TRC Companies, Inc. (NYSE:TRR)
Q2 2016 Earnings Conference Call
February 04, 2016 09:00 AM ET
Martin Dodd - General Counsel
Chris Vincze - CEO
Tom Bennet - CFO
Dan Mannes - Avondale Partners
Jeff Reda - Eagle Asset Management
Good morning and welcome to the TRC Companies Second Quarter Fiscal 2016 Financial Results Conference Call. Today’s call is being recorded. There will be an opportunity for questions at the end of the call. [Operator Instructions]
At this time, I would like to turn the call over to Mr. Martin Dodd, General Counsel for TRC. Please go ahead, sir.
Thanks, Manny, and welcome, everybody. We are happy you could join us today. With me here in Lowell, Massachusetts, are Chris Vincze, our Chairman and Chief Executive Officer and Tom Bennet, our Chief Financial Officer.
The primary purpose of today’s call is to review our fiscal 2016 second quarter financial performance. But also in the course of today’s presentation, we will be giving you some of our thoughts on where we think our company and our markets are going. As such, to the extent we talk about future events, those remarks constitute what are called forward-looking statements as defined under federal securities laws.
We believe it’s important to be able to talk about where we see things headed. Nevertheless, forward-looking statements are subject to risks and uncertainties, and there may be events in the future over which we have no control, which can cause actual results to differ materially from what we think today.
For a more complete consideration of factors to keep in mind with respect to forward-looking statements, please refer to our public SEC filings, including the 10-Q we filed last evening, our press release and the presentation slides we’re using for today’s call, which are posted on the Investor Centre of our Web site.
And with respect to those slides, they are intended as a visual supplement to our discussion today. We hope you find them helpful, but please consider them in the full context of our 10-Q, the press release and our commentary today on the call.
And with that, I’d like to turn the call over to Chris.
Thank you, Martin. Well it’s quite a second quarter and I will get into that in a minute. The agenda for today’s call will include my comments on the financial and operational overview for the second quarter. Operating and market review of our newly acquired pipeline services business and business outlook and some key initiatives going forward. Tom will provide a comprehensive review of TRC second quarter and year-to-date results including the pipeline services business. And then finally we will open up the call for any questions you might have.
Yes a busy holiday season, my team continues to celebrate that we closed our Willbros Professional Services acquisition on November 30th. Middle of the holiday season, the winter time and calendar year-end, et cetera. Yes, we added a degree of difficulties for sure. Seriously, I think it truly tested TRC’s capacity to execute a large transformative acquisition in probably the most difficult time schedule available in the calendar year. And we feel, we have accomplished a lot here over the course for the last 60 days, and I’ll let you known a few moment some of those accomplishments.
With that said, as you can see on this particular first slide on Page 3, the arrows continue to show progress. Once again double-digit growth on all of our key metrics. I do want to point out the adjustment notation at the bottom. In regards for our operating income, net income and EBITDA, we are excluding a $1.2 million of acquisition and integration expenses in those analyses. And on the first item NSR, we are including the pipeline services revenues for that first particular month, which you can see has equalized our organic and acquisition revenue streams.
With that said, we are still showing a nice overall growth in our base business with 6% organic growth on a year-over-year basis. Importantly on the EBITDA line, that number considering that our pipeline services business did have a loss in this first month is actually even better than the 13% year-over-year growth that we’re indicating.
And then finally on the slide, which continues to portend to solid performance going forward is NSR backlog increased 23% year-over-year on our base business and this does exclude any backlog from our pipeline businesses. Though again we’re continually holding strong on our backlog, moving forward with our infrastructure business as you can see in particular growing at rapid levels.
Moving onto our segment analysis on Page 4, environmental segment remains our largest segment of the business, approximately 39% on a pro forma basis now with the pipeline services business included. Overall, still good performance by the segment despite the impact of the oil and gas market issues, which I’ll speak to in a moment.
