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

Sean Eastman - KeyBanc Capital Markets Inc., Research Division Michael Shlisky - Global Hunter Securities, LLC, Research Division Corey Greendale - First Analysis Securities Corporation, Research Division Justin P. Hauke - Robert W. Baird & Co.

Incorporated, Research Division Steven Folse - Stifel, Nicolaus & Company, Incorporated, Research Division David L. Rose - Wedbush Securities Inc., Research Division.

Good morning, and thank you for joining the Tetra Tech's Earnings Call. By now, you should have received a copy of the press release. If you have not, please contact the company's corporate office at (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 security risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements.

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

Thank you very much, Portia. And good morning, and welcome to our first quarter of 2015 earnings conference call. While Steve Burdick, our Chief Financial Officer, will present the specifics of our financials, I'll start this morning's call with a brief overview of the company and some of our key financial metrics.

In the first quarter, we had solid performance delivered by our newly aligned segments, which represented our ongoing operations.

The 2 segments are the Water, Environment and Infrastructure group, which we refer to as WEI, and the Resource Management and Energy group, which we refer to as RME, and you'll hear me referring to those 2 acronyms throughout this morning's presentation.

Their performance resulted in our meeting our revenue guidance and beating the top end of our earnings guidance by $0.05 in the quarter. Now over this last year and especially during this past quarter, we've had a significant change in our foreign currency exchange with Canada.

Today, about 30% of our revenue is generated in Canada, and the Canadian dollar has decreased by a value of about 10% relative to the U.S. dollar just since the beginning of the fiscal year, quite a dramatic move. To give you a better understanding of our business, I'll be presenting our financial results on a constant currency basis.

So overall, for the quarter, the company generated a $581 million of revenue, $437 million in net revenue with an operating income of $37 million that resulted in an earnings per share of $0.41 for the quarter.

For the first quarter, our total and net revenue were down 8% and 7%, respectively, from the prior year, but that was due primarily to our decision to wind down the RCM segment. Similarly, our operating income was down slightly from the prior year, and that was due primarily to a project-related losses from completing work in our RCM segment.

In fact, we reported about -- just about $3.5 million loss in the quarter from RCM. Our diluted earnings per share did benefit from the reduction of share count as a result from our buyback program, and Steve Burdick will speak to that and some tax issues.

But I will say on backlog, and most notably, backlog was up 5% year-on-year for the WEI and RME segments, and was flat overall year-over-year, which takes into account the continued wind down of the remaining projects in the RCM business segment. I'd now like to present our performance by segment.

The WEI segment generated about 43% of our net revenue from ongoing operations during the quarter. WEI was up 4% on net revenue and delivered a 12% operating margin for the quarter, with improvement across all of their end markets in both the United States and in Canada.

The REM -- the RME segment is slightly larger and had generated 57% of our net revenue in the first quarter. RME delivered an 11% operating margin with strong performance in power generation, oil and gas midstream engineering services, international development and remediation work.

However, the revenue in RME was affected by a very slow ramp-up in federal mediation projects and continued weakness in mine-related work during the quarter. I'd now like to provide an overview of our performance by customer.

Our international net revenue for WEI and RME was, overall, essentially flat year-on-year and represented about 31% of our ongoing revenue. Work for our U.S. commercial clients was also relatively flat year-on-year and represented also about 31% of our ongoing work for the quarter. Our U.S.

federal work was 27% of our ongoing business, which was down 9% year-over-year, but this was primarily due to timing of new orders and project startups and also had a very difficult year-on-year comparison when comparing it to federal work in the first quarter of last year.

I do expect our federal work to be trending up for the remainder of the fiscal year as we start up some of the large-scale remediation projects that we've already been awarded and are actually in the very beginning changes. And finally, our state and local work was up 5%, and this is all organic.

