Tetra Tech, Inc.
Q2 2008 Earnings Call Transcript

Published: 15 May 2008

[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 offices at 626-351-4664, and we will get one to you right away. With us today, from management are Dan Batrack, Chairman and Chief Executive Officer; Sam Box, President, and David King, Chief Financial Officer. They will provide a brief overview of the results, and then we'll open the call up for questions. During the course of the conference call, Tetra Tech management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning future events and Tetra Tech's future financial performance. The statements are only predictions and may differ materially from actual future events or results. Tetra Tech's Form 10-K and 10-Q reports to the Securities and Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statement. Tetra Tech 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 the conference up for questions and answers after the presentation. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

[Dan Batrack:]

Thank you very much and good morning and welcome to our Second Quarter Fiscal Year 2008 Earnings Release Conference Call. While we've had a strong performance in all of our segments for each of the last 11 quarters, this past quarter, the second quarter, was the best in the last five years. With more than 30% revenue growth we recognized in the second quarter, we are on target to finish the year at about $1.9 billion in total revenue for the year. This growth rate far exceeds our initial plan of 15% year-on-year growth. Our backlog has grown even faster than our revenue. For the first time, our backlog is over $1.5 billion. Our backlog grew at almost 40% in the second quarter, and this number is over $1.5 billion, represents almost 10 months of funding, which is the longest visibility of funded work we've had at Tetra Tech in more than five years. Also, during the second quarter, both our resource management and our infrastructure segments just did a great job on executing fixed-price contracts. This performance delivered some of the highest second quarter margins we've ever had during this period. And this project performance resulted in our income growing at more than 30% during the quarter. I'd like to go over our three primary client sectors that comprise our business. In this quarter, I'd like to start with our commercial sector, which was the client sector that grew sequentially the fastest this past quarter. Our commercial sector now represents about 36% of our total revenues. The first area that drove the commercial growth was alternative energy, namely wind projects. The wind industry is forecasted in overall industry-wide growth at about 25%, but we here at Tetra experiencing [ph] a much faster growth. In 2008, we are forecasting approximately 100% growth in revenues over what we experienced in 2007. In 2007, we did about $50 million in revenue in the wind sector and 2008 we are forecasting about $100 million, a 100% increase. What's driving this and giving us great confidence and visibility is in the last 90 days we received more than $150 million in orders for new wind projects, and that was all booked here in the second quarter and was a big contributor to our backlog. A secondary outgrowth in the commercial sector is urban revitalization projects. More specifically, this is where are we are remediating (inaudible) and groundwater contaminated properties for their return to productive use. And in this last quarter, we signed a significant contract to remediate the largest undeveloped property in Metropolitan Los Angeles and return it to use for residential, commercial and entertainment purposes. And this is a very strong market and has not really been impacted by the volatility in the commercial sector. Our next client sectors are state and local clients. While we continue to grow this area more than 10%, specifically this last quarter has become a smaller part of our overall portfolio with our state and local business representing about 16% of our revenues, and that's down from 20% sequentially last quarter. At the state and local markets, we are continuing to focus on the most essential water programs, which are specifically first, water regulatory driven programs, which are programs like combining sewer overflows and other enforcement-driven projects. That's a very strong market for us. We also do design and inspection of critical water infrastructure and those are projects like inspection and design of dams and levies and other protection structures. And the third area that we're performing at the state and local is water management projects, and this is really services at the front end of water at the tap. These projects, three I just listed, are least likely to be affected by state and local budget cuts and an awful lot of these projects are funded by bonds and not tax receipts. So we see this work being very stable at the state and local level for us. And finally, our largest client sector is the federal government, which generates almost half of our revenues. Federal work continues to be very stable, and as I'll talk about in a moment, our federal contracts provide us significant orders this last quarter for work to be performed both here domestically and internationally. And I'll actually describe that here in just a moment. Performance by market, the combined growth that we had across all three client sectors was more than 30% year on year in our total revenue and more than 20% year on year for our net revenue. All three of our client sectors grew at more than double-digit rates, and this really shows strength across all of our end markets, we are seeing across all of our segments and all of our clients. I do want to say a few words about this last quarter's list of significant new wins. On the webcast you can see a list here. We've changed this format from previous quarters, and we are including a contract ceiling, not just the funded value that's being contributed to backlog but also our contract ceiling. This past quarter, we added about $4 billion in new contract ceiling, and that new contract ceiling will allow us to sell work to our federal customers. Primarily, these large contract ceilings were driven by the federal clients, but what we count quarter backlog is only the funded task orders we've received. In the second quarter, we received $674 million in funded orders, an all-time record high for Tetra Tech. We feel really good about that here. I'd like to highlight one of our orders from this quarter. On the webcast, you can actually see the details here. Let me focus on one that's a relatively new client for us at the federal government. We are doing work for the United States Agency for International Development or USAID. The U.S.' foreign policy is made up of what they refer to as the three Distribution. First is diplomacy, and so the State Department and Foreign Service professionals. The second is defense, and that's an example would be troops in Iraq or Afghanistan. And the third, and this is a growing area for us, is development, and this is where the U.S. government is supporting developing countries through water, irrigation, agricultural and governance projects. And we expect an increasing focus in this area by the U.S. government, and we're looking to be a major supporter of these programs. And it's really been a huge growth area for us from previous quarters. Now really it's all these orders that resulted in our first ever $1.5 billion of backlog. This is without a doubt our best leading indicator of our performance to come. It clearly demonstrates our continued strength and stability across all of the business groups, and all of our client sectors contributed to this growth. I do want to note that these projects we received many very large awards this last quarter. They are longer duration, larger in size, and I'm going to make a note, they typically will be executed over 12 months up to 18 months. Not all of this increase in our backlog is going to be recognized in either the third or fourth quarter, but will be incrementally recognized. And that actually contributed to our preparing and increasing our guidance for the rest of the year, and I'll talk about that in our guidance section. At this point, I'd like to turn the presentation over to David King for a more detailed review of our financials. David?

