Tetra Tech, Inc. (TTEK) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and thank you for joining the Tetra Tech Earnings Call. By now, you should have received a copy of the press release. If you have not, please contact the Company's Corporate Office at (626) 351-4664. 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 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 appendix to this presentation and 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.

Great. Thank you very much, Nicole, and good morning, and welcome to our fiscal year 2012 first quarter's earnings release conference call. While Steve Burdick, Chief Financial Officer, will present the specifics of our financials, I'll start this morning off with a brief overview of some of our key metrics for this past first quarter. We had a very strong start to fiscal year 2012. Both our revenue and net revenue grew to record highs during the quarter, quite proud of. Our revenue was at $683 million for the first quarter or up $72 million or 12% year-on-year. And our net revenue was up at $492 million, an increase of 21% over the same quarter last year. Our earnings before depreciation and amortization, our operating income and earnings per share were all up between 5% and 8%, and these increases are all inclusive of about a $3 million or about a $0.03 of earnings of planned investment that we made in back-office systems to support the international operations that we acquired at the end of last year. Without this investment, our operating income grew at 14% year-over-year, a rate faster than our overall revenue growth. Our performance by segment. This quarter, all 4 of our business groups grew, with our net revenue, as I mentioned just a moment ago, are being up 21%, up over the same quarter last year. The growth in our international commercial markets drove a 13% organic growth rate, one of the fastest that we've had in the past several years. Our largest group, ECS, which now represents about 41% of the company's net revenue, grew at 23% year-over-year. This is the group that focuses on the earliest phases of the project, and it's been driving our growth in the U.S. commercial markets and the international work that we have in Canada, Australia and in Chile. Both our TSS and our EAS groups, who provide front-end technical service staffing and design services, they also grew this past quarter. And our fourth business group, RCM, who provides the implementation of the work that we did the studies and designs on, grew significantly this past quarter and it was partially due to our ability to accelerate work into the first quarter, due to favorable weather conditions that allowed us to complete more field work during the quarter. In fact, we were able to accelerate about $20 million of self-performance net revenue work that we had expected to perform in the second quarter. Overall and during the past 6 months, RCM has improved their performance in revenue, and the backlog in that group's up, and their margins have increased. And while we expect a seasonally -- a little bit lower revenues in this group during the second quarter because of slowdowns in fieldwork during the center of winter months, I expect the performance in RCM to continue to improve throughout the year, and I expect a good performance for all of 2012 in this group. Which is really a big turnaround, both in the group internally, and I think it also portends improving condition in the marketplace. Overall, we had strong performance in the first quarter across all 4 of our business groups. For our customer mix, when we look at the company overall now, the majority of our revenues are now generated by international and U.S. commercial work. This is a big change for Tetra Tech. Work for international clients grew at 41% year-over-year. This work is dominated by our Canadian operations, of course, and it includes some revenue contribution from areas that we're just expanding to geographically in Australia and in South America. International work, overall, is about 30% of our revenue compared to 13% just back in 2010, and it's consistent to 30% of revenue contribution, that's consistent with my projections for this fiscal year. I do expect that this is going to continue to grow and increase in line with our longer-term goal of about 40%. In the United States, commercial revenue also increased, up 25% year-on-year, driven by work from projects supporting industry, manufacturing, mining and other Fortune 500 clients. This is the third sequential quarter where the U.S. commercial work for us has grown at a rate faster than 25%, and for us, this has been a very good indicator of the strength in U.S. industrial sector. Our U.S. federal work now provides about 35% of our net revenue compared to 38% a year ago. And it didn't seem too long ago, in 2010, it was up to almost half, 44%. Now although this is a smaller percentage of our overall business, federal revenue for our first quarter is actually going up in dollars. It was up from $153 million a year ago to $171 million of net revenue year-on-year or a 12% increase and 9% sequentially. So I do want to point out that while, yes, federal as a percentage of our overall portfolio is smaller, it continues to grow as part of the overall revenue contribution. Our U.S. state and local work remains close to 10% and absolutely in line with our projections. All 4 of our customer groups that we track were up this past quarter. And as a result of our investment this past few quarters in higher growth markets, mostly international and in the U.S., our customer work -- our customer mix is now about 55%. If you take U.S. commercial and you take our international, it's just about 55% of great majority of our work. So it's really been great diversification into higher-margin and higher-growth marketplaces. For our backlog this past quarter, we received about $635 million in new orders, and more than 50% of these new orders, this past quarter, were from our commercial clients, mostly in the United States and Canada. We received about $350 million during the quarter in major orders from industrial and manufacturing clients and for projects doing environmental management and balance of plant infrastructure, which is mostly water infrastructure work. We also received about $50 million in new alternative energy projects, primarily wind in the U.S., and we expect the wind market to be very stable and actually should contribute about $100 million in revenue during fiscal year 2012, which is very much in line with what we did in 2011. In the public sector, we won new contracts with USAID or Agency for International Development, including a major IQC or indefinite quantity contract for $750 million contract ceiling for water and energy work that significantly expands the scope of services and contract capacity we have with that client. So we feel very good about this, this last quarter. And across our entire U.S. federal client base, we received additional task orders to support their priority programs. As we grow our commercial international work, a larger portion of our orders are coming from these clients. And one artifact of this is that the commercial clients tend to bring projects that are awarded in smaller, shorter duration. So as a result, we've seen our backlog increasing more slowly as our revenue increases at a faster pace. These projects are coming through in smaller task orders, the overall size of the projects are roughly the same size, but the funding are getting smaller and are being burned up in the same quarters, so we're not seeing the backlog grow at the same rate, but the backlog does support the revenue growth of the company. I'd like to now turn the presentation over to Steve Burdick who will provide us a more detailed discussion of the financials for the first quarter. Steve?

