Dan L. Batrack - Chairman, Chief Executive Officer and President Steven M. Burdick - Chief Financial Officer, Executive Vice President and Treasurer.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division Noelle C. Dilts - Stifel, Nicolaus & Company, Incorporated, Research Division Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division Michael Shlisky - Global Hunter Securities, LLC, Research Division James Kim - Wedbush Securities Inc., Research Division.

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 we'll 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. These statements are only predictions and may differ materially from actual future events or results.

Tetra Tech's Form 10-K and 10-Q reports to the Securities and Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements.

In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the Investor Relations section of Tetra Tech's website. [Operator Instructions] With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack..

first, we realigned our front-end segment operations by market sector, and I'm going to speak more to this a bit later in this morning's presentation; second, we transferred the complementary and profitable components of RCM into the front-end businesses; and third, we initiated the wind-down and exit of the remaining RCM operations.

Now because of this realignment and the RCM wind-down, I'll be highlighting the financial results of our 2 front-end segments, in addition to presenting our overall performance.

So overall, for the quarter, the company generated $622 million in revenue, $462 million in net revenue, which generated an operating income of $25 million or an EBITDA of $37 million, which resulted in an earnings per share of $0.35 for the quarter.

For the fourth quarter, the total in net revenue were essentially flat for the combined front-end segments of ECS and TSS, but their operating income was up 11% year-over-year, resulting in $49 million of operating income with an associated EBITDA of $51 million, which was up 9% over the year earlier.

And I would like to note that it was these 2 segments, ECS and TSS, that generated more than $600 million in orders for the quarter, that drove our backlog up to over $2 billion to finish the fiscal year. I'd now like to present our performance by segment.

Our ECS, or Engineering Consulting Services segment, was up 2% on net revenue and delivered a 12% margin, with improvement across their markets in both United States and Canada. And the growth in our water-related services took place both for our government and our commercial clients within the ECS segment.

Our Technical Support Services segment delivered an excellent 14% margin, and they just really had a good entire 2014, with a continued rapid growth in the oil and gas-related services, especially in the United States midstream engineering sector, and that was designing of pipelines to transport the production of oil and gas here in the U.S.

This was offset -- the growth in the oil and gas was offset a little bit by a slow ramp-up within federal services for the quarter, but I'm going to talk more about this in our backlog because, really, we're seeing federal services pick up and be one of our stronger areas.

We did continue to wind down our noncore work in the RCM segment, which did result in a 42% drop in our net revenue in this unit year-over-year, and actually, even a much larger reduction in their total revenue from a year earlier. Our fourth quarter performance by customer, let me go over that briefly.

The work we performed by our front-end segments, ECS and the TSS, we believe, are most representative of our customer mix that we'll have on a go-forward basis now that we're winding down RCM.

So our international work in the ECS and TSS segments was overall flat year-over-year, and it represented 32% of their revenue, and that'd be the revenue from the ECS and TSS segments. Work for our U.S. commercial clients was up 5% from the front-end segments, and it represented 26% of their work for the quarter.

Our federal work was relatively flat year-over-year, but sequentially, it was up from the third quarter and represented 25% of our front end business segment work.

And finally, our state and local work was down significantly overall, which was a direct result of our decision to exit the RCM state and local construction activities, and it did have a secondary impact on some of the state and local work that we did on our front-end segment design services, where they were supporting some of the construction activities within the RCM business segment.

Now before I turn the presentation over to Steve Burdick to present the details of our financials, I'd like to show you the profit contributions by segment, because our collective financial results don't really show you where our operating income came from during the quarter.

So in the fourth quarter -- if you're following along on the webcast, you'll be able to see this on our segment performance table. But in the fourth quarter, our ECS and TSS segments generated $49 million of operating income, while our RCM segment lost $35 million.

We did have about $8 million in the quarter in corporate expenses and interest charges, which are generally typical for us. And we also had a very unusual $17 million in net purchase price accounting pickups that were primarily due to the forfeiture of earnouts that came from acquisitions that occurred in 2013, primarily in 2013.