[David King:]

Thank you, Dan. Again, this is the best performing quarter for the past five years, for the second quarters, actually as far as I can remember, it's actually we can go back longer. All the key operating and financial metrics registered outstanding results, revenue growth, income and EPS trends, cash flow and backlog performance. Revenue grew 33.3% to $461.4 million. Net revenue grew 21.6% to $287.4 million. It was, as Dan mentioned, only it was a broad-based growth across all segments and markets. More importantly, we also experienced strong organic growth, 16.5% on revenue and 7% on net revenue. Income from operations also registered strong results at $24.8 million, a 35.1% increase. As you recall last year, we had a favorable outcome on a legal matter, and which resulted in a $1.8 billion pickup. Normalizing it, the increase would be 49%. Operating margin was 8.6%, excluding some M&A related charges, it would be 9.1%. It was partially contributed by the closeout of a couple of large fixed-price (inaudible) during the quarter. Nevertheless, this is an excellent grade for the second quarters. EBITDA grew from $21.2 million to $28.8 million, a 35.7% increase. This result included $700,000 increase in the intangible amortization during the quarter. SG&A grew from $26.8 million to $32.9 million, a 20% increase. First, this is consistent with our revenue growth, excluding the litigation, as I mentioned earlier, the increase was only 15% or about 11% of the net revenue. In all the increase actually came from increase in proposal effort and spending. And, as you recall, this also happened in the last quarter, and all this increase in effort and spending actually contributed to a larger and longer cycle of new orders, as Dan mentioned earlier, it reflected in our backlog. We will continue to invest heavily in new business opportunities and hold down our G&A infrastructure as we grow. Interest expense increased a bit to $1.5 million. It was principally due to acquisition borrowing and much lower yield in our cash. Tax was $9.7 million due to increased earnings. The effective tax rate was and will be 41.5% for the year. EPS increased from $0.18 to $0.23, an increase of 27.8%. Adjusted for the litigation impact on last year, the increase was about 44%. On some of the balance sheet items, let me just repeat what I said last quarter. We had reclassified certain tax accounts as a result of adopting FIN 48. There was no P&L impact nor retained earnings adjustments. Accounts receivable was $470.4 million. This is consistent with our revenue growth. Accounts payable increased 45.7% to $143.7 million, primarily due to revenue growth. Partially, it was our continued effort and focus on contract and working capital management as you can also see from our cash flow results. Net debt was $40.5 million due to acquisition borrowing, sequentially reduced by $19 million. Our debt/equity ratio at the end of the second quarter was 15.2%. Debt to capital ratio was 13.2%. Cash flow from operations, it increased more than 100% from $22 million to $44.4 million. During the quarter, we received about $15 million of advanced payments on two large projects which ramped up during the quarter. A substantial portion of the $15 million will be cycled and dispersed in Q3 and some in Q4. In Q3 we expect our cash flow to be between $10 million to $15 million as a result. For the whole year, we are increasing our forecast to $55 million to $65 million from $50 million to $60 million. CapEx was $5.9 million from the same quarter last year of $2.5 million. As I mentioned, it was pretty much due to some ramp-up of some large projects, including the wind jobs that we've. We are also increasing our CapEx forecast to about $20 million from $16 million previously. As Dan mentioned earlier, we will be a $1.9 billion company, 20% plus bigger than what we had last year. DSO is 77.2 days improvement as a result of strong cash collection and advanced payment on some jobs I mentioned earlier. I expect DSO to stay at the high 70s for Q3 and Q4. Our net debt claim charge, again this is a key metric we continue to track and report. Shorter term we will lever to buy new companies on organic growth, and we will see some fluctuation as a result. Longer term we'll continue to deliver our balance sheets or self-fund our growth from cash flow. And if you think – look at '06, we were at about $1.4 billion. In 2007, we were slightly under $1.6 billion, and we will be $1.9 billion in 2008. And our goal is to stay within this span moving forward. Again, this is an outstanding quarter. Back to you, Dan.

