Dan Batrack - Chairman and CEO Steve Burdick - CFO.

Tahira Afzal - KeyBanc Corey Greendale - First Analysis Min Cho - FBR Capital Market Andy Wittmann - Robert W. Baird Company Mike Shlisky - Global Hunter Securities David Rose - Wedbush Securities.

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 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. 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 the 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. At this time, I would like to inform you that all participants are in a listen-only mode.

At the request of the company, we will open the conference up for questions and answers after the presentation. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack..

Thank you very much, Britney, and good morning and welcome to our third quarter of fiscal year 2015’s earnings conference call. While Steve Burdick, our Chief Financial Officer, will present the specifics of our financials, I will start with a brief overview of the company and some of our key financial metrics.

In the third quarter, we delivered solid performance from our ongoing operations, which are the water, environment, and infrastructure group and the resource management and energy group, RME. For the quarter, the company generated $575 million in revenue and $422 million in net revenue.

The revenue for the WEI and RME groups were up 2% from the prior year, while our net revenue was down 1% on a constant currency basis. Operating income was $41 million, or up 35%, from the prior year and up 14% year-on-year from our ongoing operations from WEI and RME. Earnings per share for the quarter was $0.43, which is up 39% from last year.

Our backlog was up 6% year-over-year from our ongoing operations and that's giving us excellent visibility as we are entering the fourth quarter of this year. Now we did generate about $109 million in cash for the quarter, which is a significant record for us, an all-time record high.

Now cash generated of this $109 million did include a final settlement of $29 million, and the operational cash generation then would have resulted in $80 million from our ongoing operations, but even the $80 million is up 35% from our prior year.

Year-to-date, we have returned $89 million to our shareholders through a combination of stock buyback and dividends, and I am pleased to announce that at our last board meeting we authorized another quarterly dividend of $0.08 for the fourth quarter to our shareholders.

Overall, this quarter demonstrated Tetra Tech's ability to deliver consistent and strong operational and financial performance and puts us in an excellent position to capitalize on new fast growing markets that I'm going to talk about a bit more later in this presentation. I’d now like to present our performance by segment.

In the third quarter, our WEI segment's net revenue was up 1% on a constant currency basis, which was in line with our expectations. WEI produced a 14% EBITDA margin in the quarter, with strong performance in the United States and seasonal improvement in Canada as their field activities and utilization picked up.

The RME business group's revenue was down slightly year-over-year and they generated 12% EBITDA margin for the quarter. RME's growth in the midstream oil and gas, power generation, and waste management services, all which were up, was offset by a continued decrease in mining and upstream oil sands revenues compared to the prior year.

I would like to now provide an overview of our performance by customer. Our state and local work in the United States was up 8% year-over-year, which is a direct result of the increase in water and infrastructure work for cities and municipalities all across the US.

This work for our state and local clients is our fastest growing area in the entire company. Work for our US customer clients were also up and it was up 2% for the quarter and represented 31% of our ongoing work for the year.

Our commercial clients’ revenues included an increase in environmental projects, especially for complex sediment remediation work, and continued growth in our midstream oil and gas work all across the US. Our international net revenues were actually down 6% year-over-year.

In Canada, our growth in the midstream oil and gas pipelines work, which was up was offset by a reduction in the upstream oil sands work. And I do want to note that our mining work, which is mostly performed internationally, continued to decline and is now down about 70% from its high at about three years ago.

Year-to-date, our US federal work was 27% of our ongoing business. For the quarter, our US federal net revenue was down slightly or about 4% from the previous year.

Now year-to-date, we saw growth in our civilian programs in support of our federal clients for programs at the US Environmental Protection Agency, Federal Aviation Administration, the Department of Energy, National Science Foundation, and NASA, but the growth in all of those areas was offset by a decline with the US Department of Defense work compared to what we did with them a year ago.

We did have a very good third quarter for orders and contracts wins. On a constant currency basis, our WEI and RME segments' backlog is up 6%year-over-year. Backlog growth was driven by a broad base of orders across the private and public sectors.

In particular, the Department of Defense, which I just noted was down on revenue, actually did award us this last quarter $1.2 billion in new contract capacity for our long-term clients at the Air Force and the US Army Corps of Engineers.

In addition, we added more than $100 million in new contract capacities with the US State Department, who actually converted the new contract capacities into more than $50 million in new task orders during the quarter. It was a very good quarter for US State Department and USAid.

Outside the US federal government, we had over $300 million in commercial orders, primarily for oil and gas, power, and environmental remediation services, and as we've previously indicated, we continued to reduce the RCM backlog. This quarter, we are now down to well below $100 million, further reducing our exposure to these markets.

Now I would like to turn the presentation over to Steve, who will present some of the details of our financials from this past quarter..

Thank you, Dan. I will begin with the fiscal 2015 third quarter financial overview in a bit more detail. Overall, our third quarter consolidated operating results fell in line with management's expectations regarding the guidance ranges that we provided for both net revenue and earnings per share.

First, comparing the third quarter results this year to last year, revenue decreased about $54 million or 9% to about $575 million. This decrease was primarily due to our decision to exit the non-core construction markets now reported in our RCM segment.

The year-over-year comparisons were also negatively impacted by foreign exchange rates, due to the strengthening of the US dollar this year compared to last year in our international markets.

Now, our net revenue decreased to $422 million or about 8%, for the same reasons that our gross revenue decreased, and although lower than the prior year, the net revenue results were within expectations and the guidance range provided due to, as Dan had indicated, the strength in our core markets in the water, environment, and resource management and energy groups.

Also, as Dan mentioned earlier, overall our revenue was up about 2% and net revenue down about 1% on a constant currency basis, excluding RCM. Now, our operating income was about $40.7 million in the third quarter.

