Tetra Tech Inc

NASDAQ:TTEK

Earnings Call Transcript 2018-Q1

[Operator]

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 the 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 of -- or results.

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

In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the investor relations sections 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.

[Dan Batrack, Chairman, CEO, and President]

Great. Thank you very much, Eryn and good morning, and welcome to our fiscal year 2018 first quarter earnings conference call. I'd like to start off with stating we just had an excellent first quarter and beginning of the 2018 fiscal year. And I'm very pleased with the operational performance of Tetra Tech in this first quarter.

We operationally achieved the highest revenue of any quarter in the history of the company, and we also operationally exceeded both the revenue and earnings per share guidance that we came into the quarter with.

Our strong growth this quarter was driven primarily by our U.S. clients, including double-digit growth with our state and local clients, our commercial accounts and with our federal work.

I'm also very pleased to announce that the U.S. federal tax law that was enacted at the end of the calendar year will have a net benefit to Tetra Tech, both with a deferred tax accounting treatment in the first quarter and with a long-term reduction in our annual tax rate.

In fact, the new tax law will have the greatest benefit to companies that are just like us who are both profitable and have a significant portion of their revenue generated right here in the United States.

As a result of our strong first quarter performance and our assessment of the new tax law and most importantly our confidence in our outlook, we're increasing our guidance for revenue and earnings per share for the entire year of 2018, which I'll cover later in this morning's conference call.

So, I'll now begin with an overview of our quarterly results and business outlook, while Steve Burdick, our Chief Financial Officer, will provide additional details on our financial performance, on tax, and on our capital allocation.

We had an excellent first quarter with record highs for revenue and earnings per share. For our first quarter, our revenue from ongoing operations was $753 million, up 14% from last year.

Our net revenue was $544 million, up 11% from the prior year, which generated an operating income of $50 million, which is up 16% from last year. This operating income resulted in a diluted earnings per share of $0.65 per share for the quarter, which is up 33% from the prior year.

And finally, our backlog ended at $2.428 billion at the end of the quarter, which is essentially flat from the prior year, but I will note that our strong -- we did see strong bookings from our U.S. state and local clients.

And excluding oil and gas both with our U.S. commercial work and our international work, we're all up, but it was partially offset by slower federal awards that are primarily due to the U.S. budgetary delays that many of you may be familiar with.

I'd now like to provide an overview of our performance by our end customers. Our record first quarter performance was led by strong double-digit growth for our U.S. state and local, our U.S. commercial, and our U.S. federal work.

Our United States state and local revenues were exceptionally strong this quarter with an organic net revenue growth of 56% year-over-year. Now this is the sixth sequential quarter of double-digit growth by the same client -- this group of end clients, so this increase was a direct result of the work that we're doing in the high-growth states of Texas, Florida, and California.

This is where we're performing significant amount of water infrastructure work and where we also provided emergency planning and recovery services in response to the hurricanes and fires that struck at the end of calendar year 2017.

Our U.S. federal net revenue in the quarter was up 10%, driven by strong year-over-year growth primarily for our clients at the U.S. Department of Defense. Our U.S. commercial work net revenue was up 13% year-over-year on a broad base of commercial permitting, analysis, and design engineering work.

And finally, our international net revenue, if you excluded the effect of oil and gas, was up 8% year-over-year, reflecting the strengthening Canadian, South American, and Australian economies.

However, I will note that our Canadian oil and gas revenues did decrease, as compared to a year ago, which was primarily due to completion of a Canadian pipeline project that we completed last winter.

I'd now like to present our performance by our two business segments. As a reminder, last quarter, we announced the new organizational alignment that took effect for the 2018 fiscal year. Our two segments are predominantly government-focused, and the second is commercial-focused. The first is Government Services Group we referred to as GSG; and the Commercial and International Business Group, which we referred to as CIG.

The Government Services Group includes our U.S. federal, our U.S. state and local, and our international development businesses. This group also includes our highly successful emergency response practice and our water infrastructure programs.

The GSG business group had an excellent first quarter with a 12.6% margin and an overall revenue growth of 22% year-over-year. They had a strong growth in both our U.S. infrastructure and emergency response work.

The Commercial and International Business Group or CIG focuses on our global commercial client base with regional operations in Canada, Australia, South America. And this business group includes our oil and gas, mining and our energy practice activities.

The CIG business group's revenue was up 4%, with a solid 9.1% margin. We did see solid growth in commercial and industrial work and our Canadian regional operations but was offset by very difficult year-to-year comparisons for the Canadian oil and gas work primarily with a large pipeline project that continued through last year.