[Dan Batrack:]

Great. Thank you, David. I'd like at this point to provide an update on our guidance for the third quarter and for the rest of the year. Our guidance for the third quarter, and I'll start with net revenue, our net revenue guidance is $285 million to $305 million with a guidance of earnings per share of $0.22 to $0.24, and that would be for the third quarter of fiscal year 2008. Our updated guidance for the entire year of FY '08, fiscal year '08, is a total net revenue for the year of $1.15 billion with a range of $1.15 billion to $1.19 billion. The earnings per share on a diluted basis for the entire year is $0.90 to $0.94, and this reflects a raising of our guidance, both at the lower end and the upper end. This $0.90 to $0.94 represents raising the lower end of our guidance from $0.87 to $0.90. So we raised the lower end by $0.03, and we raised the upper end of our guidance from $0.93 to $0.94. This raising and narrowing of our guidance is driven by increased backlog that you've seen, increased visibility that we have out into the future and really an overall lower risk to our plan at this point. But with the vagarities of the economy, we do believe it's appropriate to provide our Q3 and Q4 guidance consistent with our earlier forecasts. And you can see we moved everything up in accordance with our exceeding performance here in the second quarter. I also want to note that our earnings guidance does include $0.05 of intangible amortization, and once this intangible amortization has been expensed, this $0.05 will be converted to contribution to earnings. So that'll be converted. The guidance also provides for no contributions from future acquisitions that may take place either the rest of this year or out into the future. And as David had mentioned earlier, assumes 41.5% effective tax rate. In summary, our performance for the second quarter shows the strength of our position in all of our key markets in the water market, alternative energy namely the wind market, and in our environmental markets. We are going to here in the third quarter and out into the future aggressively invest in pursuits and acquisitions in our core markets. We are in an excellent position, and we think we are well-poised to even build on this strength. And with this momentum, we feel confident in our 2008 guidance and our future into 2009. And at this time, I'd like to open up the call to questions.

[Operator:]

(Operator instructions) The first question comes from Alan Robinson with Royal Bank of Canada.

[Alan Robinson:]

Good morning.

[Dan Batrack:]

Good morning, Alan.

[Alan Robinson:]

A couple of items on the release caught my attention. Firstly, obviously strong growth all around, but you had a particularly surprising jump in organic growth in the quarter on the positive side. And on the negative side, it seems that state and local growth was less robust, and in fact, you had a noticeable sequential drop-off in business there. I wonder if you could provide some more color on both of those items.

