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Edited Transcript of TTEK earnings conference call or presentation 8-Nov-18 4:00pm GMT

Q4 2018 Tetra Tech Inc Earnings Call

PASADENA Nov 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Tetra Tech Inc earnings conference call or presentation Thursday, November 8, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan L. Batrack

Tetra Tech, Inc. - Chairman, CEO & President

* Steven M. Burdick

Tetra Tech, Inc. - CFO, Executive VP & Treasurer

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Conference Call Participants

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* Andrew John Wittmann

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Noelle Christine Dilts

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

* Ryan Michael Connors

Boenning and Scattergood, Inc., Research Division - MD & Senior Analyst of Water and Environment

* Tahira Afzal

KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst

* Tate H. Sullivan

Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst

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Presentation

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Operator [1]

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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.

As a reminder, Tetra Tech is also simulcasting this presentation with slides in the Investor section of its website at tetratech.com.

This call is being recorded at the request of Tetra Tech, and this broadcast is the copyrighted property of Tetra Tech. Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited.

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 we'll then open up the call for questions.

I would like to direct your attention to the safe harbor statement on Page 1 of today's presentation. Today's discussion contains forward-looking statements about future growth and financial expectations.

Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risk described in Tetra Tech's periodic reports filed with the SEC.

Except as required by law, Tetra Tech takes no obligation to update its 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 Investors section of Tetra Tech's website. (Operator Instructions)

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

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [2]

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Great. Thank you very much, Hilary, and good morning, and welcome to our Fourth Quarter and Fiscal Year 2018 Earnings Conference Call.

We had a very strong fourth quarter, hitting new all-time highs for our ongoing operating income and earnings per share, with record orders driving backlog to over $2.6 billion for the first time ever for the company.

For the full 2018 fiscal year, we also achieved new records for revenue, net revenue, operating income and earnings per share. And for the first time, generating over $2.9 billion in revenue.

Strong orders that drove our backlog to these record levels in the fourth quarter were broad-based across our markets, including government, commercial, state and local and our international work.

It's this momentum and the strong demand for Tetra Tech services that gives us excellent visibility for 2019 and beyond. We are focused on the future, and confident that the Leading With Science solutions that we provide for essential services in water, environment and infrastructure are highly differentiated and highly valued in the markets that we serve.

I'll now provide an overview of our quarterly and annual results and also provide a business outlook for us for 2019, while Steve Burdick, our Chief Financial Officer, will provide additional details on our financial performance and capital allocation for the company.

We had a very strong quarter, achieving new record highs for operating income and earnings per share for ongoing operations. For our fourth quarter, our revenue from ongoing operations was $747 million, up 3% from the prior year.

Our net revenue was $564 million, up 6% from the prior year, which generated an operating income of $62 million, up 9% from last year, resulting in a diluted earnings per share of $0.75 for the quarter, which is up 19% from the prior year.

And finally, backlog, was up 9% sequentially and 5% year-over-year, growing to $2,664,000,000, the highest in the history of the company.

I'd now like to provide an overview of our performance by our end customers.

Our record fourth quarter performance was led by strong growth across our end markets, but especially, for our U.S. state and local and our U.S. commercial work.

Our state and local revenues were strong in this quarter, with an organic net revenue growth of 10% year-over-year. This growth was a direct result of our municipal water infrastructure work in the metropolitan areas of California, Texas and Florida, and for continuing emergency planning and recovery services for the past fires and floods.

Our work for our U.S. federal clients was 30% of our net revenues in the quarter and was up 5% year-over-year. This increase in the U.S. federal work was driven by our consulting work for the Department of Defense and the U.S. State Department.

Our U.S. commercial net revenue was up 10% year-over-year, driven by our environmental permitting, consulting and design services activities.

And finally, our international net revenue was up 9% year-over-year, driven by local water and transportation infrastructure work in Australia, New Zealand and Asia-Pacific region, however, it was partially offset by weakness that we saw in our Canadian markets.

I'd now like to present our performance by segment. Our Government Services Group, or our GSG business group, had another just great quarter, with both the fastest growth rates and the highest margins for the quarter in the company.

In the fourth quarter, the GSG business group had an excellent 16.3% margin, up 120 basis points from the same quarter last year. They grew 10% year-over-year, with strong revenue generation from our U.S. federal and our state and local clients here in the United States.

The Commercial and International Business Group's net revenue was up 6% in the fourth quarter, if you exclude the impact of a noncore divestiture that we completed in the third quarter of 2018.