Thank you, Dan. I will begin with the fiscal 2012 first quarter financial overview. Revenue increased $72 million or about 12% to $682.6 million, primarily as a result of growth in our commercial and international markets, and secondly, revenue from acquisitions in the last half of fiscal 2011. Net revenue increased 21% to $492.1 million, which is at a higher rate than revenue increases for the same reasons I previously noted. We are involved in much more self-performance work, especially in our commercial and international markets, and this increase in net revenue resulted in Tetra Tech hitting close to the top end of our guidance. Income from operations increased 5% to $36.1 million. When compared to the revenue and net revenue growth, we did experienced a lower growth rate in operating income, which is consistent with our guidance previously provided in our last earnings conference call. The operating income has been impacted by the increased SG&A cost, which I will cover on the next slide. However, I do want to point out that income from operations would have increased 14% on a pro forma basis if we exclude the additional SG&A cost incurred. This increase is greater than the 12% increase in revenue on a year-over-year comparison. The EBITDA margin increase is better than the operating income because the intangible amortization was higher in the current year by about $1.5 million when compared to Q1 of last year. The SG&A increased about 18% or $7.3 million to $48.6 million for the quarter. As I stated, about $1.5 million of the increase was due to intangible amortization associated with our fiscal 2011 acquisitions. In addition, we did incur nominal SG&A increases relative to supporting our ongoing operations. Furthermore, as we move further into our international expansion, we have made decisions to invest in IT and risk management areas to support this growth. Specifically, as we discussed in our last earnings conference call, we incurred more for financial systems to support FX, cash management and ERP systems, human resources to provide policies and procedures in foreign languages, legal and tax compliance and corporate development to enhance M&A and marketing activities. As a result, we incurred an additional $3 million of SG&A in the first quarter of fiscal 2012 compared to fiscal 2011. Now I want to point out that we do not expect to see the same spike in SG&A growth after fiscal 2012. Instead, we will continue to incur sustaining costs that can be leveraged through our growth in the foreseeable future. Tax increased $12.1 million due to higher income and the effective tax rate will be about 34.7% for fiscal 2012. Earnings per share of $0.36 met the high end of our previous guidance. On a pro forma comparative basis, our EPS is up about 15% when you take into account the $3 million of SG&A that I noted in the slide, as well as the previous year's tax benefit in the first quarter of last year. As a reminder, we did have about a $0.02 benefit in the prior year due to the catch-up of our R&D tax benefits in the first quarter of 2011. Looking at the balance sheet, our accounts receivable increased about 11% or about $65 million to $665 million. The majority of this increase related to the increase in revenue. And secondly, our DSO decreased from last year. Accounts payable decreased slightly due to lower subcontractor costs. And on the first quarter, year-over-year basis, our net debt position was lower. We've had very good cash generation from our operations, and as we continue to generate cash from operations, we will continue to pay down our debt. Our line of credit, as always, will be used to invest in growth and increase shareholder returns. And looking a little bit more into the detail of the cash flow, our quarter one operating cash flow was about $38.3 million. Historically in the first quarter operating cash flow, we see an amount that's close to breakeven as we pay out funds for yearend bonus payments, 401(k) distributions, and we make a lot of our annual insurance premium payments in the first quarter. However, we experienced strong cash collections at the end of the first quarter. As a result, our operating cash flow is much better than anticipated. Our forecast for 2012 remains to be -- we estimate that it will remain at between $130 million and $150 million. And this translates to cash generated on a per-share basis of $2.03 to $2.34. Overall, we continue to be very efficient at converting our revenue into cash flow. Our capital expenditures are consistent with the prior year and in line with our previous guidance, and we continue to expect our CapEx to be about $20 million to $25 million for fiscal 2012. Our day sales outstanding is 75.4 days. This is an improvement when compared to last year at this point. And as this graphic shows, the impact of our positive operating cash generated and cash used for acquisitions. As you can see, our net debt position has improved sequentially from the end of the fiscal year. And assuming that we make no further acquisitions, we would expect to be in a positive net cash position in quarter 3 of this year. With that said, this management team will continue to leverage our balance sheet to invest in growth opportunities that will provide high profit margins and access to new markets to further enhance our shareholder value. And with that, that concludes our first quarter financial review, and I will now hand it back over to Dan.