In fact, all of these numbers are organic, which was a direct result of an increase of our work for cities and municipalities all across the United States. We had a good first quarter for orders and contract wins in our ongoing business. On a constant currency basis, our WEI and RME segments' backlog grew by 5% year-on-year.

Backlog was driven by a broad base of orders, primarily across the public sector with our government clients, and that was led by work for the U.S. Federal Government work that we do for the U.S. Navy, the Army Corps of Engineers, the USEPA and USAID.

Was also benefited by the work that we won for cities and municipalities across the United States and Canada. And it wasn't just in one geography, it was really very broadly spread out, and included new large contracts with cities such as Montréal in Canada, Los Angeles out in the West Coast and some new orders in Miami out in the Southeast.

So it was really very broad spread. As we've indicated, the remaining work that we have for RCM is in the process of being completed, and we're going to continue to reduce the RCM backlog for the remainder of the fiscal year. Now I'd like to turn the presentation over to Steve Burdick to present the details of our financials.

Steve?.

first, the strength of our core markets in water, environment, resource management, energy and infrastructure; in addition, on a constant dollar basis without the impact of the foreign exchange rates, our net revenue would have exceeded the midpoint of our guidance. Our operating income was about $36.6 million in the first quarter.

Overall, operating income represents a margin of about 8.4%. Now the operating income was primarily driven by project execution and favorable results in our WEI and RME groups. In fact, on a standalone basis, our 2 front-end businesses produced an operating margin of about 11%.

In addition, the operating income, when we -- when I compare it to the prior year, was impacted by a continued reduction in overhead costs due in part to the rightsizing actions we've taken over the last 2 years.

Also, there was a significant nonoperating gain on revaluing some acquisition-related earnout liabilities last year that have not been recognized or occurred this year. Our EBITDA was about $49.3 million.

Our EBITDA was driven by the same factors as our operating income, but at a higher percentage as we recognized intangible amortization and depreciation of about $13 million in the current quarter. We achieved an EBITDA margin of about 12.3% on our front-end businesses.

And this higher EBITDA margin from our -- from these front-end businesses, WEI and RME, excluding the results of RCM, which is now currently being wound down. SG&A was about $42.2 million for the quarter. This is less than the prior year quarter.

The decrease of about 11% in SG&A costs compared to last year was consistent with our planned decrease in revenue as a result of winding down the noncore construction market. Further, we expect our overhead and back-office costs to further decrease a little bit as we complete the transition out of these noncore markets.

The tax provision resulted in a net expense of about $9.2 million. The effective tax rate was about 25% for the quarter. This lower rate resulted from the federal government's passage of the research and experimentation test credit at the end of calendar 2014, which allowed us to recognize a significant benefit in the first quarter.

Overall, the expected rate is about 32% for the rest of the year without these R&D credits. And as I mentioned at the beginning, earnings per share of $0.41 exceeded guidance. Our earnings per share benefited from this R&E tax benefit that I talked about.

However, if we remove the R&E benefit related to fiscal 2014, we still would've beat our guidance estimates. So next, I'd like to point out a few of the more significant balance sheet items. As a result of our higher day sales outstanding in the RCM segment, we did experience a 4% increase in our net accounts receivable balances.

Also, the accounts payable balances decreased by about $160 million due to the lower payment paid subcontracting activities when comparing the current year to the prior year. These activities took mostly -- or took place mostly in our federal and state government projects in the RCM segment.

Our net debt compared to the prior year did increase about $56 million to about $102 million. Although our net debt increased as a factor of EBITDA, we are still at about 0.5x our EBITDA.

We have had positive cash from operations, and as I will explain in a few slides, we've allocated a portion of our capital to shareholder returns through dividends and share repurchases. Now as I noted in our discussion of the balance sheet just now, we have had positive cash flows from operations.

Our first quarter is typically and historically the low point of our cash flows as we pay out year-end bonuses and our client shut down around the Christmas holiday. So as a result of this and the timing of our cash flows, our first quarter was less than the prior year.