The operating income compared to the prior year was impacted by significant non-operating gains on revaluing our acquisition-related earnout liabilities of about $9 million last year, compared to virtually – or actually nothing this year. And excluding these non-operational items, operating income increased about 35% year-over-year.

The improved operating income was primarily driven by project execution and favorable results in our WEI and RME groups, and I do want to note that our operating income reflects RCM at a breakeven this quarter.

So as RCM is breaking even, what we see is better income, better cash flows, and more consistency and predictability in our operating results. Our EBITDA was about $50.7 million in the third quarter, and excluding the same non-operating earnout items, EBITDA actually increased about 19% over last year.

And on the same basis, our EBITDA margin was approximately 12%, which is an improvement over last year's third quarter. SG&A was $41 million for the quarter, which was down about $6.2 million or 13% from last year.

Now, this decrease in our SG&A cost compared to last year was consistent with our planned decrease in overhead and back-office costs as a result of winding down the non-core construction markets. And to a lesser extent intangible amortization costs were down and lower by about $1.3 million compared to last year.

The tax provision resulted in an expense of about $12.4 million and, as such, the effective tax rate was about 32.2% for the quarter and we expect a 32% effective tax rate for the fourth quarter, which would give us about a 30% effective rate for the year.

As I mentioned at the beginning, our earnings per share of $0.43 was within guidance and at the higher end. EPS was up about 5% on a GAAP basis. However, last year's results did include about $0.10 from earnout gains that I had talked about in operating income. And excluding this, EPS would have been up about 39% compared to last year.

So going to our balance sheet now, as a result of the wind down in the RCM business and the collection of some contract claims that Dan talked about earlier in the RCM segment, we experienced about a 6% decrease in accounts receivable.

Also, the accounts payable balance decreased to $141 million due to the lower subcontracting activities for the year when compared to last year, and these activities took place mostly in our federal and state government projects that are in the RCM segment. Our net debt compared to the prior year increased about $46 million to about $61 million.

As we talked about, we have had positive cash from operations, as I will go through in a bit more detail on the next slide. But offsetting that, we’ve allocated about $147 million of our capital to shareholder returns through dividends and share repurchases over the last 12 months.

So, as I noted on the discussion of our balance sheet, we had positive cash flows from operations. In fact, we recognized a historical record for cash generated by operations in the quarter at $109 million.

We expect strong cash flow for the remainder of the year, and so in our fiscal 2015 forecast we are looking at cash from operations to be in the range of about $175 million to $185 million, which translates to a per share amount of $2.85 to $3.01.

Now, CapEx of about $8 million compared to the prior year is more for the quarter, but is still on track in terms of the guidance that we had given for the full year. So based on the $20 million we’ve spent to date, we continue to expect our spending in fiscal 2015 to remain in the initially forecasted range of $20 million to $25 million.

And this amount continues to represent a ratio of about 1% of our annual revenue. When we look at the days sales outstanding of 85 days, this is lower when compared to last year at this point. Also, the total DSO decreased sequentially from last quarter by about seven days.

Our DSO is lower primarily due to the performance in the RCM segment, as we talked about. Still, the actual DSO is not in line with our expectations.

Now on the other hand, our aggregate DSO for the two frontend segments, when we exclude RCM and the related claims, is about 74 days and our efforts are continuing to be focused on reducing our DSO to be below 75 days, with an ultimate goal to be closer to 70 days when we exclude RCM.

So based on the cash that we’ve generated, now I would like to go through how we're going to use that cash in our capital allocation program. Our current leverage is less than 1 times EBITDA, while our target leverage range is about 1 to 2 times EBITDA.

As such, I would say that we have a plenty of dry powder to invest in growth and provide a return to shareholders. Although our long-term target is to return about 33% of our free cash flow through a mix of dividends and buybacks, we have taken advantage of our leverage capacity in 2015 to provide a greater return to shareholders.

As such, we completed about $6.7 million in buybacks this quarter and we paid out about $4.5 million in cash dividends. So on a year-to-date basis, we purchased about $75.5 million in stock buybacks and paid a total of about $13.4 million in dividends, for a total of about $89 million that we’ve paid as a return to shareholders this year.

And over the past 12 months, as I talked about, that total was $147 million. And so today I would like to announce our further commitment to providing value to our shareholders. The Board of Directors has approved the declaration of Tetra Tech's sixth consecutive quarterly dividend and this quarterly dividend is $0.08 per share.

This both reflects management and the board's confidence in our ability to continue to generate strong free cash flow. And this amount, if annualized, represents about 15% of our annual free cash flow and more than 1% yield on our current stock price. This dividend will be paid on September 4 of this year to the shareholders of record on August 17.

Now, 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 into that target range.

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

So while we remain committed to a significant share buyback program over the next two years, we will update our shareholders on our capital allocation plan in each of our next quarterly conference calls. 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..

Great. Thank you, Steve. I’d now like to give you an update on Tetra Tech's growth strategy. Tetra Tech provides essential services in water, environment, and energy and we have long-term established customer bases in both public and the private sectors.

We've built over $12 billion in current contract capacity with the US federal government to provide a wide range of consulting engineering services. And, today, through our federal contracts, we do engineering and consulting work in over 100 countries per year, which provides us global opportunities.

Tetra Tech also has an extraordinary geographic coverage, with over 300 offices to support local markets in every major city and metropolitan area in both the United States and Canada.

Now Tetra Tech's business model and performance has established our number one rankings, as published by the Engineering News-Record for water, which has now been for 12 consecutive years, number one rankings in environmental management, and number one rankings in solid waste.

Now Tetra Tech is benefiting from a broad-scale recovery in the United States. That's where our headquarters is based and where the majority of our revenue is generated.

Our core business is strongly correlated to the economy, which continues to recover, with our core business growing at a range of sort of 1 to 2 times GDP and that's the base load of the Company. Now we're growing our core business. We are constantly evaluating new opportunities.