So without the net pickups, without the pickups from the net purchase price accounting adjustments, which were not incorporated into our guidance as we came into this year, our fourth quarter would've had a reported $0.37 -- somewhere between $0.37 to $0.41 for the quarter if RCM had just broken even and didn't report a loss.

And this is one of the reasons why we made the decision to wind down and exit the RCM segment. So now, I'd like to turn the presentation over to Steve to go over the specifics of some of our financials.

Steve?.

in water, environment, resource management and infrastructure. Our operating income was about $24.8 million in the fourth quarter. Overall, the operating margin represents a margin of about 8.3% and close to 10% without intangible amortization expense.

Now this operating income, as Dan talked about, was primarily driven by the project execution and favorable results in both our ECS and TSS groups. In fact, on a standalone basis, our 2 front-end businesses produced an operating margin of about 12.8%.

In addition, the operating income was impacted by a reduction in overhead costs due in part to our rightsizing actions that we've taken over the last couple of years, also, as Dan mentioned, significant nonoperating gains on revaluing acquisition-related earnout liabilities.

And however, our operating income was reduced by project charges in the RCM group. Now our EBITDA was about $36.8 million. This EBITDA was driven by the same factors as operating income, but at a higher percentage as we recognized intangible amortization and depreciation of about $12 million in the quarter.

We achieved an EBITDA margin of 13.3% on those front-end businesses. And the higher EBITDA margin on our front-end businesses excludes both any of the purchase accounting earnout gains as well as any of the operating results from RCM, which are being exited. The SG&A was about $48.5 million for the quarter.

This was consistent with the prior year's quarter. However, the slight increase was due to about $2 million of charges in G&A from restructuring and impairment costs. We expect our overhead back-office costs to further decrease as we exit our RCM noncore markets. The tax provision resulted in a net expense of about 0 for the quarter.

Now the effective tax rate was about 25% for the whole year, and the lower rate is due primarily to the nontaxable nature of some of the earnout adjustments, which offset the tax impact from our profitable operations. Overall, the tax rate was about 34% without the earnout adjustments and some of the other onetime charges.

And as a result, our earnings per share was about $0.35 for the quarter, which was within the guidance range. I'd like to point out a few more of the more significant balance sheet items. As a result of the higher days sales outstanding in the RCM segment, we did experience about a 6% increase in our net accounts receivable balances.

Also the net -- the accounts payable balances increased to $176 million due to the higher pay-when-paid subcontracting activities which -- and these activities took place mostly in our federal and state government projects in the RCM segment. Our net debt compared to the prior year is about the same.

We would've taken down our net debt over the year as we generated $127 million in cash from operations. Now offsetting this favorable operating cash flow, we implemented a stock repurchase program in fiscal 2013, which utilized cash of about $80 million in fiscal 2014, and we paid about $9 million in cash dividends to our shareholders this last year.

As such, the capital returned to shareholders totaled $89 million. We also had some CapEx for the year, and as a result of all those different moving pieces, our net debt remained consistent with the prior year. As noted in the previous discussion on our balance sheet, we had a solid cash flow from operations.

So for fiscal 2014, we generated $127 million of cash flow. However, the fourth quarter was less than the prior year, and this lower amount resulted from the disappointing results in the RCM segment.

Going forward, we do expect to generate operating cash upwards of 30% more in 2015, as our forecast indicates cash from operations to be in the range of about $145 million to about $165 million.

Now CapEx is less than prior year and slightly lower than our previous guidance for fiscal 2014 as we've remained disciplined in our spending based on the strategic decisions we implemented relative to our RCM segment, and we expect to remain disciplined in our spending for fiscal 2015 as our forecast CapEx range is expected to be somewhere in the $15 million to $25 million range.

And this amount continues to represent a ratio of less than 1% of our annual revenue. Now days sales outstanding of 87.5 days are higher when compared to last year at this point. The actual DSO is not in line with our expectations, and we have put corrective actions in place to bring this down.