However, we still expect to generate operating cash upwards of 25% to 30% more in 2015 as our forecast indicates cash from operations to be in the range of about $145 million to $160 million for the year. CapEx is more than the prior year and slightly ahead of our previous guidance for fiscal 2015.

We remain very disciplined in our spending based on the strategic decisions implemented in 2014, and the initial CapEx amounts are higher in order to invest in organic growth for the remainder of fiscal 2015 and beyond. However, we will not remain on the same pace.

We expect our spending for the rest of fiscal 2015 to remain as initially forecasted and be in the range of about $15 million to $25 million for the year. And as just as a side note also, this amount continues to represent a ratio of less than 1% of our total annual revenue.

Days sales outstanding of 87.8 days are higher when compared to last year at this point. The actual DSO is not in line with our expectations. Our DSO is higher due to the performance of the RCM segment. On the other hand, the aggregate DSO in our 2 front-end segments is about 75 days.

So our efforts for 2015 are focused on reducing our DSO to below 75 days, with an ultimate goal to be closer to 70 days when we exclude RCM. For those following on the webcast, I'd like to provide an update to our capital allocation program. Our current leverage is about a half churn on EBITDA, while our target leverage is about 1 to 2x EBITDA.

So as such, I would say that we've got plenty of dry powder to invest in future growth. Now although our long-term target is to return 33% or about 1/3 of our free cash flow through a mix of dividends and buybacks, we have enhanced our 2015 returns to take advantage of our leverage and provide a greater return to shareholders.

As such, in the first quarter, we have provided about $20 million in stock buybacks this quarter and another $4 million in cash dividends. And so today, I'd 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.

This quarterly dividend is $0.07 per share, and this amount, if annualized, represents about 14% of our estimated annual free cash flow. And the annualized amount further equates to a bit more than a 1% yield on our current stock price. The dividend will be paid on February 26 of this year to shareholders of record as of February 11.

An important aspect to understand, relative to our capital allocation program, is that the 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 to our target range.

And as Dan will discuss in a bit more detail, our focus continues to be in on a strategy of long-term growth through water- and environmental-related services, both in the public infrastructure and the commercial industries.

So while we've committed to a more significant buyback program over the next 2 years, we will continue to update our shareholders on our capital allocation plan for each of our quarterly conference calls. So with that said, I will now hand the presentation back over to Dan, to discuss our outlook and our business strategy in a bit more detail..

for Q2, our net revenue, be in a range of $400 million to $450 million with an associated diluted earnings per share of $0.28 to $0.32; for the entire year of fiscal year 2015, our net revenue range will be from $1.7 billion to $1.85 billion with an associated diluted earnings per share of $1.55 to $1.70; and for the entire year, our cash earnings per share would be between the range of $2.30 to $2.55.

Steve Burdick had covered some of the details of this a bit earlier. I'll cover, very quickly, some of the key assumptions that underpin the guidance.

This guidance does include intangible amortization of $21 million, which would equate to $0.23 per share for the entire year; an effective tax rate of $0.32 for the entire year for the remainder of the year for fiscal year 2015, as Steve had indicated earlier; $63 million average diluted shares outstanding; it does exclude contributions from acquisitions and impacts of share buyback; and as I said at the very beginning of this call, we are assuming that we're at a current FX and have not included any material movement in FX, and that's primarily with Canada, from where we are today.

In summary, our WEI and RME new business segments and operating units had solid performance in the first quarter, resulting in our exceeding our earnings per share guidance for the quarter.

And I just want to reiterate that includes, if you exclude any impact from the retroactive tax effect, it still excluded -- still exceeded significantly the high end of the guidance that we provided coming into the quarter. The WEI and RME backlog continues to grow with strong orders for water- and environmental-related services, very broadly.

And with our new alignment in place, our focus on organic growth and acquisition opportunities, in an excellent public and private sector client base, were very positive on our outlook and our future opportunities. And with that, operator, I'd like to open the call up for questions..