This is where we are looking for changes in the marketplace that can generate new revenues in new service lines that are being performed at higher rates of growth and with higher margins for our shareholders. We are seeking to capitalize on new growth markets that are undergoing transformational changes.

Now we are looking for new growth markets that have no incumbents and it is in these markets, the first to be selected are going to be the companies that are technically differentiated, which goes to the very core of who we are here at Tetra Tech.

Now the strategies I’ll identify today provide the underpinnings for our investments in organic growth and acquisitions that are going to take place over this next year. Now we select our strategic focus areas by looking at opportunities that meet the following four criteria.

First, it has to have a technical -- we have to have a technical expertise, the market does, that leverage on our fundamental core experience in science and engineering. Second, there has to be specific and clear drivers that establish the need for actions by our clients. Third, there has to be a certainty of funding.

These clients have to have access to funding and have to be committed to actually see these projects go forward. And fourth, they have to have a favorable risk profile that primarily includes reasonable contract terms and conditions, so these are the four that we are measuring these opportunities against.

And we have identified three emerging markets that fit all four of these criteria.

Response to new regulations for coal ash generated by utilities and power generation; pipeline studies and design that support the transformation of energy use and delivery in North America; and smart water management, which adapts emerging technologies to meet critical water supply needs.

And I now would like to give you a brief overview of each of these growth areas and markets. One of the clearest markets' drivers is a new regulation, a requirement that sets out specific requirements and a timeline for compliance.

The new regulations published in April 17 of this year, 2015, define new waste requirements for managing residuals from coal-fired power plants, including fly ash and bottom ash byproducts. Addressing this regulation is estimated by the US Environmental Protection Agency to cost over $20 billion.

Now, today, we're working with utilities to develop plans and designs to address these requirements for power plants that are primarily located in the central and eastern parts of the United States. Now this is a technical area that we are very well differentiated.

To help our clients comply efficiently with this regulation, we are applying our expertise in geotechnical analysis of slope stability and zonal characteristics, modeling of risk and potential pollutants in surface water and groundwater from this waste material, and design and installation of high-tech liner systems to actually protect the natural environment from this waste as it is actually disposed of.

Now just in the past few months, we have been awarded a whole series of early-stage projects for major utilities and these projects range from sort of $1 million to $3 million to provide initial investigations, studies, and plans to address these regulations, and these are just the first steps in the overall compliance of this regulatory new framework that has been put in place.

With the unprecedented availability of oil and gas in the United States and low prices, there are widespread changes in how energy is managed, used, and distributed.

Now these transformation changes are resulting in new pipelines and new collection systems, such as in production areas that are now connected with major population centers, refineries, and definitely connected to future export terminals.

To address this need, we focused on the midstream pipeline permitting and engineering work, which is now about 85% of our oil and gas revenues. Now by maintaining this focus, we are able to track -- we are on track to do over $400 million in revenue in the oil and gas related work this year.

We are well differentiated in the midstream oil and gas market throughout North America where we have experience in complex permitting and routing and right-of-way assessments, especially for challenging topography, waterway crossings, and pipelines that are intersecting metropolitan areas.

And in the northern regions of North America, we are experts in addressing geotechnical considerations and engineering designs in the Arctic regions where permafrost is a particularly difficult and specialized area requiring engineering solutions.

In the southern and western regions of the United States, a long-term drought has local governments increasing their spending in desalination, brackish water treatment, and water reuse, particularly strong areas for us here at Tetra Tech.

California, for example, has passed funding legislations for $7.5 billion, an acceleration of $1 billion in spending, and implemented new requirements for water conservation at local levels.

Local, state, and federal agencies are now beginning to turn to technology to solve supply, storage, and use of water for our communities, industry, and even in agriculture.

Now sometimes referred to as smart water management, mass deployment of remote sensors and instrumentation could provide real-time control for water collection from rain events, diversion of this water to storage areas that will maximize its retention, and ultimately optimize its distribution through the existing infrastructure.

Now while just in its infancy, this change in water management will create a new market, which is projected to be more than $100 billion over the next ten years, and that’s just for sensor deployment, data collection, and data analysis. This is a market that has no incumbents and is well suited for Tetra Tech's expertise.

Now the funding for this smart water programs will come from major water utilities and state water resource agencies as they address challenges in the water management. Now, in summary, it is really is better solutions through science and that's really us here at Tetra Tech.

I would now like to present our guidance for the fourth quarter and provide guidance for the entire year of fiscal-year 2015. Our guidance is as follows.

For the fourth quarter, our net revenue is from a range of $420 million to $450 million, with an associated diluted earnings per share of $0.48 to $0.52 and a cash earnings per share for the quarter between $0.67 and $0.83. Now for the entire year of fiscal-year 2015, our net revenue guidance is at a range from $1.710 billion to $1.740 billion.

Associated diluted earnings per share would be $1.63 to $1.67, with an entire year cash earnings per share of $2.85 to $3.01.

This does assume an intangible amortization of $21 million or $0.23, which is included in those estimates; a 32% effective tax rate; and assuming no additional contributions from acquisitions between now and the end of the fiscal year. It also assumes no additional changes in the current FX rate from the international work that we are performing.

In summary, we delivered a solid performance in line with our plan. We saw year-on-year growth in our operating income and earnings per share significantly up compared to last year. Our backlog is up 6% year-over-year, with strong orders from our core services and $1.4 billion in new contract awards just this last quarter.

The Company continues to do an excellent job in generating cash, with a record $109 million from cash from operations this quarter, and we will deploy this cash to continue to grow our core markets, invest in new emerging opportunities where there is higher growth and higher margins, and we are going to continue to return capital to our shareholders through stock buybacks and through dividends.