I will note that our CIG work, our Commercial and International Group, due to their current Canadian operations, will have a highly seasonal revenue stream with the lowest revenues and margins that we'll see in our second quarter. That would be for the months of January, February and March, with a significant increase in our third and fourth quarters, which represent their field -- or summer field seasons. So, when taking a look at the guidance and quarterly partitioning of our revenues, this should be taken into account.

Now this time, I'd like to turn the presentation over to Steve Burdick to go over the details of our financials, a bit more background on the tax, and our capital allocation. Steve?

[Steven Burdick, EVP and CFO]

Hey. Thank you, Dan. So, for those following on along on the webcast: You can find a full reconciliation of our GAAP results, presented on these couple slides, to our ongoing results which Dan just addressed; and in the appendix of this presentation.

So, now turning to our financial results for the quarter. As Dan just highlighted, revenue, operating income and EPS for the first quarter of 2018 were outstanding. In fact, revenue of $759.7 million was an all-time high and an increase of 14% from last year.

In addition, net revenue of $544.8 million and an ongoing EPS of $0.65 both exceeded our guidance ranges for the quarter. These increases were broad based and led by our state and local projects as well as U.S. federal government and commercial work.

Our continued focus on front-end differentiated consulting and engineering work has resulted in improved margins for Tetra Tech as well as decreased risk profile for our overall business. As a result, our first quarter operating income of $48.6 million and EPS increased double digits over last year.

I'll now review a few key cash flow metrics for the quarter. So, for the first quarter, cash flow used in operations totaled $66.5 million, up slightly year-over-year. The first quarter is typically our seasonally lowest cash generating quarter. In addition, due to the increase in revenue in this quarter, there was a greater use of working capital.

So, these net uses of cash are timing related, which will turn over the next two quarters. And looking out over the remainder of fiscal 2018, we will generate strong cash flow and have at least a 20% improvement over fiscal 2017. Our net debt increased slightly year-over-year and totaled $274.9 million at the end of the quarter.

Over the past 12-month period, we purchased $100 million in stock, paid out approximately $22 million in dividends and invested in acquisitions to advance our strategic goals.

Our leverage ratio of net debt to EBITDA remained within our target range of one to two times. And as a result of this leverage ratio, which is 1.1 times, we continue to have the ability to invest in our organic growth as well as in acquisitions while still having sufficient capital to deliver returns to our shareholders.

Lastly, our day sales outstanding was 85.4 days for the first quarter. By focusing on front-end consulting and engineering work, we've been able to lower our DSO compared to the prior year. And we do remain committed to a DSO target of less than 75 days, and we'll continue to work towards this goal in fiscal 2018.

So, our results were impacted by the new tax law. And as you can imagine, like many companies, our tax and accounting team has been working around the clock the last month, assessing the impact of this new tax legislation. And based on this work to-date, we're pleased to report that we expect substantial benefits on a long-term basis.

The new U.S. tax law enacted in December 2017, commonly known as the Tax Cuts and Jobs Act, significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. federal corporate tax rate from 35% to 21%, effective January 1st, 2018, while also implementing a territorial tax system, which included a one-time tax on deemed repatriated earnings on foreign subsidiaries.

Now, we came into this year expecting our global average effective tax rate to be about 32%, as outlined in our original guidance for fiscal 2018, which also included a U.S. federal corporate tax rate of 35%.

Since three months of our fiscal year occurred before the effective date of this new tax law, our U.S. federal tax rate will be a blended 24.5% in 2018 and it will be 21% beginning in fiscal 2019.

All else being equal, the new U.S. federal corporate tax law would have lowered our expected consolidated global tax rate from 32% to 28% in fiscal 2018 and to 26% in fiscal 2019 and beyond. And this lower tax rate contributed approximately $0.03 to our Q1 earnings per share.

In addition, we had a discrete tax benefit in Q1 related to stock-based compensation similar to the first quarter of last year, as most of our stock awards have vesting or expiration dates in November. This lowered our Q1 effective tax rate further from 28% to 21%, which corresponds with our ongoing earnings per share of $0.65.

Now, going forward, we do not expect a material amount of our stock-based compensation benefit for the remainder of fiscal 2018. And as a result, our effective tax rate for the last nine months of fiscal 2018 is expected to be about 28%, resulting in an annual effective tax rate of 26% for all of fiscal 2018.

As I mentioned, as a result of the new tax law, we were also required to revalue our deferred tax assets and liabilities, which resulted in a one-time tax benefit in the first quarter of $10.1 million or $0.17 per share, which lowered our effective tax rate on a GAAP basis to actually a net benefit of 1%, which corresponds to our GAAP EPS for the quarter of $0.81.