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

This is Sean, on for Tahira today. My first question would just be addressing the more moderated outlook in your oil and gas business.

Obviously, this business has been operating at a high-utilization level, and I just wanted to know, what are you guys sort of looking at in terms of utilization on a go-forward basis with this more moderate growth outlook?.

Well, Sean, we came into the year having -- looking at building on a $400 million revenue base from 2014. As we entered 2015, we were anticipating a 10% to 15% growth rate in that. So around a $450 million revenue contribution for this year. We really saw little or no impact in the first quarter in our revenue, so we were actually right on plan.

However, we have seen some projects being pushed to the right, and we have seen, obviously, the uncertainty and volatility in the oil and gas sector. And so we have -- we are now have moderated our outlook down by about 10%, meaning that we're forecasting a flat year-over-year oil and gas.

So we, for fiscal year 2015, currently are anticipating about a $400 million contribution. Now that is on a prospective basis, assuming things are going to, we're predicting, things are going to slow down a bit, even though we didn't see that in the first quarter. Fortunately, most of the work we have is on a time and materials basis.

And so for utilization, we actually have the timing to move staff to other projects that are strengthening, which we've seen both in our state and local work, it's probably the most notably. But I'll tell you, I think we're going to have a good year on the federal front, too.

So experts that are doing work on the environmental and water side, in oil and gas and other specialty engineering areas, we actually have the ability to move them to others that are growing. So I think our utilization, to use your specific term, can be addressed as it moves.

We don't expect an exceptional movement in this, and we look to reallocate the staff to other areas that are growing..

All right, that's pretty helpful. And then, I think in the presentation, you said -- you mentioned that you're targeting specific regions on the oil and gas side.

Now I was just curious what specific regions that might be?.

We've been very interested in growing our West Texas business, which is the Permian. We think that some of the reserves that have been forecasted out of Permian are extremely attractive and have long-term economic drivers. Obviously, there's different price points for oil and gas production, and we think that's one that will be quite favorable.

So it's an area in the United States that we're interested in.

And in Canada, we think, in the longer term, we're interested in having a larger presence in British Columbia because a lot of the production is -- will need to find additional exit points out of Canada, not necessarily just down to the south, but east and west, and a lot of it would be to the Pacific, the British Columbia.

So we can do a lot of permitting work and a lot of valuation work, right-away work, and then ultimately, the touch points at LNG terminals and other export points. So in Canada, we are looking at British Columbia for the oil and gas sectors..

Okay. Great. And then, the last thing for me is just if you could expand on this incremental opportunity in the coal residuals market.

What do you guys sort of expect in terms of the peak contribution to the top line from this opportunity? And do you think it might help offset some potential weakness in oil and gas in fiscal '15?.

I think it's a -- I think that in 2015, it's just going to begin to grow. So the requirements are that this has to be implemented over a 2- to 3-year period.

And what we find very encouraging is not only new disposal of coal residuals need to be regulated, but existing impoundments, where the material has been disposed of in past years need to be addressed and brought into compliance. So this is actually, in some respects, has opened the market even a little bit larger than we originally envisioned.

So that's a really good thing. We think, this year, it's going to begin to ramp up. We do have a goal of this being $200 million to $300 million contribution on an annual basis to the company and currently, it's sub-30, so we think this thing can go up about tenfold. Now we think it will ramp up.

We think, this year, it could ramp up from -- we're sort of in the 20s right now, $20 million-ish, and we think it could ramp up to double to maybe even triple that number this year, and that will help offset some of the oil and gas uncertainty.

But I think this is really a 2016, '17 material contributor to us as we move from study and evaluation of the alternatives to implementation. So I think this thing will ramp. And the nice thing about it, it has a very long tail to it. It's not only addressing the current discharges, but again, the historical discharges.

So we think this is an excellent market, fits right into our wheelhouse and has a long run to it..

