TRC Companies (NYSE:TRR)
Q3 2013 Earnings Call
May 08, 2013 9:00 am ET
Martin H. Dodd - Senior Vice President, General Counsel and Secretary
Christopher P. Vincze - Executive Chairman, Chief Executive Officer and President
Thomas W. Bennet - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
Steve Shaw - Sidoti & Company, LLC
Good morning, and welcome to the TRC Companies Third Quarter Fiscal 2013 Financial Results Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I'd like to turn the call over to Mr. Martin Dodd, General Counsel for TRC. Please go ahead, sir.
Martin H. Dodd
Well, thank you, Brenda. Hello, everyone. Thanks for joining us this morning. We're glad you could be here. With me here in Lowell, Massachusetts are Chris Vincze, our Chairman and Chief Executive Officer; and Tom Bennet, our Chief Financial Officer.
As you know, the topic for today's discussion will be principally the financial results for TRC's third quarter, the 3-month period ending March 29, 2013. In addition to discussing those historical performance issues, we'll also be giving some insight into where we see the company and our markets heading in the future. And to the extent we do talk about future events, those would constitute what are called forward-looking statements as defined under the Federal Securities Laws. You should understand that forward-looking statements are subject to risks and uncertainties and they could change materially over time due to a variety of factors, over which we have no control and which we cannot accurately predict in all of the cases. For a more complete consideration of factors to keep in mind with respect to forward-looking statements, I would ask that you look at our press release that we filed this morning, as well as our public SEC filings.
And so with that, I'd like to turn the call over to Chris.
Christopher P. Vincze
Thank you, Martin. And before I begin, just apologize for my raspy voice today due to allergies and pollen count here in the Boston area. Welcome again to TRC's third quarter fiscal '13 results call. Today's agenda will include my third quarter operations review and business outlook. Tom will then provide detailed comments on TRC's third quarter and year-to-date results. And then we'll complete the call with any questions that you might have.
Overall, TRC continues to make steady progress on its path to becoming a top financial performer in the engineering, consulting and construction management space. We've established many leadership positions with regard to services in the Energy and Environmental and Infrastructure markets, ranking 32nd in ENR's top 500 Design Firms as of April 2013. We also ranked in the top 28th in both hazardous waste and power services categories.
Our profitable growth and performance excellence initiatives we launched 2 years ago, which are updated annually, help provide us the focus to execute.
The third quarter results are highlighted by our 10% growth in NSR and 10% EBITDA increase year-over-year, our strongest growth quarter this year. Additionally, while we acquired 2 firms early in the third quarter, GE Air Services businesses and HMG, an energy efficiency management consulting business in California, the majority of our growth was organic. It typically takes 1 to 2 quarters for the integration activities to fully take hold such as cost synergies, employee training and orientation, revenue recognition, et cetera. We anticipate stronger performances by both entities as they normalize in the TRC environment. I say that as both were still accretive to Q3 results.
With regard to our strategic acquisition program, TRC announced today that we acquired all the assets of Ocampo-Esta Corporation's Covina, California operations or more specifically, its power delivery engineering business in Southern California. Additionally, TRC has established a working alliance with Ocampo-Esta's primary office in Vallejo, California. This acquisition and partnership establishes TRC as a strategic provider of power delivery services in the critical Southern California region, as well as expanding our overall presence in the state. Approximately 16 colleagues will join TRC and provide us the platform to expand our power delivery and distributed engineering services to our Southern California utility clients. In total, TRC has approximately 650 engineers in our power segment across the country.
Overall, backlog grew in the quarter by 9%, primarily due to double-digit growth in Infrastructure. This represents 2 quarters in a row that our Infrastructure backlog has grown by over 13%, pretending to improving top line growth. Energy and Environmental continue to be steady. I caveat that with significant opportunities in the pipeline for both sectors.
Assuming the economy and its related uncertainties improve at all, our expectations are that over time, many of those opportunities will be funded and become backlog and, eventually, production.
From a segment perspective, TRC's Energy business grew nicely in the quarter, demonstrating the ongoing demand in our transmission engineering businesses. Our utility customers are enhancing their investments across TRC's service areas, such as telecommunications engineering, energy efficiency and distributive engineering to name a few. In the quarter, we continued our expansion with both services in geography, focusing much in the mid-Atlantic, Midwest and Texas. With the Ocampo acquisition and other strategic hires, the West Coast will also be a growth concentration.