[Dan Batrack:]

Absolutely. Let me start with the sequential numbers from our state and local. The second quarter, which is the months – our fiscal second quarter, which are the months of January, February and March, are historically a reduced revenue month, particularly in state and local. We do not have field surveyors out in the field, less drilling activities, less field sampling activities. So, our headcount and revenues at the state and local are down in the second quarter. So, a better comparison is year-on-year comparison at the state and local level. So, if you compare that to a year ago, you will that see our state and local business is in fact, up. With respect to organic growth, it has increased on a net revenue basis, which is largely labor driven. We are up to 7%, and in fact, that's our goal. Our stated objective has been to achieve 15% total top and bottom line growth with approximately half of that coming for organic production or organic generation. And so this has been a target. It's not something that we see as unusual. In fact, this is a target we've been working on for sometime, and we feel we finally got to the point that we believe that it's going to be sustainable at this level.

[Alan Robinson:]

So to that point could you give us some idea of how you are progressing in terms of cross-selling with some of the acquisitions that you've put on board recently? It seems that cross-selling might be contributing quite a lot to that growth?

[Dan Batrack:]

It is. Let me give you one example that's just been exceptional. It was just over a year ago, almost a year ago precisely that we brought The Delaney Group onto Tetra Tech. They are a firm that had focused on the wind market located in upstate New York. It was cross-selling and using their expertise together with our local delivery through our 250 offices across the United States that allowed us to win, to be successful on three wind projects, wind generation projects in Wyoming that contributed approximately $150 million in new orders during the quarter that was back in January. That would not have happened without Delaney and was fully a function of this cross-selling. The same is true with United States Agency for International Development. It contributed very well to specific orders and were really some of the largest contracts we won. Tetra Tech had been doing work with USAID at a range of $10 million to maybe $20 million per year with this client and bringing on ARD here six months ago, not only brought on their success, but helped lever additional success within our own operations. So these really are synergistic.

[Alan Robinson:]

Okay. And just finally, your gross revenue backlog increased by over $200 million sequentially, suggesting that net revenue backlog should be up over $100 million too. And yet your net revenue guidance midpoint is only up $10 million for the year compared to last quarter. Now I know that's just for two quarters remaining and I appreciate your backlog covers up to 18 months, but can you explain perhaps some of the apparent disconnect there, the magnitude of the difference between the backlog increase and the guidance increase is quite dramatic?

[Dan Batrack:]

Well, I want to go back to the wind project because that was a particularly large driver for this last quarter since it represented over $150 million in new backlog. The upfront work that'll take place in Q3 and Q4, which are the next two quarters out, are a lot of the upfront study work, evaluation. Some of the big revenue drivers both on a net and a gross basis will actually be in out quarters. And so you can expect that while the actual construction management engineering aspect is larger, it's actually pushed out a little bit further in that time frame. So, as I mentioned when I talked about both the – some of the new wins on the backlog, it is not evenly spaced out and isn't particularly front-end loaded into Q3 or Q4. So that's if you want to call the disconnect between the increase in the backlog and the forecasted revenue growth.

[Alan Robinson:]

Okay. Thank you.

[Operator:]

Your next question comes from Francesca McCann with Stanford.

[Francesca McCann:]

Congratulations on a great quarter.

[Dan Batrack:]

Thank you very much.

[Francesca McCann:]

Hi, there, congratulations on a great quarter.

[Dan Batrack:]

Great. Thank you very much Francesca.

[Francesca McCann:]

Sure. Couple of questions. One is, turning to international and what you anticipate for additional growth there and perhaps what you are seeing either through U.S. federal contracts or directly with international entities not through the U.S. government?

[Dan Batrack:]

Well, the first question what is rest of the federal government, the biggest driver will be U.S. Agency for International Development. I've talked a bit about them, so I won't repeat myself too much. But we think it's going to continue to grow and be very strong. The Department of Defense work we are doing both Iraq, Afghanistan and other areas to support their missions, including in Europe, it will continue to be strong for us. But let me turn to work that'll be actually contracted in country. One area that we've had some particular recent success is just beginning is in India. We have an office there that has now grown to almost 100 individuals, and we've just had our first success this past quarter with a couple of different projects, specifically two, which are design and build wastewater treatment plants. We think it's a huge market. It's at the very beginning of their infrastructure development there on water supply and wastewater treatment. And it's one of the areas that we are focused on. So, that's an example of where we think we will see some growth.