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

I wanted to touch briefly here on the M&A environment. Can you give us your thoughts as to perhaps how some targets are looking from a valuation point now versus a few months ago? And whether the FX changes between U.S.

dollar and the Canadian dollar might change the footprint in which you look for acquisitions?.

Well, the multiples of the valuations of acquisitions in any of the sectors associated with commodities, and have we seen this over the past 2 years? We watched it steadily decline in mining, as an example, because we have a little longer history in that area. It's come down dramatically, and we're just seeing the beginning of it in oil and gas.

So I would say the valuations have come down dramatically, and I would say it's even more than just the valuations. I would actually classify it as availability. Because prior to this downturn and some of oil and gas pricing, there were some of these which is not available.

So availability's increased dramatically, and price points and valuations have become much more reasonable, and I would say, that in the oil and gas and in the commodities sector, which is mining for us. So that looks good. It's been sort of a double benefit then with the reduction in the currency exchange, and it's not just in Canada.

We have been looking in Europe, and you've noticed that quite a material change from $1.30 down to $1.10, roughly, on the euro. And so I think it makes some of the areas we've been looking in Europe that have been relatively expensive on a translation basis on the U.S. currency to be much more reasonable.

So I would say, both Canada and in Europe, has actually looked better for us. And I also want to say a word about here in the U.S. In some of the areas, with this new solid waste or the coal residuals becoming a larger market, we have been named as the largest U.S. solid waste design firm.

And most of this, of course, is in the municipal side because this is just an emerging market. And I do believe that the utilities are going to look for experts in solid waste disposal, and it's a good opportunity for us to consolidate capability and resources in the United States.

So I think that's also a good opportunity for us at reasonable valuations. So Canada, both from reduction and commodity and FX, same is true in Europe. And then in the U.S, a lot of the large utilities are looking for larger firms who have a better footprint, a balance sheet and a deeper technical expertise.

So I think all three of those bode well for us on the M&A side..

And just kind of follow-up on your answer there, as far as hiring goes.

Are there enough experts and people out there to meet some of the fly ash and other coal waste product demand that the new EPA rules might bring about?.

Great question. First of all, there is enough experts, but I'll tell you part of what's -- I actually think is beneficial is the way that the ruling is being implemented. It is -- this is going to get phased in. We do have a few year period to implement it. And what this means is it's not going to create a land grab for everybody flocking to this.

So there'll -- they're going to look for the best experts, people with the most experience. And so I think those that have excellent leading positions in this market will be the ones that utilities move to.

It's not an emergency, it doesn't have to be done this week, this month or even this year, as they have time to very thoughtfully and effectively come up with the right solutions that will be the best cost, the longest solution, the lowest risk, and we have a very deep bench for this all across the country.

So from a long-term business perspective, this phased-in approach really bodes very well for us.

If it all had to be done in 1 year, I think then you would have problems with capacity and anybody who has a slide rule or a backhoe would call themselves a solid waste expert and get business but not under what's being proposed as far as it's phased in requirements..

Got you. And lastly, if I could just touch on your guidance for the next quarter here.

Is there some component of seasonality to your results in the fiscal second quarter on a more normalized basis, not versus last year? Can you kind of take us through about what might be different for your results in the average Q2 versus the other quarters of the year?.

Yes. Q2, first of all, since we moved into Canada about 4 years ago, maybe a bit more, has become very seasonal for us. Q2 is the low point, both on revenue and on operating income. And the reason is all of the field activities that we have in Canada go dormant.

And in fact, some of our operations -- we've spoke about this in the past, some of our engineering operations in Canada actually are in a loss position during the second quarter. And just to be really clear, the second quarter is the months of January, February and March, and those are where we have no field survey work.

We have no field assessment activities. Now I do know for pure pipeliners and some of the people in the oil and gas industry, decreases are good for digging and working in tundra and other soft-soiled areas. But that's not true for the lot of the work that we do in water. So taking water samples over a frozen lake is difficult and other things.

