Tetra Tech, Inc.
Q1 2015 Earnings Call Transcript

Published: 29 Jan 2015

[Operator:]

Good morning, and thank you for joining the Tetra Tech's 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 will then open up the call for questions. During the course of the conference call, Tetra Tech management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning future events and Tetra Tech's future financial performance. The statements are only predictions and may differ materially from actual future events or results. Tetra Tech's Form 10-K and 10-Q reports to the Securities and Exchange Commission identify certain security 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:]

Thank you very much, Portia. And good morning, and welcome to our first quarter of 2015 earnings conference call. While Steve Burdick, our Chief Financial Officer, will present the specifics of our financials, I'll start this morning's call with a brief overview of the company and some of our key financial metrics. In the first quarter, we had solid performance delivered by our newly aligned segments, which represented our ongoing operations. The 2 segments are the Water, Environment and Infrastructure group, which we refer to as WEI, and the Resource Management and Energy group, which we refer to as RME, and you'll hear me referring to those 2 acronyms throughout this morning's presentation. Their performance resulted in our meeting our revenue guidance and beating the top end of our earnings guidance by $0.05 in the quarter. Now over this last year and especially during this past quarter, we've had a significant change in our foreign currency exchange with Canada. Today, about 30% of our revenue is generated in Canada, and the Canadian dollar has decreased by a value of about 10% relative to the U.S. dollar just since the beginning of the fiscal year, quite a dramatic move. To give you a better understanding of our business, I'll be presenting our financial results on a constant currency basis. So overall, for the quarter, the company generated a $581 million of revenue, $437 million in net revenue with an operating income of $37 million that resulted in an earnings per share of $0.41 for the quarter. For the first quarter, our total and net revenue were down 8% and 7%, respectively, from the prior year, but that was due primarily to our decision to wind down the RCM segment. Similarly, our operating income was down slightly from the prior year, and that was due primarily to a project-related losses from completing work in our RCM segment. In fact, we reported about -- just about $3.5 million loss in the quarter from RCM. Our diluted earnings per share did benefit from the reduction of share count as a result from our buyback program, and Steve Burdick will speak to that and some tax issues. But I will say on backlog, and most notably, backlog was up 5% year-on-year for the WEI and RME segments, and was flat overall year-over-year, which takes into account the continued wind down of the remaining projects in the RCM business segment. I'd now like to present our performance by segment. The WEI segment generated about 43% of our net revenue from ongoing operations during the quarter. WEI was up 4% on net revenue and delivered a 12% operating margin for the quarter, with improvement across all of their end markets in both the United States and in Canada. The REM -- the RME segment is slightly larger and had generated 57% of our net revenue in the first quarter. RME delivered an 11% operating margin with strong performance in power generation, oil and gas midstream engineering services, international development and remediation work. However, the revenue in RME was affected by a very slow ramp-up in federal mediation projects and continued weakness in mine-related work during the quarter. I'd now like to provide an overview of our performance by customer. Our international net revenue for WEI and RME was, overall, essentially flat year-on-year and represented about 31% of our ongoing revenue. Work for our U.S. commercial clients was also relatively flat year-on-year and represented also about 31% of our ongoing work for the quarter. Our U.S. federal work was 27% of our ongoing business, which was down 9% year-over-year, but this was primarily due to timing of new orders and project startups and also had a very difficult year-on-year comparison when comparing it to federal work in the first quarter of last year. I do expect our federal work to be trending up for the remainder of the fiscal year as we start up some of the large-scale remediation projects that we've already been awarded and are actually in the very beginning changes. And finally, our state and local work was up 5%, and this is all organic. In fact, all of these numbers are organic, which was a direct result of an increase of our work for cities and municipalities all across the United States. We had a good first quarter for orders and contract wins in our ongoing business. On a constant currency basis, our WEI and RME segments' backlog grew by 5% year-on-year. Backlog was driven by a broad base of orders, primarily across the public sector with our government clients, and that was led by work for the U.S. Federal Government work that we do for the U.S. Navy, the Army Corps of Engineers, the USEPA and USAID. Was also benefited by the work that we won for cities and municipalities across the United States and Canada. And it wasn't just in one geography, it was really very broadly spread out, and included new large contracts with cities such as Montréal in Canada, Los Angeles out in the West Coast and some new orders in Miami out in the Southeast. So it was really very broad spread. As we've indicated, the remaining work that we have for RCM is in the process of being completed, and we're going to continue to reduce the RCM backlog for the remainder of the fiscal year. Now I'd like to turn the presentation over to Steve Burdick to present the details of our financials. Steve?