And with that, operator Britney, I’d like to open up the call for questions..

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

So, Dan, first question for you is you had some continuing overhead, some headwind on your revenue side.

Qualitatively speaking, do you think you're at a point where some of those headwinds are now sort of dissipating, so we can finally, as we head progressively out of the next quarter or two, we could sustainably see revenue growth really being much more visible?.

That's a very good question. We have had some headwinds with our topline revenue growth. They have primarily been in three areas. Number one, which has been persistent, although it is becoming smaller, has been mining. As I mentioned in my prepared remarks, mining is down 70% from three years ago.

So on an annual run rate we're about $120 million in total revenue from our mining activities, but it does continue to decrease, but it is becoming more modest all the time. So I think it’s going to continue to abate only because it’s a smaller part of our business.

The second area has actually been quite acute has been the upstream oil and gas work, and for us it has primarily been in the oil sands where we are addressing some of the waste materials that come out of the process and water supply. That's been quite a bit slower. It has been offset by the midstream, so it’s been overall roughly neutral.

In fact, we collectively are a little bit up, but I think again as that decreases on a year-to-year comparable becomes more favorable, it will look good. And last area that’s been a little bit difficult for us to judge the inflection point, but I think we're getting close, is funding and actual translation of contracts to work with the U.S.

Department of Defense. So for about a year, we’ve seen this be slow. The year-on-year comparables are going to get better, but this is the first quarter that we’ve seen in probably a year where we’ve actually seen our contract capacity go up.

And as I had mentioned, we received about $1.2 billion in new contract capacity that was put in place this year, and so we actually see that as the first indications of activity that should indicate that that will be a pickup as we move into the fourth quarter and certainly into 2016.

So those are sort of some of the key points on areas where the headwinds are, but I do want to point out some of the tailwinds or areas that are actually increasing for us.

The biggest area that I mentioned was the state and local work and most of it is in the South, places like California, where there is incredible pressures on water supply, Texas, Florida; some of the northern states are actually seeing increases now. We're at 8% and I think that year-on-year increase at state and local could even go higher.

The other areas we’re seeing increases, our midstream is actually going quite well and I think that those areas are growing well enough, including our U.S. and Canadian commercial work, that it should be able to more than offset the headwinds from revenues. And I do want to point out one thing.

Our backlog grew in our front two businesses at 6% this last quarter, Q3.

It was actually higher than that the prior quarter, and this business and our work product is not stretching out longer, so at some point there will be a conversion, conversion from our backlog to our revenue, and that should be an indication of greater growth rates in our two front segments..

So Dan, it seems like as you enter fiscal year 2016, and I know you're not providing guidance right now, but you’re in a position now maybe where you can see revenue growth returning and maybe coming into the low-to-mid single digits?.

Yes, I do believe that, and one thing I’m really looking forward to is I know that we've used words such as ongoing operations and excluding RCM.

I do think that over the next few quarters, that will continue to reduce and the numbers are going to become even more visible with respect to the performance in our two front groups, so water, environment, and infrastructure and our resource management and energy.

And so, it will become even more apparent what the growth rates are without this RCM noise in the results..

Got it, and I’ve got one other follow-up and I will hop back in the queue, and that's in regards to coal ash. When I look at that slide and how you’ve pictured really the activity levels picking up, they are fairly material halfway through fiscal-year 2016.

So, would love to get a sense for you on how comfortable you are with the visibility around that.

This is obviously an area where you can do EPC as well, so how do you look at it in terms of the dollars scope for a company such as yourself?.

I will address that now because I do know that a number of our both analysts and shareholders and even our employees internally are looking to this as a large driver. We are currently doing in the [indiscernible] coal residual business probably about $20 million to $30 million a year. It is really quite modest right now.

As I did comment, we do have a number of projects that are between $1 million and $3 million. If you do look at the slides, if you followed along with the webcast, at the upper right-hand portion of slide 14, it does show sort of the buildup of the revenue expenditures that are going to take place as this market matures and implements.

So for the first year roughly, to year and a half from the regulation being published to the time that is being implemented, it’s mostly studies, and so these are small dollars. It is not even designed in selecting the proper best most cost-efficient solution for these utilities and these energy producers.

And those are projects that range from, at the small end, a few hundred thousand dollars, to the upper end, a few million dollars. And that's what we're doing now.

But as you move forward, and this is going to be roughly into 2016, we think that we’ll be able to take these studies that we are participating in, convert those to engineering documents and detailed permitting projects with the regulators that then will convert later in 2016 to actually implementation.

And we can do this on a turnkey basis in Tetra Tech. We can self-perform most all of this work, and it has been -- it does meet their criteria of acceptable contract terms, which is quite often cost reimbursable or time and materials where we are able to commit to target prices.

If we go over, we will put perhaps some of our profit at risk; but if we go under, and that's our goal for our clients, we’ll actually see our margins go higher and even return more savings back to our client. So, that's sort of the timing. As far as the size of it, I think we can increase our revenues by tenfold.

We can go from roughly $20 million or $30 million to $200 million to $300 million over the next few years as it goes from study design and ultimately implementation.

And how we get there is to focus on this for our largest utility customers and it's really to bring these waste disposal for around 500 coal combusted power generation facilities into compliance..

Thank you Dan that is very helpful and I’ll hop back in the queue..

Great, thank you Tahira..

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

Hi, good morning. .

Good morning, Corey..

I had a few questions about your various growth areas. Maybe since you're on the topic of the coal ash, I will start there. I had two questions about that.

One is, are your customers there going to be entirely the producers, or will you also be working for some of the waste companies? And secondly, just thinking about the very long-term here, is this an opportunity you think over the next like three years, and then once all the solutions are implemented, it kind of died down for you, or is there a long-term more sustainable opportunity in that area?.