In particular related to the oil and gas downturn our environmental operations and our permitting businesses across TRC certainly felt some level with slowdown and deferrals with projects in Q2 and that pretty much resulted in a slight decrease in our NSR over year-over-year, our segment profit which was a slight decline and ultimately our backlog being pretty much flat on a year-over-year basis.
With that said, many small projects are continually being contemplated even with our oil and gas clients as they are looking at more of an operations and maintenance program as opposed to those large capital programs. Again in midstream activity which we continue to believe is more sheltered than some of the other market within oil and gas are also feeling the conscious capital constrains.
Importantly from an environmental perspectives on a positive note we’re seeing an uptick in activity in many other areas from M&A advisory services, state municipal services, the real estate and construction markets all are improving as we see [ph]. Also our penetration in the utility markets from an environmental perspective is materializing due to many of our vertical business development efforts. All in of the segment provided recently good profitability at about 19% from a margin level, so all in even with that down turn in oil and gas, a good performance.
Moving on to energy of Page 5 or Slide 5, energy remains the second largest segment from a pro forma basis at about 27% of our business. It had a great quarter across the board resulting in 11% increase year-over-year. Segment profitability grows nicely at 17% and even with that growth we continue to grow our backlog showing strength in the market where it's growing as high as it is. In particular we’re seeing renewable and energy efficiencies initiatives continue to be hot throughout the country. Increase utility investments in electric transmission distribution with underperforming inefficient and new sources of energy all contributing to that capital spend on T&D [ph] of our utilities. And again TRC is uniquely positioned across the total country to participate in that market place.
I’ll highlight a couple of projects in a moment on another slide, as you can see on the bottom of the slide, a very healthy margin of 24% for the quarter.
Moving on to our infrastructure segment, our smallest segment of the business which is approximately 10% of our total TSR or TRC NSR from a pro-forma perspective a tremendous quarter. Outperforming all others areas of TRC from a growth perspective. With growth of NSR at 26%, our segment profit close to 100% growth year-over-year again a basis from last year based on a project issue a year ago so. Again while it is a great performance it certainly came from a basis of -- that is lower than it should have been last year. Very importantly the backlog growth portends to solid growth opportunities in the future, growing it about 133% year-over-year. The growth is really recurring to a couple of reasons, the strategy of our growth in different geographical markets and our concentration in PPT projects. In particular a bridge replacement project which I’ll mention in a moment, also so many designs wins in the west coast. We are also seeing a market explanation, long term funding now addressed on top of expanded [indiscernible] investment strategies throughout the country and then finally from a margin perspective, a nice 90% margin for the quarter in that business.
Moving on to the next slide, our backlog and project wins slide, you can see from the backlog picture relatively flat from a quarter-to-quarter perspective but as I said earlier 23% growth on a year-over-year basis, so again portending well on a year-over-year basis. Again this does not reflect our pipeline services backlog which we will provide next quarter.
Giving you a few highlights of some recent wins which help illustrate some of the points I just made related to the segments. In our environmental business, the two projects I had listed; one is a renewable project, a win project. TRC will be providing some environmental consulting assistance and support to our energies, client’s application to New York state department and uniquely this is one of the first projects under Article 10 of New York which is part of one of more aggressive renewable energy goals of the country. TRC is in the middle of providing that support service for this particular project. Very material contract that was just awarded in the second quarter of our year, was with Pacific gas and electric environmental services MSA for 420 million for three years. TRC will be providing a full range of licensing permuting environmental compliance services to various PG&E projects throughout their service.
Again the in term with the contract is three years with possible options to move forward. A major win for the company, especially in a light of a utility that is looking to consolidate suppliers and vendors that we one of the few suppliers that were awarded this contract.
Moving on to the energy awards, the first one Applied Energy Group, we historically have had that project despite the New Jersey clean energy program. We were rewarded a 21 million three year contract. TRC has been the commercial and industrial market manager for the New Jersey clean energy program since 2007, where we’ve been designing and implementing market response programs, providing administration technical services associated with the program delivery for the various New Jersey market place needs for energy efficiencies. We just won that project again for another three years with again options for extensions. I am very proud of our continued efforts in the state of New Jersey from an energy efficiencies perspective.
