Tetra Tech, Inc.
Q3 2012 Earnings Call Transcript

Published: 2 Aug 2012

[Operator:]

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 [phone]. 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. During the course of the conference call, Tetra Tech's 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. These 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 statements. Tetra Tech undertakes no duty to update forward-looking statements. In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the Investor Relations section of Tetra Tech's website. [Operator Instructions] With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

[Dan L. Batrack:]

Great. Thank you very much, Kimberly, and good morning, and welcome to our 2012 Third Quarter Earnings Release Conference Call. While Steve Burdick, our Chief Financial Officer, will be presenting the specifics of our financials, I'd like to start this morning off with a brief overview of some of our key financial metrics for this past third quarter. We had a very solid third quarter of fiscal year 2012. Our diluted earnings per share was $0.45, up 18% year-over-year at the high end of our guidance for the quarter, and this was the highest quarterly earnings in the company's history of any quarter of our history. Operating income was $46 million, up 17% year-over-year. Our revenue also hit a new record all-time high as well, with our revenue at $685 million for the quarter and net revenue of $517 million for the quarter, which was an increase of 8% year-over-year. And maybe most importantly and certainly of big importance here in the company, our visibility into the future also went up with a new record high for our backlog, which ended the quarter at $2,064,000,000, up 10% year-over-year. Now as has been the case in many of the past quarters, our ECS and our TSS front-end segments grew this quarter at 5% and 20%, respectively. These are the segments that are focused on the earliest studies at the beginning of our projects and deliver our highest profits, they are the segments that are largely leading are international and commercial growth markets. Our third upfront and smallest front-end segment, EAS, shrank slightly this past quarter due to continued softness in the federal and the municipal building design markets. And I'm going to be looking in the future quarters to more closely align some of the design capabilities in our EAS segment with our ECS and TSS segments, where their front-end markets in the mining, oil and gas and international water-related services, I expect to drive more growth into the design groups that we have within the company. So look for that in the coming quarters. Our RCM, our Remediation and Construction Management group, grew slightly with an uptick in our U.S. commercial projects that actually offseted some of the completion of the federal coastal protection projects we had in New Orleans. Our RCM segment continues to steadily increase their revenue and improve their performance. In fact, this past quarter, the operating margin within RCM more than doubled from the same quarter last year. And I'm very pleased with their performance, and that was all done organically. No acquisitions, nothing that was infused from the outside. Overall, we did have a positive organic growth for the quarter. It was just at about 2%, driven primarily by our front-end services for the U.S. commercial and international projects. However, if we take out an account for the completion of our federal coastal protection projects that were done for the Army Corps of Engineers, our federal client in the New Orleans area, if you actually took those out, we did know it was going to be a difficult year-on-year comparison. Our core organic growth would have really been in the 6% to 7% range. So if you adjust for that one change from a year ago, it puts us up right in the target of what we would be expecting. Our performance by our customers. In the United States, our commercial revenue continues to grow with our commercial work up 16% year-over-year, driven by workload from just a really broad base of our commercial clients. Some of those clients included the industrial and manufacturing sector, energy, commercial and commercial utilities. Our oil and gas saw nice uptick for us, and mining continued to be strong, so it was really very broad based for us. The U.S. commercial revenues were up year-on-year in all 4 of our reporting segments, so it wasn't concentrated in one -- any one given area. And this is the seventh sequential quarter of double-digit growth for our U.S. commercial clients. Work for our international clients grew also by about 9% year-over-year. This work continues to be dominated by our Canadian-based clients, but it also includes our recent acquisitions in Brazil, Chile and Australia. Our international work is now at 31% of our revenues this past quarter, and it's consistent with our projection for this fiscal year. We expect the percentage to continue to increase to a level of about 40% of our revenue within the next few years. So this is one of the higher growth areas for us. When we look at the company overall, the majority of our revenues now or about 57% is now generated by our international and U.S. commercial work, which again is the highest profit margin work we have within the corporation. Our percentage did change in the federal work. It was down about 2% year-over-year, reflecting the completion as I've mentioned a couple of times of the construction work that we had in New Orleans in the prior year. I expect the federal work to be relatively flat year-over-year, and in fact, if you took out the headwind on the New Orleans work, our federal revenues were roughly flat. And I expect for the remainder of this fiscal year for our federal revenues to represent about 1/3 of our overall business. Our state and local work was about 12% of our revenues this past quarter, and I do expect that because it's a small number, it will see some fluctuations. It was actually up nicely this past quarter, but I suspect these fluctuations will be driven by just a few large projects at the state and local level. Overall, this is not a growth market for us, and I expect it to hover right around the 10% level for the company. This past quarter, our backlog was up both year-over-year and sequentially, resulting in an all-time high record of $2,064,000,000 for the company. I'm especially pleased with this quarter's list of new orders, which if you're following along on the presentation, you can see on the right side. That started with new project startup awards from our government, commercial and international clients across all of our key major client sectors. In the third quarter, the biggest single area where we received orders was in the commercial side. We had over $300 million in new project awards from our commercial clients, and these were associated with more than 1,000 different projects, predominantly for front-end services in our ECS and our TSS business segments. In the federal market, we're seeing an increase in the bidding activity and awards. It continued to be strong. We expect this to continue through the fourth quarter as we see our U.S. federal agencies obligate their funds and issue new contract awards prior to the end of the fiscal year. So this is sort of a seasonal effect we see year right before the end of the completion of the federal fiscal year. This last quarter, we received awards from our top federal clients from USAID, Department of State, Army, Navy, NASA, FAA and U.S. EPA. And if you take a look at the slide, you'd notice that other than the first list of various commercial projects, all the rest of them were from our federal clients. So we do see this being strong moving into the end of the year. I'd now like to turn the presentation over to Steve Burdick who will provide a more detailed presentation of the financial results for this past quarter.