Great questions, great questions. So the first is, do we work just for the energy producers or also the waste companies? The answer is both. We have strategic alliance with the largest waste landfill owners in the United States. They own the landfills because there is really three solutions to coming into compliance.

You can take the waste material and put it on a truck or a rail or, in some instances, a barge or a ship and take it to landfill that exists already. And that would go to the largest landfill owners in the United States. And those we are teamed with.

We are engineers and scientists and technical professionals for the permitting, and so that's how we participate on that alternative. The second is, you can take that material and create a landfill and dispose of it right next to where the power generation is taking place for where the waste is being generated.

We generally lead that ourselves, and that is where you’ll actually design and permit a landfill or a receiving facility right on the property. And so we would do that essentially completely in-house. And the third is, well, you can just shut the plant down.

You can just stop generating waste, and we would participate in that with respect to doing all of the decontamination, the disposal and the environmental work, and infrastructure work associated with closing those plants down. So those are sort of the three different primary alternatives, and we would participate in all three.

And so that does include the waste. Now, your question with respect to, is this a big bubble, is there going to be a lot of work for a few years, and then does it go away? Well, it doesn't go away. There is initial work with respect to evaluating your alternatives.

But as long as there is a plant generating this material, and that is fly ash or bottom ash or other waste products, you are going to have to dispose of it. So it really is a perpetuity. Now, I would say the upfront evaluation and selection of your alternative only has to be done once.

Although I will say periodically you go back and evaluate what you’ve done, but you need to continue to expand cells, you need to continue to permit and manage that waste, so it is, to a certain extent, a perpetuity. And I will say this what sometimes been referred to as a war on coal.

There are new regulations coming out that are now going to take and regulate the water systems for discharge. And it's coming out we expect over roughly the next year. It's with respect to effluent, which means the water that's coming out of the disposal, so it's effluent guideline restrictions and new requirements on that waste.

We haven't even talked about that. As it comes to pass, we’ll incorporate that into new opportunities. So, as far as this being a one, two, or three-year bubble that is going to come and go away, I think far from that, Corey..

Okay, great. And then moving on to the water management, it's the first time that I've seen you have been positioned at some of these things as part of the business. I realize these aren't new concepts, but just as far as including things like IOC and big data on your slides, so a couple questions about that.

Do you see any more of a technology play for you, or is it very similar to what you’ve been doing more on the consulting side? And secondarily, is there -- you said there really are no incumbents, do you have the expertise you need in-house? Are there acquisitions you could do, or is that -- since there are no incumbents, does that imply that there are no acquisitions? That would be helpful..

No, there are acquisitions. And, first of all, you are right. It is the first time that we've actually to -- on this investor call talked about the Internet of Things, IOT, big data, but it is the reality. We have – we at Tetra Tech for about 10 years have been at the forefront of implementing real-time controls.

Now, over the past decade, you’ve heard us talk about combined sewer overflows. And what a combined sewer overflow is that where the storm water and wastewater from a city or municipality go through a single pipe.

And when it rains really hard, it goes past the water treatment plant and out into the rivers and surface waters and lakes and things and cause a lot of problems.

We developed, including through some of the acquisitions that we did over the past five years, real-time controls that will divert the storm water away through different systems of monitors, valves, and so we’ve been doing this.

We have it implemented in a number of cities, and it's a combination of software, hardware, and real-time engineers running this. So we have been doing this.

It's moving, it's actually migrating and moving quite quickly now to the Internet of Things, where things can be monitored through more remote sensors as the technology become that much more effective.

And you can actually avoid spending significant money, in some instances billions of dollars for special tunnels or reservoirs by implementing this type of technology, and so it is a focus. Most of the companies out there that are leading this are small start-ups. They are out there for acquisitions.

We have teamed with a number of them, and this might be one of the few exceptions that we announce a very small acquisition. Our practice is that unless it’s larger and unless it's a few hundred people or $20 million or $30 million or larger, we typically don't announce them. We consider them tuck-in resources or assets.

In this instance, the impact to our business is not directly related to the size today. And so you might take a look at our press releases as we move on to the coming quarters.

But they are out there, they are very specialized, and this is truly where synergy of their technology expertise, plus our resources of over 300 offices and being present in all these cities, can be one plus one. It's a lot more than what we are individually. So, do look for that, Corey..

Okay. Well, that helps.

Just to be clear, would you consider acquiring, say a provider of sensors, or would you more likely partner with the hardware providers?.

We’ll probably partner with the hardware providers. But the actual programmers and the individuals that will program and connect the hardware to the science, which is the interface, which is everything from the communication and the analysis of the big data, that’s what we would look to bring on..

Okay. And then just one last quick one on the third growth driver on the energy side, I realize these are long-term projects.

So maybe not as subject to the vagaries of the oil and gas market, but is there anything we can watch as an indicator where, looking for a certain price of crude or a certain rig count or something that would show us that activity is more likely to pick up or slow down?.

Well, for us, we are not at the upstream. So with respect to – although, I’ll say we are less at the upstream than we were before, which is primarily the oil sands, a little bit in the US.

I think the areas you could look for that would be a precursor toward a movement upstream would be regulatory moves with respect to the supply or treatment of the water coming out of the existing water -- oil and gas production.

So if you see any movement on the regulatory side, whether it's the state and local level and certainly at the federal level, if there's any movement to mandate compliance, tracking, monitoring or regulatory cleaning processes on the water coming out of that, that should be seen as a large catalyst for us.

With respect to the primary work though that we are doing, which is midstream, just take a look for any new fields coming on. Different oil fields that are producing at different price points to make them more economically viable.

And what that means is that they are producing more product in a given field to either take it to a refinery or directly to a metropolitan area or even for export as we have a surplus potentially at some point. That drives requirements for pipelines, and that becomes a precursor.