Finally, for fiscal 2018, we also potentially had a one-time tax expense related to the transition tax on deemed repatriated foreign earnings. However, we currently expect to have no such liability. I should note that these one-time tax items are provisional and we expect to finalize them by the end of fiscal 2018, as provided by the recent SEC guidance.

So, in light of the benefit from the Tax Cuts and Jobs Act, I'd like to update you on our capital allocation plans. Our strategy has not changed, and we continue to target a net debt to EBITDA between one and two times. Our focus on high end consulting and engineering services has enabled us to consistently deliver strong and industry-leading financial results.

Our strong and consistent cash flow generation allows us to invest in our business through both organic growth and strategic acquisitions while returning capital to our shareholders through dividends and buybacks.

So, just in the first four months of this fiscal year, we've closed on two strategic acquisitions, Glumac and BridgeNet. And we expect to close on a third acquisition, NDY, in the second quarter.

In the first quarter, we paid $5 million in dividends and bought back $25 million in stock. And just this week, our Board of Directors approved our 16th consecutive dividend of $0.10 per share, to be paid in March.

Now, Dan is going to cover our updated guidance later in this call, but the bottom-line is that the benefit from the new U.S. tax law will further enhance our ability to deliver on our balanced capital allocation strategy that will benefit all of our stakeholders, including our shareholders, employees, and customers.

So, thank you for your time today. And I will now hand the call back over to Dan.

[Dan Batrack, Chairman, CEO, and President]

Great, thank you very much, Steve. And I assure you all there was a significant effort from Steve's staff to actually go through all of the tax and have it done as one of the earlier reporters in this earnings season.

And as we enter the second quarter of 2018, we expect our largest growth areas to be driven by work for our U.S. clients, which includes our U.S. state and local clients, our U.S. commercial clients, and our U.S. federal government work. Internationally, though, we do expect our local infrastructure work to continue to grow, with some headwinds in our Western Canadian oil and gas work.

Our fastest growth within the U.S., we actually expect to be with our state and local clients with the work we're doing for municipal water infrastructure. We expect this client sector to have robust growth rates for the remainder of the year, somewhere between a 10% and 15% rate, even with the more increasingly difficult comparisons as we move forward since we had significant growth from even a year ago.

Our U.S. commercial work, excluding the oil and gas sector, is expected to grow at a rate of between 5% and 10%, with increases in revenues for industrial water treatment, mining, energy, and solid waste.

We expect our U.S. federal work to grow at a rate between 5% and 10% for the rest of 2018. Our federal growth will be driven by a combination of work that we're doing for the Department of Defense and the various federal civilian agencies that we work for, including our growing data analytics work and our related IT practice activities.

Finally, we expect Tetra Tech's international revenues to grow at a rate of between 2% and 5%. Our international work is primarily generated in Canada and Australia and regionally in South America and the Asia-Pacific areas, driven by infrastructure programs and industrial studies and design work.

We do expect to see some additional contraction in our oil and gas midstream services in Canada and we expect associated year-on-year comparisons to remain challenging for us until near the end of our fiscal year 2018.

With strong growth in our water and infrastructure work, we're also looking into the future in areas that we can invest in for strategic growth markets that link our Leading with Science approach with new emerging technologies.

Emergency recovery is a rapidly growing business for us that spans from the very early monitoring and assessment phases to the longer term mitigation and resilient design work, and that leverages our technical expertise in water and infrastructure.

We continue to expand our work in data analytics across multiple markets to address our clients' needs for the interpretation and analysis of the rapidly expanding reservoir of information available to them.

At the same time, we're combining our expertise in advanced water management systems with new technologies to create smart water infrastructure systems that add efficiency. They reduce costs, increase the flexibility of entire water systems.

I'd like to actually highlight two of these new markets that'll provide additional upside to our 2018 performance and represent long-term growth opportunities for us. With now well over $300 billion in damages expected from the disasters that struck the United States in 2017, last calendar year is considered to be the most costly year for natural disasters in U.S. history. We expect the rebuilding and mitigation measures that result from these disasters will drive infrastructure spending for well over a decade.

Now, Tetra Tech has an established expertise in emergency planning and recovery services, from the detailed monitoring and damage assessments to long-term resilient design services.

We maintain a significant suite of proprietary software solutions that facilitate our ability to provide a rigorous and very fast response and documentation as part of the recovery process for every one of our clients.

We do see this market in three distinct phases. The first would be early monitoring, followed by damage assessment and consulting. And longer term includes mitigation and resilient engineering design services. And Tetra Tech is a leader in providing services in all three of these recovery phases.

Over the past year, we mobilized to support over 100 counties and cities across the United States and its territories and their monitoring and recovery programs, some of which you've seen the benefit to the company in the first quarter.