[Steven M. Burdick:]

Thank you, Dan. I will begin with the fiscal 2015 first quarter financial results in a bit more detail. Overall, our first quarter operating results fell in line with management's expectations regarding the guidance ranges that we've provided for net revenue. In addition, and as Dan mentioned earlier, our EPS results exceeded guidance. So first, comparing the first quarter results this year to last year, our revenue decreased by about $65 million, or 10%, to $581 million. This decrease was due to our decision to exit noncore construction markets, representing low-margin, high-risk, fixed-price work, primarily in the RCM segment. The year-over-year comparisons were also negatively impacted by the FX rates due to the strengthening of the U.S. dollar. So for instance, and as Dan mentioned earlier, the Canadian dollar has lost about 10% against the U.S. dollar over the last 4 months. Our net revenue decreased to $437 million, also about a 10% decrease for the same reason that our overall revenue decreased. And so although lower than the prior year, the net revenue results were within our expectations and the guidance ranges that were provided due to

[Dan L. Batrack:]

Great. Thank you, Steve. I'd now like to give you an update on Tetra Tech's water-focused business strategy. With our newly aligned organization in place, we're focused on organic and acquisitive investment plans to support growth in both our public and our commercial industrial water and infrastructure markets. Both the public and private markets are really driven by similar demands for water supply and the need to address regulatory requirements. Our high-end experts in areas like hydrology, water quality, water treatment and engineering design have the ability to support both our public and our private clients in addressing these needs. This provides us with a great amount of flexibility in meeting staffing needs across our operations, which is particularly important in times like today, when we have rapidly changing demands from our clients. And I'm going actually speak to that a moment in some of the commodity areas. Now I'd like to give you a brief overview of some of the specific markets, where we're investing in growth right now. In light of the significant reduction in metal prices over the past 2 years, and most recently, the dramatic drop in the oil and gas prices, our government sector work, which still remains the largest portion of our business, provides us with stability and reliable performance. In this business cycle, infrastructure and the associated public sector spending is becoming much more active in the United States, both with the return to more predictable budgets from our federal customers, we're glad to see them pass budgets quite early this year, and by a significant increase in spending by our government clients with cities and municipalities. Now we, here at Tetra Tech, address the entire water cycle for these clients, and it's everywhere from storm water management to reuse of wastewater. In the Southern and Western regions of the United States, a long-term drought has the local governments investing in desalination and brackish water treatment and reuse, which is a particularly strong area for the expertise here at Tetra Tech. And one example of this, and it's just one, is a recent bond that was passed in California for $7.4 billion, just to address these issues

[Operator:]

[Operator Instructions] And our first question is from the line of Tahira Afzal with KeyBanc Capital markets.

[Sean Eastman:]

This is Sean, on for Tahira today. My first question would just be addressing the more moderated outlook in your oil and gas business. Obviously, this business has been operating at a high-utilization level, and I just wanted to know, what are you guys sort of looking at in terms of utilization on a go-forward basis with this more moderate growth outlook?

[Dan L. Batrack:]

Well, Sean, we came into the year having -- looking at building on a $400 million revenue base from 2014. As we entered 2015, we were anticipating a 10% to 15% growth rate in that. So around a $450 million revenue contribution for this year. We really saw little or no impact in the first quarter in our revenue, so we were actually right on plan. However, we have seen some projects being pushed to the right, and we have seen, obviously, the uncertainty and volatility in the oil and gas sector. And so we have -- we are now have moderated our outlook down by about 10%, meaning that we're forecasting a flat year-over-year oil and gas. So we, for fiscal year 2015, currently are anticipating about a $400 million contribution. Now that is on a prospective basis, assuming things are going to, we're predicting, things are going to slow down a bit, even though we didn't see that in the first quarter. Fortunately, most of the work we have is on a time and materials basis. And so for utilization, we actually have the timing to move staff to other projects that are strengthening, which we've seen both in our state and local work, it's probably the most notably. But I'll tell you, I think we're going to have a good year on the federal front, too. So experts that are doing work on the environmental and water side, in oil and gas and other specialty engineering areas, we actually have the ability to move them to others that are growing. So I think our utilization, to use your specific term, can be addressed as it moves. We don't expect an exceptional movement in this, and we look to reallocate the staff to other areas that are growing.