So take a look at the fields that are coming online, and that’s where you will likely see us, and that’s not at the fields themselves, but for the collection and distribution ultimately to the transmission..

Great, thanks for taking my questions. .

Great, thank you, Corey..

Your next question comes from the line of Alex Rygiel with FBR Capital Market..

Great, good morning. This is Min Cho for Alex. Just a couple of questions. First of all, congratulations on your strong cash flow this quarter.

It sounds like there is a little bit more focus on kind of on acquisitions in the near-term, and I was wondering if you could talk a little bit about your acquisition pipeline? If you do expect more of the smaller tuck-in acquisitions, I know Dan, you just talked about the Smart Water opportunities as well.

But do you see something bigger in the pipeline or just maybe some timing as well?.

Great questions, Min. We do -- we have actually had a full pipeline with respect to evaluation of opportunities. So I want to separate identification of opportunities and evaluation versus closing. And it’s either been through a combination of price points, which prior to the oil going down, the expectations of valuations have been a bit lofty.

We have been extremely disciplined here. I do understand that our discipline on the multiples that we have paid in the case of oil and gas, as one example, have tempered our topline growth, and you’ve seen that. So all the numbers you’ve seen have been organic for the last few years.

We do see more opportunities, and I think that for those on this call, I will make it clear. Some of it will be to actually strengthen and broaden out our core businesses in water environment and actually municipal infrastructure work, so that is a portion.

The market is going through consolidation, and those are a little bit larger properties or assets. There are other growth areas that I just talked about, and those are likely to be a bit more in the tuck-in or sort of start-up. So you’ll probably not see a really, really large bet on a new area that’s just beginning to come into an emerging status.

So perhaps in our core business, that should represent stability, larger backlog and low risk and strengthening our core business, and the size should be a little bit larger.

And then I would say the areas that are going to grow quicker that are just emerging, they’ll be a little smaller, although as I mentioned to Corey a moment ago, could actually be noteworthy because of speed and contribution in these new growth areas..

Okay, that makes sense.

Also, can you talk a little bit about the -- your oil and gas business? Have you seen -- can you talk about the activity level that you are seeing now relative to a year ago or even just sequentially in the last quarter?.

Yeah, first of all, I’ll separate out to two aspects to us. We’re really upstream, which is now about 15% of our revenues at roughly just a bit more than $400 million for our forecast for all of fiscal year 2015. It's about 15%, which is down from where we started the beginning of the year. The other 85% would be midstream.

Upstream, we have actually seen it very slow. Things have pulled back, and the nominal amount of work that we're doing is really on sustaining capital or even OpEx.

So we have seen that very small, very tactical, meaning go in and fix this because it’s broken and redesign a fix or some small projects where how can you increase the efficiency to decrease our costs of the oil generation process. So that has been very slow, and sort of holding our own, but it depends on what breaks and what could be more efficient.

So I don't see that as a bright spot in the immediate future.

With respect to the 85%, the great majority of it midstream, we still see it pretty strong both in the US, which we are doing permitting, consulting, and design work, and we are doing no construction here in the US, nor really much construction management, although we are doing some field monitoring and environmental compliance.

In Canada, we've got a large project that gives us visibility through the rest of 2015, really through the rest of 2016, fiscal year 2016. So that feels really good, and we really need to get focus on other midstream projects that will give us a full booking out into 2017 and later.

And I’ll tell you that in our business there isn't a lot that we have more than a year of full backlog in place. So that's sort of what we’re seeing in the oil and gas area..

Okay. And then finally, my last question on the federal business. Can you talk a little bit about the pace and the task orders that are kind of coming into backlog from the IDIQs? Obviously your new awards after the quarter are very positive.

But if you can just talk a little bit about the pace, if you are seeing any pickup there?.

I would say that the sole source or the single award IDIQs, which are primarily with the State Department and USAID, and it's actually quite good. So I would say that's very strong. The work where we have single IDIQs with civilian agencies, mostly EPA and FAA, have been very strong. In fact, I’d say even picking up.

So I would say sequentially, it continues to pick up and you've seen some of the numbers -- year-over-year, those numbers are sort of middle single-digits up 5%, 6%, 7%, some even better than that. I would say DOD, they are adding contract capacity, but have not seen a pickup in those.

If there is a pickup in those, you’re going to see it very quickly in our revenue from the federal side, and you'll see very quickly that reduction in federal year-over-year up 8% and actually watch that turn to a positive number. But I would say as of this call, the conversion from contract award to task order issuance has been slow.

And I want to make one point here because it's not just us. It's not just, are you getting the contracts, but you're not being successful, we’re just not seeing it actually come out to any of the contract holders. But hopefully these new large contracts that have been awarded are an indication that we’re going to see that conversion.

But I’ll let you know next quarter..

All right. Thank you..

Great. Thank you, Min..

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

Hi. I wanted to I guess talk about the balance sheet and the investment opportunities a little bit more. Dan, because of the good cash flows from the business, like you mentioned before the balance sheet is kind of under-levered versus your targets.

I guess does that mean that the buyback necessarily maybe needs to pick up to kind of get you there, and what’s the timeframe, if so, that you would be looking at trying to re-lever the company? And then was there any implication or impact from the old credit facility that you replaced that maybe limited your buybacks in the quarter? $7 million was lower than what we had seen over the past year, so I just want to understand if there was something that caused that from a credit facility perspective..

Yeah, I’ll answer that question with the second part first, which is, was there a reason that the buyback during the quarter was a bit lower, and then I will go back to address the optimal leverage and what are we going to do to get there.

But Steve, if you want to address the timing and the amount of the buyback during the quarter?.

Sure. Yes, so our previous credit agreement that we just amended and extended only allowed us to go to about $75.5 million in buybacks for the year. And that's what we did. We have amended our credit agreement because there is a lot more flexibility. It increases that buyback amount quite a bit.