Thanks, Steve. I'd like to share with you our customer outlook for the remainder of fiscal year 2012 and actually out into fiscal year 2013, so out the next several quarters. We expect our growth here at Tetra Tech to increasingly be driven by projects in the private sector, both here in the U.S. and internationally. In the international demand for our water-related services in commodity-driven economies like Canada, Australia and South America continue to increase at a rate even faster than we had expected. Overall, we expect that this is going to drive about a 10% annual growth rate organically in the international. So if you're following along the slide, you can see this is about 1/3 of our business, and we expect it to grow at a rate of 10% or better. In the United States, as I'd mentioned earlier, our commercial revenues have been growing very quickly. And I repeat that we've seen it at more than 25% growth over each of the last 3 quarters. And what's noteworthy for us, this is after our seeing that the U.S. commercial work shrinking in 2009, 2010 and 2011. And so, this is really quite a market turnaround. And I wouldn't forecast this turning around of being sustained unless we see multiple quarters. So 3 in a row, I think is a pretty good trend for us. Although we have been coming out of a declining U.S. commercial market, we expect this market to continue to grow at better than 5% organically for us through the rest of this fiscal year and out into 2013. We do see the U.S. public sector revenues as remaining stable for us, primarily based on our focus on economically-driven priority programs at the federal level, doing projects that will actually in the long term save money for our federal clients. And they have support on both aisles of the political landscape. And at the local level, our support for critical infrastructure needs at the local level will leave our program stable also. This is providing clean water, they're not going to turn that out, treating wastewater and environmental priority programs. Those will go forward at a stable level. Taking into account our business mix and the overall organic growth rate, again primarily on international and U.S. commercial, we expect the organic growth rate to be better than 5% on a consolidated basis even with stable revenues coming out of our U.S. government sectors. With our move into Canada, following along on Page 13, I think this is very illustrative of a change in Tetra Tech's business mix was primarily because of our move into Canada. And our move into Canada over these past 3 years have resulted in 2 primary aspects of our businesses -- that our business has changed. First, we've increased the margins, each of the past 5 years. I know we've been in Canada for just a little over 3 years now, but before that, we have had project offices up there that began to drive this business also. And I expect, we have a dotted line here on this particular slide, forecasting based on the midpoint of our guidance that our margins are going to go up here in 2012 also. So first, again moving to Canada has moved our margins up, and a lot of that's because of the high content of commercial work there. But the second action -- the second aspect that's changed our business is our operations are no doubt more seasonal. In Canada, in summer, they work in longer days, but in the winter, they're just not working as much. And you actually will see that a little bit in the first quarter of our fiscal year, which is the effect of December, where you begin the winter months. But most notably and acutely, the second quarter will be our low point for the corporation in both revenue and earnings, and I'll talk about that in a moment. With that, I'd like to move to actually our guidance for the second quarter, which are the fiscal -- our second fiscal quarter of 2012, which are the months of January, February and March. And I do want to note those months because those are the dead of winter months in the Northern Canada. For net revenue, for the second quarter, our revenue guidance is $430 million to $480 million. I will note that the midpoint of that range represents a 6% growth in revenue over 2011 same quarter. For the year, for the earnings per share associated with the second quarter, is a range of $0.32 to $0.34 per share, and the midpoint of that range represents an 18% growth in our earnings per share year-over-year. We have updated our annual guidance on earnings, but I'll start with net revenue. We've left our net revenue guidance for all of fiscal year 2012 unchanged at $1.9 billion to $2.1 billion. The midpoint of that if you compare it to 2011 represents a 12% increase. And diluted earnings per share, based on the strong performance in the first quarter and actually the work that we have in hand and the outlook for the rest of the fiscal year, we've moved up both the bottom end and the top end of our guidance. The bottom end from $1.50 to $1.54 for the year or $1.54, and the top end we moved up from $1.63 to $1.64. The midpoint of this range represents an 11% increase from our 2011 performance in earnings, diluted earnings per share. And I do want to note, there's a few notes on this slide that I think should be taken into account with respect to our guidance. Our guidance does include the expense of intangible amortization. And we have included this time a forecast of how the intangible amortization will be reduced in the coming 4 years and also 2012. So it's a 5-year look forward. While we only had a modest reduction from 2011 to 2012, from approximately $0.30 to $0.28, but our forecast in reduction, if we do no further acquisitions, is from $0.28 noncash charge of intangible amortization, down to $0.13 or a $0.15 contribution next year in the reduction in intangible amortization. Our guidance also includes an $0.11 stock compensation expense, which is noncash. And as Steve had indicated earlier, the 34.7% annual effective tax rate on our earnings. And it also assumes approximately 64 million diluted shares outstanding. In summary, we had a very strong performance in the first quarter, particular with the 13% organic growth rate and a 21% overall net revenue growth year-on-year. Our international commercial work is picking up and represents 55% -- just under 55% of our total business and it's growing, both of these client sectors are growing at the fastest rates. That number is going to go up. And we continue as Steve had outlined in good detail, we continue to generate cash even faster than earnings, and we're quite proud that we're generating well over $2 a share in cash. And based on this performance and our outlook, we did increase guidance both on the top and bottom end for the quarter and for the year. And with that, I'd like to open the call up to questions. Nicole?

[Operator Instructions] Your first question comes from the line of Joe Ritchie with Goldman Sachs.

So great job obviously on the solid organic growth that you booked this quarter. My question and I'd really appreciate you actually outlining the growth trajectory across each one of your businesses. Your federal government was particularly strong, up 12% this quarter. Just out of curiosity, was that driven predominantly by USAID? And can you maybe tell us a little bit about the -- you highlighted stable growth going forward, and the federal government businesses are potentially upside to that number?

That was not -- let me go to the first part of your question, it was not driven by USAID. It was actually broad-based, and some of that was driven by federal work that we performed within the RCM group that we moved forward, which was the Army work and Army Corps work. So I'd say it was broad-based, not USAID, number one. Number two, we said it will be stable. What I indicated by stable is I think that our revenues are going to be relatively consistent with last year with respect to the federal government. I think we have some areas that we expect will be strong and growing and others that will actually be under some pressure, and I think overall, our revenues from the federal government, and even state and local here in the United States will be stable or consistent. I do think that we have some upside. I think that there are programs like the water and energy, IQC contract with USAID, that is incremental. We have not included that in our guidance for 2012. Certainly, we're well early for 2013. We've not included any contribution from the big CJPS contract that has yet to solicit any of the task orders. So that is incremental upside. So I think there are many catalysts that could actually represent upside in the federal government. But right now, we're forecasting, when we say stable to flat revenues year-over-year as we look out into the end of this year and early 2013.

That's helpful color. And I guess just following up on the CJPS contract, is there an update on timing? I think last quarter you mentioned that, that contract you're hoping that you could book it past quarter by the end of the year. Is there -- have you -- has there been any update on timing thus far?

There has been a little bit of updating. I did expect that we would be able to compete and be successful on the task order right about now. I thought the first ones would come up close to the end of the calendar year, and the awards would have been sort of January, early February. There were 2 primary solicitations that took place. One was a full and open, which we were successful on with a limited number of other large firms. And there was also a parallel solicitation taking place for small business set-aside. The small business set-aside has gone through a protest process. And so, the client has taken and postponed the solicitation of individual task orders until the small business protest is being resolved. We expect that in roughly the end of February, although these processes are a little uncertain, so that's what's pushing out the solicitation of task orders. It's not funding. It's not the need for the work to be done. It's really just the contractual process. So I expect that here in the next -- hope the next quarter I'll say, I'll push out one more quarter that we'll see the first task orders, but we did not include that in our guidance. Anything that would come from that would be incremental upside. So I'm not overly concerned about its short-term impact on our business because they didn't incorporated into it, but I do hope this next quarter would see the first task orders.

Okay, that's helpful. And I guess, one last question. Can you just give us an update on your expansion plans in South America and Australia? In particular, any M&A opportunities and your expectation for 2012? I know that you've given a diagram on your slides relating to your intangible amortization declining in '13 and beyond, which would imply not much M&A, but I know that M&A historically has been a core part of your business though. Any color there would be helpful.

Well, thank you for the question because I do want to highlight or clarify one point. I did not and I do not intend to send any -- in respect to a slowdown in our acquisition and the list of opportunities or timing. That, as we've said each quarter, we outlined the intangible amortization for the year assuming, and we have provided the information on a forward reduction in IA based on no acquisitions. That is simply because we don't preannounce any acquisitions or provide guidance with respect to acquisitive contribution in our guidance. I do not expect our acquisition list of opportunities to slow down. We are focused on select build out on Canada. There's some areas that we can add some additional capability on the highest growth areas. Australia continues to be our #1 geographic priority area, along with South America because of the mining, the water infrastructure projects. So we have plenty of opportunities. The pipeline is quite full, but we don't want to set false expectations because of timing until we actually close one of these acquisitions. So -- but do not take the forecast of reductions in IA as any indication of the opportunities or timing of an acquisition.

Your next question comes from the line of Michael Gaugler with Brean Murray, Carret.

Most of my questions, believe it or not, have already been answered. One thing I did notice though, on the DSO improvement, I'm guessing part of that's being driven by quicker payments as international grows. Correct me if I'm wrong there. And then secondly, I would expect that improvement probably slows down once the CJPS contract begins to hit and federal becomes, grows a little bit more on the back of that. Just trying to get my hands around where DSOs are probably ahead over the next 3 or 4 quarters.

I'll let Steve talk about the timing of individual clients who paying quickly in international. But let me give some insight into our expectation and CJPS. The federal government large contracts that we have that are cost reimbursable that we performed in the past for Department of Energy and others that are these very large baseline support contracts actually have some of the lowest DSOs in the company. They get paid quite quickly, they are quite often pre-billed, in the case where we expect to incur expenses before, and so that it can be concurrent or we can electronically invoice very quickly. In some instances in the past, it's been as quickly as every 2 weeks. So while we don't have any individual projects that have come out, no task orders have been bid, we do have an expectation that, that will not adversely impact our DSO from that particular project. But Steve, if you want to provide some detail on payments on international and others that helped contribute to a good cash quarter?

Yes. What we've historically experienced is new acquisitions have come on, especially in the international area. DSOs were higher with those acquisitions. However, we've worked with them and worked together to bring the DSOs down, and we've continually seen improvement. And so that's what we continue to experience. And in addition, we've had a lot of our commercial clients and even some of our federal clients that paid a lot of our invoices at the end of the quarter that we actually expected them to pay in January. So we continue to see improvement, and we continued to see our DSO stay at or get better than where it is right now.

Your next question comes from the line of Andrew Wittmann with Robert W. Baird.

I wanted to ask a little bit about the general administrative implementation cost that you've been incurring. First of all, Dan, any surprises either positively or negatively as you've made some of these investments? Anything come out of the woodwork that may have changed your view or how is that whole process going?

It's going pretty good. Last quarter, I indicated that I thought we'd spend around $5 million. The finance department and back-office came to me with a request as I'd indicated last call with a increased investment, and I like investments where I'm going to get a return, but I don't like to spend money. So I made them give me all sorts of detail as to what we're going to do, why we're going to do it, how it's going to contribute to the business, and that's why we had a fair amount of visibility into the actual number. So that's around $5 million or $0.05. So if we're going to do it, why wait, let's move on it right away because if there's necessity to create HR systems in Spanish and French and Portuguese, let's move on with it if we need risk management. So we've moved quickly, about 60% of that's been incurred in the first quarter, that's about $3 million. I'm actually very pleased. We've not had any negative surprises. We've not seen -- importantly to me and the company, we've not seen that increase or balloon as we've seen happen in some of the others in this industry. We've been quite fortunate that, that hasn't happened. And so I guess, if anything it would be a positive surprise, and that it's met its budget, it's met its timing, and I expect the remaining amount of the expense, the other $2 million roughly to be incurred in the second quarter. So I think we'll be pretty much finished here within the next 90 days. So most of it will take place in the second quarter, so roughly $2 million, and after that it will be a very de minimis amount in Q3 and Q4. So I'd say on time, on schedule, on budget and the outcome of it has been as expected. So maybe, no surprise is a good surprise, Andy.

I think so. And then just in terms of some of that investment, how much of that, if any of that is, would you consider not recurring in nature or one time?

That was the one thing I'd see you can spend at once and it's going to go away. But as it was explained to me, when we hire a treasurer, who's going to focus on FX, are you going to hire them and let them go next year, so that it's a reduced cost? I think as Steve has -- if you look at his remarks, he is quite precise to me, and I think on this call that it's going to represent not an additional increase at the same rate, but the systems that we're putting, a lot of it's in labor and a lot of them are going to be ongoing costs. I don't expect it to actually come back down. I just don't expect it to increase at this rate in the future. Steve?

I agree. Just to reiterate what Dan said. We'll see an increase this year, but we won't see the same spike next year.

Got it. And then on the $750 million contract vehicle from USAID, Dan, just hoping for a little bit more color on that one, can you give us how many hands are in that vehicle and what's your expectation for maybe timing for that large vehicle could be?

Well, it's ourselves plus 2 others, so were a total of 3. So it's a much smaller pool of awardees. So just 3 of us. Of the 3, and I'll let you do your own homework who the other 2 are, we're the only firm of the 3 that is focused on the water-end aspect of energy. So I think from a technical standpoint, we really are a standout. However, after watching what's happening with the CJPS, and we didn't anticipate the delay with respect to the small business protest. I am really going to be cautious with respect to forecasting revenue or timing on this one. As we begin to get orders, and I've had a little bit more clarity on it as it comes out, I'll certainly update everyone on this next call. But I think I'm going to remain a bit cautious until I see the actual task orders come out. But as far as the capacity, the client and the type of work, I couldn't be -- it couldn't be more closely aligned with what Tetra Tech is.

Your next question comes from the line of Tahira Afzal with KeyBanc.

First question is, could you elaborate a bit on your personnel in terms of utilization on some of your mining work? I know that's a very strong end market in general. I would love to get a sense where you stand there. And then perhaps if you could provide an update in terms of cross-selling opportunities and how those are working out with some of the new acquisitions?

On labor utilization within mining, I don't have the precise number here. We don't track it per subcategory like that. But I do know qualitatively, it's very high. And in fact, if there's one area that we're looking to add additional staff and where there's a shortage, really across the globe for certain aspects of mining, it's in the mining support, particularly the engineering aspect. So utilization's quite high. There's that one area again that we may be resource constrained, it's beginning to be in the mining area, so that's a good thing. We have quite a large staff there, but they're fully utilized.

Okay, great. And cross-selling opportunities, you've talked about Canada and how that's opened up markets for you. Could you talk about some of the other acquisitions if you've seen something similar there?