CIG's margin in the fourth quarter was impacted negatively by the slow recovery in the Western Canadian markets. Excluding these impacts, CIG's margins for the reoccurring business was 11%, supported by strong performance in our United States commercial and Asia Pacific operations.

While I'm very glad to present the results for our entire fiscal year of 2018. For the full fiscal year of 2018, our ongoing operations achieved all-time record highs in almost every financial metric, including revenue, net revenue, operating income and earnings per share.

Tetra Tech's full year revenue was $2,961,000,000, which is up 8% from the prior year. Net revenue was at $2,209,000,000, up 9% compared to last year and operating income was $216 million, up 13% from the prior year, resulting in an all-time high diluted earnings per share of $2.64, up 24% from just last year.

Of course, our outlook going into 2019 is extremely important, and we had an exceptionally strong contract wins and new orders in the fourth quarter. We achieved the book to bill of 1.3%, which resulted in a sequential 9% increase in backlog from the prior quarter.

Our total backlog at the end of the quarter was, as I mentioned earlier, $2,664,000,000, an all-time high for the company, and giving us just fantastic visibility as we go forward.

We had very strong orders across a broad base of our clients, including the United States federal clients, in areas such as the Army Corps of Engineers, the U.S. Navy, the Federal Aviation Administration, the U.S. Agency for International Development. We had great growth with our state and local clients, with counties such as Los Angeles County, and from our major commercial clients.

Commercial orders included very high-end environmental and permitting services all across the energy, manufacturing and resource management client sectors.

And at this point, now I would like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present the details of our financials for the quarter and some for the year. Steve?

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Steven M. Burdick, Tetra Tech, Inc. - CFO, Executive VP & Treasurer [3]

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Thank you, Dan. So I do want to point out that in the appendix of this earnings presentation, you could find a full reconciliation of our GAAP results presented on this financial overview slide, if you're following along, to our ongoing results, which Dan addressed previously.

And now turning to our financial results for the quarter. As Dan just highlighted, revenue, operating income and EPS for the fourth quarter 2018 were quite strong. The fiscal 2018 fourth quarter revenue of $739 million and net revenue of $553 million increased when compared to the revenue of $735 million and net revenue of $534 million in the fourth quarter of fiscal 2017.

These revenue increases came from our continued focus on high-end differentiated services, which do have higher margins. In addition, after you take into account the third quarter divestiture of our field services operations, the relative fourth quarter increases were higher, with revenue up 5% over last year and net revenue up 8%.

From an ongoing perspective, we saw an increase in operating income of 9% and EPS of 19% compared to last year. Our GAAP results for revenue, operating income and earnings per share includes a $0.16 noncash charge due to a settlement of a claim, which is highlighted and reconciled in the appendix of this presentation.

This was an old claim on a fixed price contract related to a multiyear construction project, which have been completed in late 2014. This noncash fourth quarter charge resulted in a final resolution that provided a net cash receipt for receivables owed to us.

Now for the fourth quarter, cash flow provided by operations totaled $109.4 million. The fourth quarter is typically a strong cash generator, which has not only the case this year, but I want to point out this was the most cash from operations Tetra Tech has ever generated in a single quarter.

And to put this in perspective, our operating cash flow increased 65% compared to the prior year fourth quarter, and up 28% when comparing the total of $176.9 million in fiscal 2018 compared to fiscal 2017.

Our net debt totaled $131 million at year end and resulted in the leverage ratio of 0.5x. Lastly, our days sales outstanding was 85.4 days for the fourth quarter.

But even with this elevated DSO, we managed our working capital to generate significant cash from operations. And lastly, over the long term, we do have a DSO target of 75 days or less, which we will continue to work towards in fiscal 2019.

For example, a, this 10-day reduction from our current DSO of 85 days to 75 days would result in about $80 million in operating cash flow.

Lastly, I'd like to cover off our capital allocation. So our capital allocation strategy calls for balance of investing into growth of our business, managing the balance sheet and returning cash to shareholders. And our strong operating cash flows of $177 million in fiscal 2018 allowed us to continue to do just that.

In 2018, we utilized about $10 million to invest in CapEx for internal growth purposes. Also, during the year, we deployed about $68 million to acquire top firms such as Glumac and NDY, in order to add to our sustainable infrastructure design business.