In fact, if we stay under a 2.0 leverage, effectively we have unlimited amounts that we can do the buyback. If we are under 2.0, then we are limited to a certain amount. So we do have a lot more flexibility, and we are going to take advantage of that flexibility going into the future. .

Great. Thank you, Steve. With respect to our leverage point, we recognize that we are below and Steve actually made the statement in his prepared remarks that we’re well below our target of 1 to 2 times annual earnings leverage point. In fact, at $60 million, we’re at about 0.3 or about 30% where we want to be, between 100 and 200.

Now, I will say that our board has addressed this partially. They did authorize a $200 million buyback over a two-year period. We had indicated before our goal would be to do that on a linear basis. That would be $100 million a year. After three quarters, we are at $75 million, so we’re tracking almost on, right to the dollar.

You can expect no change on that. We’re going to continue that. And I will say that if we don't put to work our balance sheet and that's both the cash that we generated and the access to credit that we have for acquisitions, we will achieve those leverage ratios by return of capital to our shareholders.

Now, we’re not going to measure that on a week basis or a month basis, but if it looks like that is not going to change, that means acquisition opportunities we will look to revisit the return to capital numbers that we have talked about..

Okay. That's helpful. Maybe just on the margins then next, we’d seen – and you mentioned some of the color on this. The WEI margins got some benefit from the Canadian folks, kind of being able to go back outside and work.

Does that mean as we head into the fourth quarter that the heavy summer quarter, that that gets even better? What should we expect from the margin profile? And I guess the reason why I ask this is because for the quarter, revenue, this quarter, revenues came in at the low end of guidance. The guidance came down.

It looks like the trend on revenue does not really expect it to materially inflect one way or another, but yet the earnings side is there. So I guess that implicitly means that margins are expected to be pretty good, and I wanted to understand why that could be the case and what gives you confidence for doing that..

Well, we had very good performance out of WEI. Now, Water Environment Infrastructure is where most all of the work that we do for municipalities, it's where most of our government work is.

And as you stated and I have commented on in my prepared remarks, the Canadians are getting back out in the field where you do water samples in the spring and summer. It's not frozen like the winter. So we've got people out there collecting samples. Field activities are well up.

Now, this year, if you take a look at our margin for the third quarter on an EBIT basis, we were 13.5%. Last year, we were 11.1%. Last year was good; this year was better. But last year, we went from 11.1% -- and I don't want to indicate this has a definitive number – but we were over 16% in the fourth quarter.

And so going up from 13% to a slightly higher number is quite achievable. And in fact, you saw it quite notably last year and it's driven by two things. We've got plenty of backlog in Canada. People are busy, and they're out -- things are picking up right now.

And second of all, the work that we’re doing here in the US within WEI, a lot of it is for our state and local clients, and you saw that the backlog is growing and its revenue is up year-over-year at 8%. And that means utilization is up [indiscernible] and that converts to a margin.

So actually, the performance within the WEI group is -- looks quite clear to us as we enter the fourth quarter. And the headwind areas, which I've talked about being mining, is actually in RME and oil and gas is in RME. We really don't have as much of that in WEI with the exception of the Department of Defense environmental work.

And if I can see that rebound, I have great expectations for our WEI group..

Okay. Great.

And then just maybe to close the loop on that discussion, is there anything in the marketplace that is moving the has been margins higher, or is it just really kind of a mix thing and what you're working on today?.

Yeah, it's actually a mix thing. I will not say that -- I would not correlate the increase in the margins to better pricing pressures that we have as far as increasing rates or anything else. It's really just operational performance and utilization within that group..

Got it. Okay. I’ll leave it there. Thank you..

Thank you, Andy..

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

Good morning, guys..

Good morning, Mike..

So just wanted to check in, your commentary on activity in the upstream oil and gas markets, could you say almost the exact same thing about how things are going in your mining business at the current time? Is it kind of just bumping along the bottom at very bare-bones levels?.

Yes, although I would say that the mining is quite different, the reason is the mining is much more pervasive, whether or not it's certainly greenfield opening new mines, it is little or nothing there.

Work even on OpEx on mines is down, and the pricing pressure, depending on which commodity you are talking, base metals like iron is down to -- is under a significant pressure across the board. And it's not as if you can move to a different phase of the product within mining such as exploration to development or upgrading or even restoration.

The only area that has some – I don't even want to use the word strength, but some opportunities in the mining for us at least is in the restoration or the cleanup above the tailings. So they stop mining. They shut everything down. Well, the regulators didn't go home, so they're saying you've got all these impoundments and tailings.

Some areas like phosphate, there is more work. It has a different driver and agriculture. So I’d say mining is much more pervasive. I would say in oil and gas, it's really confined to the upstream components. And in Canada, that's largely oil sands. And in the US, it's the shale plays. But it's much more confined in the upstream.

And I would even say that in the upstream, they are still producing. The difference is mineral production is down significantly because of its use. Oil and gas, the price point may be down, but the amount of product that’s being delivered is still quite high.

And so I would actually -- both are headwinds, but I would actually think that the upstream oil and gas is not as impacted..

Okay.

And then turning over to the coal ash opportunity, how confident are you that you have the people that you need in ‘16, ‘17, ‘18 to get the contract done there? Are you currently kind of hired up there, or do you need to get more people from the outside to kind of get this work done?.

Well, I think we need to get more people from the outside to get this work done as it builds. So we don't have a shortage today, but I think we're going to have -- it's going to move toward that in ‘16 and ‘17. And how we're looking to address that is through acquisitions and to bring other folks on board.

We do have a good position in the solid waste industry. We are the leader. But it's being ranked number one by entering news record by revenue. But I will say it’s a very fractured market, a very un-consolidated market. So they are spread out.