The other project diversity is with Sempra, San Diego gas and electric subsidiary. The project is really relate to distribution engineer. In support of hardening distribution circuit against fires in California. Again TRC has been involved and working on this project since 2013 and we’re just extended through 2019 to continue those engineering and design services.
Moving onto our infrastructure award, the first one listed is Louisiana DOT project. Again TRC’s focus and market strategy to participate in the public-private partnership initiatives across the country, here we’ve been hired by the Louisiana DOT for three years to serve as a strategic advisor for any of their PPP projects that would be undertaken throughout the state. Again these services might include engineering financial business management to support the evaluation economic, feasibility contract and contract negotiations and award of any PPP projects throughout the LA DOT. Again a very prestigious award and continuous to uniquely qualify us in a leadership position and the services we provide.
The next project something that we are hugely proud of virtually every major infrastructure transportation engineering firm of note went for this particular project, it’s a highly profiled project in San Francisco and TRC was awarded it. It was the third street movable bridge for approximately 3.4 million of revenues for the company over few years.
We are going to be providing engineering services or a significant rehab of the historic third street movable bridge, which connects the China basin and the Mission Bay districts of San Francisco. So everything from mechanical, electrical, structural elements of the bridge including environmental issue. So again a fully integrated solution for our long-term clients in California related to our transportation infrastructure engineering businesses.
Going on to our pipeline services, two projects of note. The first one, which was awarded a literally during the announcements of our transaction. Is a full integrated TRC solutions within the pipeline engineering and facility engineering services, also surveying project management support, environmental services are also now included in this particular confidential oil and gas client. Which includes approximately 163 miles of 24-inch pipeline between two facilities in the Gulf Coast and it include two intermediate pump stations.
Again a great example of the synergy between TRC and our newly pipelined services division and ultimately our client acceptance of that synergy. Again this project is initially at 5.7 million with the opportunity to advance to the 20 million to 30 million level, if all goes according to our prospects.
The other and last project I’ll mentioned today includes a Multiple Compression Station Feed Study and again this is a project that have multi-million dollars of future potential, it’s where we’re going to be delivering process flow diagrams, piping and instrumentation diagrams plot planning and again selection of the different equipment for this particular site on behalf of the local utility.
So again, while the overall industry and market is certainly in a bit of an upheaval, lots of projects in particular like this, which are smaller and scope, but are necessary to move forward, we continue to see and certainly feel comfortable, successful in bringing many of them home over the course of the next numbers of months.
Moving onto the next slide, our Willbros integration operations update. This slide and the next slide will describe and highlight the aggressive integration and transition activities with our recent acquisition. Additionally, I’m going to catch on the overall marketplace and TRC’s activity related to the revenue growth strategies of the business.
Before I get into the slide specific, I do want to remind everybody. When we went over our last investor call the profile of the Willbros Professional Services now TRC pipeline services. Just quickly, if you recall, we are basically divided into five different parts of the business, the largest being engineering and facilities engineering business within the pipeline services. We also have EPCM and EPC elements of the business, field services, integrity, government services, so those are the five areas of the business, it’s approximately 750 to 800 people that came over to us.
The Willbros Professional Services business was a division of Willbros Group Services. In particular note, again the corporate overhead did not come over with it and I think Tom will address some of those points in his conversation. Importantly, the company was in a distress mode at multiple elements of divestitures and ultimately the finances of the parent hurt the subsidiary and was part of the reason of the acquisition was to raise capital for the parent company.