[Steven M. Burdick:]

Thank you, Dan. I will begin with the fiscal 2012 third quarter financial overview in a bit more detail. Overall, our third quarter results either met or exceeded our previous guidance, as Dan indicated. Revenue increased about $10.9 million or 2% to $684.7 million, primarily as a result of growth in our commercial and international markets. And secondly, revenue from acquisitions over the last 12 months added a little bit of revenue also. Net revenue increased at 8%, to $517 million, for the same reasons I previously noted for the revenue. I do want to point out that our net revenue is growing at a faster pace than revenue because we're involved in more self-performance work, especially in our commercial and international markets. Income from operations increased by about 17% to $46.3 million. When compared to the revenue and the net revenue growth, we did experience a higher growth rate in our operating income, and this increase was driven primarily by solid project performance. The EBITDA margin increased to about 11.4% from 10.7% last year. The EBITDA margin has improved sequentially over the last 6 years, and it will continue to be a financial metric that we focus on to improve going into the future. On the income statement, our SG&A was about $51.5 million for the quarter. This is an increase over the prior year's third quarter. First, our selling costs have increased at a higher rate when we compare to our revenue and net revenue growth, primarily because we were bidding on more proposals, and we are focusing more efforts on our commercial and international work, which are requiring additional selling efforts. Secondly, I want to point out that our -- the G&A portion of our SG&A continues to increase at a lower rate than our net revenue. Next is the tax. Our tax increased to about $15.7 million due to higher income. The effective tax rate that we will be looking at for the year is about 34.8% in 2012. And EPS of $0.45 met the high end of our previous guidance. We hit the high end of our guidance again as a result of solid project performance and the increasing EBITDA margin. On the balance sheet, our accounts receivable increased about 4% or approximately $28 million to $697.2 million. The majority of this increase related to our growth in revenue. Accounts payable decreased as a result of lower subcontractor activities, and this lower amount is reflective of the revenue again increasing at a lower rate compared to our net revenue. On a third quarter year-over-year basis, our net debt position was lower. We had very good cash generation from operations, both for the quarter and year-to-date. In fact, we were in the net cash position for a good portion of the quarter up until a few of the acquisitions that closed towards the end of the quarter. And as we continue to generate cash from our operations, we will continue to pay down our debt. So as you can see on the cash flow that has benefited our balance sheet, the quarter 3 operating cash flow was $56.8 million for the quarter. This is fairly consistent with the prior year quarter. And in addition, I do want to point out that our year-to-date cash flow is up about 30% over last year. Our forecast for 2012 is estimated to come in between $135 million and $150 million, and this translates to cash generated on a per share basis of between $2.11 to $2.34. CapEx is above the prior year, but is in line with our previous guidance. We expect our CapEx to be about $20 million to $25 million for fiscal '12, and we will most likely be at the lower end of this range as we continue to carefully evaluate our capital investment approach. And the lower CapEx not only benefits our cash position currently, but will also benefit our future EPS through future lower depreciation expense. And our DSO or days sales outstanding at 78.6 days are consistent with last year at this point. We do expect the number to decrease during the year even though we see increasing revenue in the near term. And the next graph is a -- shows our net debt position. What this graph shows is the impact of our positive operating cash generated and the cash used for acquisition investment. As you can see on the graphic, our net debt position has improved sequentially from the end of last fiscal year. And further, we expect to be in a net cash position at the end of quarter 4. With that said, this management team will continue to leverage our balance sheet to invest in growth opportunities that will provide higher profit margins and access to new markets to further enhance our shareholder value. And with that, that concludes our third quarter financial review, and I will now hand the presentation back over to Dan.