Our DSO is higher -- and our DSO is higher due to the performance of our RCM segment. On the other hand, the DSO in our front 2 segments is less than 75 days, and our efforts in fiscal 2015 are focused on reducing this DSO to stay below that 75 days. Now for 2014, I'd like to give you an overall recap.

Net revenue was down 8%, about $1.86 billion, and this activity was lower due primarily to our decision to exit the RCM market. Operating income improved quite a bit from last year. Overall, we reported about $154 million in operating income.

Now from an operating perspective, our front-end business in both the ECS and TSS segments managed to perform well and posted strong earnings. And these operating results from the front end were offset by losses in our RCM segment. Further, this operating income resulted in EPS of about $1.66.

In the prior year, it was, just to remind everybody, was negative due to goodwill impairment charges and significant noncash project charges. Although we had several large noncash charges and income improvements due to the acquisition accounting, we still managed to generate $127 million in cash from operations.

This operating cash generated about $1.96 per share in fiscal 2014. And as I noted in my previous comments, next year, we expect to generate $145 million to $165 million in operating cash, which translates to about $2.30 to $2.60 in cash per share in fiscal 2015.

Now for those following on the webcast, this next graph shows how our net debt has changed over the last 5 years.

As you can see on the graphic, our previous net cash position has transitioned to a net debt position due to the borrowings for acquisitions in 2014 and 2013, but it also shows what I mentioned earlier, that we have reduced our net debt by a substantial amount.

In fact, our experience has always been that we are generating cash at a faster and more consistent pace compared to our net income. So as a result of our performance, we continue to focus on an enhanced capital allocation program, which I would like to give you an update right now.

Our current leverage is close to 0, while our target leverage range is about 1x to 2x EBITDA. Although our long-term target is to return about 33% of our free cash flow through a mix of dividends and buybacks, we have enhanced our returns in 2014 to take advantage of our leverage and provide a greater return to shareholders.

As such, we did provide about an 82% return of free cash flow and we have completed the previously committed $100 million stock buyback that was authorized back in 2013. So as of today, I would like to announce our further commitment to provide value to our shareholders.

The Board of Directors has approved the declaration of Tetra Tech's quarterly dividend and this dividend is $0.07 per share. Now on an annualized basis, this represents about 15% [ph] of our estimated annual free cash flow, and the annualized amount further equates to about 1% yield at our current stock price.

This dividend will be paid on December 15 of this year to shareholders of record as of November 26. In addition to the dividends, Tetra Tech's management and its Board of Directors have committed to a stock buyback program for an additional $200 million, which will be utilized over the next 2 years.

An important aspect to understand is that this cash dividend and stock buyback will not impact our growth strategy from either an organic or acquisitive standpoint. In fact, we expect to be active in the M&A market and move our leverage towards that target range here in 2015.

While we have committed to a more significant share buyback program over the next 2 years, we will update our shareholders on our capital allocation plan at each of our next quarterly conference calls. And so with that said, I will now hand the presentation back over to Dan to discuss our outlook and business strategy in a bit more detail..

we've assumed an intangible amortization for the fiscal year of $22 million, which would translate into $0.23, that's already incorporated into the guidance; we assume a 33.5% effective tax rate for the year; 64 million shares of diluted shares outstanding; and this guidance does exclude any contributions that would be added during the year from acquisitions or the impact of the share buyback program that Steve Burdick had described a bit earlier.

In summary, our ECS and TSS units had an absolutely solid performance in the fourth quarter and really for all of fiscal year 2014. We've implemented a new alignment that significantly reduces the overall risk profile in the company while improving our margin across all of our end markets.

Our commercial and our government end markets are both improving and look good, and our growth in backlog in areas where we're a market leader supports our confidence in our 2015 guidance and really supports the success we feel for the company that is going to come in 2015 and beyond.

And with that, Jennifer, I'd like to open the call up to questions..