Even with these strategic investments into our business, we had substantial capital to return cash to shareholders through both buybacks and dividends.

We paid out $24 million in dividends in 2018. And just this week, our Board of Directors approved our 19th consecutive dividend, which will be paid out in December at a rate of $0.12 per share.

And delivering significant returns to our shareholders remains a key part of our balanced capital allocation strategy. As such, in addition to approaching the completion of the previous $200 million stock buyback program initiated about 2 years ago, our Board of Directors has also approved a new $200 million stock buyback program to be initiated in fiscal 2019. Including both the dividends and the stock buybacks, we paid out 56% of our annual operating cash flow to shareholders in fiscal 2018.

I just want to say I'm very pleased to deliver these outstanding financial results for the year, and I want to thank you all for your time today. And I'll turn the call back over to Dan.

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [4]

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Great. Thank you very much, Steve.

As we enter fiscal year 2019, we expect strong growth across all 4 of our major customer sectors. In fiscal year 2019, we expect Tetra Tech's international revenue to grow at a 10% rate. Our international growth will be driven by regional infrastructure services and engineering design work, primarily in Australia and Canada.

We expect our U.S. federal work to be almost 1/3 of our overall business, and grow at a 5% rate for the year. This increase in our federal work is supported by our strong backlog, which will convert to a revenue for our civilian, Department of Defense and our international development-related services.

We expect our U.S. state and local work to continue to be a growth market for us. Overall, being up 5% year-on-year, even with the difficult comparisons with this last year's extraordinary hurricane events. It actually contributed quite significantly to our revenues.

Our underlying municipal water infrastructure work is expected to be up approximately 15% year-over-year, continuing on its industry-leading performance in this market.

And finally, our U.S. commercial work is expected to grow at a 5% rate, with increases in revenues for industrial water treatment, environmental cleanup programs and specialized renewable energy services.

I'd like to give a brief highlight to some of these end markets and types of projects that are actually driving our growth as we go into 2019. And I'd like to start with the U.S. federal government.

The U.S. federal government is a major long-term client of Tetra Tech's. We think of this client overall in 3 major areas: the first being the Department of Defense; the second being, civilian agencies; and the third being the U.S. State Department or its component of the U.S. Agency for International Development.

For the Department of Defense, our services include the assessment, management and design of key facilities and infrastructure, both here in the United States and overseas for the Department of Defense. And with an approved fiscal year '19 budget for the Department of Defense that is up significantly from last year, we see increased opportunities to support them.

On the civilian side of the federal market, we support the Federal Aviation Administration, the Department of Energy, the Environmental Protection Agency and other departments within the federal government. And by providing expert consulting, monitoring and data analytics, we believe that with the significant orders that we received in the latter half of fiscal year 2019, we have excellent visibility and funding to support their highest priority programs.

And finally, for international development, we're entering 2019 with the highest ever backlog supporting key projects worldwide to this department of the government.

The work we do for the Department of State and for the U.S. Agency for International Development is closely tied to the administration's priorities in all of the developing world.

With strong backlog and approved budgets with the federal programs that we support, we see increased opportunities to leverage our more than $15 billion in contracts that we have with the U.S. federal government.

Tetra Tech has a leadership role in the state and local water infrastructure market. We here at Tetra Tech have held the #1 rankings with Engineering News-Record in water for 15 years in a row, and we're quite proud of that. Our water-related services and municipal infrastructure and emergency response have resulted in Tetra Tech achieving 9 consecutive quarters of double-digit growth for our state and local work.

These regions associated with our state and local work leveraged our very strong presence in the largest markets for water-related services, and that's primarily in the states of California, Texas and Florida. These regions dominate the water business because of their large populations, expanding metropolitan areas and exposure to the extremes of water management, which include both droughts and floods.

Now Tetra Tech does provide full water lifecycle consulting and engineering for state and local clients, including the development of new water supplies. By doing things such as converting saltwater into drinking water, treating wastewater for beneficial reuse and even developing large-scale watershed management plans that protect the resources statewide.

For our commercial clients, we are using our Leading with Science approach to develop solutions for renewable energy, environmental management and high-end sustainable infrastructure.

For renewable energy, we are the leading consultant for the offshore wind industry, having worked on 11 of the 13 offshore wind projects on the East Coast, as an expert in complex permitting issues associated with this emerging-market, we're ideally positioned to support the expected expansion in the offshore wind market here in the United States. Over the next 2 years, the number of proposed offshore wind projects are expected to double and add another 5 gigawatts of capacity along the shorelines of the United States.