[Sean Eastman:]

All right, that's pretty helpful. And then, I think in the presentation, you said -- you mentioned that you're targeting specific regions on the oil and gas side. Now I was just curious what specific regions that might be?

[Dan L. Batrack:]

We've been very interested in growing our West Texas business, which is the Permian. We think that some of the reserves that have been forecasted out of Permian are extremely attractive and have long-term economic drivers. Obviously, there's different price points for oil and gas production, and we think that's one that will be quite favorable. So it's an area in the United States that we're interested in. And in Canada, we think, in the longer term, we're interested in having a larger presence in British Columbia because a lot of the production is -- will need to find additional exit points out of Canada, not necessarily just down to the south, but east and west, and a lot of it would be to the Pacific, the British Columbia. So we can do a lot of permitting work and a lot of valuation work, right-away work, and then ultimately, the touch points at LNG terminals and other export points. So in Canada, we are looking at British Columbia for the oil and gas sectors.

[Sean Eastman:]

Okay. Great. And then, the last thing for me is just if you could expand on this incremental opportunity in the coal residuals market. What do you guys sort of expect in terms of the peak contribution to the top line from this opportunity? And do you think it might help offset some potential weakness in oil and gas in fiscal '15?

[Dan L. Batrack:]

I think it's a -- I think that in 2015, it's just going to begin to grow. So the requirements are that this has to be implemented over a 2- to 3-year period. And what we find very encouraging is not only new disposal of coal residuals need to be regulated, but existing impoundments, where the material has been disposed of in past years need to be addressed and brought into compliance. So this is actually, in some respects, has opened the market even a little bit larger than we originally envisioned. So that's a really good thing. We think, this year, it's going to begin to ramp up. We do have a goal of this being $200 million to $300 million contribution on an annual basis to the company and currently, it's sub-30, so we think this thing can go up about tenfold. Now we think it will ramp up. We think, this year, it could ramp up from -- we're sort of in the 20s right now, $20 million-ish, and we think it could ramp up to double to maybe even triple that number this year, and that will help offset some of the oil and gas uncertainty. But I think this is really a 2016, '17 material contributor to us as we move from study and evaluation of the alternatives to implementation. So I think this thing will ramp. And the nice thing about it, it has a very long tail to it. It's not only addressing the current discharges, but again, the historical discharges. So we think this is an excellent market, fits right into our wheelhouse and has a long run to it.

[Operator:]

Your next question is from the line of Mike Shlisky with Global Hunter.

[Michael Shlisky:]

I wanted to touch briefly here on the M&A environment. Can you give us your thoughts as to perhaps how some targets are looking from a valuation point now versus a few months ago? And whether the FX changes between U.S. dollar and the Canadian dollar might change the footprint in which you look for acquisitions?

[Dan L. Batrack:]

Well, the multiples of the valuations of acquisitions in any of the sectors associated with commodities, and have we seen this over the past 2 years? We watched it steadily decline in mining, as an example, because we have a little longer history in that area. It's come down dramatically, and we're just seeing the beginning of it in oil and gas. So I would say the valuations have come down dramatically, and I would say it's even more than just the valuations. I would actually classify it as availability. Because prior to this downturn and some of oil and gas pricing, there were some of these which is not available. So availability's increased dramatically, and price points and valuations have become much more reasonable, and I would say, that in the oil and gas and in the commodities sector, which is mining for us. So that looks good. It's been sort of a double benefit then with the reduction in the currency exchange, and it's not just in Canada. We have been looking in Europe, and you've noticed that quite a material change from $1.30 down to $1.10, roughly, on the euro. And so I think it makes some of the areas we've been looking in Europe that have been relatively expensive on a translation basis on the U.S. currency to be much more reasonable. So I would say, both Canada and in Europe, has actually looked better for us. And I also want to say a word about here in the U.S. In some of the areas, with this new solid waste or the coal residuals becoming a larger market, we have been named as the largest U.S. solid waste design firm. And most of this, of course, is in the municipal side because this is just an emerging market. And I do believe that the utilities are going to look for experts in solid waste disposal, and it's a good opportunity for us to consolidate capability and resources in the United States. So I think that's also a good opportunity for us at reasonable valuations. So Canada, both from reduction and commodity and FX, same is true in Europe. And then in the U.S, a lot of the large utilities are looking for larger firms who have a better footprint, a balance sheet and a deeper technical expertise. So I think all three of those bode well for us on the M&A side.