While revenues were up between the organic growth, key hire investments and acquisitions, our segment profit was down year-over-year. This was primarily due to a couple of fixed-price projects with the new utility account in the mid-Atlantic. The project overruns tend to result from new client engagements and meeting their full expectations. While the drag on the segment profits in the near term is real, it is outweighed by the long-term benefit of building a successful relationship with that client. Two important sidenotes. We've enhanced our internal quality programs, which have been instituted, and the overall margins of the business are still very strong, approximately 18% at the segment operating level. In fact, TRC has been requested to propose on significant projects with this mid-Atlantic utility. The pricing would be considered comparable to our typical margin projects across the portfolio. The client, who views the projects as successful, just awarded or just announced cap spending over the next 5 years of over $1 billion a year, and TRC is considered one of their top suppliers.
Our energy efficiency markets continue to be very strong. Our recent acquisition of HMG in Sacramento, California has been fully integrated. We have just launched strategic initiatives across the energy efficiency business unit, and are proposing on tens of millions of program management services across the country, including in California. A recent win involves our TRC key utility account in California. The $5.5 million award, which includes approximately $2 million in fees, involves a multi-family new-homes program. The 2-year contract further solidifies our leadership position in the California multi-family new-construction market.
TRC's Environmental segment also exhibited growth in the third quarter, which was attributed to both organic and acquisitive activities. The GE Air Services business was acquired in mid-January, and subsequently integrated into TRC's air measurement businesses. Importantly, as part of that transaction, TRC received the universal 3-year MSA with GE. This provides us an opportunity to expand other TRC services into the GE platform. While the Environmental segment achieved decent growth in certain areas, we still notice ongoing sluggish markets in other areas. Effectively, we had some margin decline because of it. Capital spend on Environmental issues with regard to construction, real estate and even to some degree, oil and gas and power have been inconsistent for the past few quarters. With that said, opportunities across the board on all fronts continue to grow as. As an example, we have literally proposed on tens of millions of dollars on permitting in environmental consulting services for natural gas pipelines. Many are pending for a variety of reasons.
An area of business that has been positively active is TRC's repowering and decommissioning services. A third quarter award involves 2 more National Grid projects in the East Coast. The $1.5 million contracts involves initial engineering consulting services in support of abatement, decommissioning and limited remediation of 2 sites in the East Coast. TRC is now actively working on 4 grid plants, providing services from all 3 of our sectors.
Our third segment, Infrastructure, had a great quarter, growing NSR and profit by 14% and 74%, respectively. Our continued improvements in the sector demonstrates the success of our initiatives to perform higher-margin work for commercial clients. Also, while historic budget deficits at both Federal and state levels hampered growth in the past few years, we have noticed an improving marketplace at the state level. In particular, we have increased our presence in the structural bridgework across the country. Proposal activity was very strong in the quarter for this sector.
A recent award for $3.5 million by the West Virginia Division of Highways consists of a study, design and preparation of an EIS document to the Jefferson Road project, which would be considered one of the marquee projects in all of West Virginia. Before I turn the call over to Tom, I thought I would provide a few outlook and concluding remarks.
We remain excited and optimistic that our mid- and long-term profitable growth prospects remains strong across all 3 of our segments despite some challenging near-term markets. Second, we continue to invest in our strategic organic growth strategies, key accounts and key initiatives, such as RE POWER in shale and, more broadly, oil and gas. We've hired additional market leaders in the oil and gas and power spaces to support those efforts. Third, TRC's maintaining a strong pipeline of strategic acquisitions, which combined with our organic strategies and improving markets, should support our profitable growth results. Fourth, with our strong cash position, the balance sheet and enhanced credit facility, we have the flexibility to execute our growth strategy. Fifth, while we're managing our G&A effectively and continue to be very scalable, we have additional opportunities to improve at the cost-of-services level. We have launched additional initiatives to improve quality throughout the business, as an example. Finally, TRC's management team is well-equipped, experienced and team-oriented to further our mission to become a top-tier financial performer in the engineering, consulting and construction management space.
With that, I'd like to turn it over to Tom.
Thomas W. Bennet
Thanks, Chris. Good morning, everyone. Today, I'll review some financial details of our fiscal third quarter compared with the same quarter of the prior year. As Chris highlighted, we had strong 11% net service revenue growth in the quarter. That growth was driven by growth in all 3 segments, including 15.7% in the Energy segment, 6.5% growth in the Environmental segment and 14.4% growth in the Infrastructure segment. In addition, our NSR backlog as of quarter-end was $245 million, which was up to $3 million, or 1.2%, compared with the same quarter of the prior year, and up $20 million, or about 9% sequentially, compared with the second quarter.
The year-over-year backlog growth in the Infrastructure segment was partially offset by slight declines in the Energy and Environmental segments.
Looking at some details on the income statement, cost-of-services, which we always state as a percentage of NSR, increased to 84.8% compared with 83.7% in the same quarter of the prior year. Accordingly, our non-GAAP measure of basic gross margin percent was 15.2% in the quarter, down from the 16.3% achieved in the same quarter of the prior year, but up a full 1% sequentially compared with the gross margin percent achieved in the immediately prior second quarter.