[Dan L. Batrack:]

Thanks, Steve. In June, we announced our most recent acquisition, the acquisition of Rooney Engineering. Rooney is a $30 million per year engineering firm with about 200 employees. They're based in Denver, Colorado, and Rooney provides high-end engineering and planning support for the development of oil and gas pipelines, essentially the midstream engineering market for the oil and gas, which we expect to be a high-growth sector across North America, both the U.S. and Canada for us. Now Rooney, I'd like to say a few words about them, is just what we were looking for in an acquisition. They're a great technical and cultural fit. They have a great financial track record, and very importantly, they have the desire to continue to grow and leverage the resources of a larger company. And when you put all 3 of those things together, it's just the right fit for Tetra Tech and expect to make a significant contribution not only from their own performance, but for other work that we'll be able to leverage across the company. Now we do have an active pipeline of acquisition candidates, with a particular focus of expansion of our capabilities of water and environmental services in the oil and gas industry. So look for more Rooney-type firms to join us as we build out this area. And I, therefore, expect the commercial revenues from oil and gas projects to significantly contribute to our growth in this next coming year. On the next slide, our EBITDA margin trend. As you can see on this graph, we're projecting continued improvement in our EBITDA margin toward our long-term goal of 13%. With a larger percentage of our revenues now coming from commercial clients, both in the United States and internationally, and the improved performance in our RCM business group, I expect that 2012 to continue the trend of margin improvement that we've maintained over the past 6 years now. I would like to share with you all now a little on our customer outlook as we come to the end of 2012 as we move into the fourth quarter and as sort of a general overview of what we see moving into next year. Our international and our U.S. commercial clients will continue to drive the growth of Tetra Tech. Internationally, we see our operations in commodity-driven economies, especially Australia, Chile and Brazil growing very rapidly. I expect our international commercial revenues to continue to grow at a pace of sort of 10% to 15% per year, augmented by additional acquisitions on top of that. And at this growth rate within the next 2 or 3 years, I expect our international revenues will represent about 40% of the overall company. We expect our U.S. commercial markets to maintain double-digit growth. As I mentioned, we've seen over the past many quarters, which will put the U.S. commercial revenues to continue at about 25% of our revenues, which is very similar to where they are right now. Overall, I expect our combined international and U.S. commercial revenues to increase from its 57% currently, up to 65% or perhaps even a bit more than that, just in the coming years. In the United States, I expect the public sector, which includes the federal and state and local work to remain relatively flat on an annual basis. I do want to point out that on a relative percentage, how these revenues will drop, but we expect to maintain approximately the same revenue levels in the terms of dollars for these clients. So we'll do the same amount of work, we'll hold the same positions, but as a percentage of our overall business will drop, just because the other areas are growing so much quicker. On a combined basis for fiscal year '12, 2012, I expect our organic growth to be in sort of a 5% to 8% range, which is consistent with our long term growth objective. As I presented previously, we target a 15% compounded annual growth rate, which is about half organic and about half from acquisitions. We're pretty well right on track towards that. Based on the improved visibility that we have with our backlog in this last quarter and our performance through the first 3 quarters of this year, I'm raising our FY '12, fiscal year 2012 guidance for earnings per share. So I'd like to share with you our specific guidance for the fourth quarter and for the year. So for the fourth quarter, we're providing a net revenue guidance of a range of $525 million to $575 million. The midpoint of that range would calculate at a 16% year-over-year growth rate. The associated diluted earnings per share for that revenue would be from $0.45 per share to $0.50, which at the midpoint would be approximately 13%. We've also updated our 2012 year end total net revenue guidance, which remains the same at $2 billion to $2.1 billion, midpoint puts us at about 14%, with a associated diluted earnings per share guidance range for the entire year of $1.61 to $1.66, which also calculates to a midpoint of 14% growth year-over-year. I do want to point out a few items that are included in this guidance. This does include a $0.31 charge during the year for intangible amortization as shown on this chart. It also assumes $0.11 stock compensation expense, which is a noncash charge. As Steve had mentioned earlier, a 34.8% effective tax rate, which I'll note is larger than last year. And so the growth if you take and normalize the tax, we've actually performed even at a higher level on an earnings per share. And assumes a 64 million average diluted shares outstanding for the company. In conclusion, our strategy is to focus on international expansion and growth in the private sector, such as oil and gas markets, while maintaining our U.S. public service revenues. We're not moving back from these at all, but in flat budget dates, we don't expect this to be a large growth area for us. Our strong performance in the third quarter resulted in an 18% earnings per share year-on-year growth, and we continue to generate cash even at a faster rate than these earnings. And I expect at the end of the year, the cash per share to be at midpoint of our guidance is over $2.20 per share of cash generated during the year. Our backlog is a record high, as I had mentioned earlier, at well over $2 billion. And based on this performance, I'm very happy for the entire Tetra Tech team and for our shareholders to be able to increase our EPS guidance for 2012. And with that, I'd like to now open the call to questions.