We continue to lead in environmental management holding the market-leading #1 position, as reported by Engineering News-Record, for 10 consecutive years. We provide high-end consulting and design services for our clients.

Over the past year, we've also tripled the size of our high-end sustainable infrastructure design revenues, with the acquisitions also Glumac engineering Group here in the United States and Norman Disney & Young in Australia, both of which took place in 2018.

Our operations based here in the U.S. and Australia now have the ability to support our clients worldwide in designing net 0 buildings. And these are facilities that generate energy, recycled water and provide high-quality environments for their occupants.

I'd now like to present our guidance for the first quarter and for all of fiscal year 2019. Our guidance is as follows: for the first quarter, our net revenue guidance is for a range of $525 million to $575 million, with an associated diluted earnings per share of $0.60 to $0.65. And for all of fiscal year 2019, our net revenue guidance is for a range of $2.2 billion to $2.4 billion, with an associated diluted earnings per share of $2.75 to $2.95.

Now if you're following along on the webcast, you can see the assumptions, this include the charges, the noncash charge of approximately $9 million or $0.12 for intangible amortization. That's included in these estimates. We anticipated 26% effective tax rate for the entire year. We have about 56 million average diluted shares outstanding. And as in past years, this guidance does not include any contributions from future acquisitions that we take place during the year.

In summary, we just had an excellent fourth quarter and entirety of fiscal year 2018, setting new records for revenue, net revenue, income and earnings for the company.

Our backlog reached an all-time high, with not only the highest number, but the highest quality of the book of business that we've had in the history of the company. Our focus on differentiated consulting and engineering service is providing us with a very high value, high margin business, that we believe is quite unique in the entire industry.

We are leading with science and recognize the value of innovation and the adoption of new technology in growing our business. And in closing, our financial and technical performance has placed us in the best position ever to execute our strategic plan and to invest in the future.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from Tahira Afzal, KeyBanc.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [2]

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Dan, I know that you've set guidance conservatively that's worked out pretty well for you. And 2 areas that seemed sensibly conservative around some of the storm revenues and come back in oil and gas. Can you, at the same time, frame what those opportunities could be if you did see those emerge and help your numbers into next year?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [3]

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Well, I think you have identified the 2 areas that we have been cautious. You could say conservative going into 2019. I'm going to work on these backwards, as you listed them between storm and oil and gas.

Oil and gas, we've been very cautious with respect to the timing and the magnitude of recovery of the markets. We have seen it a bit more consistent here in the United States, so we have seen our U.S. oil and gas work, which we primarily are focused on the midstream, continued to increase at a nice steady predictable rate. And -- so we have built that predictability and forecast into our plan. But the Canadian oil and gas work we've seen actually be quite slow. We've actually seen a number of areas where it's become more competitive. Price points have become more aggressive, in other words, "How low will you go?" And we're not focused on chasing it to the bottom. And so we have elected to remain quite disciplined, which has left it much more uncertain as to the contribution in 2019. So that's primarily -- we've not included much for the Canadian oil and gas recovery.

Now certainly, if that did recover and if you looked at the contribution, if you went back 4 or 5 years, no doubt it was structurally different time, but it contributed probably approximately $200 million in revenue and a significant amount in earnings. And in fact, if that came back to even half of that level, it would push our performance to above the high end of our own guidance, just that one item. And primarily associated with Canadian oil and gas. But we do remain cautious. You're right, we've been conservative on it. And I'd like to use the word, "We are prudent," in the way we've included it in our forecast.

Now storms, 2018 was just a remarkable year. A year ago, at this time, in this telephone call, so a year ago, today, essentially, we were responding to Hurricane Irma and we were responding to fires and Harvey and issues that are really throughout to the southeast of U.S. and fires out in the West. So those are quite difficult to estimate, so we put a very modest contribution. If anything similar to that happened again, this year, and we do recognize the frequency and severity have been increasing, but we've been very modest with the contribution. So if there was any unusual activity with that would also push us to the high end of our range with in and of itself that has that ability. But we have included some storm events, but really quite modest amount coming in. So I would consider ourselves appropriate, and some might even say conservative certainly, compared to what we've seen in the last 2 years.