[Operator Instructions] The first question comes from Corey Greendale with First Analysis. There was no response from that line. Your next question comes from Tahira Afzal with KeyBanc..

Okay. I guess, first question is, Dan, what are your assumptions around oil and gas? It seems that, in the longer term, you continue to be pretty upbeat on commodities and their contribution.

So I would love to get a sense on how you're thinking about that, both anything that's commodity-oriented, given all the movements we are seeing, at least the nearer to medium-term oil prices?.

Well, I'll talk about oil and gas first under the work we do in the commodity sector. Our oil and gas was very strong for the year. It was the highest margin-producing unit we had within the company as an end client. The contribution was quite significant, we've grown it to $400 million.

Our goal was to make it $400 million at the company, and in total revenue, it was just slightly over that. So it not only met but slightly exceeded our goals for growth. Now most of our work is on the midstream. Now we're associated -- we're really trying to support the design, the permitting and the environmental oversight of the pipelines.

Most of the design work is here in the U.S. and it's mostly associated with the Bakken Shale work. And it's really pretty simple, it's getting it out of trains and into pipelines. And right now, we've got as much work as we can possibly handle, and we're looking at adding additional capabilities so we can grow this even quicker.

Now we have established -- and I didn't put it in this quarter's presentation, but it has not changed. We have a, roughly, a 3 to 5-year goal to take that $400 million and more than increase it by 2.5x to take it up to $1 billion, and we actually see that there's plenty of work.

We see that the midstream or the pipeline work is relatively less affected for oil prices. And certainly, in the short term, from the work that we have with respect to backlog and opportunities, we've not seen any slowdown in that. So we are very bullish on oil and gas market..

Got it. Dan, I guess, from the longer term, I mean, Bakken, for example, is considered to be the highest in terms of price points or the most likely to eventually see some impact.

So would you be looking to sort of diversify your exposure within the different shales?.

We definitely are. In fact, if we had to pick one area that's our #1 focus, it's the Permian in West Texas. So a bit with the Eagle Ford, but mostly the Permian is our next biggest area of focus. We still think, though, that it is the most expensive oil to get out or one of the most expensive in the U.S.

in the Bakken, but the area we're focused on is simply, over the next several years, would be the pipeline support to move what they've already identified. So it's not the upstream work that we're involved in that could be significantly impacted more in the transport.

But we are moving quickly to the south, to Texas, and we expect that, that, at some point, will be as large or larger than even the Bakken work we're doing..

Got it. Okay. And one follow-up and I'll just jump back in the queue. Any talks around the Republicans coming in? I assume it's good for your energy and resources segment, maybe mixed for some of your federal components. So would love to get your first take on that, guys..

Well, a bit of time will tell. Certainly, we've seen multiple bills being proposed to get the Keystone pipeline moving. And while that particular project is not a big mover for us, it is indicative of the focus on getting more pipelines and movement of the oil and gas in the U.S. underway and allowing it to move forward.

So certainly, that would be a big positive for us. I do believe that, certainly, nobody has the executive and both houses, so they don't have all of it. So I do expect additional environmental regulations to continue to move forward. And the one part that I feel very positive about is the oil majors get more and more involved in these activities.

They bring their own environmental regulations in cleanup and standards both for water, environment, permitting, in order to minimize and to manage the long-term liability. So it's not strictly regulatory and government-driven. A lot of this is going to be brought in by the oil majors and the more mature oil producers.

So I feel pretty good about that..

The next question comes from Noelle Dilts with Stifel..

My first question is sort of a housekeeping question. When I look at your recast segments, the WEI margin was very strong in the quarter, it looks like 16.5%. So I'm just trying to figure out how much of that came from the earnout reversal.

And then, also, I was hoping you could speak to what kind of drove the earnout reversal in the quarter and essentially what segment it was in..