So again all those things in consideration, says we go over these issues, I think they are important to maintain that understanding. So where are we now two months into this transaction? Importantly as the highlight shows pipeline services has been functionally integrated within two months of closing. This is with a lot of effort. We have been working 24/7 to being integrating our new colleagues 750 scatter throughout the year in United States as well as the make them feel at home as part of the integration strategy of our business. As some of these bullet point out they are 100% on our systems at this point affectedly as of January of this -- a few weeks ago. So they are on our enterprise system, they are on our IT networks and our operating platforms, they are fully integrated into our payroll and benefits plan, they are now conducting all of their business including billing to our clients on our systems and they are part of the ongoing discussions management meetings and reporting structures of the company. And again have done that in a fairly aggressive schedule.
Other issues are the important in any acquisition and integration strategy is certainly identifying and pursuing any opportunities on the cost synergies side. Again while the corporate organization did not flow over, we certainly found some level of redundancies with the overhead within the division, there we are moving forward with some level of cost reductions related to that. And most importantly from a management perspective we have instituted a number of incentive and retention programs throughout the business which have been fully communicated and expressed to the organization. Which again we will very favorable in how we manage this going forward and then going into next fiscal year it will be a 100% part of the TRC programs and most because it relates to incentives [ph] and stock of programs.
Moving on to the next slide from a market place perspective unfortunately it has deteriorated from our last call. Price of oil has dropped below $30 a barrel from over $40. Additional issues where banks are retreating from the market, equity market place has declined heavily continues to even if as we speak. All leading to capital constraint in the oil and gas market really with no area left on touched. We still believe this is relatively short term in particular from a midstream perspective we defiantly view the eventual growth of this market place, primarily from U.S. becoming a net exporter which is a matter of time. The overall growth of our economy, which is the matter of time. Generation of power and transportation conversions to natural gas and tights liquids all which are going to be happening and ultimately the infrastructure related to all of those things is related to exactly what we do.
So again while we certainly feel that the short term we will continue to fill some constrain in capital projects, we believe some of the strategies related to ONM, Integrity Services and some of the smaller projects that continue to need connection points, various facilities and pipes will continue to fall in our direction and certainly plant some of the larger projects that we might have hope for. But certainly we will be ready as that market re-bounds in full capacity.
So what we are doing internally to support some of that we have fully rebranded the WPS offices with TRC, in fact I personally held an open house at the Headquarter Office of Tesla with government officers, our key teams, many of our clients, the ribbon cutting, operation and again we are doing that not only just symbolic afford but also in terms of how we are integrating our services in our solutions that we’re providing to our clients.
We launched a number of integrated clients strategy pursuits back from November right to today. There are many meeting scheduled including with myself at the executive levels of the oil and gas industry, which has viewed this transaction very favorably and we haven't yet see the opportunities, the full synergy availability to us and build some of these meetings and strategies and projects move forward, so more to come on that over the course of the next quarter or two. We have already seen multiple opportunities, I mentioned one in our recent awards where our operations and marketing teams are proposing on integrated services. But again we will be certain to have more to report to you by the next quarter on that.
And finally we are continually going forward with our strategy that is to continue to identify key market players in support of our organic possible growth strategy. The current disruption provide this opportunity with similar light to the acquisition, there are key leaders in the oil and gas market that are currently available and are looking for opportunities where they can participate in an organization that really provides a unique set of circumstances in a market that does really needs good solutions in qualitative [ph] way. And lastly from our perspective we defiantly view this acquisition from this point going forward on tract to be accreted to net income in 2017 as we stated when we first acquired the business.
On our next slide just briefly our ongoing growth strategy where we continue to invest our vertical business and marketing strategies. We’ve shown a healthy growth, organic growth rate of 6% again despite of distraction of our transformed that acquisition in the oil and gas market place. Again our strategies are working from organic perspective and we continue to focus and making sure that that continues. As you can see on the right side the most recent acquisition is the Willbros Professional Services, we certainly anticipate that the percentage of growth from organic and acquisitive will shift now that the transformative transaction is onboard and we will be looking at from quarter-to-quarter perspective.