And I think the last area, and I know you didn't mention it, but we have seen a pick-up but the first -- the first indications of the pick up on the budget is actually now at the U.S. federal government being spent, have shown up in our backlog, you've seen those. But if they actually continue in a manner of pushing out the contracts and the task orders, that also could push us to the upper end. So we've been somewhat modest on those 3 areas for 2019.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [4]

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Got it. While you were speaking, I was doing the math. It seems like you're being conservative comfortably, 15% plus versus the midpoint of your guidance. would that be kind of the right way to think about it?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [5]

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You could think of it that way. We, certainly, had people do that calculation. And as always, we're -- we can be very focused on meeting or beating what we're estimating, but these are increases, and as I shared during my prepared remarks, in every one of our end markets. So I certainly wouldn't call it being overly cautious, because we are forecasting increases in all of our end markets. But I do believe that some could be quite strong, given some favorable activities during the first quarter in the year.

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Operator [6]

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The next question is from Ryan Connors with Boenning and Scattergood.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - MD & Senior Analyst of Water and Environment [7]

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I wanted to dive into the backlog just a little bit, Dan. You've kind of -- you danced around this in a couple different ways, but I wonder if you could just more directly address the composition of the backlog, in terms of the mix and the type of margin profile we should expect as that gets delivered?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [8]

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The backlog has generally reflected the revenues that we have. So take a look at the partitioning of the revenues per year, backlog would follow up with a bit more emphasis on our federal government. So our federal government is about 30%, backlog is a bit more than that. And commercial since it's a bit shorter, in some instances, almost book and burn, on the commercial, it would be a bit smaller. So if you use the -- if you took about 15% increase on the 30%, so if you put about 35%, 37% on government, and then you took the same reduction on commercial, that would be a reflection of the partitioning or the makeup of the backlog.

As far as the overall margins embedded, we had a really good year in the Government Services Group. No doubt, capped by the fourth quarter. But I would say on a good year, or I should kind of -- I hate to call it the middle-of-the-road, maybe middle-of-the-road for us to be a good year by many standards, but at about a 13% margin, it's about our forecast would be in the Government Services Group. And that would be embedded in the backlog, which is what causes us to actually predict or forecast or guide our revenue and income numbers from the backlog. CIG, or the commercial international, while it was lower just last year in 2018, we actually think it will move into double digits between 10% and 11%, and that's what's embedded in the backlog. And that's what we would expect to achieve in 2019.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - MD & Senior Analyst of Water and Environment [9]

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Got it. That's exactly what I was looking for. Great detail. My other question just has to do with -- you talked about the sustainable design. Obviously, that discipline is growing fast, you talked about it's tripling year-over-year. But can you size that in any way for us in terms of when that becomes, starts to really move the needle? And then also my understanding of that is that, that really is across your different customers, that type of activities happening everywhere, or is that just more of a commercial thing?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [10]

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It's mostly commercial right now. We have some state and local, but it's really been mostly commercial. And we've grown it quickly, I think on a run rate, because we're still picking up to this level. So on a run rate, if you use our last quarter, we're probably getting closer to about $200 million a year. So that's sort of the number. It's beginning to get significant, so that's on the total -- and by the way, that's not on a net revenue, that's on a total revenue basis, but on $3 billion, so it would be about 7%. So it's actually getting to the point of contributing. It is higher margins, and we are just beginning to actually move that capability into our federal clients, because we have plenty of contract capacity. We do think the margins would moderate a bit under the federal rate structures that we have, being cost plus and some T&M that were established, that are very low risk, with respect to the federal clients. So we would have top line growth that could actually be -- increase significantly, and of course, there might be some trade-off or moderation on margin. So that is a trade-off that we're going to take a look at. But we would not grow that top line at the federal level at the expense of the growth that we're having on the commercial, so it would be incremental on top.

So I'd like to see it next year get to be 10% of the entire company's business, which would forecast a 50% increase from $200 million to $300 million. We'd put it at about 10%. It might -- I don't know if we're going to hit that in 2019, but certainly, we're headed that direction.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - MD & Senior Analyst of Water and Environment [11]

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Got it. And then one last one from me. Just talking about, I guess, more of a risk factor, but what -- obviously, a lot is talking about accelerating wage growth in the U.S. economy. Your assets walk out the doors every night. It's a people business. So talk about how you're managing against that in terms of cost?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [12]