[Operator:]

[Operator Instructions] The first question comes from Justin Hauke of Robert W. Baird.

[Justin P. Hauke:]

So I had a question just in your presentation slides, the targets were still an 11.2% EBITDA margin for the year, and I think year-to-date, you're at 10.7%. So is there anything unusual in the fourth quarter that kind of helps bridge that gap or how do we think about that?

[Steven M. Burdick:]

I think one of the things that we looked at is -- and then we talked about at the last 2 quarters is, we did have additional $5 million of SG&A that took that down a little bit, and we don't expect to have that going forward. So you'll see -- what you see is increasing EBITDA this quarter and increasing EBITDA in the fourth quarter to get back up to that higher level.

[Justin P. Hauke:]

Okay. That's helpful, and then my second question is, can you talk a little bit about just kind of the level of procurement activity? I mean, you announced a lot of good contract vehicles this quarter, and I guess how is that trending? And how should we think about maybe some of that actually translating into task order releases going forward?

[Dan L. Batrack:]

Well, as you've seen on the backlog slide from the presentation, we saw a pretty fair amount of activity of actual task order awards. So our backlog in actually the federal government was up slightly on a sequential basis. That was a good thing. But more importantly, we're seeing the government put in place many task -- many contract vehicles, whether they're multiple award IDIQ contracts as the government refers to them or even sole source, so that they can be prepared to provide more work. So we really saw strength across all of the sectors, as I mentioned in the call. So on the federal side, we saw strength really across the board. On the -- mostly with contract capacity with a fair amount of task orders, but I'd say the contract capacity is where we saw the most activity. On the commercial side, it's a bit different. They don't put in vehicles that they don't use, and they don't do multiple awards. The task orders come out. That's why we listed the over $300 million of individual task orders. And again, I'll point to the difference as Tetra Tech reports its backlog and its orders. It has to be contracted. They have to have the funding and have to authorize us to proceed. So those numbers really don't have a comparison for most of the other E&C or engineering firms out there. So they get the work, they give it to you, and they ask you, they fund it on a very short-term basis. So we really saw strength very broad across the commercial side, and contract capacity growing on the federal side.

[Justin P. Hauke:]

Great, and then I guess that $300 million, so that would be about, what, 40% of your orders or so for the quarter?

[Dan L. Batrack:]

Yes.