I'll speak to the segment with respect to the fourth quarter on the recast at the roughly 16% margin. None of that was associated with earnout forfeitures, so that was strictly based on operational performance on projects. Now we, in some instances, on federal programs, asked for projects to be closed out by the fiscal year. They performed very well.

And so, as I've said before, quite happy with the 12% to 13% in this recast. You can see they were a bit higher than that, but none of that was contributed from an accounting reversal or other noncash accounting treatment of earnouts or anything like that.

And with respect to what drove the pickup, it was primarily the acquisitions that we did in 2013 in the RCM segment. So if you go back and track those, you'd see that the pickups were in the RCM segment that offset the charges that we took in the quarter.

So while I do understand one is operational, one is a noncash accounting pickup, it was really all affected by the units -- operating units as we refer to them in the RCM segment..

Okay. Perfect. And then, I was hoping -- you talked about this pickup in government work. Can you speak to -- a couple of quarters ago, you talked about just kind of DoD releases of task orders being slow.

Can you talk about what you're seeing in terms of task orders versus new IDIQ contracts, kind of where you're seeing the improvement?.

That's a great question because it's across both, it's across all of our end segments, so it's interesting. As good as I feel about the orders that came out -- and if you go back to the backlog slide in the presentation, we have a small table that's actually detailed some of the specific orders that we had.

So for instance, during the quarter, we had $77 million in USAID or the Agency for International Development, it's a division that the State Department issued, so $77 million there. We had over $50 million in Navy task orders. We had the Department of Energy also at about $50 million. The Army Corps of Engineers at just under $40 million.

And the EPA issued new programs. But the story that's actually not told in those numbers in our backlog -- so when I say $2 billion, we should feel good about that, and we do. But mainly, the part we feel even more bullish and that'll translate in coming quarters is we had even more contract awards.

And in fact, what you saw in a press release by Tetra Tech is actually only a small part of what was awarded. The one thing that we've had through this economic downturn is anytime you win a project of any size, everybody protests that, and we're going through this, "I win." "Oh, I protest," and we go through anywhere from a 1- to 6-month period.

But if you go through the government release pages, you'd find that this past quarter was substantially more beneficial for us on new awards than what you've seen here. Now these awards, these protests go through and they get resolved and they come out.

But I would like to tell you it was -- I actually don't want to tell you, but I can tell you, it's just AID or it was just the Navy or just DoE. But I think, Page 20 in our backlog slide shows that quantitatively, and it gives example of some of the contracts.

So it's kind of a long answer, very broad-based, and the awards are coming out in task orders across all these vehicles, and they're adding more vehicles..

The next question comes from Andy Wittmann with Baird..

Dan, I was hoping you could give us some characters or some flavor of the charge that you took in the RCM, the $35 million.

Is that charges from exiting projects? Or is that a charge from fixed costs on fixed-price contracts going higher in your new accounting look of those projects? Just understanding some of the components there, I think, would be helpful..

That's a great question, Andy. I mean, I certainly, by no means, meant to simply say the number $35 million and move on.

So first of all, this was not -- I don't want to say it was not unexpected, we certainly didn't expect this, but I knew, and in the last quarterly conference call that I shared with you all a little over 3 months ago, I did indicate that we were going to make a strategic decision in RCM, and we would drive what was in the best interest of the company and try to complete it in the fourth quarter.

That was quite a high standard that we were going to get ready, set, go and finish all in the quarter, and that's what we did. So of the $35 million, let me break it down into sort of 3 buckets real quick. The first is we did reduce staff, we had severance costs, we had separation costs with individuals, and we closed down a number of offices.

So around $5 million is in what I'd call just operational wind-down of offices and staff. Because we dropped our revenues so significantly during the quarter by having turned everything off with new work coming in and accelerating the reduction, we did have about another $5 million of unabsorbed overhead.

So now, that leaves about $20 million to $25 million left. We did incur about that number, $20 million to $25 million in project charges. Now some of it was very tactical on our part.