Well, cross-selling has been one of the best stories, one of the best outcomes we've had, particularly in Canada. I would say that in Chile and Australia, it's only -- they've only been with us for a few months, and that's beginning to pick up. But what I'll point to is the organic growth at 13%, a lot of that we're seeing out of growth year-over-year out of the Canadian activities that have all been with us now, except for the very small friends[ph], which is now just approaching one year. But the rest are growing quite quickly, and it's almost exclusively because of cross-selling. We've taken the contracts and clients that we've had previously in Canada with the original Tetra Tech in the U.S. and we've moved those clients into our Canadian activity, and we've moved up people in the U.S. where we used to do just planning up there and planning engineering, now we're doing design work, and so it's growing. We do track our metric internally, it's not something that we will report on this call, but we track intercompany work. So it's actually the definition of how much work do we have internally within Tetra Tech that we hand from one unit to another for the same client. We actually track this in our company. It gets eliminated so we don't internally count it twice. And that number is up almost 100% from last year, and the year before, it was up at even more than that. So the number's probably almost $200 million or getting close to 7% of the total revenue of the company that we move back and forth by leveraging work with our existing clients and a lot of that is coming out of new acquisitions in Canada.

That's great news. I guess just a 2 quick follow-up questions, follow-on questions. Number one, you talked about water and the energy side of the business. I've been getting several questions on frac-ing, and is there a way we can play in the E&C space. Could you talk about your positioning there and I know you've talked about it a bit in the past, but an update would be appreciated. And secondly, you talked about acquisitions remaining as a key part of your business strategy going forward. Could you comment on whether this acquisitions you're looking are largely going to be accretive because, clearly amortization falling off next year helps, and I'm just trying to see if they're not accretive could that take away from some of your amortization accretion going forward?

The first one is the frac-ing process, which has been primarily a natural gas technology, but has had an offshoot of a lot of liquids coming out. The areas that we've been focused on as a company have been the environmental aspect and handling of waste water treatment, water supply. We've been very small in our revenue in this particular field because most of it has been in the water supply. As permitting's been required, they require very large amounts of water, the numbers range from 4 million to 7 million gallons per frac, per well, so they require lots of clean fresh water. And so, that's been most of our revenues. And I've mentioned before in this area in 2011, we were maybe $5 million. We've been looking for, if there is a regulatory move to either report or more importantly if it ever regulates the waste coming out, the very large water quantities. We think this market will go from 0 to quite large very quickly. In fact, in states like Colorado, here just recently in last month, they now require a reporting of the actual chemicals being used and even the component as to the percentage. It's these types of regulations or reporting requirements that are precursors and in fact, drivers of what could this business much larger. Another area that we're looking to expand that represents a very large opportunity, and they could play Tetra Tech as an area that's close to 0, and we believe will be a material contribution both late 2012, maybe Q4-ish, and certainly into 2013. The frac-ing process with the regulatory side on the back end, you're not going to just truck it, you're going to have to treat it, handle it and manage it as a waste, and the other is the pipelines with respect to both supply and taking water, and we're moving Tetra Tech into the design aspect to support the oil and gas and natural gas aspects in that market. We've got some people that do that, but we don't have enough. So this is an area that we're looking to have others join us, which will go right to the M&A is one of the areas that we're looking here in the U.S. to fit for our acquisition strategy. And I'll go right to your question as far as accretive. We have not made. We've been quite acquisitive. We brought in some excellent partners. But to date, we have not brought in a firm that's been dilutive on an EPS basis, which is a very high standard. You hear others say it's not dilutive on a cash basis or while pro forma, something unusual. On a GAAP basis for EPS, it has not be dilutive. Now unfortunately, the intangible amortization does create quite a high hurdle. And so on the first year or sometimes 2 years, that's neutral. And so that's why really the performance of the underlying business has been so strong because we're bringing revenue on, and we're still growing EPS and earnings at a level faster than our growth rate, an example of 14% if you just take out the SG&A and the tax. Even given no contribution of EPS from the acquisitions that have come on. So if you look at it a little bit deeper, the performance of the underlying business is actually exceptionally strong. So that's -- I don't expect that to change at this time. It's not that we will never do a deal that's not EPS accretive, but it would have to be quite special and strategic to move us into some new areas, but -- and kind of a -- and I'm getting this point a lot, but on this particular point to here, we've not had a dilutive EPS acquisition, certainly in the last 7 years.

Your next question comes from the line of John Quealy with Canaccord.

Dan and Steve, it's Chip Moore for John. I was wondering maybe if you just give us a little clarification on the near-term outlook for RCM, just given that pull-forward of construction activity in the quarter. It sounded like maybe you were talking about a slight sequential decline, just a little more color there?

Very perceptive, Chip. That's exactly what I'm saying. Because we moved up, these 2 things happening with RCM because of the winter months, a lot of the field activity slowed down, so there is a natural and always has been a natural decline sequentially between Q1 and Q2, and then you see a pickup in 3 and 4. You'll see that this quarter and even this second quarter, you'll see that. We will see that, but it will be slightly more accentuated because of the pull-forward of the Q2 work. So Q2, we'll watch RCM come down both in revenue, our gross revenue, net revenue and income. And then it will move right back up in Q3 and Q4. And on my prepared remarks, that's why I wanted to point out clearly, if you take a look for the year, they're going to be strong, and I think a way to take a look at RCM's performance, even in the first half is to take Q1 plus Q2, and take a look at the first 6 months compared to last year, and you're going to see it up organically, you're going to see the margins up and you're going to see very good performance. So I will inform you that we do see because of both the winter months and the acceleration of the revenue. RCM itself be a little bit softer sequentially.