[Michael Shlisky:]

And just kind of follow-up on your answer there, as far as hiring goes. Are there enough experts and people out there to meet some of the fly ash and other coal waste product demand that the new EPA rules might bring about?

[Dan L. Batrack:]

Great question. First of all, there is enough experts, but I'll tell you part of what's -- I actually think is beneficial is the way that the ruling is being implemented. It is -- this is going to get phased in. We do have a few year period to implement it. And what this means is it's not going to create a land grab for everybody flocking to this. So there'll -- they're going to look for the best experts, people with the most experience. And so I think those that have excellent leading positions in this market will be the ones that utilities move to. It's not an emergency, it doesn't have to be done this week, this month or even this year, as they have time to very thoughtfully and effectively come up with the right solutions that will be the best cost, the longest solution, the lowest risk, and we have a very deep bench for this all across the country. So from a long-term business perspective, this phased-in approach really bodes very well for us. If it all had to be done in 1 year, I think then you would have problems with capacity and anybody who has a slide rule or a backhoe would call themselves a solid waste expert and get business but not under what's being proposed as far as it's phased in requirements.

[Michael Shlisky:]

Got you. And lastly, if I could just touch on your guidance for the next quarter here. Is there some component of seasonality to your results in the fiscal second quarter on a more normalized basis, not versus last year? Can you kind of take us through about what might be different for your results in the average Q2 versus the other quarters of the year?

[Dan L. Batrack:]

Yes. Q2, first of all, since we moved into Canada about 4 years ago, maybe a bit more, has become very seasonal for us. Q2 is the low point, both on revenue and on operating income. And the reason is all of the field activities that we have in Canada go dormant. And in fact, some of our operations -- we've spoke about this in the past, some of our engineering operations in Canada actually are in a loss position during the second quarter. And just to be really clear, the second quarter is the months of January, February and March, and those are where we have no field survey work. We have no field assessment activities. Now I do know for pure pipeliners and some of the people in the oil and gas industry, decreases are good for digging and working in tundra and other soft-soiled areas. But that's not true for the lot of the work that we do in water. So taking water samples over a frozen lake is difficult and other things. So Q2, it has become very accentuatedly a seasonal low point for us. So that's why you see some lower numbers. It's actually become maybe even a bit more accentuated because a lot of the RCM construction, we were doing no -- very little or no RCM construction in Canada. It was in the U.S. So as you take that down, and that was with carried revenues through these winter months, doing construction in California, Texas, Florida. When you take that out, the remaining business appears to be even more cyclical because of the percentage of work we have in Canada. So that's the -- that's what's different from a year ago and -- but that is going to be representative of the business as we go forward during those 3 months.

[Operator:]

Our next question is from Corey Greendale with First Analysis.

[Corey Greendale:]

So a few questions for you. So first of all, I appreciate the detail on the change in your assumption on oil and gas. Just a clarification, are those numbers -- were those gross revenues or net revenue numbers?

[Dan L. Batrack:]

Those were gross revenues, just about 75% of those numbers.

[Corey Greendale:]

Okay. So in other words, that is 75% of a $50 million reduction in your assumption for net revenue in 2015?

[Dan L. Batrack:]

We actually took $50 million down on net, is what we took down. So of the $100 million that we brought down on the top and bottom, about $50 million was oil and gas and about $50 million was directly FX calculation from Canada.

[Corey Greendale:]

Okay. So you didn't get change your assumption on mining work?

[Dan L. Batrack:]

No.

[Corey Greendale:]

Can you give the same high-level numbers for your mining work? So how much of your, maybe, fiscal '14 gross revenue, net revenue was from the mining industry?

[Dan L. Batrack:]

Yes, I can. Let me give you gross numbers and then I'll give you an approximation from that. The -- and I will -- let me clarify this, some of the reduction was from mining. So in 2012, we were around $200 million. So -- I'm sorry, in fiscal year 2014, the last year, we were about $200 million in gross revenue. Now we expected that to come down. We did see it softening. So we came into the year with our original estimate, about $150 million to $160 million. So we saw almost a 25% reduction we're anticipating. And after the first quarter, we believe that, that will even be softer or less than that in total revenue. We think that number will be, maybe $120 million to $130 million. So maybe $20 million reduction, now that's -- a lot of that is in Canada, a big significant portion. And so FX actually makes that a little bit less of the number in U.S. So a portion of the revenue reduction was mining, with the balance at oil and gas.