And we expect to see significant additional opportunities to support damage assessments and related consulting and services, especially in these regions where we're already very well established and have an -- a very large network and offices, in areas like Texas, Florida and California.

In fiscal year 2017, we began a strategic initiative here in the company to expand our high end infrastructure business, with a focus on sustainable engineering that uses less energy, facilities that recycle water, and create healthy environments for their occupants or individuals that actually visit the facilities.

At the start of 2018, our fiscal year 2018, we added Glumac engineering group, based primarily in California, here in the United States. And just in January, we announced the intent to acquire Norman Disney & Young or NDY, an Australian-based firm that's going to add over 700 professionals in the high end infrastructure design practice. They're primarily located in the Asia-Pacific region and give us a significant additional geographic reach. In fact, our collective team now has a geographic coverage and the high-end technical resources to support our clients worldwide.

Sustainable design is a key differentiator in the infrastructure market today and very well is aligned with our expertise in water and environmental management. Through a combination of organic and acquisitive growth, we expect this high value business to go from approximately $100 million annual revenue, which we have today, to over $250 million a year by 2020.

I'd now like to preside -- I now would like to present with our updated guidance for -- and our updated guidance for 2018. For the second quarter of 2018, our guidance for net revenue is a range of $490 million to $515 million with an associated diluted ongoing earnings per share of $0.48 to $0.53.

Now based on our performance to date, which is the exceedings that we had in the first quarter, the business outlook we have and the expected new tax law, we have raised our guidance for all of fiscal year 2018 for both net revenue and earnings per share as follows.

Our updated guidance for the entire year for net revenue is $2.1 billion to $2.2 billion with an associated diluted ongoing earnings per share of $2.40 to $2.60. This updated guidance for our earnings per share for the year does exclude that one-time deferred tax of $0.17 that Steve Burdick spoke to. It does include amortization -- intangible amortization, which is a noncash charge of $0.21 per share.

As Steve had mentioned before, we anticipate a 26% effective tax rate for the entire year. And it does exclude the contributions of any additional acquisitions, including those of NDY. We do expect NDY will close in the second quarter and we will update our guidance at the conclusion of that quarter, during our next call that would incorporate the addition of NDY to the company.

In summary, we had an excellent first quarter with double-digit growth and record revenue and earnings per share performance. Our strong water infrastructure programs, with the addition of hurricane recovery services, in key regions of the United States resulted in a 56% year-over-year growth for our state and local business in the quarter.

Future opportunities that result from the U.S. administration's $1.5 trillion infrastructure plan are going to provide significant additional upsides for our differentiated consulting and engineering services.

Now, clearly the desire for investment in building of U.S. infrastructure continues to have bipartisan interests and even support in the United States. The cycle of investment will likely involve a much more complex and innovative capital plan that is going to blend funding from multiple sources, not just the federal government. It's going to leverage smaller portions of federal funding and integrate new water funding for programs like WIFIA at the Environmental Protection Agency.

And our role as a consultant and trainer and an adviser puts us in an exact -- in excellent position to help our clients assess and navigate these major changes in infrastructure funding structure.

Tetra Tech's international public-private partnership training center located in Washington, D.C. has provided training to more than 30,000 government workers worldwide on P3 programs. And we're look -- we're looking forward to bringing this international expertise in P3 projects to the new focus that's emerging right here in the United States.

In addition, our commercial business could also have a significant upside opportunity for growth and margin expansion with the cyclical recovery in the oil and gas sector. And we've seen oil and gas now at $60 or greater per barrel in recent weeks. It's actually been quite encouraging for us.

So, in closing, we believe today that Tetra Tech is in a stronger strategic and financial position than ever before to allow us to capitalize on these opportunities.

And with that, I'd now like to open up the call for questions, operator. So, Eryn, let's open up for questions. We look forward to hearing from some of our analysts and shareholders.

[Operator]

The question-and-answer session will begin now. [Operator Instructions]

The first question comes from Sean Eastman.

[Sean Eastman, KeyBanc Capital Markets Inc.]

Congratulations on a good quarter. It sounds like everybody worked really hard, so I'm glad to see the numbers come through. I just wanted to start on the backlog trajectory. You did a good job characterizing what caused sort of the sequential downtick in the first quarter here.

I just wanted to get an impression from you on how you see the backlog trajectory unfolding through the year and whether you think the bidding environment's supporting backlog being up year-over-year as we exit 2018.

[Dan Batrack, Chairman, CEO, and President]

Thanks for that question, Sean. I think it's a really good question. We have seen ourselves with about a year and a half of sequential increases in backlog, which has been quite well received here. But let me say that sequentially we typically do see a downturn in backlog in our first quarter, which encompasses the months of October, November, and December.