[Justin P. Hauke:]

Okay. Great, and then my last question, I guess just looking at the cash flow again, which obviously you guys continue to do a really great job with that, but as we think about Tetra Tech being now a larger company and $150 million or so of operating cash flow that you're looking for, relatively low CapEx needs and some of these deals, the range that you're looking at being in this $30 million to $50 million range I guess the question is, is there room to do M&A and also maybe think about a dividend? Has that entered the calculus at all or is that still kind of off the table at this point?

[Dan L. Batrack:]

Well, that's a great question. We -- at the current deal flow that we're doing, we not only have enough to -- and you can see it on the net debt graph that Steve Burdick had presented. We not only have enough cash flow to fund all of the M&A deals that we've been doing and still build a cash position. So that is something that we're looking at. Certainly, with the sort of general macro uncertainty in the federal government and other areas, we want to be a bit conservative before we step out on that front, but it is something that we're looking at because we wouldn't look to just accumulate capital on the balance sheet. That's not going to happen. So I'm going to deploy it for growth both for our commercial and international growth plans, but there are other uses of it, including dividends that are not being eliminated from consideration.

[Operator:]

The next question comes from Michael Legg of Roth Capital.

[Michael Frederick Legg:]

We talked earlier about acquisitions out there, the larger ones being somewhat higher valuations than you're willing to pay right now. Could you comment about why that is? Is it because these companies believe they have great prospects going forward and how that fits with your prospects going forward also?

[Dan L. Batrack:]

Yes, great question, Michael. As we talked in the past that we would love to and continue to evaluate larger deals, so to speak. I think that the ideal size is probably is between $100 million and $300 million a year in revenues would be the size that we'd like to acquire. But I would say the reality is that the pipeline of opportunities that are transactable by us or our actionable are actually the smaller to midsized, sort of the Rooney size. I'd say $30 million to $50 million. You're right. Some of the characteristics of those types of firms, are they are growing faster, and they have higher margins. And there's more of them to meet and see where we have the fit both culturally, financially and in the marketplace. Now the areas we've been looking. We've been looking to grow in Australia. We've been looking in the oil sands and in some of the higher growth areas and to find a firm of scale, so $100 million to $300 million or even larger is there's just -- the fact is, there's a scarcity. And the scarcity of the good performers drive a expected very high valuation. And in fact, in most instances, it results in a valuation that would be dilutive, and we have not done that and don't expect to do a transaction that would be dilutive unless it was really strategic and made a difference. All of these transactions of the small to midsized firms are accretive in the first quarter on a GAAP basis. So they have the right fit. They'll contribute top line and bottom line, and they'll be accretive even after intangible amortization. So those are the areas that we're focused on. They are lower risk, and we think that at least in the U.S. and North America, we've got plenty of resources to capitalize on markets that a small to mid firm can get us into. So we don't necessarily need the resources. What we need is the experience, some of the technical capability and access to the clients' market. So I think this is going to work well for us, and the reality is over the next several quarters, you should look for small to midsized firms coming through our acquisition. But we certainly continue to be active looking for larger that would be more of a platform acquisition in places like Australia, Brazil and even certain locations in Canada, in niche areas like the oil sands and others.

[Michael Frederick Legg:]

Okay, and just to expand on that. When you go into market such as Australia, could you talk about how it opens up other geographic markets for you from a trading perspective that you may not be as favorable trading status with the U.S.?

[Dan L. Batrack:]

Yes, absolutely. It's interesting. How we say it here is when we wanted to go to Latin America, we went to Canada. So for example, when we first went to Canada here starting 3 years ago, we knew that there were favorable tax treaties, a lot of the multinational commercial clients in Canada were mining firms that worked in South America. So by going to Canada, we immediately had access to work and clients and projects in Chile and Brazil. In the case of Australia, the large trading partner is China in Southeast Asian countries. So by going to Australia, it gives us access to the growth markets in, let's call it, China is predominantly the big driver, but the other Southeast Asian markets without the contractual currency or other legal risks. So it's a -- some would call it a bank shot or an indirect -- indirectly participating in the growth in Asia, but we're doing it through Australia.

[Operator:]

The next question comes from Tahira Afzal of KeyBanc Analysis.