[Corey Greendale:]

Sorry, those were gross revenue numbers?

[Dan L. Batrack:]

Those were gross revenue numbers, yes. And net numbers are sort of 60% to 70% of that.

[Corey Greendale:]

Okay, that helps. And then I also appreciated the detail on the waste opportunity. Just one point on that, as I read the EPA regulation, it sounds like they're saying that no changes need to be made to -- or let me restate that. Online landfills that are currently in use can remain in use, and you need to use liners on new landfills. Is that your understanding and does that impact the opportunity that you can continue to use online landfills that are already in use?

[Dan L. Batrack:]

Yes. I think you have to go through the details of the draft final rule, but it's my understanding that they'll have to be addressed to make sure that they meet integrity requirements that may or may not mean that they have to be retroactively lined, but they may have to be addressed through some other methodology, such as slope stability is a big one with respect to the containment around the perimeter. And then also for leachability, with respect to groundwater, and that can include other things other than full removal, lining and replacement of the material. It could mean groundwater pumping treated. It could be slurry protection. So that doesn't mean that you have to "line" it, but it does mean that you have to monitor it and ensure that it meets all of the containment requirements. And that's -- there are other ways to do that for ret -- for existing landfills than removal, lining and replacement.

[Operator:]

Our next question is from the line of Justin Hauke with Robert Baird.

[Justin P. Hauke:]

So Dan, I noticed that you guys have not changed that $1 billion goal for oil and gas, and I understand that the assumptions, I guess, on the organic side have come down and the offset is maybe the acquisitions are taking up a bigger chunk of that pie with valuations coming in. I guess, is that the message you're trying to convey, is that the goal to get from $400 million to $1 billion is probably more acquisition-weighted from here versus organic? Or what's your thinking on that?

[Dan L. Batrack:]

Yes. I think that's exactly right, that if you went back to 6 months and earlier, we were growing at 20%-plus organic. We've brought in a very few or no acquisitions in the past year or 2, and it was growing very quickly. And we were looking and I will tell you that we had always presumed to achieve $1 billion run rate -- or an annual revenue from oil and gas, that it would be a combination of organic and acquisitive at 20% growth. And you double that $400 million in just under 5 years, so it puts you at $800 million. So we needed to acquire about $200 million somewhere along the way. But the price points were so expensive on those. They were multiples not of earnings but multiples of revenue, which gave us pause. Now we've actually watched these come down, so I think that this is actually a very good opportunity for us to bring in acquisitions that will not only offset, but probably more than offset where we were growing on an organic standpoint. And there are other regulatory drivers that are coming into place in the oil and gas areas, such as handling of wastes similar to what you just saw in coal, water supply and other items that will still be drivers for this business for us. So we think that even under the current environment and maybe even traditional pressure, they're still areas that will drive this business for us.

[Justin P. Hauke:]

Got it. And I guess, maybe my next question is just talk -- circling back to the RCM segment, I know you're exiting, but I think the assumption was that, that would be more breakeven for the year. There's another loss here. And it also sounds like the DSOs increasing are a function of that. So how should we view that? Is that indicative of additional kind of project disputes that are going on or change orders that aren't being resolved? And is the goal still to be breakeven on RCM for the year?

[Dan L. Batrack:]

I'll start with the last part. Do we anticipate RCM to be breakeven for the year? Yes. But just to be clear, in the first quarter, we did have additional losses on projects of about $3.5 million for the quarter, which you see in our segment reporting. I think some of that's timing. In fact, I know some of that's timing. So we do have certain assets on projects, and I'll give you an example of equipment. So we have fully depreciated equipment on projects like backhoes and excavators and things associated with construction projects. And so as we move to complete projects, it may cost us more to finish it. There is your loss of $3 million, but we complete it, we'll liquidate equipment that has essentially no book value and are only used to offset. So I think that some of it's timing, and I do believe that our goal still is to have this year at a 0 point with no profit or loss from RCM. Now with respect to the DSO or our receivables outstanding there, no doubt, as we finish this construction work we have, we're still at about $100 million to go. A lot of it goes into unbilled because we have to wait until we deliver projects to achieve either milestones or something else. And so it sits there and becomes aged until we hit these milestones. We've had no material -- in the first quarter, we've had no material change by adding additional disputes or change orders. That has remained unchanged from the fourth quarter, most of it is just pulled up by receivables that will be paid when we achieve a milestone or a project delivery.