If a project was on hold, we approached the clients and said, "What do we have to do to exit the project?" So in some instances, we had actually been awarded work and we had bid bonds out. We say, "We don't want to work, take it back." And they cashed our bid bonds. So that happened during the quarter.

Other projects, it felt that it was more important to add certainty to the quarter and put this behind us before going into 2015. So we dramatically accelerated projects by adding more staff, more equipment, paying overtime, subcontracting, and so it did incur project charges.

But the focus we had here was, I'd rather take certainty, even though it added up to $35 million to put this behind us, than to allow this to languish.

And I'm not going to say that we were free with taking charges and spending money, but I know that by trying to take and save a dollar now, by stretching it out over the next year to try to save it, the reality is by all that additional time, we have issues with respect to completion, moving into the winter weather, staffing changes, all these different things that make what may look like a logical savings, not the case.

So we drove that number in order to reduce the amount of work we had remaining with RCM. So that's what the $35 million was made up of..

I also wanted to dig into your comment, Dan, that some of the earnout reversals were from acquisitions in 2013. As I think back to 2013, that was Parkland, that was AEG, were really the 2 bigger ones there. I don't know, was it maybe -- I don't know if Rooney was with the pipeline business, I guess, that was earlier.

But 2 of those businesses are some of the businesses that you've been kind of talking more about growth, more about opportunity. So I was just hoping you could help us reconcile the fact that they've failed to achieve the ultimate earnout with the fact that those are some of the better businesses today..

Well, you've got our calendar for 2013 down exactly, so you're right on that. It did not include Rooney, so just to be -- just to reinforce what you said, that was earlier, it was not part of this. So let me just describe briefly, I'll try to keep this concise.

When we came on, we had unbelievably, together with the owners of Parkland, unbelievably optimistic and positive expectations for that business. And here's one artifact that I think is quite misunderstood by, sometimes, our shareholders and analysts, and so I'll just spend a moment on this.

An acquisition can come into Tetra Tech and produce very good profit and very good earnings and still not achieve the standards set for the earnout, because sometimes there's a perception that if you don't receive the earnout, they performed poorly or didn't even make money in some instances. That is absolutely not the case.

The valuations that we pay include the entities achieving growth rates that they've identified when they come in.

So for instance, if an entity says we're going to grow 35%, and that's what's required to achieve the earnout, and they only grow 15%, while we had 15%, it didn't achieve the earnout thresholds, and therefore, the earnout component is forfeited, but we still have positive performance in the unit.

And so that's the juxtaposition between how can you get an earnout back without a unit performing poorly..

Got it. I had 2 more questions that, I think, are important, I feel, for me [ph]. The next one is on, basically, I guess, the guidance and as it relates to some of the components that you kind of sped up here, part of the $35 million to get out of RCM.

Are there future charges or costs of exiting RCM included in this guidance range? And how are they included, if so?.

Well, our guidance is, on an earnings per share basis, is $1.55 to $1.75. The midpoint would assume that RCM essentially is at 0. There's no operating income contribution nor subtraction. And so the lower end and what would drive us to the lower end, I would believe, would be additional charges that we don't anticipate at this time.

But I will say, with a $120 million in backlog today, I think, we've got our hands on it. I think. We firmly understand where we're at. We've got everything -- I will tell you that there are some loss projects in there, but they've been reserved for and we're appropriately reserved.

So -- but if things slide worse for us, that would then potentially drive you to the lower end. However, it is possible that we actually have some recovery on claims or other receivables that maybe RCM might actually contribute.

Liquidation of some of the equipment that we have there, which is not insignificant, could be a net favorable outcome, and we've also assumed sort of a flat mining and a steady-state oil and gas. And if there's a pickup in either of those areas, I would actually see that, that would drive us to the upper end of our range.

And if that was particularly strong, it could even go higher..

Great. Last question, I promise here. Just on the buyback, $200 million over 2 years. Is this going to be done under a 10b5-1 plan, as you've done some of your other plans? Or is this one a little bit more discretionary now..