A large component of our work with the U.S. federal government and U.S. state and local government typically sees less orders coming out really beginning around Thanksgiving through the end of the calendar year, which encompasses the holiday season and Christmas and New Year's.

So, actually that was -- normally, you'd see it be a bit lighter. In fact, historically you can always see the first quarter actually a slight reduction. And in fact, a better way to look at it is year-over-year, and we were 1% down year-over-year, yes. So that is not particularly unusual to us.

I will say that I was quite encouraged that most of our end markets' backlog actually went up. So, the backlog and the orders that we brought in, in the first quarter for state and local work here in the United States was up. Excluding oil and gas, our U.S. commercial work was up.

Our international work, excluding just the Canadian oil and gas, was up, so those were all up in the first quarter, which is actually unusually strong for us. And the only area that was a little bit flat was the U.S. federal government orders. And as many of you may be aware, there have been some continuing resolutions and negotiations on the budget.

We did not see a reduction in the number of orders we received, but what it came in with was a little bit smaller in size and a little bit shorter in duration more or less the time when they're continuing negotiations on the budget for 2018.

So, I do feel quite good about the number of opportunities out there. We have excellent visibility. Our contract capacity continues to be at a very high level in the company. We're up at just under $15 billion and we have a significant backlog carrying us -- calendar year 2018. So, I do think things are quite strong.

And with the exception of a very logical and expected correlation between the size and duration of task orders coming out of the government to correspond with the funding levels that have been agreed to at the executive and congress level, we think things look very strong.

[Sean Eastman, KeyBanc Capital Markets Inc.]

Really, really helpful. Second question for me. I just was hoping to -- you could characterize really the key swing factors in the updated guidance. Last quarter, you guys highlighted the emergency response work as being the most clear potential upside driver. We certainly saw that this quarter.

I'm just wondering, is there still a good chance the emergency response work continues to drive upside to where you guys have placed the outlook? Or are we kind of looking for oil and gas to start to pick up as the key driver at this point? Any help there would be great.

[Dan Batrack, Chairman, CEO, and President]

Good question that has been. There are a few different areas. The one thing I feel good about is that it's not just one or two areas that represent an area that could be a catalyst to drive us to the upside. We actually have quite a few.

So, one, I will say that our continued work on the emergency response activities and movement quickly to assessment of the damage would actually move us up to the upper end. So, no doubt state and local has the ability to continue to outperform and that would drive us to the upper end of our range.

I would say, number two, the actual federal government establishing a budget and providing funding to the Department of Defense and the other key federal clients would drive us to the upper end. We haven't actually included any significant upside and that certainly could happen.

I would say our U.S. commercial work continues to be strong. And we've actually -- we actually are forecasting a very modest to no increase in oil and gas, so if there's any cyclical upturn in that, that would move us to our upper end.

And finally buildings practice that I spoke of a moment ago is NDY joins us. With the collaboration between the existing practices we have in other areas, that would drive us up both in revenue and income, but this is -- because it is a high margin business and we're highly differentiated in that.

So, one nice thing sitting here is we have all of those as upside. And of course, the big one that may eclipse all of those is any type of meaningful movement on the U.S. federal infrastructure program that could bring three different funding sources in; federal government; state and local matching funds; and of course, private sector, which includes private capital, of which we may be one of the few firms in the entire United States that actually works closely with the federal government. We have the broadest state and local representation in contracts and working with the private sector that brings funding in, so that actually represents an upside that we've not factored into our guidance at this time.

So, it's kind of nice to be sitting here at the end of the first quarter and having that many different areas that would represent an upside to the range of our guidance and potentially even higher.

[Sean Eastman, KeyBanc Capital Markets Inc.]

Great. And I just want to sneak one last one in. On M&A, you guys have had a busy couple of months, obviously, but I'm just wondering here leverage sitting at very comfortable levels, extra cash coming in the door post tax reform.

I'm wondering if you guys are looking at anything on the larger side. Or is NDY kind of the profile we should be thinking about going forward? Any color on your updated thoughts here?

[Dan Batrack, Chairman, CEO, and President]

It's a really good question. And we've announced in the past 90 days three acquisitions, so people that have joined us. We've a small one which is highly technically differentiated to BridgeNet, which brings us proprietary IP, industry-leading technology and modeling for a noise and environmental impact. And that's a very small acquisition, and headcount measured in the tens of people.

We had a larger one, which was Glumac, 90 days ago, measured in the 300 to 400. And then we have NDY up at the 700 plus. And you'd say, what do they all have in common? One is, let's say, 10, one is 300, and one is 700. They're all industry leaders. They help us technically differentiate ourselves in the marketplace, and they lead with science.