So Q2, it has become very accentuatedly a seasonal low point for us. So that's why you see some lower numbers. It's actually become maybe even a bit more accentuated because a lot of the RCM construction, we were doing no -- very little or no RCM construction in Canada. It was in the U.S.

So as you take that down, and that was with carried revenues through these winter months, doing construction in California, Texas, Florida. When you take that out, the remaining business appears to be even more cyclical because of the percentage of work we have in Canada.

So that's the -- that's what's different from a year ago and -- but that is going to be representative of the business as we go forward during those 3 months..

Our next question is from Corey Greendale with First Analysis..

So a few questions for you. So first of all, I appreciate the detail on the change in your assumption on oil and gas.

Just a clarification, are those numbers -- were those gross revenues or net revenue numbers?.

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

Okay.

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

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

Okay.

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

No..

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

Yes, I can. Let me give you gross numbers and then I'll give you an approximation from that. The -- and I will -- let me clarify this, some of the reduction was from mining. So in 2012, we were around $200 million. So -- I'm sorry, in fiscal year 2014, the last year, we were about $200 million in gross revenue. Now we expected that to come down.

We did see it softening. So we came into the year with our original estimate, about $150 million to $160 million. So we saw almost a 25% reduction we're anticipating. And after the first quarter, we believe that, that will even be softer or less than that in total revenue. We think that number will be, maybe $120 million to $130 million.

So maybe $20 million reduction, now that's -- a lot of that is in Canada, a big significant portion. And so FX actually makes that a little bit less of the number in U.S. So a portion of the revenue reduction was mining, with the balance at oil and gas..

Sorry, those were gross revenue numbers?.

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

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

Is that your understanding and does that impact the opportunity that you can continue to use online landfills that are already in use?.

Yes.

I think you have to go through the details of the draft final rule, but it's my understanding that they'll have to be addressed to make sure that they meet integrity requirements that may or may not mean that they have to be retroactively lined, but they may have to be addressed through some other methodology, such as slope stability is a big one with respect to the containment around the perimeter.

And then also for leachability, with respect to groundwater, and that can include other things other than full removal, lining and replacement of the material. It could mean groundwater pumping treated. It could be slurry protection.

So that doesn't mean that you have to "line" it, but it does mean that you have to monitor it and ensure that it meets all of the containment requirements. And that's -- there are other ways to do that for ret -- for existing landfills than removal, lining and replacement..

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

So Dan, I noticed that you guys have not changed that $1 billion goal for oil and gas, and I understand that the assumptions, I guess, on the organic side have come down and the offset is maybe the acquisitions are taking up a bigger chunk of that pie with valuations coming in.

I guess, is that the message you're trying to convey, is that the goal to get from $400 million to $1 billion is probably more acquisition-weighted from here versus organic? Or what's your thinking on that?.

Yes. I think that's exactly right, that if you went back to 6 months and earlier, we were growing at 20%-plus organic. We've brought in a very few or no acquisitions in the past year or 2, and it was growing very quickly.

And we were looking and I will tell you that we had always presumed to achieve $1 billion run rate -- or an annual revenue from oil and gas, that it would be a combination of organic and acquisitive at 20% growth. And you double that $400 million in just under 5 years, so it puts you at $800 million.

So we needed to acquire about $200 million somewhere along the way. But the price points were so expensive on those. They were multiples not of earnings but multiples of revenue, which gave us pause.

Now we've actually watched these come down, so I think that this is actually a very good opportunity for us to bring in acquisitions that will not only offset, but probably more than offset where we were growing on an organic standpoint.

And there are other regulatory drivers that are coming into place in the oil and gas areas, such as handling of wastes similar to what you just saw in coal, water supply and other items that will still be drivers for this business for us.

So we think that even under the current environment and maybe even traditional pressure, they're still areas that will drive this business for us..