No. We are setting up or have set up a 10b5-1 plan that it'll go into effect here in this quarter..

Got it.

So this one isn't like some of the previous plans, Steve, that you kind of said, "Hey, this much by this date, this one, it maybe $200 million." You tell me, is this one -- you fully expect to do the $200 million in the 2 years or is this one going to be more -- should we think of this one as more opportunistic?.

It will be both, and we have a grid set up and we have a buyback program set up and we fully expect to utilize the $200 million over the next 2 years..

The next question is from Mike Shlisky with Global Hunter Securities..

So could you maybe tell us a little bit about -- now that most of the RCM is kind of past here, can you maybe give us a flavor as to how much fixed-price work you expect to have in your portfolio going forward as far as mix goes?.

It should be about 30%, so it's going to go down from what had been as high as 50% down to 30%, so it's going to drop dramatically..

Okay. Great. My other question is, I mean, you seem a little bit more positive on some of the federal work, given what you said about the backlog and about kind of how that market has been performing.

Is there perhaps any upside to your organic growth estimates for '15 for water? Or is this basically based on what you're seeing today? Or just give us some kind of color as to could you actually exceed low single-digit growth there in the coming year?.

Well, Mike, I think, we could exceed it. Certainly, our backlog grew at 5% for the quarter. One quarter doesn't make a long-term trend, but I'll tell you, it looks -- as I described earlier, the contract vehicles coming out give me sort of additional confidence beyond just the orders for the quarter. So I think, it is possible that it could go higher.

And so, we sort of -- if you take it on a collective basis, sort of between the lower- to upper-single digits. So maybe depending on how you model this, you could end up with anywhere from a 2% to 7% or 8%. So it is possible, Mike, it could be higher..

Great. Just one last one for me.

Is there any large change to your appreciation expenses next year given that some of RCM is, again, in the rearview mirror? Or is that going to be somewhat equal to the past year?.

No. We do expect our depreciation cost to go down as our more capital-intensive projects and businesses are -- go away..

Is there any kind of number we can get? Sort of just broadly speaking, what RCM meant to your overall past numbers?.

I would say that our depreciation cost has usually run, say, around $25 million to $30 million a year. We expect that to be down probably 20% of that..

I would say, Mike, that if you -- you can actually see the effect of our decision and our actions on this. While we've been in the upper 20s, just under $30 million in the past, in 2014, we're down to $19 million. So we knocked 30% of our CapEx out as part of -- directly in connection with the decision to move out of the RCM group..

And the next question is from David Rose with Wedbush Securities..

This is actually James Kim calling in for David. So I wanted to start out with a question on the commercial business. Obviously, that business has been performing very well. And you had record bookings last quarter. I think, it was about $0.5 billion.

Are you still seeing strong growth there in terms of bookings? I know you talked about the strength of oil and gas market, but if you could give us a little bit more color on other end markets.

Kind of looking at this quarter's performance, growth in the quarter was slightly lighter sequentially, granted that you had tougher comps, but just wanted to see if there's any other color from that?.

James, oil and gas was the strongest, but I would say that the other areas that were strong for us were commercial utility work, so utilities have been strong. That's work we've done for right-of-way valuation for a number of the commercial utilities across the country, and that would be both onshore and offshore, and so that would be one.

Our industrial clients have been quite strong. And I would say that the one area seeing some strength in some very small pockets is actually, and I want to qualify this, is in the mining sector, but mine closures.

So because of the downturn in commodity prices, a lot of mining sites have gone inactive, which then trigger environmental restoration, which is cleanup, management, capture the groundwater and these items, and we've had some very nice programs on, we call, restoration projects or environmental cleanup projects and monitoring projects.

But with that said, we continue to see -- if you ask, is there a soft spot in our commercial sector, we're still very cautious on the mining, upfront siting and even operations. So we see that continue to be the one watch area out of the commercial sector..