[Aleena Khan:]

This is actually Aleena on for Tahira and Saagar. I'm an associate on the team. So I guess I just had a quick question on your EPS guidance. What are -- for the fourth quarter, what are the different variables maybe like U.S. elections, commercial activity that could impact your company in the fiscal fourth quarter, and how is it coming at the bottom or top of your EPS guidance range? Your full year guidance seems to have a $0.05 range. Seems a little bit wider than what I believe is your usual $0.02 -- $0.02 to $0.03 range. And if you could walk us through that.

[Dan L. Batrack:]

Well, we don't have a lot of variables coming into the fourth quarter. We're sitting here on August, beginning of August, so we're already roughly 1/3 into the fourth quarter. The intent wasn't to widen the range to represent more risk in the quarter. In fact, as we move to the end of the year, we see less moving pieces. Certainly, some unusual activity at the federal government with respect to acrimony during the election could have -- has the potential to impact the government, but we're seeing that it's already at sort of a high level, so I don't know how much higher it's going to go, so I don't see additional risk there. And an economic slowdown on the commercial side could actually move quickly through the commercial markets. One thing we know is, regardless of what happens in the federal market, your actual projects and funding don't change very much. Commercial clients can move quite quickly. So if you saw a material change in the economic outlook, the commercial side that could have an impact as it always would, and there's certainly a lot of uncertainty built into the market. So that could cause it to either be higher or lower, and then there's sort of the normal things such as weather or some other type of certain force majeure events if we had an unusual huge storm events, and it closed down all field activities that can drive you to the lower end. So those are sort of the standard items. This year items that would be unusual would be the election and potentially the risk associated with the economy. The $0.05 is not intended to represent any broader. I think we've $0.03 -- normally, I think we've been $0.04, this time we left it at $0.05 just to leave the -- move the bottom end up a bit for the year hitting to go with a annual guidance of only $0.02 or $0.03 coming into the end of the year.

[Aleena Khan:]

Okay. Great. And if I could just ask another quick question. In the past, I believe you noted that your Canadian operations have higher bookings in the winter months, and you burn more work in the summer months. Is that still the case? And will we be able to notice an impact from the shift or has integration, growth of the overall business sort of subdued the effect?

[Dan L. Batrack:]

Well, there will be a little effect. There's no doubt that the Canadians write their proposals and get to fund -- they write their proposals in the winter, get the funding in the spring and do the work in the summer, and that effect is in place. We did have some nice awards here in late spring. We did press release one of the commercial mining projects, which was a great example. It's international for us. It's outside the U.S. It's in Canada. It's commercial. So it's a commercial miner, and it's for an environmental program, which is exactly in the dead center of what our expertise is. And it was one that added a nice size contract and just the beginning of the orders. So that's an example of a larger one that we actually press released. So that's going well. I wouldn't say that integration of the Canadian activity into the company has muted the impact of that cyclicality of proposals in the winter and the funding in the spring. They're 30% of the company, and that's a big enough number that actually does effect the company both in its revenue, and its bookings a little bit, and does add a seasonality to the company's numbers.

[Operator:]

Your next question comes from the line of Corey Greendale of First Analysis.

[Corey Greendale:]

Question about the organic growth. So Q4 guidance I think implies stronger organic growth, and it sounds like one reason for that is that you're not anniversarying that large federal project like you did in Q3, but can you just verify that's the primary dynamic? And in what segment would you see that acceleration of organic growth primarily?

[Dan L. Batrack:]

It's really across the board. I'd say that the headwind for the last quarter, and you had it exactly right, was the headwind in the RCM. So within the segments, we'll see more growth within the RCM group, and it is because of the single headwind of the New Orleans work.

[Corey Greendale:]

Okay. And then with the shift toward commercial and international, the key -- I realize this question had come up in the past, but it seems like the TSS and EAS operating margins are kind of sustainably above your prior target ranges. Is there any reason to think that, that will not continue and would you consider increasing the target operating margin ranges for those segments?