Got it. And I guess, maybe my next question is just talk -- circling back to the RCM segment, I know you're exiting, but I think the assumption was that, that would be more breakeven for the year. There's another loss here. And it also sounds like the DSOs increasing are a function of that.

So how should we view that? Is that indicative of additional kind of project disputes that are going on or change orders that aren't being resolved? And is the goal still to be breakeven on RCM for the year?.

I'll start with the last part. Do we anticipate RCM to be breakeven for the year? Yes. But just to be clear, in the first quarter, we did have additional losses on projects of about $3.5 million for the quarter, which you see in our segment reporting. I think some of that's timing. In fact, I know some of that's timing.

So we do have certain assets on projects, and I'll give you an example of equipment. So we have fully depreciated equipment on projects like backhoes and excavators and things associated with construction projects. And so as we move to complete projects, it may cost us more to finish it.

There is your loss of $3 million, but we complete it, we'll liquidate equipment that has essentially no book value and are only used to offset. So I think that some of it's timing, and I do believe that our goal still is to have this year at a 0 point with no profit or loss from RCM.

Now with respect to the DSO or our receivables outstanding there, no doubt, as we finish this construction work we have, we're still at about $100 million to go. A lot of it goes into unbilled because we have to wait until we deliver projects to achieve either milestones or something else.

And so it sits there and becomes aged until we hit these milestones. We've had no material -- in the first quarter, we've had no material change by adding additional disputes or change orders.

That has remained unchanged from the fourth quarter, most of it is just pulled up by receivables that will be paid when we achieve a milestone or a project delivery..

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

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

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

Our next question is from Steve Folse with Stifel..

First question, so if I'm kind of -- I'm assuming that the majority of your mining and oil and gas exposure is in the RME segment, so if I kind of look through -- work through the assumptions that you have for the mining decrease and flat year-over-year oil and gas, it's kind of implying pretty substantial growth in the other verticals in order to get to that flat to low single-digit growth in RME, like some high single-digit to low double-digit type of growth.

So I was wondering if you could kind of go through and talk about what verticals, in a little bit more detail, that you're seeing particular shrink there and what's going to drive that?.

Yes. Steve, you've got it exactly right. So the mining work is essentially all in RME, so resource management component of it. So that's correct. The oil and gas work is essentially all in RME, that's correct.

So those areas are both under a bit of pressure, based on commodity pricing, but what's offsetting those on the growth is since we believe that our solid waste business is going to be driven primarily by the private utilities, the ones that we've talked about, since we think solid waste is going to grow and offset, and that's on the plus side.

We do have some of our remediation work for the U.S. Federal Government is located in RME, and we expect it to grow. And it's on the upside, that will ultimate show up under commercial in the U.S. and show up partially under U.S. Federal Government. You can see it there. And so that's a plus to solid waste remediation. And actually, USAID work.

So the agency for international development under the U.S. State Department has actually been very strong. And in fact, you saw an announcement that we made for a 200-plus-million dollar contract for Promote that came along with initial funding right out of the gate. We expect our USAID work to be very strong, and that's a plus this year.

So I'd say, you've got a bit of a -- we've done well on oil and gas, and because of the high concentration on midstream, we expect it to be relatively stable. We're not unfamiliar with the volatility in the market -- mining.

So those are the 2 minuses and then pluses on solid waste, pluses on remediation and pluses on USAID and international development work. So those are sort of the plus and minuses.

And three, offset the minuses with a little bit of pluses, somewhere between flat to slightly up, and that's how we came to that juxtaposition between those different markets..

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

Was most of that improvement that improved resource allocation or was it just a market improvement?.

It's market improvement across the board, really. It was very broad-based. So it wasn't any one area at all. And in fact, I think that if you took a look at the oil and gas area from 2014 to 2015, you would've found, if you were able to parse that out, year-on-year, that part was maybe even slightly down this year.