[Justin P. Hauke:]

So yes, just to be clear, nothing indicative of a material change order. It's more just a function of those are unbilled receivables until you get to the end of the project, at which point they can be billed.

[Dan L. Batrack:]

Right. And of course, the calculation, when you take a look at the calculation, one thing that -- I actually have Steve Burdick say a word, too, but I am very sensitive to the methodology of calculating DSO because, as your revenue shrinks, it by definition makes your DSO go up. But Steve, maybe you want to...

[Steven M. Burdick:]

Right. So we do have claims that we're collecting on and we do have receivables unbilled that Dan talked about. But probably the biggest factor in terms of that DSO is in RCM, the much lower and decreasing revenue that it's calculated off of.

[Operator:]

Our next question is from Steve Folse with Stifel.

[Steven Folse:]

First question, so if I'm kind of -- I'm assuming that the majority of your mining and oil and gas exposure is in the RME segment, so if I kind of look through -- work through the assumptions that you have for the mining decrease and flat year-over-year oil and gas, it's kind of implying pretty substantial growth in the other verticals in order to get to that flat to low single-digit growth in RME, like some high single-digit to low double-digit type of growth. So I was wondering if you could kind of go through and talk about what verticals, in a little bit more detail, that you're seeing particular shrink there and what's going to drive that?

[Dan L. Batrack:]

Yes. Steve, you've got it exactly right. So the mining work is essentially all in RME, so resource management component of it. So that's correct. The oil and gas work is essentially all in RME, that's correct. So those areas are both under a bit of pressure, based on commodity pricing, but what's offsetting those on the growth is since we believe that our solid waste business is going to be driven primarily by the private utilities, the ones that we've talked about, since we think solid waste is going to grow and offset, and that's on the plus side. We do have some of our remediation work for the U.S. Federal Government is located in RME, and we expect it to grow. And it's on the upside, that will ultimate show up under commercial in the U.S. and show up partially under U.S. Federal Government. You can see it there. And so that's a plus to solid waste remediation. And actually, USAID work. So the agency for international development under the U.S. State Department has actually been very strong. And in fact, you saw an announcement that we made for a 200-plus-million dollar contract for Promote that came along with initial funding right out of the gate. We expect our USAID work to be very strong, and that's a plus this year. So I'd say, you've got a bit of a -- we've done well on oil and gas, and because of the high concentration on midstream, we expect it to be relatively stable. We're not unfamiliar with the volatility in the market -- mining. So those are the 2 minuses and then pluses on solid waste, pluses on remediation and pluses on USAID and international development work. So those are sort of the plus and minuses. And three, offset the minuses with a little bit of pluses, somewhere between flat to slightly up, and that's how we came to that juxtaposition between those different markets.

[Steven Folse:]

Okay, great. And then, I guess, sticking in the RME segment, a lot -- much better margins in the quarter. I was wondering how much of that was driven by the kind of improvements in resource allocation as some of the legacy RCM businesses and projects have wound down? And I know you guys cited that as a bit of a drag last quarter. Was most of that improvement that improved resource allocation or was it just a market improvement?

[Dan L. Batrack:]

It's market improvement across the board, really. It was very broad-based. So it wasn't any one area at all. And in fact, I think that if you took a look at the oil and gas area from 2014 to 2015, you would've found, if you were able to parse that out, year-on-year, that part was maybe even slightly down this year. And it just shows that the rest of the business was even that much stronger. So no, it wasn't any one area, that there was no project settlements. There was no litigation recovery. It was just performance across the board and very even.

[Steven Folse:]

Then, I guess, last one here. It looks like you lowered the targeted RME margin for the year, on the bottom end, by 100 basis points. I was wondering if that was mostly on the mining side? It sounds like it probably was. Or there was some anticipatory action there on what could come on oil and gas in -- or whether or not you're already seeing a little bit of pricing pressure there?