[Francesca McCann:]

Okay. I will follow-up with probably more India questions after. And then drilling down a little bit into state and local, my two questions there, one are you seeing any slowing in the noncritical, you walked us through as you had a couple of quarters ago the areas of critical infrastructure, water management, all that's regulatory driven. But what about the portion of state and local that is not, which I know is a smaller portion? So one is, if you are seeing any slowing there? And then secondly, geographically any areas of either higher growth or slow in growth?

[Dan Batrack:]

Well, we are not seeing it. I tell you it's something I'm really sensitive to. I like everyone on this call, read the newspapers. I follow very closely the number of states that are forecasting deficits. It's substantial. I've seen the forecast of reducing tax receipts, and there's not a day that goes by that doesn't trigger me going to those individual states within our own operations looking for projects that are canceled, solicitations that are being delayed, and we've just not seen it. And I think the first leading indicator for us would be these projects are being these new solicitations that are coming out would be – being put on hold, and we've not seen that. Now what I would say is that the Sunbelt states, irrespective of their forecast is where we are seeing strength. I do know that out here where we are located, our headquarters is in Pasadena, California, that California's deficit for this next year is essentially equal to pretty much all the rest of the states combined. And we are still seeing a lot of programs coming out. Now some of them are bond funds, and I know that would fit into the critical nature that we think we won't see any. But we just haven't seen it yet. But we are cautious. We are looking as far ahead as we can, but at this moment we just haven't seen it.

[Francesca McCann:]

Okay. Thank you. Another industry that you commented on in the past, although not as recently, is mining. So, I just want to see what your view is on mining if that's still an area that you are focusing on for possible acquisitive growth and any other commentary there?

[Dan Batrack:]

Well, mining is one of our strongest internal markets. It's growing very fast. It is work that U.S. multinationals primarily are taking us overseas. They've taken us to exciting places like Mongolia for uranium mining development, which we've staff on the ground there right now. It has taken us a lot to Latin America, South America, and it's taken us up into Canada. Those are kind of the primary areas. We are having good success. Certainly there's a lot of talk about these very high commodity prices in mining. Even if they came down and we've seen some changes in – short-term changes in prices, the breakpoint or the cost point for these commodities is substantially below what the market price is now. So even a very large correction would have little or no effect on the work we are doing out in the field. So that's working very well for us. It's all organic. We are looking for acquisitions, but mining is maybe equal to oil and gas, is one of the hottest markets that exists, and the likelihood of an acquisition at what we would consider a appropriate price, which would mean accretive to earnings in the first year, is difficult. So, we are still looking, but we are not the only ones that know that mining firms are valuable commodities.

[Francesca McCann:]

Great. And then last question, my apologies if you said this, but a follow-up to Alan's backlog question. Is the percentage of subcontracted work within the backlog higher than it has been in the past?

[Dan Batrack:]

No, it is about the same. This last quarter or the second quarter that just finished that we are addressing in this call, our subcontracted work was about 37%. The first quarter of this year, it was slightly higher, just around 40%. Our backlog currently has a mix of about the high 30s. So it's very similar to what our revenue experience is that you have seen.

[Francesca McCann:]

Okay. Perfect, thanks so much.

[Dan Batrack:]

Thanks, Francesca.

[Operator:]

Your next question comes from Debra Coy with Janney's.

[Debra Coy:]

Thank you. Good morning Dan and good morning everyone. Just to follow up on the margins, I don't know if you can sort this out entirely, but a few moving parts, some unusually profitable closeouts that David mentioned in the quarter. Clearly your FTEs was down a little sequentially, suggesting your utilization must have been unusually good, and the percent of subcontracting has moved around a little. And the other factor there that I'm wondering about is the mix of fixed-price versus cost-plus types of contracts. Can you talk a little bit about how those mix of items are looking for your backlog going forward? It seems that the margins that we've gotten here in the second quarter are unusually good. I don't know how we can sort out the different drivers of that and how sustainable it is?

[Dan Batrack:]

There's few questions here. Let me start with the type of contract mix embedded in our backlog. It has been historically and we've spoken to this, our contract type mix overall is about 30% cost-plus, about 40% time and materials and about 30% from fixed-price projects for a lump sum.

[Debra Coy:]

So that has not changed?