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It's a great question. With unemployment here in the U.S. down around 3%, we're really sensitive to it. But it is an interesting market in that we have not seen appreciable wage pressures by the professionals in the categories that we're working in. We've actually seen a net -- I don't know how to call it, but the migration into the company through the disruption and consolidation of a lot of the other competitors and peers in the marketplace. It maybe a short-term effect of all of these consolidation. I think that those that we've seen in as consolidators use 2 words, we're consolidating and, then were we are initiating cost synergies, which is code for we're getting rid off a lot of folks, which makes a huge amount of technical staff available. And it is interesting, the best and brightest are not the ones being let go, but the ones leaving on their own and going to another location that they would look -- they'll be more stable. And we've been a huge recipient of that. And that's actually helped, I think, as far as supply and demand create more supply. So it hasn't actually caused an increase in our direct cost base. So we are sensitive to it, but it's not been a big issue.

And just one note, while salaries are what you're referring to, much of Tetra Tech's compensation at the senior engineer and management executive level is around performance and equity participation. And so when you take salary well, we would be at market when you actually add in performance compensation annually, which is bonus and participation in equity. Coming to Tetra Tech, generally, puts them at the best spot as far as overall compensation in the marketplace.

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Operator [13]

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And our next question comes from Andy Wittmann with Baird.

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Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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I'm going to -- want to dig in a little bit on the cash on the balance sheet here. Usually, when you guys settle a claim, like it was recognized in this quarter in the CIG segment, there's usually some compromise and you guys get cash. I think, Steve, you might have mentioned in your prepared remarks. Did you quantify that? And was that received? Was that cash on that claim settlement received at the end of the fourth quarter? Is that still part of the 85 days that's outstanding?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [15]

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It was -- to answer your question, it was part of the 85 days outstanding at the end of the quarter. We did resolve issue in the fourth quarter, and we did receive the cash in the first quarter.

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Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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Okay. And was it -- how did it relates to the $10.6 million charge? Was it -- can you give us like the actual size of that?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [17]

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We actually received -- so the charge, the charge was the difference between what we had booked and what we actually received. So we did receive the -- it will be somewhere between $15 million and $20 million.

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Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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Okay, great. And then just, I guess, as it relates to that, and the other 10 days of the $80 million opportunity, I think last time you guys comment on this, a lot of that was tied up on the RCM segment, kind of wind down. You guys are getting real close there. Maybe Steve, just an update on kind of the negotiations on the RCM tied-up cash. And do you think that fiscal '19 is the year where we get some of that in there?

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Steven M. Burdick, Tetra Tech, Inc. - CFO, Executive VP & Treasurer [19]

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So I think we have, for the RCM segment, we have taken our backlog down to 0. We have wound down the projects that were there for the last 4, 5 years finally. And we do have a handful, maybe 6 contracts, that are still outstanding where we do have claims out there. We would like to resolve those sooner versus later, but as you see with this last claim that was just resolved, it took over 4 years to resolve. And so these things will, they are -- we are focused on resolving those. We like to resolve them in the next year. In all probability, they'll probably go beyond that.

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Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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Okay. Well, despite that, your leverage level is still kind of well under your targets now. You didn't -- it's kind of conspicuous that this is the first quarter where company didn't come in and do the normal $25 million in stock buyback. Dan, I'm going to look to you for a little bit of coverage here. I mean, obviously, you increase the size that kind of gives us the sense that the board wants you to do a little bit more. You didn't in the quarter. What does that tell us about kind of what you're thinking in the quarter and why didn't you participate, when it's been so programmatic in the past and how do we think about this going forward? And maybe even more specifically -- I mean with the company kind of deleveraging, returning over 50% of the cash over this year, why isn't that the template to return more like 50% rather than the 30% on a go-forward basis?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [21]

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Well, I think, first of all, with respect to the deployment of the last bit of the previous $200 million, just a matter of timing with respect to renewing the $200 million. So we were simply focused on both the size and the time frame that would be approved by the board. So there should be nothing unusual. We have been returning, we've had 2 sets that we essentially have completed a $200 million buyback, and have just entered into the third one. Essentially, We've been buying back on a linear basis, $25 million a quarter, for essentially will be moving into our fifth year. And I would expect no material change there. But I will say that the reason we wouldn't make that number substantially higher as far as an announcement at the outset is, we do want to give the flexibility to invest our capital to growing the company and maintaining and expanding our #1 positions, not just here in the United States, not just in Canada, moving very quickly in Australia to those positions, but there's geographies and technical service areas that we would like to bring on, the best and brightest in the entire industry. And what that means is acquisitions and M&A. And so we do want to keep plenty of flexibility. We can deploy this $200 million that was just announced on -- at this call and in our earnings release yesterday, and still do a substantial sizable amount of M&A to keep us at the forefront in the markets that we compete in.