And it just shows that the rest of the business was even that much stronger. So no, it wasn't any one area, that there was no project settlements. There was no litigation recovery. It was just performance across the board and very even..

Then, I guess, last one here. It looks like you lowered the targeted RME margin for the year, on the bottom end, by 100 basis points. I was wondering if that was mostly on the mining side? It sounds like it probably was.

Or there was some anticipatory action there on what could come on oil and gas in -- or whether or not you're already seeing a little bit of pricing pressure there?.

I would say you could give that presentation for me. You're exactly right. It's mining is most notable. Now we've paid the big reductions on some type of cataclysmic change there, but it just is this continued pressure, so we've incorporated that. And it is anticipatory. I could use exactly the right word.

We have seen, and this is mostly on our upstream work, we have seen some communications from some of our oil and gas clients looking for concessions or participation in the pricing pressures in the market. And we've seen that on the upstream, mostly. But that's mostly anticipatory on oil and gas, just that it is very uncertain period..

Our final question comes from David Rose with Wedbush Securities..

This is a follow-up to the last question. On the RME side, looking at the hole from which you're digging out, you're 7% down in the first quarter. So you kind of highlighted a couple of the factors like USAID, that should help.

But I mean, is there a concentration of project work that could be at risk? And maybe you can kind of help us better understand, this is -- I mean, it's a pretty significant move.

So where are we seeing the big move from?.

Well, I would say that, in RME, some of it is timing. I talked about the U.S. Federal Government being down 9% on Q1 this year versus Q1 last year. The component, if you actually parsed it out, the component that was actually down was under remediation.

And so the group that actually took almost all of that or represented almost all of that reduction on the year-on-year happened to be in RME. Now as I mentioned during my prepared remarks, I actually expect that to strengthen, and most of that is associated with timing. And the backlog looks very good. So I think that's part 1.

So I don't think it's indicative of where there will be. So I think that will come back. I think the second area is mining, it was down, and I do not expect that to materially come back.

But we're in an incremental position, whereas the reality is the front-end work on the mining, as we complete the work that's in the backlog, it's not being replaced on the exploration or from feasibility study. The back-end, which is cleanup work, continues to be about even, and that represents most of our work.

So I do expect that to continue to be under pressure and represent a bit of a down move. And with respect to now having moved our Canadian midstream work into RME, to really consolidate all of our oil and gas there, a year ago, there's very cold weather in Canada and there was a very big oil and gas revenue that came from Canada.

First of all, the upstream at the oil sands was stronger a year ago. We didn't really have these pricing pressures when things were stronger. And our midstream pipeline, which is the biggest piece in Canada, was very strong. And I expect that to pick up here in the second quarter.

So you're actually going to see, on a sequential basis and it will be very noteworthy year-over-year, that pick up because of work we're doing on the midstream up there. So I don't think it's anything that's -- we have no single project.

We have one larger project in the oil and gas side that is somewhat material, but other than that, we have no concentrations of projects, programs or singularity of a client concentration that, I think, could be at risk..

Okay, that's helpful.

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

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

That's probably -- I understood.

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

No. I think that is on a currency..

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

Yes..

Okay, that's helpful. Okay.

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

That would be a reasonable assumption. As Steve had indicated in our capital allocation, we do have approved for $200 million. We did approximately $20 million in the first quarter.

If you do the math and divide $200 million over 8 quarters, you'd see you're pretty well in that type of constant run rate with maybe additional triggers that would require equal or greater. So that would not be an unreasonable basis of calculation. And thank you for your questions and interest in Tetra Tech.

Those are great questions, and I'll tell you, it's a very interesting time with -- when you see changes in such an enormous market like oil and gas moving 40% in 90 days from one call. So thank you very much for your questions, and I do look forward to speaking with you again next quarter. And if you're on the East Coast of the U.S.

or Canada, I hope you stay warm and dry through the storms, and I'll talk to you next quarter. Bye..

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