And it is agnostic to size, so if we find the right partners based on scale, if they help differentiate us at the high end of the technical delivery model cycle, if they help differentiate us in a competitive landscape, we do not have size as a differentiator. We have plenty of capital available. And there are a few -- folks out there that we think would be great partners for us. We need to remain disciplined as we want our partners to.

So, I would not take that off the table, but it needs to be technically highly differentiated; and to make us a better company than we are today, as these last three just did. And they need to be in the right fiscal model that would be accretive to our shareholders in the first 12 months.

[Sean Eastman, KeyBanc Capital Markets Inc.]

Got it. Thank you so much for the helpful responses. Take care guys.

[Dan Batrack, Chairman, CEO, and President]

Thanks Sean.

[Operator]

Our next question comes from the line of Bobby Burleson from Canaccord.

[Dan Batrack, Chairman, CEO, and President]

Good morning Bobby.

[Robert Burleson, Canaccord Genuity, Inc.]

Hey, good morning. congratulations on strong results.

[Dan Batrack, Chairman, CEO, and President]

Thanks.

[Robert Burleson, Canaccord Genuity, Inc.]

So, I guess, Dan, just one for you, if we could dive a little bit more into NDY. I just wanted to get your thoughts on how that complements the Coffey business. Any synergies there, overlaps? How should we think about how that positions you geographically and with your capabilities?

[Dan Batrack, Chairman, CEO, and President]

NDY is just an absolutely excellent firm. Their headquarters is in Melbourne. The have major presence in the cities of Australia and New Zealand. And they also have a small presence in the Asia markets and also in the U.K.

The primary reason we were looking to bring them in, so I would say this was our criteria number one, was to actually have them co-joined to offer services globally with our practices that we have had here for 20 years on the East Coast of the United States and that Glumac had augmented on the West Coast. So, we had an entire U.S. and Canada presence on high end sustainable building design; and we were looking for a geographic presence so we could be in the same time zone, the same locations and the same cities along the Asia-Pacific, from New Zealand to Australia. And that's what NDY gave us. So, it makes us much more responsive. It gave us additional technical capabilities and expertise. And so the first move was to actually build the world's preeminent high end sustainable design infrastructure practice. We can support our global customers anywhere anytime with staff on the ground. So that was the number one reason.

But Coffey does not have a buildings practice; does not have a mechanical, electrical, and hydraulic engineering, often referred to as MEP, practice; does not have a net zero practice. And so there is zero technical overlap with the practice that we have in Coffey, zero. It's completely complementary and provides us new full-service offering to the clientele that we have there.

Now, I'm glad to say that most of the offices we have in common geographic footprints like Melbourne, like Sydney are full for us, so we've got a pretty full set of staff in our locations. So, synergies as to filling empty space with respect to the cost is not the reason we did this, although we will look at leverage on the back office and we do think there is some there.

Certainly, for ND&Y leverage buying power on a bigger platform is significant. And I think the decrease in the SG&A and particularly some sales will be a big complementary benefit because NDY can actually access the customers that we have; and I would say that -- when they join us that they have because they are all of ours from the first day they join us.

And so I expect significant revenue synergies. And there will be some cost synergies, but it's mostly in back office from our leverage buying, not from staffing or other facility reductions, in the near-term.

[Robert Burleson, Canaccord Genuity, Inc.]

Okay, great. Thank you. And then you described three kind of distinct stages in the disaster recovery. And I'm wondering, here in the U.S., what the timing might be, as you guys can tell at this point, in that transition from the first stage maybe to the second stage of -- where there's more consulting.

[Dan Batrack, Chairman, CEO, and President]

Yes, if you -- I would just reference, for those following along on the webcast or the prepared materials, on page 12 that shows those. Typically, the big surge is about a month after an activity happens to about six months as the big first push, which you saw in our first quarter. It began at the end of our last fiscal year and certainly was quite prominent during our first quarter. They will continue in a slightly lower rate in the second quarter.

They do then go through a bit of a lull, where you go from the emergency response assessment monitoring. And then you move to damage assessment, which includes structural, which includes the civil work, which includes of course erosion, all of the different things that Tetra Tech is a leader in.

Floods are caused by water and actually we do have probably the preeminent water practice on both civil engineering treatment practice, shoreline protection. That, we expect to start about in a year. Some of this work has actually ramped up for us already from events that had happened a year ago.

So, these actually -- while we're working on the current set of hurricanes and fires, we're actually beginning in phase two on items that have happened a year or two ago. So, these things actually become overlapping and I would expect the damage assessment and consulting from these most recent events would probably be a few quarters out.

[Robert Burleson, Canaccord Genuity, Inc.]

Okay, great. And just last quick one. Considering your P3 expertise and the kind of nature of how a federal infrastructure plan might be financed, do you consider yourselves fairly early cycle in terms of getting involved with the training? And will you have good visibility on how that's unfolding?

[Dan Batrack, Chairman, CEO, and President]

Yes. And I think the one thing that should, though, not be mischaracterized: Early training will mean lots of projects, lots of clients, smaller dollars, good margins, but it's where we will get at the front end of the consulting training and actually preparation of the processes, systems to put them in place.

The larger dollars when -- will be when these projects actually go to implementation. And we would look to be a member of the execution team in the design capacity, which by participating in a lot of projects upfront we can actually pick the ones that we can bring the most value to our clients and our partners too.

So, yes, but as we begin into training, we'll report it out. But it's not big, big dollars in training. It's -- it does add up to quite a reasonable number, but it's lots of little numbers collectively add up to something that will help move the needle for us.

[Robert Burleson, Canaccord Genuity, Inc.]

Great. Thanks. And congratulations once again.

[Dan Batrack, Chairman, CEO, and President]

Great. Thanks Bobby.

[Operator]

And our next question comes from Justin Hauke from Baird.

[Justin Hauke, Robert W. Baird & Co.]

Yes, thanks. I guess, just to help quantify a little bit. I mean obviously the restoration was a big part of the quarter. And it sounds like that could continue. What was the contribution in the quarter? And is there any expectation, I just wanted to clarify, that -- for the guidance for the remaining quarters?

[Dan Batrack, Chairman, CEO, and President]

It's a good question, Justin. Good morning. The contribution to our net revenue in the quarter was between $20 million and $25 million. And so the part I would want to make a note, that even if you took that off, we still would have been at or above the high end of our guidance.

So, the part I don't want to leave an impression on this call with is that the beat in the performance was driven exclusively by the additional emergency response and assistance work. That helped push it not only to beat an all-time record, but to beat it significantly.

So, about for the number for the quarter, it's $20 million to $25 million net revenue. And we've actually included a deminimus amount for the remainder quarters because we're looking forward to transition from the very early monitoring and environmental response to damage assessment. Until we have more visibility, we're not including in our guidance any material contribution.

[Justin Hauke, Robert W. Baird & Co.]

Great. That's helpful. I guess the next question, maybe for Steve, just the tax rate, the 26% for 2018. I'd hate to ask about 2019, but just to make sure that everyone is on the same page, would you expect that to be about the same year-over-year because you'll get the extra quarter pickup? Or is it going to go higher because the 28% is more the effect of the 2Q through 4Q quarters? Or what were you thinking?

[Steven Burdick, EVP and CFO]

Yes, so, your initial statement of a 26% rate in 2019 is an amount that you can probably go ahead and use for your models. That's pretty close.

[Justin Hauke, Robert W. Baird & Co.]

Great. And then maybe just one last one, on the slower federal awards and I appreciate all the color on that. It makes sense. The sequential reason for it was the budget year. I guess the question is we've been under kind of a CR environment for a while. And I'm just curious, was it -- was the impact broad based, or was it more in defense because of the sequester? Or maybe just characterize where those smaller awards were?

[Dan Batrack, Chairman, CEO, and President]

Across the Board, Justin, we went, and we took it apart completely. We took a look at our international development work, the USAID and the State Department. We took a look at our defense work at all the major branches, Army, Air Force, Navy; even on the sort of defense agencies, the others. So, we took a look at our civilian agencies, corps of engineers, Federal Aviation Administration, EPA.

Actually, the reduction in the overall volume, meaning the dollar amount, was roughly equal across all of those. It was not biased toward any one particular area. And the actual number of orders that came in were about the same as usual. It's just the size and the duration were smaller both in the length of time and in the dollar amount.

And of course, we took an opportunity to talk to our project managers. We talked to their counterparts. And the response essentially was the same; is, until we actually have a number and it's been authorized and approved by the executive branch or through the government, we're just being cautious with respect to how much we actually commit right now.

So, as soon as that gets approved, we expect to be able to get moving on that. And certainly it gives us a feeling that there is some pent-up requirement to have this released, so the higher you -- the more you hold back the requirements to get the work, but don't disappear, it just builds up.

And so there could be at some point a bit of a catching-up of what wasn't done in the first quarter and now we're into February. They've been -- need to get that done. So, the government hasn't, as of today, shut down. They're not stopping performing the work. It's just delayed. So, I don't see this as a long-term issue, just an artifact of this negotiation process.

[Justin Hauke, Robert W. Baird & Co.]

Okay, great. That's all helpful.

[Dan Batrack, Chairman, CEO, and President]

Okay. Thank you, Justin.

[Operator]

Our next question comes from the line of Noelle Dilts from Stifel.

[Noelle Dilts, Stifel, Nicolaus & Co., Inc.]

Hi, good morning.

[Dan Batrack, Chairman, CEO, and President]

Good morning Noelle.

[Noelle Dilts, Stifel, Nicolaus & Co., Inc.]

First, just on the Canadian oil and gas business, I know you gave some clarification there, but just given that I think there was maybe a little bit of a mismodeling issue in this -- as it relates to the second quarter, is there any way you could kind of walk us through what the revenues associated with the large pipeline project looked like last year so we can kind of better assess the year-over-year headwind?

[Dan Batrack, Chairman, CEO, and President]

Yes, I think that's -- I'm actually glad you asked that because I think there has been some forecasts out in the marketplace that don't appreciate the difference in Q2 last year versus Q2 this year. So, in Canada, year-over-year, we'll see a reduction of 80% to 90% from last year to this year.

Last year, we were -- on a net revenue basis, we're up around $45 million to $50 million. And this year, we expect to be below five and so that delta is between $40 million to $45 million headwind in that one marketplace, that one area.

And I think, if you calculate that and you go through, it creates a quite a significant headwind. And if you actually take into account our guidance for the second quarter and adjust it for just that one year-on-year comparison, you'll find that we're actually up across the Board on essentially everything.

And so I think that does need to be taken into account. We did take that into account in providing both our second quarter guidance on revenue and income; and also, and I'll repeat again, increasing the 2018 full year.

So, this -- we do believe, notwithstanding this very steep -- in the second quarter will be our largest year-on-year comparison headwind that we have in the company in any area. And it's one thing I'm looking forward to later in the third and fourth quarter because the comps actually get significantly better. And even if oil, gas doesn't come back one iota for us, we're going to look a lot better in late Q3 and certainly Q4 just because year-on-year comps have changed.

[Noelle Dilts, Stifel, Nicolaus & Co., Inc.]

Okay. And then, I mean, how -- are you seeing any kind of significant signs of improvement in that market around either projects activity? Or I know pricing has been really difficult. I know your commentary has been sort of that you're not expecting much improvement, but any signs of life, I would say?

[Dan Batrack, Chairman, CEO, and President]

At the risk of tempting fate. Yes, we are and it's mostly around the front end. And I would say that the work that drove the really big revenues in past years was a very large turnkey project in Canada. We're not seeing ourselves design, build or EPC or even big EPCM projects, but we are seeing upfront studies, routing; technical evaluation; different types of permit -- even permitting work, which is a -- which is the next step toward actually seeing these go through; and even preliminary design projects on the midstream.

So, I would say there are smaller projects. There's actually a significant larger number of them. So, yes, we are seeing indications that it will come back, but I'd like to actually see those numbers increase before we make a determination that we're moved back up the cycle.

[Noelle Dilts, Stifel, Nicolaus & Co., Inc.]

Okay. And then just to switch gears a little bit. You've discussed this to some extent today on the call, but could we dig a little bit more deeply into what you're seeing both in terms of trends with USAID and also international aid work?

I know that's an area that's been of some concern to folks just kind of given a change in the administration, so could you just speak to how you're thinking about that moving forward?

[Dan Batrack, Chairman, CEO, and President]

Well, it has been a very stable business for us. It's -- notwithstanding significant rhetoric, it actually has been very stable. The projects typically have been awarded for longer terms, so we typically have longer visibility on these projects. And we've not seen anything that has made it more volatile up or down, so I would say it's one of our more stable, predictable areas.

Of course, with a lot of commentary coming from many different areas, it's an area that we've looked at quite closely. In fact, they've -- I think some of our folks are -- say, really, another review? We had one two days ago. But no, it's been very resilient.

And I would say that's not only in the U.S. It's also been the case in the U.K. with DFID and in Australia with DFAT. And so it's really been -- those are our three primary areas, the U.S., U.K. and Australia. And I would say they've been quite stable, which may sound inconsistent with the rhetoric, but that's what we have seen through this past period.

[Noelle Dilts, Stifel, Nicolaus & Co., Inc.]

Perfect. Thank you.

[Dan Batrack, Chairman, CEO, and President]

Great. Thank you, Noelle.

[Operator]

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

[Dan Batrack, Chairman, CEO, and President]

Thank you very much, Eryn. And I want to thank every one of you for your questions, your insight into the business and your interest in Tetra Tech. And we're looking at keeping very busy; and not seeing that the first quarter, while it was a record, is our best quarter. It was just our last quarter. And we're looking forward to a good 2018. And I look forward to speaking to all of you again next quarter. Thank you very much.