[Dan L. Batrack:]

That's a great question, Corey. I'm actually looking at the anticipated operating income or profit ranges, profit margins for all 4 segments. And I have seen the number increase for RCM. I'll sort of work from the bottom up. RCM has shown the most pressure in the last few years because of the slowdown in the construction side. They've been performing well inside the anticipated margin now for the past couple of quarters, and I think as we put in more commercial work into that segment, I'll see them not only at the top end of that range, but I'd like to sometime mid next year once we increase the book of business in the commercial sector, maybe move that entire range up. EAS, I've talked about actually lining them up closer to ECS and TSS. And by the very nature of that, it would move the margins coming out of that business up. And so, I would look to increase that here this next year from the 7% to 9%, up slightly. And TSS has been consistently beating its range of 9% to 11%, and we've slowly been adding a commercial component into that business. The beat of that range had historically been just excellent performance and award fees coming out of our federal work because of really project closeouts and just good performance. But we've recently been adding commercial work into that sector, and in fact, Rooney went into the TSS group because we've been doing a lot of environmental clearance for pipeline right-of-ways, and it's a natural fit with what Rooney does. So as we increase the commercial of that, we'd go up. And ECS, I think we already have them up at a range of 10% to 12%. Depending on how the commercial growth continues, we could actually see that at the upper end of that, but I probably wouldn't look to move that in the short term.

[Corey Greendale:]

Really helpful. Thanks for giving us some insight into how you might be think about that. I just had one more quick question, which is, you talked a little bit about the federal backstrap, but have you taken kind of a shot at what the effect could be if sequestration were to occur next year?

[Dan L. Batrack:]

Well, we have. Obviously, we're watching it very closely like everyone who works for the federal government. Well, even if you don't work for the federal government, you should be watching it because there'll be a ripple effect through other parts of the economy. We did note this week that Congress just announced a plan to come up with a 6-month continuing resolution to hold the existing funding levels now through the end of the calendar year. That should actually help and is a good sign that they're looking actually to work together on a bipartisan. So that increases our confidence that some form of a deal is likely to be put in place before sequestration in January could potentially hit. But there's no doubt that if, in fact, it takes place, there'll be roughly 8% to 10% reduction across the board in expenditures from defense and discretionary budgets, and it's absolutely certain it'll impact everyone who works for the federal government. It's unrealistic to think that there'll be any area that's immune. But here at Tetra Tech, we do believe that there will be a discretion within the reductions that each department receives for them to actually apply this 10% reduction. It represents just over $50 billion for defense and another $50 billion for nondefense. We believe that they'll be focused on priority programs, and the one fortunate thing we have here at Tetra Tech is the priority programs for the federal government are not something new. That is the actual core of our business. So programs that have a regulatory driver, for instance, cleaning up of old military bases, cleaning up of Superfund sites have regulatory deadlines, and that's our business. Other priority programs such as smart power within USAID and Department of State, those are also priority programs. So we're in a good spot in the event that it does happen. I certainly don't believe that we would be immune, but we would be very much more resistant to an impact in the event that it does take place than federal funding at large.

[Operator:]

The next question comes from John Rogers of D.A. Davidson.

[John Rogers:]

A couple of things. First of all, in terms of your revenue growth guidance Dan -- based -- and this is rough math, but based on your organic growth of 5% to 8% and what you're talking about total top line growth, it looks like acquisitions are expected to contribute more in the fourth quarter than at least what we've seen over the last couple of quarters. And you've done some small deals but nothing huge. Are those businesses, especially the pipeline business, more seasonal? And I guess -- yes, that's my first question.

[Dan L. Batrack:]

Well, I would say that they are a bit more seasonal because more fieldwork takes place in the spring and summer months, but I would say that the reason the acquisitions are contributing a bit more is we had a slow acquisition ramp on or addition in the past few quarters. And so, so you'd see that for instance, CRA and Rooney here just joined us in June, this past month. And so the contribution from a acquisition, they weren't there really for the third quarter or second quarter. So on a relative basis, they are contributing more.

[John Rogers:]

Okay. And it sounds as if you've got some -- a decent pipeline though, I mean, is that what I'm hearing for...

[Dan L. Batrack:]

We do have a decent. Yes, we do have a decent pipeline.

[John Rogers:]

Smaller deals.

[Dan L. Batrack:]

But one thing I would make clear is our guidance, we are not forecasting the contribution of any revenue from an acquisition that we haven't already announced and closed. So there is no built-in anticipation of additional revenue from an acquisition that hasn't already transpired.