[Dan Batrack:]

That has not changed. In fact, we looked at it very close, the numbers are almost precisely at those levels. It's not – there's not really much rounding on those. It's about 30/40/30. Our backlog, we've looked at what is in our backlog, it's about the same. Utilization was up. It was up. We were much more efficient. We had fixed-price contracts that we moved to close out, and typically on a fixed-price contract, we'll embed or keep in the project certain contingencies in case something comes up and when the project is complete we'll recognize as part of a closeout. And that did help as David had indicated, drove margins up both in resource management a bit, but most notably in our infrastructure group. And for a second quarter for our infrastructure to be over 9%, I would not model that as a sustainable number for our second quarter. We are looking on an annual basis of infrastructure 8% to 9%, so it's in that range. Resource management we are looking for 9% to 10% net revenue. And so overall I think we do have room to run at these type of levels. And so we are in the range.

[Debra Coy:]

Okay. That is helpful. And then moving across to the demand side, you talked about some of the drivers. Can you give us an update on where we are with the Corps of Engineers, and where the funding post the passage of the legislation, there's certainly been more talk in Washington lately about stimulus funding. But to my knowledge, we really haven't seen much change in the actual funding coming through the core?

[Dan Batrack:]

That is right. What we have seen, though is there have been some very large awards outside of WRDA, and WRDA for those that are unfamiliar, the Water Resource Development Act. A bill was passed in November of '07, so just a few months ago. WRDA overall we do not expect appropriations are being compiled now. We don't expect that will either pass or that it would have a financial impact the contribution to us until 2009, fiscal year '09. But we are seeing large programs come out of the Corps of Engineers. They awarded a very large coastal protection project on the Mississippi River for over $0.5 billion, of which we are a participant on the team. There are other projects coming out that are measured in the hundreds of millions in the Gulf Coast. There are additional projects coming out in the Everglades. So, we are seeing what we'd look for the type of projects we pursue, strong funding and procurement out of the core and that is exclusive of WRDA. When that kicks in and we think that will be – could be as early as late, late '08, but we really think it's a fiscal year 2009 contribution.

[Debra Coy:]

Okay, helpful. And the last question for me is, on the acquisition front, you mentioned that the mining acquisitions are looking expensive, but you also said in your prepared remarks that that was going to be a core focus for the second half of the year. What are you seeing on the acquisition front? A few things have gone to other, shall we say, more aggressive buyers. How does the market look for you?

[Dan Batrack:]

I think the market look good. In the change, and I call it retrenching or a movement down in the multiples in the A&E sector, obviously they affect public companies immediately. You can take a look on the exchanges and see your value on any given page. But the private companies have a little bit of a lag between movement in the public or public peers and themselves. They don't see theirs changes quick. It's been a few months now since there has been some slight reduction in the multiples. And so it is making water firms and wastewater treatment, water supply available. The wind companies are out there or firms that would help us in that sector. And there are some mining firms that are looking – they are looking for a fair price, but they are also looking for scale. In order to provide work to their multinationals, they need a set up offices, a deeper balance sheet and geographic locations around the world. And the smaller companies don't have that. So, it's also making them available to us. So, there's good opportunities out there, the firms we are looking at right now, pipeline looks good, and we don't want to provide any guidance until they close. But, as they do, we'll provide announcements. I do want to make one comment on acquisitions, though. I did not address this during the presentation. We did one, in case there was any question on the acquisition or M&A front, we did one acquisition during the second quarter, these last three months. It was a, what we refer to as a tuck-in acquisition. We acquired resources and a few staff. The total revenue of the small infrastructure, it's a design firm located in the Northwest of the U.S. is $3 million per year in total revenues, and that we've acquired them at the end of February. And so the contribution to Tetra Tech's revenue was de minimis.

[Debra Coy:]

Okay. Thanks, Dan. Appreciate it.

[Dan Batrack:]

Great. Thanks, Debra.

[Operator:]

Your next question comes from Rick Eastman with Robert Baird.

[Rick Eastman:]

Yes, Dan, could you just – a quick explanation on the FTE. I was surprised to see that actually drop a little bit. Do you have the resources you need to support the backlog build at this point and why did that actually decline a little?