Your next question comes from the line of Ryan Connors with Janney Montgomery.

I have 2 questions. First just a quick one on kind of the guidance and the dynamics there. And second, I just want to follow-up on an earlier question. So first off just on the guidance, the range is reasonably wide. I'm showing here the low end representing 8% year-over-year growth and the high end's roughly double that. So can you just talk about some of the swing factors in your internal model that would drive you toward the high or low end of that range, be it a external factors like new business or internal things on the margin line?

First of all, the range for revenue is about $50 million on that revenue. That's the same number we provided on previous quarters. In fact, that's exactly the same range we provided on first quarter.

I mean, I'm talking EPS.

I think that our EPS as far as the range is also similar with respect to a $0.01 range, but let me give you some of the items that would impact either the high or low. If the things are busier, utilization's higher. If we have favorable weather and we're able to pull, in the case of RCM, work that we would otherwise do in Q3 and wrap these up, we can actually see margin be a bit stronger, that would drive us to the higher end. We do have other projects that if we're able to -- while we're doing studies and evaluations that we're able to get permits in place and initiate design, that'll also accelerate revenue utilization and then drive margin as far as utilization. Those are really the 2 factors. There is no single project, just to go to perhaps an underlying implication. We have no single project that has to be awarded or single components that we have with respect to risk factor on an individual project that will drive that number. It's really broad-based, based on utilization and revenue. So for the high end of the revenue, we should be higher on the margin.

Okay, super. And then just revisiting this issue of hydraulic fracturing, and the water and environmental aspects of that. I mean, your comments earlier seems to focus on kind of the commercial side of that. But there's some pretty large environmental studies that the government entities are undertaking, I know the EPA is doing their study. The Pennsylvania DEP here in Pennsylvania is studying the Marcellus Shale and all of those studies are -- we hear fairly big-ticket -- and that would have seem to be ideally suited to your skill set. So I mean, is that something that those contracts just aren't as big as we maybe think they are or are those just not necessarily your top client relationships or you're just not really, really played there much? What about that side?

That's a great question, Ryan. In fact, our relationships and our technical position with those clients are maybe some of the best that we have in the entire company, and I belief between any technical consultant and their client. But if the projects for the governmental agencies are science, research, technical in nature, we want to support them, and in fact, we are doing some of those. But some of those that we coming out that have visibility, first of all, the revenues for those are, probably depending on the way you characterize it, I would say misrepresented because they're much smaller and would represent a conflict of interest for our doing the work for the actual providers. And so we have made a decision not to support the regulatory clients where there is an enforcement aspect or a regulatory precedent that's going to be on the opposite side of the existing clients or those that we're beginning to grow with on the private and commercial side. And so that's why where it has visibility and the consultant's name is being used in concurrence with a regulatory agency or a governmental agency that will enforce it, you're not likely to see Tetra Tech's name on that particular -- rather, we want to work for the government on the science, technology, research, underlying science, we do that a lot, and we're doing that now. And more equally important, I don't want to say more importantly, because they're both equally important to us, we want to work for those commercial clients to actually take these technologies and put them to work out in the field.

Your next question comes from the line of John Rogers with D.A. Davidson.

Just a couple of things. First of all, just going back to the investment in your international systems. Does completion of this, Dan, make it easier to do international acquisitions? And I guess, what I'm wondering is -- did it the effect the timing of your pipeline at all?

No it didn't impact the pipeline. It wouldn't make it easier. I don't expect that was going to make it -- makes it a little bit easier because we have a lot more systems we become more knowledgeable in some the details. But it's really, they're on parallel paths separately, but what it will make it a lot easier is when they do join us, the ability to track, monitor, on board, go through the orientation, and to just move them right on with Tetra Tech. So the time from joining us to the time of being -- is we're fully integrated, but that process will become significantly shorter and more robust with respect to risks in that whole process. But as far as pipeline, it's really independent.

Okay. And then secondly, I mean you mentioned a little bit, but can you give us a little more color on the strength in what you referred to as the U.S. commercial business more specifically where, what types of projects that you're seeing the strength in?