So I know our leverage is down to [0.5], I know our target is between 1 and 2 with great comfort, even between 2 and 3, which we haven't seen, I guess, ever. But we've been quite comfortable there, but those type of leverages would just be temporal as we move into a more competitive position into even bigger markets. So don't expect to see that at 0.5, if for some reason, the right acquisitions and the right disciplined price point are not available, look for us to use buyback as the lever that would return more capital to the shareholders. But the reason for that 30%, at least, coming into the year, this should give us flexibility to deploy that capital for other firms to come join us.

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Operator [22]

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The next question is from Noelle Dilts from Stifel.

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Noelle Christine Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [23]

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Just expanding on that last point around your interest in potential M&A. Could you expand upon some of the geographies that are of most interest to you as well as some of the market verticals?

And then, given your leverage position at this point, would you be looking to do sort of a bigger deal or [a coffee] or more of a kind of a roll up of smaller operations?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [24]

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So as you just mentioned, there's 2 areas that we focus on. One is geographic expansion; to support existing clients that we that are performing work and asking us to perform work in new areas that we don't have a material presence or to expand to offer services into large markets that we're not, so that's one of the geographic expansion. And the other is expanding verticals for services where we're at. So let me start with more niche, which is the roll-up. So services that we would like to expand here in the United States where we have a significant presence. We're over 300 offices in the U.S., we have over 9,000 people in the U.S. providing high-end consulting and engineering, and there's areas that we need to expand in that will make us even more competitive.

We've done very, very well on the emergency response and being really market leader on the front end of the consulting and evaluation of the disaster activities sort of from the 1 month to 1 year after event takes place. But we really would like to expand and follow that with our clients all the way through providing additional services, which are program management and the final detailed design and selection of the recovery efforts that would make the cities and counties and coastlines more resilient. So we would like to bring in here in the United States additional vertical capability on the consulting and engineering side for program management and long-term resiliency design work. Now we have a lot of our capability in house, but we would like to add additional clients, capabilities and resources here in the U.S. And so you could refer to that as a roll-up. I would say expanding our -- at the verticals in that. So that's a key area for us.

We do a lot of work on the consulting and upfront side on the oil and gas midstream here in the U.S. in areas that are growing, one of the largest oil-producing areas not just in the United States but in the world is the Permian. By all measures, if it were oil-producing country, it would be, if not in the top 10, in the top 5. It's a phenomenal in the upfront areas that we're focusing on, would not only be the environmental permitting. But the one thing that's missing and seeing great demand in Western Texas is water and water supply, water identification, water use, water retreatment, and ultimately the waste that comes from it, so that's another area that we're looking to add additional capability roll-ups that we think is a big opportunity, not only today but in the future.

So as far as verticals here in the U.S., those are 2 that we're actively looking at. And as far as geographic expansion, we'd like to add more on the municipal side in Eastern Australia, which is for the cities of Brisbane, Sydney, Melbourne, some of the others. So I would say that is rounding out the geographic expansion, we have a few thousand people in Australia, and we think we can actually move in water and environment to the #1 position in that continent.

As far as new territories, we have a very minimal presence, and I would say it's very high on our list, is actually the U.K. and the European markets. Now there are some -- we do need a platform, and so whether it would be a roll-up and small tuck-in, no, probably not. We'd actually be looking for something for scale that we could use as a platform that we could then use the capabilities that we have here in the U.S., in Canada and Australia to flow through our technology and our leading expertise in water and environment and the renewable energy. But we'd like to do that through a larger platform and we are looking appropriately to that geographic footprint.

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Noelle Christine Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [25]

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Great, that's very helpful. And then second question, just within the U.S. commercial, could you just expand a bit upon the trends that you're seeing in some of those sort of verticals that make up that category, particularly, oil and gas in the U.S., specifically and maybe some of what you're seeing on the environmental side with coal ash and some of those services?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [26]

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With the -- in the U.S. commercial, it's actually pretty broad for us. The oil and gas, if you went back 4 or 5 years was a much bigger part of our U.S. commercial business. It's actually a pullback as it has for, I believe, everyone. So our U.S. commercial is industrials. So we work for the automotive. We were for the aerospace. We work for the manufacturing sectors. We work for commercial utilities. And so a lot of the renewable energy work we do both for on and offshore wind, solar and others are actually for commercial developers, so it's actually a pretty significant portion.