[Dan Batrack:]

Yes, let me give you some detail on that. First of all, the second quarter of each year seasonally we see our headcount drop. This is the low point of the year. So, we see typically 50 to 100 heads drop. It's just part of taking our field crews and field activities out. So, that was one component. But the reduction was a little bit bigger than we would see just from a seasonal adjustment. We had one project that we are largely self-performing. It was a project in Utah. It's a UTOPIA communications project, and the project was put on hold in January at the beginning of the quarter, and we adjusted our staffing immediately just in concurrence and response to the client's authorization for work. And so we've reduced somewhere between 50 to 80 heads on that. And so that's where it took place. One adjustment, which I was actually very happy how quickly our operations moved. It kept the financial numbers both on margin and other items in communications strong for the quarter. But it did contribute to a reduction. And we do have –

[Rick Eastman:]

And is that project still on hold or –?

[Dan Batrack:]

It's on hold. As of today, we are doing essentially zero dollars today. We do expect that it'll be turned back on toward the very end of this third quarter. But we've taken that out of our forecast, and so there is no risk associated with execution on that. I know that a few years ago that project had much higher visibility, but it's really a de minimis project for us.

[Rick Eastman:]

Right. I understand.

[Dan Batrack:]

And just a word on your – do we've enough resources? We've enough resources.

[Rick Eastman:]

Yes. And then just I guess the follow-up question might be from a project standpoint. Any update on either the Hanford project or the Louisiana Inner Harbor project? Any update in terms of expected timing on awards there?

[Dan Batrack:]

Yes, I can give you an update on both. Hanford, the decision has not been made, and it's our understanding that that'll take place this summer. The Inner Harbor or Inner Harbor Navigational Channel was awarded several weeks ago. I think it was a little less than a month ago. And we were not successful in a prime or as the prime contractor on it, but were a participant with the team that was successful.

[Rick Eastman:]

Okay. Very good, thank you .

[Operator:]

Your next question comes from Chris Bamman with Morgan Joseph.

[Chris Bamman:]

Yes, good morning. I was wondering if you can maybe comment, the wind business is going pretty strong. And I was just curious to know if you are aware of any potential bottlenecks that could slow down that growth such as permitting or anything of that nature?

[Dan Batrack:]

No, no, we think one of the, I don't know if you would call it slow downs, but one of the critical path milestones is the grid, actually making sure that you can identify a point to access and receive approval to get into the grid. You can generate the power, but you have to get it into the grid. Of course, you don't have to get it into the grid until after the wind generation has actually been complete. So it is one of the tailing items.

[Chris Bamman:]

Okay. That is pretty much all I had. Thank you.

[Dan Batrack:]

Great. Thank you.

[Operator:]

Our final question comes from John Quealy with Canaccord Adams.

[Chip Moore:]

Hi, good morning, this is actually Chip Moore for John. Congratulations on the nice results. Getting back to wind, wondering if you could touch on the pipeline a little bit there. Also, are you seeing any other opportunities in the sustainability sector outside of wind? And also, how is the margin profile, and how does that compare to the base business?

[Dan Batrack:]

Wind, we do see more opportunities. We are aggressively looking for the right opportunities, and there are a lot of them out there. So we are pursuing them really across the market. Staying on that subject of wind, the margins, it's generally commercial work done either for utilities or wind developers. And so we would see on a net revenue basis, the margins to be consistent with what we would look for from our commercial sector, so in the teens. But there is a fair amount of subcontract component which we have subcontractors take on performance risk for their construction component. And so the overall margins on a total revenue are a bit lower when you take it than you would see just on the net revenue portion. We do see plenty of opportunities out there in the pipeline, and as we are successful will as into the extent that they are material, we'll have announcements on those. On the sustainability front, we just have a great number of opportunities. Certainly the design work we are doing on vertical construction, the lead or low-energy, on high-efficiency in building structures, particularly for energy consumption is just growing very fast. There's a number of jurisdictions that require all new commercial buildings to meet certain lead standards, gold or even platinum standards. We are doing the first platinum residential high-rise design right now in New York City, and that's just been a very strong market for us.

[Chip Moore:]

All right. Thank you.

[Operator:]

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

[Dan Batrack:]

Great. Thank you very much. I would like to thank all of you for your questions. Those are excellent questions. I appreciate all of your attendance of this call and support here, and I look forward to talking to you next quarter. Thank you.

[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.