[John Rogers:]

Sure. I was thinking more about fiscal '13 there. Hopefully, you've got something to get above that organic growth level so you can keep that 15% growth rate. The other question I had was in terms of your depreciation and amortization schedule. Steve, you noted the decline in amortization, but does that drop immediately as we go into '13 or does it come down through the year?

[Steven M. Burdick:]

Well, going into '13, yes, I think what we'll see is a lower amortization because a lot of the acquisitions that we closed in the last couple of years, that amortization is dropping off. And so, if you remember that one slide where we have the guidance?

[John Rogers:]

Right.

[Steven M. Burdick:]

You'll see about a $0.13 per share impact for the full year in 2013 compared to 2012.

[John Rogers:]

Right. But I mean the run rate, is it drop down immediately as you go into the first quarter of fiscal '13 or is it gradual?

[Dan L. Batrack:]

Yes, it actually -- it ramps evenly. So we darn -- you are not going to see a -- all 13% in -- all $0.13 in Q1. So I don't get a 13% (sic) [$0.13] headstart. So I was looking at that for my plan for next year. So you're not going to see it at all loaded into any particular quarter. So it's going to ramp over the year.

[Operator:]

The final question comes from Alex Rygiel of FBR.

[Alexander J. Rygiel:]

First, as it relates to mining, the market is somewhat skittish with regards to global mining CapEx. Can you comment a little bit about some of your customers, what they're saying about their CapEx plans in mining, and more importantly, how you plan on expanding your mining operations and grow market share over the next couple of years?

[Dan L. Batrack:]

Yes, good question. That is one misperception about the work that we do in mining compared to maybe some of the large EPC contractors or the very large design and build contractors or EPC as they're referred to, is we have a very loose affiliation to the CapEx programs. Most of the work that we do is associated with front-end feasibility study and evaluation of the portfolios and other new mine sites. It's not associated with whether or not an actual processing facility or production goes up or down. So in a case of a downturn, it's a -- where much impact to us is much more muted because we're actually not associated on a CapEx adjustment for an individual plan. On the other side, when the CapEx numbers go up dramatically, first good thing we receive is phone calls is, "Wow, is your mining numbers going to double?," and we have to say, well, we're actually not involved in a CapEx project, we're involved in the identification of the new sites, identification of the base infrastructure, feasibility studies, a little bit in the pre-feed work or pre-feasibility study and in engineering design work. So we think that the overall impact of the CapEx movements, either up or down, are relatively little impact on us. Now our goal to grow the business. We have seen a bit more impact on some of the juniors. So those doing exploration, we've seen a bit of a slow down there, but we've not seen an impact on the front-end work at the big majors. And we have -- we're significantly underrepresented with the majors, and so our goal is to go out -- and for instance, the acquisition of CRA that joined us in Brazil here about 2 months ago, we actually needed a presence in Brazil adjacent to one of the largest mining companies in the world, Vale. And our presence there and doing projects for them, I think we're just getting started with the majors. So a little bit of work for a few of the big guys can materially move our numbers up, and it's not associated with the CapEx projects largely. It's associated with the overall portfolio support on the feasibility and front-end alternative analysis for their work.

[Alexander J. Rygiel:]

That's great. And then secondly, can you give us a little bit more color on your Greywolf acquisition and maybe help us to size the oil well testing market up in Canada?

[Dan L. Batrack:]

Yes, that's a great question. I received that this morning, and that surprised me. I do understand that some of the newswires picked up and reported an acquisition of Greywolf by Tetra Tech. We did not acquire Greywolf. There's another firm that's traded on the exchange called TETRA Technologies. They're an oil and gas field service firm, and I believe they acquired Greywolf, and that's not a firm that's joined Tetra Tech Inc., TTEK.

[Alexander J. Rygiel:]

You know what, you're right. Sorry about that.

[Dan L. Batrack:]

But if they're a great company, they can come call us.

[Operator:]

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

[Dan L. Batrack:]

Great. Thank you very much, Kimberly, and thank you, all, for your questions and interest in Tetra Tech. I look forward to a great completion to fiscal year 2012, and I do look forward to sharing with you all our outlook for 2013. I know that's all in your forethoughts and specific guidance for the first quarter and 2013 on our next call in November. Thank you very much, and talk to you again next quarter. Bye.

[Operator:]

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