And as I mentioned on an earlier question, sustainable building design has actually moved up quite quickly. And most of that work is actually on the commercial sector. So while we are focused on oil and gas and ride that back up in the U.S. as it recovers and actually builds, it is still a pretty small part relatively speaking of the business. And now what we're doing for the oil and gas is almost -- it's heavily. I want to say, almost exclusively, but it is a great majority of the midstream work. So it's routing, it's right away clearance. It's the feasibility study for geotechnical tunneling, crossing of wetlands, the environmental permitting and we actually do it all the way through the design. We do some construction. It's actually not construction, environmental oversight, not construction oversight, but environmental oversight when the pipeline owners actually do the construction with separate constructor. We'll do the environmental oversight for compliance for water quality storm, water, endangered species, biological diversity issues such as plants.

And then coal ash because of this current administration's deemphasis on enforcement and focusing, we're doing a little bit in that area, but it has actually been an area that has suffered under the new administration from the priorities from the previous administration. So it has been very de minimis. And if you went back 3 or 4 years, you'd hear us, being quite bullish on it based on economic investment requirements, but that has materially changed in the past couple of years. So that is not one of the key drivers for us. It is a market we support. There are health and safety and priorities that individual corporations are making. But as far as regulatory driver, that has actually decreased quite significantly.

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Operator [27]

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The next question is from Tate Sullivan, Maxim Group.

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Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [28]

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I think it was the last quarter, not the most recent slide presentation on emerging contaminant opportunity. Is there an update on that opportunity? Or is there a specific announcement from the government we should be looking for? Can you update on that progress, please?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [29]

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Emerging contaminants is actually a growing area. We identified it last quarter on one of the slides that we identified that as a specific growing area and priority, primarily, for the Department of Defense, not just to federal government. And a lot of it has been chemicals, the acronyms I referred to is PFOS and PFAS, which are really byproducts of the components used in fire retardant's that have impacted ground water. And while the states and local health agencies and USEPA are actually working through -- the U.S. Environmental Protection Agency, are working through cleanup levels that would be protective of human health. We've seen the Department of Defense move forward. We identified $20 billion of new individual programs that are moving forward. It hasn't waned. It hasn't gone away, it's just something that we're continuing to pursue and actually perform on. And we can provide more updates, but we don't see any new special announcement that will come out of the federal government. This is just part of their ongoing priority to protect both the enlisted and military force, with respect to exposure of the drinking water and the surrounding communities around the basins that have been impacted.

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Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [30]

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And can you give us -- and it was also the prior quarter where you mentioned on the delays in the government releasing task orders. Can you give an example of how that time line works usually?

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [31]

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Well, last quarter, I talked about backlog had been relatively flat for Tetra Tech. Now we did have an all-time record in the third quarter. Revenue was at an all-time high, things were very busy. Backlog was relatively flat. And my comment was that the U.S. federal government really had not gone from having its budgets passed and appropriations approved to releasing projects and releasing task orders. And we did see that actually happen in the fourth quarter. Now it wasn't -- it was not a tsunami or Tidal Wave or anything like that. It was -- the federal government is not in and of itself what drove the backlog to a new all-time high with orders, but it -- we did actually see meaningful release now as to what we have been forecasting. And so I think there's a lot more that can come out just to release and expend the budgets that have been approved and authorized by the federal government. This is the earliest appropriation approval for the '19 components of the budget that we've seen in over 20 years. So it's the best visibility that we've had from the federal government going forward.

So yes, fourth quarter was much better from their authorization to their release. And actually, if that continues here through most of '19 in a more regular manner, that would also help us drive not only our backlog to even higher levels, but that would then translate into revenues and help drive us to the top end of our guidance.

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Operator [32]

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

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Dan L. Batrack, Tetra Tech, Inc. - Chairman, CEO & President [33]

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Well, thank you very much, Hillary. And thank you all for your insightful questions and your interest in Tetra Tech. I'll tell you, here at the company, we're excited and really looking forward to fiscal year 2019. We are already a month and a week into it, and we are off to a fast start, and we really look forward to speaking with you again next quarter to give you an update on how we've started in the first quarter of our fiscal year 2019. I hope you all have a great rest of the week, and I'll talk to you on our next quarter. Bye.

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Operator [34]

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