While up sequentially, gross margin was negatively impacted in the third quarter compared to the prior year due to cost performance on several fixed-priced projects in our Energy and Environmental segments, as well as the growth-related impacts of staffing costs and acquisition integration.
Our G&A expense to NSR ratio decreased nicely to 9.7% in the quarter from the 10.8% ratio in the same quarter the prior year. This efficient D&A expense ratio impacts both the short term and long term is consistent with our strategy to manage back-office costs, while we grow revenue organically and through acquisitions.
On the provision for doubtful accounts line, which I usually don't talk about, we recorded our first expense in 5 quarters. The expense was $0.4 million for the quarter. It's driven by our quarterly objective accounts receivable aging analysis, and impacted our EPS in the quarter by about $0.014 per diluted share.
On the depreciation and amortization expense line, this item increased to $0.6 million compared to the same quarter of the prior year, primarily as a result of intangible asset amortization in connection with acquisitions.
Looking at the operating income and EBITDA items, EBITDA was up nicely, while operating income was down slightly. Operating income of $3.4 million was recorded in the quarter and was down slightly compared with the same quarter the prior year, primarily as a result of the higher intangible asset amortization costs, as well as the renewed doubtful account provision. EBITDA, on the other hand, was up $0.5 million, or a full 10%, at $5.2 million in the third quarter compared with $4.7 million of EBITDA recorded in the same quarter of the prior year. The 6.3% EBITDA to NSR margin ratio in the quarter was unchanged from the prior-year period. Note that EBITDA is a non-GAAP financial measure, and is calculated by adding depreciation and amortization expense to the operating income amount and is adjusted in the prior periods to exclude the Arena litigation item.
On the income tax expense line, the $0.2 million provision for the quarter reflects the current period state in Federal income tax accrual with the Federal item being driven primarily by alternative minimum tax. In contrast to the expense, tax expense in the quarter, in the prior-year third quarter, we incurred a tax benefit of $0.7 million, effectively negative income tax expense, which favorably impacted EPS in the prior period by about $0.023 per diluted share.
Looking at the very bottom line, net income for the third quarter was $3.1 million or $0.10 per diluted common share, down $0.03 compared to our $0.13 per diluted share in the third quarter of the prior year. The differences in the doubtful accounts provision, the income tax provision and the increased intangible asset amortization expense all contributed to the unfavorable EPS comparative in the quarter.
Two final comments on DSO and cash. Our DSO, or days sales outstanding, was 88 days at the end of the third quarter compared with 81 days in the same quarter of the prior year, and 86 days in the immediately prior second quarter. DSO was adversely affected by about 1 to 2 days due to a large client undergoing a software transition, which delayed their vendor payments. We typically target a DSO of less than 85 days, and plan to make progress on that metric in our fourth quarter.
As far as cash, free cash flow and debt, we ended the quarter with $10 million of cash compared with $13.3 million in the same quarter of the prior year. Despite the higher DSO, free cash flow for the quarter was a positive $7 million, comprised of $8 million of cash flow from operating activities less $1 million of capital expenditures. Our quarter-end cash balance was also affected by the $6.6 million of cash used for acquisition-related activities in the quarter.
That concludes my remarks. Brenda, back to you for our Q&A session.
[Operator Instructions] Our first question comes from the line of Steve Shaw with Sidoti & Company.
Steve Shaw - Sidoti & Company, LLC
How did you fund the acquisition?
Christopher P. Vincze
There was -- this was laid out in the Q, so you don't have to write this down, but the -- one of the acquisitions was cash debt and stock. That was the HMG acquisition. And the Air business that we acquired from GE was all cash, and then some of the cash...
Steve Shaw - Sidoti & Company, LLC
Right, okay. And then some color on the Infrastructure segment, what's the driving force in the growth right now? Is that sort of a life-cycle factor or is that several macro factors? What's driving the growth there?
Thomas W. Bennet
A combination, Steve. One is our specific incentive driving some commercial business into infrastructure, so it wasn't fully reliant on government services at the municipal or state levels, typically. The second factor is many of the states that were in huge budget deficits have corrected themselves in some cases, and are starting to spend money in transportation activities across the country. And some of our specialties, such as bridge, structural bridge design work in particular, is one of those areas where we're seeing some more funding at the state level.
[Operator Instructions] Okay, it seems that there are no questions over the phone lines at this time. I'd like to turn the floor back over for any additional marks.
Christopher P. Vincze
Thank you, Brenda. As is typical, I would like to thank my colleagues again for another quarter, remind them that we are in the homestretch of the fourth quarter, 2 months to go, and the urgency of closing out our year. Thanks again to our shareholders for their ongoing support. I hope everyone has an enjoyable summer, and we will see everybody in September with our K. Thank you very much.
This concludes our conference call. Thank you for joining us today.
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