With the growth rates that we've had, you can imagine I'm quite interested in what specific -- and if asked the question, which project or which client or what type of activity is driving this? And it's very broad-based. We cannot give you several examples. We've seen an increase in the automotive manufacturing business where they've had plant upgrades and everything from energy efficiency, new water supply, wastewater treatment, that expanded the new facilities where we had waste management programs for groundwater monitoring, landfill design, so very broad there. We've seen it in aerospace and manufacturing similarly. We've seen it on the energy side, on the oil and gas with pipeline corridors, with respect to where they're going to put the pipelines. We're doing environmental assessments, easement evaluations, engineering and permitting. We've actually seen the renewable energies from solar and even transmission work. A lot of the work with respect to environmental permitting, evaluation, cultural resource work, habitat evaluation. We've seen it really across the board. It's been very strong and there's no one single standout that I'd say that the majority of it is here and there's been others. Mining, of course, has continued to be strong. So I'd say manufacturing, energy, mining, and even other commercial clients, telecom has been strong with respect to builds out of cell towers and evaluation of right of ways, environmental impact assessments, permitting, all of the work, it's really been very broad.

Okay. And I don't know whether this is putting too fine a point on it, but when I look at your comments relative to 5% organic growth going forward, and then your comments that the public sector federal and state and local will be flattish. Are you saying that the international and the commercial slows a little bit from the pace you're at now? Or you're just being conservative there?

Well, if you take the revenue that we have internationally and you put a 10% organic growth rate on it and you weight that, and then you take our commercial, the U.S. commercial work, and put a 5% or better weight on that, and then you put a 0 on the other 2, the overall average puts you at around 5%. So that's really an arithmetic calculation. And so if the rates are actually faster in the international or commercial or the U.S. which U.S. government work grows, then that number's going to move up. But it's really an arithmetic calculation that's come out.

But your international and U.S. commercial are growing faster than those rates you just mentioned right now.

They are. However, I do want to note 2 things. Number one, the first quarter is busier. So we're quite busy in October and early November. So some of these seasonally are busier in first quarter than second. So the second quarter across certainly Canada, even a portion of the U.S. does slowdown, so taking that first quarter and using it as a single point and then extrapolating, I think you have to take, if you look at the margin that we presented during the presentation, there is some seasonality, where it's up and down. So we're factoring in a bit lower numbers for Q2 and then Q3 and 4. But on an integration, you may see we're being conservative. I certainly hope at the end of year, you'd say that was quite the case. But arithmetically, you can see how we get to these numbers.

Your final question comes from the line of David Rose with Wedbush Securities.

A couple final questions. One is, you've talked about the SG&A benefits from the new IT spend and the back-office and HR. They are benefits that you've calculated, I mean as you look at the return of invested capital from initiatives, but you haven't talked about the benefits economically that you might see in 2013. Can you quantify what you expect those cost reductions could be or is it simply more preventative than anything else? And then two, -- and then I can follow-up on my second question.

I personally look at them as preventative. That these are not to ameliorate or to remediate an issue that we have. They're not intended to address a specific entity. None of this is to address an issue that we have with one of the acquisitions. This is all preventative or to put the structure in place to facilitate growth and leverage of our international business as we move there. So as we grow, which I hope significantly in these different geographies, we won't have to put all this in place. So this is doing it in advance to avoid a problem.

Okay. And just to follow-up on that. I sense that it does accelerate the reduction in DSOs as you mentioned earlier. Your international acquisitions tend to have higher DSOs than what you have in the U.S. at least from your federal. So can we expect an acceleration of reduction in DSOs?

No, I think what we see is that initially when some of these international operations come on with us, they've got a very high DSO. However, we worked quite diligently and effectively and efficiently with them to bring that down pretty quickly. So once they come on to Tetra Tech, it comes down. Whereas historically when they were on their own, they were higher. So we don't expect to see a huge decrease in our DSO from where it is now. But we're going to continually strive to get it lower but not see a huge impact right way.

And then finally, with the acquisition of Metalica and the potential for the desalination market ticking up in late 2012, 2013, we're seeing some -- a lot of signs of desal picking up, Metalica is sort of a great fit if you need mining -- many of the mining companies in Chile are using desalination as source of water. So are there projects that you've already identified that might be tied to -- I mean, I know you've had your hand in that market before.

Well, we have had our hand in it. We've been particularly strong, and in fact, we are one of the strongest desal design engineers in brackish water from wells in Florida, Texas, sort of the Gulf states. We have also been one of the leaders on some of the largest plants from seawater desalination and mostly on the feasibility studies and engineering support. We have identified some that are conceptually on the drawing board down in Chile, and you're right, that's quite an arid country, and water provided through desalination process is one of the primary sources for some of the mining, particularly copper in Chile for us. But they're all very much early on the drawing board, and none of them that we have included in our -- none I would say with absolute clarity for 2012 on our revenue. And for 2013, we're still a bit early. But at this point, we've been very cautious from the planning stage through anything more material. But we are aware of that, there are other countries, but Chile no doubt is a good position for us. But no, nothing that we have that we're going to do an announcement or move forward on at this particular moment.

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

Well, thank you very much. Those are excellent questions. I think that clearly by the context of the questions, the analysts that have participated today understand the business quite well. I want to thank all of the Tetra Tech associates. It's really been an excellent start to this year. I think that we're in good position for the second quarter, and I'm really looking forward to coming back here in roughly 3 months and reporting the performance for our second quarter, giving you an update on how we're going to perform through the rest of the year. So thank you very much, and I'll talk to you all on the next quarter conference call. Goodbye.

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