Okay. Next question, regarding subcontractor cost for ECS and TSS. I mean, obviously, for RCM, you guys are trying to wind down the business, and you tend to subcontract out a lot of the construction work. But just wanted to get some more color there on the increase that we saw in the quarter for ECS and TSS.

I know you talked about it being sort of under the -- normal level being around 20%, but it seems like it's higher this quarter.

Is there anything that we should be sort of taking out from that? Or is that just kind of an anomaly there?.

Well, I'd say there's a little bit of seasonality. So in our 2 front-end segments, the field work they do is not construction-related. This is where we go out in the field and do surveying, data collection, collection of samples, both water and soil.

We do marine work, where people subcontract the actual marine vessels that we're on, we don't own the large vessels. So I'd say that it would be a seasonal affect, but no, there's no, what I'd call, a macro change in the subcontract.

And in fact, you're going to see, as you just identified, as we move out of RCM, the amount that we subcontract will move from when RCM was a larger part of the business, where it was up to a size of 40% or even more, you're going to see it go down to 20% or even less.

And so, no, we think 20% is right, and there was no unusual effect during the last quarter that would indicate that, that number is going up..

Okay. And my last question is on the California water bond, $7.5 billion. I know it's a very recent event and it's probably going to take several years to play out, but just wanted to see what your expectations might be there and if this is something that you think will have a somewhat meaningful impact going forward..

I do. I think this is going to make a difference, in especially our front-end water business. Now I will say that that's a very big number.

It is over 5 years, and I do think the first studies that are going to come out, the first funds that are going to come out are right up our alley because it's going to be feasibility studies, alternative analysis, evaluations of different technologies, and a lot of it is for water storage, reservoirs and other supply at the local level, and that fits us very well.

So it's still very early. And the 2 big items, if I had to pick the 2 that we're most focused on is the green infrastructure aspect of that bond; and water supply, which, of course, is directly aimed at the drought out here in California. So yes, it will be a contributor.

It just got passed, it hasn't been earmarked, and it's going to be administered by our clients who are going to get the money to spend, so the folks we're currently working with. So we feel pretty good about where we're positioned for that.

And I'll tell you where you'll actually see the rubber hit the road, so to speak, is when you start seeing it in our backlog in orders. So I'll make a particular point of pointing those out as they come to light..

Our final question comes from Tahira Afzal with KeyBanc..

I just had one follow-up.

Could you kind of give us an idea of -- I know you're undertaking some initiatives to improve your DSOs going forward, could you give us an idea of how you baked that in into your cash from operations guidance for next year, as in if you are behind, to some degree, on that, are we still within that bandwidth?.

I'm glad you asked that, Tahira, because -- let me give you my perspective on that.

The cash EPS range or the total cash from operations that Steve Burdick had shared and presented during this call is based on a constant DSO between 70 to 75 from our 2 front-end segments, that would be ECS and TSS, and does not actually translate that reduction of the difference between -- let me say, 75 days and the 87 days does not translate that into additional cash from operations.

Now it is my objective that those days are tied up in partial-completion milestone billing and converting the work that we've already completed, so I don't have to spend revenue to get that DSO in. I just got to go collect that money, and that's what we're very focused on.

So if we can drop those days, and you can do the math, we're around $7 million a day, 365 days a year could generate $2.5 billion.

That could actually drop to the cash bottom line and actually increase that number you see quite substantially, and -- but we did not factor that into our cash EPS or cash flow from operations in the guidance that we provided, so that's all upside. And thank you all for your questions and interest in Tetra Tech.

I know it's been, from an accounting standpoint, a bit messy with respect to the wind-down of RCM and the earnout pickups, but I will tell you that we're very excited about the opportunities we have in water and the new challenges that we have for our scientists and engineers and how our strong reputation in these markets are going to put us in an excellent position as we come into this next year.

We're also very excited about our new alignment that we have in place, and it provides us a very sharp focus for the future and we're very positive on our outlook and our growth opportunities. And with that, I'm going to look forward to speaking to you all next quarter. Thank you very much..

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