?

Dan Batrack

Well, we are on a team. There’s -- I believe is three, I think they ultimately received three proposals, the ACP, the Panama Canal authority. We are one of the teams and those proposals just recently went in and its been evaluated by the Panama Canal authority and many of the people that advise on that of course are the Corp Engineers who are the original architects and constructors of that. So we will see how that plays out. We don’t expect that determination to be until the end of the year, the calendar year. So we will see, it might be mid-summer the official report.

Now, the Army Corp of Engineers, civil work project is up substantially. Its over $4 billion and they just released it this week, its about a month behind schedule but with stimulus program, they just released this week a list of the projects and we are very happy to see that 45 individual projects are associated with the Mississippi river projects, 67 different investigation projects and these are individual projects that we are sifting through very quickly to determine where we were present, what we are doing and how it would be logical and beneficial to the government and press to take those programs to the next level.

So we think of course, it has historically been our largest client and continues to be one of our very largest client and we will be looking to move on this types of navigable waterways and marine projects.

Will Gabrielski - Broadpoint AmTech

Okay, shifting gears a bit to transmission and distribution. Any expectations on when you think that will become a more material component of your business in general and any acquisitions or avenues that you might look to get bigger on the roadmap.

Dan Batrack

Well, we think it's going to -- I think it's one of the most attractive markets. One thing that we -- its the one area that I see within Tetra Tech and in fact to the industry that there is a shortage of capacity.

True, high voltage engineers are a very limited commodity and we are looking for acquisitions, we are growing a few of them internally. We have created a Tetra Tech electric division within the company, specifically focused on this.

The smart grid, grid updates connecting these alternative energy or remote electrical generation facilities into the grid, all require high voltage engineers, civil mechanics with respect to towers or burial. If we are going to direct burial, I mean its all right where we are at. But I don't see at being an impact to our top to bottom line in 2009, but I do see it they are contributing materially in 2010.

Will Gabrielski - Broadpoint AmTech

And would that involve partnerships, potential acquisition, is there an avenue or mechanism from which you can get bigger, quicker or is it all organic and internal?

Dan Batrack

Well, we are looking for acquisitions but frankly we know who they are and this is the one space that was characterized early on one of these questions is, do they -- do these companies feel that there is an opportunity, a large amount of opportunity right over the horizon and so they want us to impact, this is the one area that we see that. That even though they are running through difficult times now they believe there is great opportunity from these private firms.

There are some though that we have essentially as captive sub-contractors or partners and we have a lot of reasons and so do they that they think maybe joining Tetra Tech will be much more attractive.

So I would look for not a large acquisition in the transmission distribution space. But probably many smaller ones that would aggregate up to essentially the same thing.

Will Gabrielski - Broadpoint AmTech

And how do you view the margins there?

Dan Batrack

Better than average, we think in the double-digits, low double-digits.

Will Gabrielski - Broadpoint AmTech

Okay great. Thank you.

Operator

Your next question is from John Quealy with Canaccord Adams.

Chip Moore - Canaccord Adams

This is Chip Moore for John. Can you talk about the integration of Wardrop, we saw the nice jump in international. Just how things are progressing there? Any new opportunities that you are coming across?

Dan Batrack

Yes well first of all we remain excited and very positive on the Wardrop acquisition and integration. They have embraced Tetra Tech and the same is true vice versa, as much as I have seen in an acquisition. We have one area and while there are natural resource firm, infrastructure and energy and in fact the order would be that resource management mining in Canada and other areas is the largest 50%.

Energy is second but infrastructure, which include water, waste water, water resource work is an area that was only about 15% of their revenue. We have mobilized all of Tetra Techs top talent and moved into Canada and into the set of offices and executive teams of Wardrop and got of some of the clients because this is now our capability that exists within Tetra Tech and Wardrop in Canada with their network of offices. We’ve already had some early success being put on.

What they call rosters with cities, where we’ve been listed as an approved contractor now for water and wastewater work and Wardrop doesn’t have to generate this organically. It now exists at the highest level of any firm in North America, not just Canada but with our number one in water in the US, that now exist in Canada. So I commend Wardrop for being open and they’ve been excellent in getting us right in front of their clients.

And to put this in context, its been 90 days. This has been very fast and within the first 30 days, we are up in front of the clients and within the first 60, we had our first award, so its early but early polls were very positive.

Chip Moore - Canaccord Adams

Okay, great. And can you may be just walk us through some of your margin expectations by segment. It looks like environmental consulting, I was may be touch late on our models, just trying to reconcile the guidance?

Dan Batrack

Yes, let me go through the general range and then I will come back and reconcile very quickly because there was two outlier, our environmental consulting services, we expect to be in a 10 to 12 margin range, our technical support services, 9 to 11, our EAS, our Engineering Architectural Services, 6 to 8 and then our remediation construction management 7 to 9 range.

Now the out wires that you saw this last quarter were ECS as we just indicated. They were lower. We expect them to be sort of 10 to 12 and they came in at 8.8 and that’s the group that Wardrop went into. So it contributed to the revenue and decreased or took away on the profit and that’s what caused that to be outside the range, otherwise we’ll be right there.

Now the second outlier for the quarter was our engineering and architectural services group which we expect to be 6-8 and they were 6.4. So they were within the range but at the low end of the range and they really have the largest exposure of Tetra Tech for the work that we do.

The state local, the municipal work and the commercial development, which is we call MEP, mechanical, electrical, plumbing work of these very large high-rise building that we do the engineering work.

And that's the work that got essentially, all the turned off across not just the United States but the world here this past quarter. So those were the two outliers for the quarter from our anticipated ranges and those are the reasons why they were a little bit up.

Chip Moore - Canaccord Adams

Perfect, that's very helpful, thanks.

Operator

Your final question comes from Jeff Beach with Stifel Nicholas.

Jeff Beach - Stifel Nicholas

Hi, good morning, Dan.

Dan Batrack

Good morning, Jeff.

Jeff Beach - Stifel Nicholas

On the -- the chart of the potential stimulus that you can address the $34 billion. You said you are already in the program, you are already seeing some of these agencies come up with proposals and programs, so you are starting to get some visibility I assume.

How long you think this $34 billion is going to stretch out. I know the government would like to see a lot of within the next two years. But is this going to ramp up likely for two or three years to a high level?

Dan Batrack

We think that two to five, three to five years I know that the expectation is to have it all complete and run that amount in two to three years. But the expectation is that it would all be in the street in the 30 to 60 days.

Realistically these programs will have a natural extension to the work that its performing. So I think that will actually be over a sort of two or three to five years. And to put that in to context, one of the biggest programs that we have been a large participant in, has been the base realignment enclosure, both the 1995 and the 2005 that was just starting up. The 1995 barrack, which we did, that’s about 700 million plus, was a program that stretched over 10 years and that was $20 billion or less and the new barrack, the 2005 that is been delayed a bit, because of the work that Department of Defense has done in Iraq and even Afghanistan is estimated to be $30 billion over roughly 10 years. So this $34 billion, which we are focused on the subset is substantially larger and in a shorter time frame. So the impact should be substantially greater.

Jeff Beach - Stifel Nicholas

All right. Thanks.

Operator

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

Dan Batrack

I would like to thank everyone for your good questions and your interest and support of Tetra Tech. and we are looking forward to a strong third and fourth quarter. And as I have indicated both in our presentations and questions and answers, we are seeing early opportunities in this third quarter and we will look forward to reporting the actual results back to you on the next conference call in 90 days.

And thank you very much for participating and I will talk to you then. Bye.

Operator

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

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