And the reason I think we need people is I've mentioned the locations of these coal-fired power plants and the opportunities are mostly in the central and eastern portions of the United States. But we do have significant presence there, but not necessarily with our solid waste folks.

So we can send people out from California and the West Coast out there for short stints. But ultimately, we need locals and people that have those relationships, and we are not relocating them. So that's an area, Mike, that we are -- that is on our acquisitions lists of areas that we are looking to add resources..

Okay. Great. I just have one more question here on this topic or actually on a different topic. The midstream business, I've been hearing anecdotally from some folks that there have been some midstream projects pushed out in the calendar due to permit issues, legal issues, things like that.

Is that not actually good for your Company? Are you being engaged more to get the process speeded up? Are you being engaged to work overtime or higher-margin hours to kind of get these things up and running, or is there not much that can be done if people are from outside these companies or delaying some of these projects?.

Well, I would say that from an overall approach, it's very hard for us to ever say that having a delay from a regulator is good for our business because it is bad for our clients. We want an efficient, clear, low risk process.

Now, to the best of my personal understanding, we've not been associated with any of these projects where there have been any delays associated with work we've been associated with. They are continuing to move. We’re not being asked to spend significant overtime hours or put it on some emergency path that’s driving special revenues.

We have not been asked to come in and take over projects for other people. So that has not happened, and maybe that will happen. If there is oil majors on here, we are available to come help and solve those problems. But I would say it is kind of steady as she goes.

Revenue is up on the midstream about 10% to 15% year-over-year, which actually I find quite -- I'm really quite happy with that. Because I was concerned that it would actually be -- I actually thought it would be flat and was concerned it might actually pull back, but it just continued to remain strong for us.

But no special extra overtimes, extra bonuses or extra opportunities associated with some of these delays..

Okay. Great. Fair enough. Thanks so much..

Great. Thank you, Mike..

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

Thank you for taking my call.

I just had -- wanted to touch upon a little bit more detail as we hit into or look into 2016 and given the guidance that the top end was reduced for Q4, I was hoping maybe you can better provide us with a better sense of how you can better manage the forecasting in 2016? If there is something about the portfolio, obviously the timeline looks better.

But is there something about the awards, the nature of the awards -- obviously RCM is gone, but it wasn't a factor in Q4 -- that would provide you with better forecasting goals or a better sense of the outlook and less risk to the downside?.

Well, I think that’s something we are looking and the resulting company and back to our core business, by moving large single projects out of our focus, which is really the construction management division that we've closed down, should give us lower risk, higher margin, better cash and to a certain extent, I would say more visibility.

But more visibility is not measured by length, classically it's the length of your backlog. But when I say more visibility, it's because we have longer relationships with these clients that we are working with, and we have a ready steady amount of orders that come in kind of book and burn.

So the average duration of our backlog will actually drop as we close out RCM. Our consulting and engineering project is shorter than a construction project. And what we did when we brought down -- as you say, we brought down the upper end of our guidance for the year, I do want to point out that that was really just narrowing it.

For the most part, we’ve been narrowing both our revenue and our income EPS. But I will say coming into this year, we didn't anticipate such a big pullback in oil and gas. That was a bit of a something that we had not anticipated.

We did not anticipate mining to be as perpetual in its downturn, and we had not anticipated Department of Defense continuing to be as slow as it has been.

But we have seen the US federal budgets being passed, and I actually think we are going to go into a period with the federal government where it's more predictable, and with an election coming up, the next presidential election, historically we've seen both sides of the political spectrum get along with respect to funding.

Nobody wants to be the one who is putting people out of work or stopping funding for employment when everyone gets to vote. And so I don't know what it's going to look like over the next 10 years, but over the next couple of years, things generally I think are looking more favorable..

Okay. That's helpful. And then lastly, in terms of capital allocation, we talked about I think you covered just about everything. But some of your competitors are using the excess cash or at least using the balance sheet to help finance some projects in very creative financing to help move that business.

Is that something you would consider?.

We get that question -- I get that question occasionally sometimes from our employees, sometimes from our client, sometimes more frequently from developers. We’re not a project financing entity. We want to be the best engineers, consultants, design professionals, but we do not – you should not see that that becomes one of our areas.

It is interesting, and I've been in this business for a little while, and I've watched projects when they get into difficulty and you are working for a developer. We could have a problem with receivables. And so you can -- it can be stubborn, and you will have to go through different ways of collecting your funds.

But I would feel very uncomfortable that not only my design, engineering and consulting fees are at risk, but also the capital that I put on that project. Because that's a revenue number that includes full development.

And I know that we have other people that participate with it, but I would like to take risks that actually I control and that I am an expert on.

And so I would rather give that funds back to our shareholders through buybacks and dividends or, even more importantly, growing our business in these high-growth areas that will be higher growth and higher margins for them.

And we don't need, we don't believe -- we don't need to create an artificial benefit where we fund our own projects, and we don't have to be competitive because we are sole-sourcing ourselves. We will compete in the marketplace based on our technical differentiator and with the best price..

Okay. Well, thank you very much. That is understandable. I appreciate it. Nice job in the quarter..

All right. Thank you very much, David..

In closing, first of all, I want to thank everyone on this call. I know we’re three quarters into fiscal year 2015. This has been a year of transition with us.

I think as RCM becomes a smaller and smaller part of our results, the actual underlying performance and really the core business cycles all the way back almost 50 years will become more and more visible, where we are a market leader technically, we are a market leader with respect to performance and predictability, and that means both cash generation, best-in-class margins, and we will look to move that into new growth areas, some of which I outlined today.

And I look forward to giving you all an update on how we did in the fourth quarter and for all of fiscal year ‘15. And I know of particular note what our forecast and our look forward into 2016 is on the next conference call. So thank you very much and have a great rest of the week. Bye..

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect..