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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. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the Investors section of its website at www.tetratech.com.
This call is being recorded at the request of Tetra Tech and this broadcast is the copyrighted property of Tetra Tech. Any rebroadcast of this information in whole or part, without the prior written permission of Tetra Tech, is prohibited.
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 then will open up call for questions.
I would like to direct your attention to the Safe Harbor statement on Page 1 of today's presentation. Today's discussion contains forward-looking statements about future growth and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties including the risks described in Tetra Tech's periodic reports filed with the SEC. Except as required by law, Tetra Tech takes no obligation to update its 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 Investors section of Tetra Tech's website. [Operator Instructions]
With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.
Great, thank you, very much, Dana, and good morning. Welcome to our quarterly earnings conference call. Tetra Tech achieved its best quarterly results in the company's history, with all-time high quarterly net revenue, earnings per share, cash from operations and we ended the quarter with the highest backlog ever in the history of the company. These results significantly exceeded our expectations on what we believed was a very aggressive plan we had coming into the quarter and was actually the result of a broad-based performance across all of our operations.
Our leading with science, solution oriented approach to consulting and with our diverse portfolio of clients is resulting in both a competitive advantage and strong financial performance.
I will now provide an overview of our quarterly results and the business outlook while Steve Burdick, our Chief Financial Officer, will provide additional details on our financial performance and our capital allocation.
We had an excellent second quarter, achieving record highs for second quarter revenue, net revenue, operating income and earnings per share for our shareholders. I'll refer here, if you're following along in our webcast presentation, to the adjusted numbers shown on the slide, which better reflects our operational performance without the nonrecurring items such as the benefit from tax, which Steve Burdick will discuss later in this phone call.
For our second quarter, our revenue was $727 million. Our net revenue was $590 million, up organically 11% from last year, which generated an operating income of $55 million, which is up 21% from last year. This resulted in an adjusted diluted earnings per share from operations of $0.70 for the quarter, up 30% from the prior year.
On a GAAP basis, we achieved $1 per share in diluted earnings per share for the first time, driven by a favorable tax benefit associated with our acquisition of Coffey from three years ago. And finally, our backlog ended the quarter at $2,814 million which is up 12% year-on-year, another all-time high for the company and sequentially up for the third consecutive quarter.
I'd now like to provide an overview of our performance by our end customers. Our second quarter record performance was led by growth across all of our end markets, especially International, our United States State and Local work and Commercial and Environmental work in building design services. Our International net revenue was 31% of our business and up 23% year-over-year
International growth for the quarter was driven by our Canadian oil and gas winter pipeline projects and increases in sustainable infrastructure design and renewable energy consulting. US Commercial was 24% of our net revenue and was up 5% year-over-year. This growth was primarily due to environmental work for our commercial clients as well as services for our renewable energy and high-performance building design clients.
Work for our US Federal clients was 28% of our net revenues for the quarter and was flat compared to last year. However, our Federal work, our revenues would have been up 9% year-on-year if we adjusted for the second quarter impacts associated with the partial government shutdown that took place during the month of January.
Our United States State and Local revenues were 17% of our business in the quarter, up 39% year-over-year due to an increase in our disaster response and recovery planning services and broad-based water infrastructure work.
I'd now like to present our performance by our business segments. The GSG business group delivered another strong quarter, increasing revenues by 9% year-over-year while delivering a margin of 14.2%, up 240 basis points from the second quarter last year. This performance was principally driven by continued strength in municipal water infrastructure work, augmented by both disaster response work and the growing disaster recovery planning practice that we have.
For the second quarter, the CIG business group's net revenue grew by 20%. About half of this growth was driven by the Canadian oil and gas pipeline projects that we had during the winter, which, due to the nature of this very competitive market, carried very low margins, while the other half of the growth was driven by commercial clients in our high-performance building design practice.
Our backlog, as we completed our second quarter, is at just over $2.8 billion, an all-time record high for us, up 12% year-over-year and our third consecutive quarter of an increase.
As you can see on this slide, our second quarter had orders that were broadly distributed across our commercial, federal and local government clients worldwide. Notably in the quarter, we were awarded task orders to perform international development services, to support our United States civilian and defense sectors and execute environmental programs for our commercial clients.
We were also awarded a new $300 million indefinite delivery, indefinite quantity contract with NASA for Architectural and Engineering services, which we expect to be quite active in task orders over this coming year.
Now I'd like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present the details of our financials in the quarter. Steve?
Thank you, Dan. So as Dan just highlighted, net revenue, operating income, cash flows and earnings per share for the second quarter 2019 were among the best quarterly results in the history of Tetra Tech. So with that, I would like to review our GAAP results.
Fiscal 2019 second quarter revenue of $723 million increased when compared to the revenue of $700 million in the second quarter of fiscal 2018. Likewise, the fiscal 2019 second quarter net revenue of $585 million increased when compared to the net revenue of $533 million in the second quarter of fiscal 2018.
This top line increase resulted organically primarily from, one, our US focused environmental and municipal water consulting work; second, our international sustainable buildings infrastructure efforts; and third, the disaster response recovery activities.
Net revenue increased at a higher pace when compared to gross revenue due to the lower subcontracting activity for various field services. And as previously discussed, revenue and net revenue in fiscal 2019 reflects the fiscal 2018 third quarter divestiture of our field services operations. And taking this divestiture into account, on a pro forma basis, we saw an increase in revenue of 7% and net revenue of double digits at 14%.
We generated an 11% increase in our quarterly operating income year-over-year from $43 million to $48 million. This increase in operating income was driven by the revenue growth. And after excluding the results from the wind down of our RCM operation, our adjusted operating income is up about 21% from the prior year, as we did have some noncash charges to reflect, the current status on a few remaining claims to be resolved.
On a GAAP basis, our earnings per share was $1 per share, which compares favorably to the prior year GAAP EPS of $0.51.
Our adjusted EPS of $0.70 per share this year was up 30% over last year, primarily due to the increase in our net income. The most significant item that makes up the net income delta between our GAAP and adjusted EPS is a nonrecurring tax benefit, which requires a bit more explanation.
So for those of you following on the slide presentation, the next page reconciles our GAAP and adjusted results from earnings per share and summarizes the rationale for this tax benefit.
In the second quarter of fiscal 2016, Tetra Tech acquired Coffey International. At the time, Coffey had multiple years of losses. And because of those historical losses, Coffey had accumulated about $30 million of tax net operating losses, also known as an NOL.
For GAAP accounting processes, we could not recognize this NOL as a tax asset at the time of the acquisition and thus, we recorded an accounting reserve for this NOL. For valuation purposes relative to this Coffey acquisition, the NOL was a potential future benefit and represented the equivalent of about 20% reduction to the purchase price but only if we could turn Coffey into a consistent profitable operation and, thus, a taxpayer.
Also taking this NOL tax benefit into consideration for the acquisition, the purchase price multiple that was paid was just under 5 times EBITDA.
So our strategy in the acquisition of Coffey was to integrate them, apply overhead synergies and implement operational improvements so that we could bring their operations in line with Tetra Tech's margins. We have been successful in executing this strategy and as a result, we have utilized about $8 million of the NOL tax benefit since the time of the acquisition.
And looking back, since we've had three years of consistent profitability, GAAP accounting rules now require us to recognize the remaining $22 million of NOLs in the second quarter of fiscal 2019, and this $22 million is equivalent to about $0.39 per share. Going forward, we will have a cash benefit of approximately $22 million to be realized from this NOL.
For the second quarter, cash flow generated from operations totaled $114.6 million. This compares favorably to the prior year cash flows of $81.3 million by about $33 million, an increase of 41%. The cash generated was the highest amount ever for a single quarter. The improved cash flow was a result of our continued focus on collection of accounts receivable and management of our working capital.
And among the many benefits at this cash improvement was a pay down of debt. This is evident in the decrease of our net debt, which totaled $137.8 million as this is a decrease from $275.8 million a year ago.
Lastly, our days sales outstanding decreased to 78.2 days as of the second quarter. This is an improvement of 14.2 days from last year or the equivalent of about $100 million in collections and this brings us significantly closer to our longer-term DSO target of 75 days or less.
Now, turning to our long-term capital allocation strategy, it calls for a balance of investing in growth for the company, managing the balance sheet and returning cash to our shareholders. So our continued strong annualized operating cash flows and especially the $115 million of operating cash flow in the second quarter allows us to continue to do just that.
We currently have a net debt-to-EBITDA ratio of about 0.6 times, and our debt-to-equity ratio is at 14%. Even with these relatively lower debt factors, we've been able to invest in strategic areas while growing the top and bottom lines. To that end, we completed the acquisition of eGlobalTech at the end of the second quarter, which Dan will speak to later.
Moreover, for the benefit of our shareholders, we paid out $6.6 million in dividends in the second quarter. And just this week, our Board of Directors approved our 21st consecutive dividend, which will be paid at the end of this month in May.
Additionally, I'm proud to announce that the Board of Directors has also approved a 25% increase in the quarterly dividend rate to $0.15 per share. So in addition to these dividend payments to shareholders, we also completed $25 million in share repurchases in the second quarter.
And on a go-forward basis, we will continue to utilize the $175 million remaining under the approved stock purchase program. So I'm very pleased to share these outstanding results with you all at the end of the second quarter, and I want to thank you for your time today.
I'll now hand the call back over to Dan.
Great, thank you very much, Steve. As we enter the third quarter of our fiscal year 2019, we see our strategy is driving growth across all 4 of our client sectors. In fiscal year 2019, we expect a 10% growth for our international work in Canada, the United Kingdom and Asia-Pacific region. This growth will be driven by our regional infrastructure services, high-performance building design services and industrial consulting in engineering work.
Our US State and Local revenues is expected to grow at a 15% rate, supported by a combination of municipal water and ongoing disaster response and recovery planning work. We could actually exceed this growth rate materially if we receive additional incremental funding for disaster response services at sites that we're currently working on right now.
Our US Commercial work is expected to grow at a 5% rate with a combination of growth in high-end water treatment, environmental cleanup programs, renewable energy and solid waste consulting. We expect our US Federal work to grow at 5% in 2019, inclusive of the impact of the government shutdown that took place earlier this year.
Now as we have discussed previously, the frequency and scale of natural disasters affecting the United States has increased significantly over this past decade. In each of the last eight years, the United States was struck by eight or more billion-dollar disasters each year.
Now as communities rebuild after these catastrophic events, Tetra Tech supports our clients throughout three phases of recovery. The first phase or the work that we do first is the early response and monitoring assessment work. The second phase, which we're actually building quite quickly, is the recovery planning and program management. And it's finally followed by the third phase, which is actually the design of these long-term solutions for the infrastructure that will be built at these different locations.
Our mission as a company is to help our clients respond and manage for the long-term and create more resilient infrastructure that will withstand the future events and the impacts of storms and fires and floods or any other event.
Now we are very active in the second phase of the recovery from the three hurricanes that struck the United States in late 2017. Tetra Tech does have a competitive advantage in this market through our network of contracts, proprietary software systems and a very highly trained response and recovery team network of staff that we have on board. We increasingly see this market as a comprehensive service line with sustainable revenues, with additional surges of emergency response activity when each future event does take place.
Another growth market for us is in data analytics and associated information technology services. Tetra Tech was actually founded on the use of analytics in operations research to solve water and environmental problems. Our strategic growth planning focuses on the linkage between subject matter or domain expertise and the ability to leverage advances in technology. We're very pleased to announce a significant step forward in our growth strategy with the addition of eGlobalTech to our data analytics and IT practice. They exemplify the type of company we are looking to add to our team.
eGlobalTech brings a team of high end IT practitioners with skills in artificial intelligence, data analytics, agile software development and cloud migration. They actually have an incubator lab that provides an ideal platform for us here at Tetra Tech to collectively test and pilot new applications for our clients.
eGlobalTech also brings us relationships with US Federal clients that we really don't have much presence with, such as the Department of Health and Human Services and the Department of Homeland Security. eGlobalTech joins our federal IT team, advancing our strategy both in the core IT services and in domain knowledge with key clients.
Our hub-and-spoke strategy, as shown on the slide, is particularly effective in this rapidly changing field of data analytics. Successful application of new technologies, such as artificial intelligence and machine learning, is predicated on deep domain knowledge to provide essential insights into custom solutions that are required for our clients in solving these very unique problems.
Sustainability is a core value for Tetra Tech, both in the work we do and how we run our operations. Our commitment to sustainability begins with our Board of Directors, myself and the management team at Tetra Tech and extends completely throughout our global operations. Each year, on Earth Day, this year it was April 26, just over a week ago, we released our annual report on sustainability and I'd like to provide you with just a few highlights.
Our largest impact comes from the projects that we actually work on, which benefits the lives of millions of people around the world. Tetra Tech's projects provides safe drinking water supplies, helps communities recover from hurricanes and teaches women in developing countries into adapting their engineering skills and helps them actually enter the workforce in this technical capacities.
We also are committed to sustainability and how we run our internal operations. We've reduced our greenhouse gas emissions by over 55% and have adopted enterprise-wide electronic systems that enhance our productivity by eliminating paper and other consumable products. And most importantly, our sustainability program reinforces Tetra Tech's core values that extend to our staff, our partners and our vendors.
We are committed to providing a work environment where all employees are valued for their contributions and our global workforce reflects the diversity of our clients and the communities in which we work.
I'd now like to present our guidance for the third quarter and an updated guidance for all of fiscal year 2019. Our guidance is as follows. For the third quarter of the year, our net revenue guidance is for a revenue of $575 million to $625 million, with an associated adjusted diluted earnings per share range of $0.75 to $0.80.
The updated guidance here at Tetra Tech for all of fiscal year 2019 for net revenue is a range of $2.3 billion to $2.4 billion, with an associated adjusted diluted earnings per share of $2.95 to $3.05. The assumptions that are associated with this guidance are that this guidance does include $11 million of intangible amortization that's included in this guidance. We do estimate a 24% effective tax rate for all of fiscal year 2019, approximately 56 million average diluted shares outstanding and, as in past guidance presentations, it does exclude contributions from future acquisitions.
In summary, we had an excellent second quarter with record net revenue, earnings per share and cash from operations. Our backlog reached an all-time high driven by orders across a broad base of our business. And I'm very pleased with the first half of our fiscal year.
Our strategy focuses on high-end consulting services and is providing us a competitive advantage and increased opportunities for us in the markets that we are serving in. This has given us an excellent visibility and very high confidence as we complete fiscal year 2019 and prepare for fiscal year 2020.
And with that, I'd now like to open up the call for questions. Dana?
The question-and-answer session will begin now. [Operator Instructions] Our first question comes from the line of Tahira Afzal with KeyBanc Capital Markets. Please proceed with your question.
Thank you and Dan, congratulations on a very good quarter again.
Thank you, Tahira.
Dan, it seems like some of your other peers - you are moving even more so to more complex IT solutions. Can you sort of step back and kind of give us a breakup now of - as you look at your business, you've always been more high in value versus a lot of your more traditionally E&C peers. But if you look at data analytics solutions in this really high-end specialized bets, can you really give us a breakup of how much that is of your business right now and how much of that is concentrated with you in water solutions?
Well, it's a good question. We more and more have data analytics embedded in the actual solutions with the work that we're providing to our clients. So it does become a bit more difficult to call out exactly what practice lines we have, that is, pure IT and not embedded with technical, scientific or engineering solutions to our clients. We do have probably somewhere in the order of $300 million, in what I would call just IT services, which does give us a platform for developing technologies and different items. We do have, if you take a look at on our presentation slide, where we outlined eGlobalTech, we do have about $2 billion in IT specific contracts within Tetra Tech that we would refer to it as contract capacity.
So of our $16 billion, about $2 billion is dedicated to just IT services. I would say about 15% of that is in our annual revenues. But I would also say that the remaining $14 billion of contract capacity we have is using more and more of the capabilities within the IT services and we are using it as a differentiator. It's making us more efficient, it's actually making us smarter in providing new services that allow us to offset staffing constrictions that we've had. We're moving more to technology solutions. And so I would say that the service number at around $300 million a year is not fully representative of how it's embedded into our business.
Got it and as a follow-up to that, Dan, could you flex your utilization rate even more? I know you guys are running at a pretty high utilization rate, but is there a bit more room for flex and hence, margin upside as you do incorporate these in? And then second part of this question, you've got - some of your peers have started to change their classification because they're becoming more an IT solutions company, what's been really traditional industrial. Dan, you've always been more IT solutions to begin with. Any thoughts around how you classify yourselves?
Well, I don't like to classify Tetra Tech. I know some have classified us as E&C, as engineering and construction. I believe we are completely a consulting and engineering and what - we are not an IT company, but we are a consulting and engineering firm focused on water, environment, resource managements that utilize IT as a differentiator. So we use these IT, including artificial intelligence, machine learning, we use cloud-based applications, including incubator labs to actually further and differentiate ourselves in the technical capacity of scientists and engineers. And so I would say, we are a scientific engineering consulting and engineering firm that utilizes IT, not an IT firm that might be used to support other technical capacities.
With respect to will it help us increase utilization? Yes. But I think it will actually help us to do is complete our projects more efficiently and provide additional margin embedded in the projects. It's not about Tetra Tech adding more staff. It's about adding the right staff that are actually - can bring technologically, both with respect to use of IT, and technically, with respect to their domain expertise to our projects. And so we do have more flex, in other words, I call it leverage of our workforce, 14% is really good for the second quarter with the GSG group, but we can do better.
And we can definitely do better in CIG, and I think you're going to see it in the second half with, respect to utilization being part of and its workflow. You'll watch our CIG margins go up to –well into the double digits. I expect we'll be 10%, 10.5%, 11% for the second half, and a lot of that's driven by utilization. So yes, we have more flex in the utilization and yes, we use IT as a differentiation in the marketplace.
Thanks a lot Dan.
Great, thank you, Tahira.
Our next question comes from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.
Hey, great. Thanks for taking my question. I guess I want to talk about your disaster restoration franchise here, which has been a really nice growth driver for you guys for a while now. And it's interesting because, I think, a lot of investors maybe think of disaster as a kind of a onetime event, or something and you got to clean it up right away, to get the lights on or whatever else. But your business has proven to be different than that, Dan.
I guess my question is this. You mentioned in your outlook commentary, in your State and Local business has a 15% outlook kind of baked in for the year. You said it could be materially higher if another - if you got more work for disaster work. So I guess my question specifically is do you need another disaster to happen? Or have the disasters happened and you're waiting for incremental task orders that you already - under contracts that you already have to get that upside to your State and Local forecast?
Yes. It's a really good question, Andy. We would not need any other event, in other words, no additional disaster, fire, flood, earthquake, anything, in order to actually significantly increase the revenue in both our third and fourth quarters. So we are working actively on events that took place this past year, and we do have a number of task orders and we anticipate very well could mobilize additional staff on work that we already have. And in fact, these are on sites that we are currently working on today. So it's not can we break into or can we get that have some success? It would just be incremental task orders that, in fact, are even pending and, in fact, to quantify what type of increase we could have.
I know on the presentation materials, I've indicated we have about a 15% growth rate in State and Local, I know we were at 39% this past quarter. We could have similar growth rates in the third and fourth quarter. It could easily be 25%, 30%, 35% if we get mobilized on additional work. So I felt a little bit hesitant to actually include those unless we were already in the field, but of course, guidance is something that is predictive of the future, so we do have to take our best estimate. But it felt like putting a forecast of 30% or better for State and Local was a bit of a reach especially when the underlying business that I would consider representative or indicative of what we are achieving on our underlying business at 15% is actually quite strong. But it certainly - don't be surprised if you see 30% or better in State and Local growth the next couple of quarters.
Great, very helpful on that one, I guess my follow-up question has to do with the resurgence that you saw, at least on a revenue basis in your, I think you called it your winter pipeline work in Canada. I think you mentioned that it's still very competitive there. Obviously this is a market that was really good and then you had the oil bust, which meant not as good. It's good to see it coming back. But I guess if the profitability isn't coming with it and you are taking - this is, I think, really one of the one and only areas where you're doing kind of real construction type of work inside the Tetra Tech portfolio, I wanted to kind of garner your thoughts here strategically on how it fits or doesn't fit with Tetra Tech's future.
Well, I think it's a great observation, Andy. This is the last area where we're doing actually full turnkey including construction work. A lot of the activities we saw in the midstream are the pipeline work in Canada is really - is analogous to oil sands for the most part, was contracted up there on a turnkey basis. So we did invest in and do still have turnkey capability. It is very aggressive. It's expensive to produce oil in that region of the world, relatively. And so it's put enormous pressures on pricing. We did do about $25 million of incremental oil and gas pipeline work in Canada in the second quarter, the winter quarter when it normally takes place. It was essentially at a very de minimis margins, just above breakeven. It was good for us.
It actually covered staffing and overhead costs and allocations and equipment and other items. So it did make sense. But we do have to evaluate is that market going to come back. It is actually going to pick up. And I don't want to actually call out the oil and gas Canadian construction activities. I will say it is a bit of an outlier, but we do look at our entire portfolio on an ongoing basis to determine, has it become commoditized or is that end market actually not going to be favorable over a longer term. We did make that determination a year ago in the summer, with respect to the field services. It was a low-margin business, it had become commoditized. It was still profitable, but we decided it would actually fit better with another entity. So it is something that we'll continue to look at, but we don't have actually a definitive update on that today.
All very fair, thank you for your time.
Great, thank you, Andy.
[Operator Instructions] Our next question comes from the line of Noelle Dilts with Stifel. Please proceed with your question.
Hi, thanks. Good morning. So I was just curious if you could give us some thoughts on how eGlobalTech is impacting your guidance for the year, and if there's any sort of dilutive impact as we head into the third quarter?
Well, they joined us right at the beginning of the third quarter, technically the last day. They will impact, and the reason we increased our guidance from 2% to 5% was to be inclusive of the revenues that will be contributed from eGlobalTech. Now we're only going to have them on board for six months. They are an exceptional workforce. There's about 300 staff there at eGlobalTech that have joined us, so it's not insignificant. But they're almost 100% Federal, that's what accounted for the increase from 2% to 5% on our outlook on Federal for the year. But with respect to being dilutive, they are not dilutive on an EPS basis for the year as in our other acquisitions.
We would call it relatively neutral on a GAAP basis. And the reason is we, of course, include in that the intangible amortization and interest expense and transaction costs and other items. But even with those included, it will not be dilutive in our 2019 and as we've said in the past, that we have remained quite disciplined. We think that, for our shareholders, acquisitions that join us, it should be not dilutive, which, of course, I - someone would say, does that mean then accretive, I would say the first year, because of all of the noncash charges such as intangible amortization and other items, typically, it's just a little better than breakeven. But they are not dilutive in 2019.
Thank you, very helpful. And my second question, I understand that in your discussions around disaster response and planning that that's becoming - you're seeing more of that type of work. But is there any way you could give us a sense of, if you were to look at some of the disaster response Phase 1 that you're doing here in fiscal '19, how much that is shorter term in nature? And should we not, maybe count on recurring into 2020?
Now we do we look at that. We do look at that and that's why we included the 15% growth instead of some other number on our State and Local. So we've actually tried to include that in our outlook. I would say if you went back two years ago, it would be 100% of the revenues coming from disaster associated activities would have been upfront response activities, which would come and have, typically execution periods of one month to one year. That has actually changed. I would say it's still about, probably two thirds of that still in the upfront disaster response activity. But we've actually grown it to about a third of that business is now what I referred to as Phase 2, which is the recovery and planning work and the program management. So it's gone from nothing to something. And that work typically has - runs from - begins about a year out and runs from one to three years.
So even without an event taking place at all, we never have another storm, we never have another disaster, we never have another impact; we still have work that would run out three years. And then even at the conclusion of that, then we would move to actually the detailed design of activities. And we did a lot of that work in Katrina, such as the inner harbor navigation channel, a $1 billion-plus storm surge structure. So there's a partitioning of it. There is some that which is upfront response work, although as I'd indicated in my prepared remarks, a minimum of eight storms per year in each of the last eight years, it is a bit - it's becoming statistically more relevant that it's unlikely there will be zero next year. So we are not including it as something we expect, but to say it's completely not recurring may not necessarily be fully descriptive of what we are seeing in the marketplace or actually in the environment.
Okay, thank you very much.
Thank you, Noelle.
Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
Hi, thank you for taking my question and thank you very much for all the detail on the tax benefit from Coffey. It shows a lot of progress there. Steve, a couple of quick financial questions, too. I see on the release, you note a promised issuance of a promissory note. Is that based on the timing of closing eGlobal or what is that?
Yeah, so we closed the acquisition on the last day of the quarter, which was a Sunday. And so for that reason and the tax planning reasons, we had a note that was outstanding and that was paid out two days later.
Okay. So then it will be a cash outflow, actually for the current quarter. Is that right?
In the third quarter, yes.
Okay and then thank you. And there wasn't earn-out expense, but there was a cash inflow slightly of $3.5 million. Was that just related to some of the promissory note accounting and at the end of the quarter?
So I think - well, there's two things. One is, yes, we had some earn-out adjustments. Some of the earlier acquisitions from a few years verse ago, but then that cash amount that you're looking at, the $3.5 million, that's just the net cash that came onto our balance sheet at the end of the quarter for eGlobalTech.
Okay. Okay. And then thank you for the detail on the oil and gas margins, and I understand that. And then that was a good clarification on the comment. Is most of the oil and gas work you can do, going forward, still include some of that turnkey construction capability? Or are you still doing some permitting and design work as well within oil and gas?
Yeah, in the US the work is really involved with the slowdown in the oil and gas market. It's moved to - predominantly our revenues are coming here in the United States. In the U.S., we are 100% professional services, which is environmental permitting, site evaluation, geotech and the detailed design work. And so, that work is actually growing at about upper single digits, so we're sort of at 8%, 9% growth rate and the margins are actually consistent with what we would see in our more normal business of professional services.
In Canada, a portion of it is in construction, which has been the lower margin, but we also have a professional design and permitting services work that is smaller in Canada but actually doing well. So the actual pipeline construction is a small portion and its relative contribution is largest in Q2, or our winter quarter. And you'll see in our Q3 and Q4 it becomes much more de minimis, and our revenues in oil and gas are represented by our professional services; permitting, right of way, design services and those all carry much more representative margins of the rest of the company.
Okay, great. Thank you for that follow up detail.
Great, thank you, Tate.
Operator
Our next question comes from the line of Marc Riddick with Sidoti. Please proceed with your question.
Hi, good morning.
Good morning Marc.
I was wondering if you could update us on the use on contract capacity and what portion of that might be attributable to the recent acquisition? And then I have a follow-up on that.
Our total contract capacity in the company is about $16 billion, and what we refer to that is where we have contracts that have a collective ceiling at the contracts. The $2.8 billion that we list in our backlog is actually the amount of that contract capacity that has been awarded, contracted, funded and authorized us for us to go do the work. So it's this the side of turning into revenue. Because of that definition of our backlog, I guess I could even use - I was going to say it's uncommon, but this really would be rare that we would see any de-obligation because we're already out in the field working on these projects, or in the design.
Now with respect to the contract capacity that we have, it's relatively small with respect to the amount of backlog that was contributed, but their contract capacity is - they do have some very large standing contracts with GSA and others and so, depending on how we would calculate the apportionment to eGlobalTech, or now Tetra Tech, that would be measured in several hundred millions of dollars of contract capacity. But the actual backlog that was taken across was actually quite de minimis.
Okay. And then just a quick follow-up on federal for a moment I was wondering if you could go back to - I know that during the shutdown, you did - following the shutdown, there was a reduction on full year expectations, due to some lost revenue there. If there were to be regained orders or what-have-you that had been lost during the shutdown, would that represent upside to the 5% number that you have out there now or is that embedded in the 5%?
Marc, that would be additional upside, but we have not seen at the federal government on the contracts that we've had, we've not seen that because they were not funding and not working in a number of agencies during the month of January. That they didn't then work twice as much in the month of February to make up for the shortfall in January. In fact, what we saw is, rather than it ramping up to make up for what they didn't incur, we saw everything just shift to the right. So the funding streams and the revenues and the work that is coming through is similar to what we saw prior to the shutdown, but we didn't see it actually ramp-up in order to close the gap. So we did not include that as a catch-up or as a make up for this roughly 30 days of shutdown. We just saw it pushed to the right. I don't think it's going away, but it's just everything got moved to the right. So for some reason, it was to get ramped back up. But now we're to the case it would be incremental upside. So we did not factor into our growth rate for the year any additional dollars to make up for that shutdown.
Okay, that's very helpful. Thank you very much.
Great, thank you, Marc.
This will conclude the Q&A session. I will now turn the conference back over to Dan Batrack to conclude.
Great, thank you very much, Dana. And thank you all for your insightful questions, your interest in Tetra Tech. I'm again, very glad to have reported to you all the performance on behalf of all of our employees. And I'll tell you, we're going to look to do as well or better this next quarter. Things are going well here and I really look forward to speaking with all of you next quarter. Have a great rest of the day. Bye.
Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may disconnect now.