[Steven M. Burdick:]

I would say you could give that presentation for me. You're exactly right. It's mining is most notable. Now we've paid the big reductions on some type of cataclysmic change there, but it just is this continued pressure, so we've incorporated that. And it is anticipatory. I could use exactly the right word. We have seen, and this is mostly on our upstream work, we have seen some communications from some of our oil and gas clients looking for concessions or participation in the pricing pressures in the market. And we've seen that on the upstream, mostly. But that's mostly anticipatory on oil and gas, just that it is very uncertain period.

[Operator:]

Our final question comes from David Rose with Wedbush Securities.

[David L. Rose:]

This is a follow-up to the last question. On the RME side, looking at the hole from which you're digging out, you're 7% down in the first quarter. So you kind of highlighted a couple of the factors like USAID, that should help. But I mean, is there a concentration of project work that could be at risk? And maybe you can kind of help us better understand, this is -- I mean, it's a pretty significant move. So where are we seeing the big move from?

[Dan L. Batrack:]

Well, I would say that, in RME, some of it is timing. I talked about the U.S. Federal Government being down 9% on Q1 this year versus Q1 last year. The component, if you actually parsed it out, the component that was actually down was under remediation. And so the group that actually took almost all of that or represented almost all of that reduction on the year-on-year happened to be in RME. Now as I mentioned during my prepared remarks, I actually expect that to strengthen, and most of that is associated with timing. And the backlog looks very good. So I think that's part 1. So I don't think it's indicative of where there will be. So I think that will come back. I think the second area is mining, it was down, and I do not expect that to materially come back. But we're in an incremental position, whereas the reality is the front-end work on the mining, as we complete the work that's in the backlog, it's not being replaced on the exploration or from feasibility study. The back-end, which is cleanup work, continues to be about even, and that represents most of our work. So I do expect that to continue to be under pressure and represent a bit of a down move. And with respect to now having moved our Canadian midstream work into RME, to really consolidate all of our oil and gas there, a year ago, there's very cold weather in Canada and there was a very big oil and gas revenue that came from Canada. First of all, the upstream at the oil sands was stronger a year ago. We didn't really have these pricing pressures when things were stronger. And our midstream pipeline, which is the biggest piece in Canada, was very strong. And I expect that to pick up here in the second quarter. So you're actually going to see, on a sequential basis and it will be very noteworthy year-over-year, that pick up because of work we're doing on the midstream up there. So I don't think it's anything that's -- we have no single project. We have one larger project in the oil and gas side that is somewhat material, but other than that, we have no concentrations of projects, programs or singularity of a client concentration that, I think, could be at risk.

[David L. Rose:]

Okay, that's helpful. And to be clear, are you assuming the FX headwind in that growth? I mean, are you separating the 2, organic and FX -- excluding FX? Or FX is included in that organic assumption?

[Dan L. Batrack:]

The FX is actually separate. And so when we took a look at reducing our top line revenue, we took the amount for what I would call a constant currency, which is a combination of oil and gas and mining, and that was roughly $50 million. And the other half is really FX. So we didn't double and we spread that across all the Canadian activities.

[David L. Rose:]

That's probably -- I understood. I was just wondering when your slide, where you're showing RME, you show flat to single-digit growth, that's incorporating the FX headwind, is that right? Slide 17?

[Steven M. Burdick:]

No. I think that is on a currency.

[Dan L. Batrack:]

It's on a constant currency. That's on currency.

[Steven M. Burdick:]

Yes.

[David L. Rose:]

Okay, that's helpful. Okay. And then lastly, given where the stock is today, could we -- why wouldn't we assume that you'd have consistent share buyback that you had in fourth quarter? Is there anything that would preclude us from seeing kind of a similar run rate or if not, greater?

[Dan L. Batrack:]

That would be a reasonable assumption. As Steve had indicated in our capital allocation, we do have approved for $200 million. We did approximately $20 million in the first quarter. If you do the math and divide $200 million over 8 quarters, you'd see you're pretty well in that type of constant run rate with maybe additional triggers that would require equal or greater. So that would not be an unreasonable basis of calculation. And thank you for your questions and interest in Tetra Tech. Those are great questions, and I'll tell you, it's a very interesting time with -- when you see changes in such an enormous market like oil and gas moving 40% in 90 days from one call. So thank you very much for your questions, and I do look forward to speaking with you again next quarter. And if you're on the East Coast of the U.S. or Canada, I hope you stay warm and dry through the storms, and I'll talk to you 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 now disconnect.