Going to my last slide, key initiatives moving forward and before I turn the call over to Tom, just wanted to remind everyone that some of these key initiatives and strategies, many of which are consistent from previous presentations, again our organic growth strategy has been consistent for the past numbers of years. Its stems from our strategic investments, we continue to make in our vertical market, key hires and importantly technology tool supporting the business with end-to-end solutions is truly differentiating TRC from the pack.
The Willbros Professional Services acquisition speaks to this in spaces in particular in the integrity side of the business. TRC’s ability to solve consult design oversea with new efficient technology solutions for virtually any U.S. energy issue, uniquely qualifies us as a strategic partner in the total energy space.
Again our ability to enhance and develop leading edge solutions in a difficult environmental climate will allow us to again to make sure we maintain a market share that we would hope for. On the transportation side, we certainly aspire to bring a summer scale and strategy to infrastructure area and particularly in transportation we’ve already displaced some giants with some of our prowess on this specific project. We will continue to work to that in the near future.
With that said, we continue to identify opportunities in the future, but at this point we’re satisfied with fully integrating and optimizing our most recent strategic acquisition. We’ll continue to work on that for the next couple of quarters. And then finally, as we continue to always emphasize costs and efficiency in our company and Tom will be addressing some of these things from a scalability perspective. We continue to believe with technology and discipline, we can continue to find some more efficiencies particularly as we fully integrate our new acquisition, but even with our existing business in four services.
So with that, I’d like to turn the call over to Tom.
Thanks Chris. Good morning, everyone. Let’s move to Slide 12 in the Investor Relations presentation. I’ll review the key financial results and metrics for our fiscal second quarter ended December 25th compared to the same period in the prior fiscal year. And I will also highlight certain financial elements of our recent acquisition including activity on the credit facility.
Continuing on Slide 12, as Chris highlighted, our net service revenue of 111.4 million for the second quarter was up 11.5 million or 12% compared to the same quarter last year. Organic growth accounted for 5.1 million or 49.5% of the overall NSR growth and was [indiscernible] by 26% NSR growth in our infrastructure sector and 11% growth in our energy segment.
Note here that NSR also includes 6 million of revenue from our new pipeline and services segment for the somewhat limited four weeks of operating activity recurring after the November 30th closing date and before the holiday abbreviated end of the quarter on December 25th. The top and middle right part on Slide 12 show the non-GAAP EBITDA and adjusted EBITDA performance for the quarter. EBITDA of 9.5 million for the quarter was reduce by the acquisition and integration expenses which are shown as a separate line item in our income statement.
Accordingly in the top right chart on Slide 12, we present adjusted EBITDA of 10.7 million, which was up 1.2 million or 13% compared to the same quarter last year. This adjusted EBITDA excludes acquisition-related expenses and shows the continued strength in our diversified business model. Particularly the energy and infrastructure segments offset in part by weaker results in the environmental sector. By way of number, the new pipeline segment for the four week period had a 0.6 million EBITDA loss for that limited activity in that holiday shortened period.
Let’s move to Slide 14, well I’ll go through some more details on the income statement. That said acquisition and integration expenses is a new line item in the income statement and reflects acquisition-related cost for both the second quarter as well as later in the slide deck, the six months year-to-date period.
The expenses shown in this line item are directly associated with the acquisition, execution and integration activities for the pipeline services segment and are not part of the new business unit’s operating expenses. These costs slightly [ph] reduced operating income, EBITDA and net income are also affecting key metric such as EBITDA margin. Under the applicable financial reporting criteria, the acquisition expenses are isolated and reported to the separate line item.
We also report the adjusted financial metrics, net of the acquisition expense. So the investors can seek current expenses and financial trends separate from temporary costs being incurred just for execution and completion of the acquisition process. A 1.2 million of acquisition expense in the second quarter that Chris mentioned and 2.1 million spent in the six month year-to-date period, consist mostly of accounting, audit and legal fees currently prepared for and execute the transaction. Well of information technology expense resulting from the ongoing integration activities.
In addition to the expenses in the quarter and the six months period, we expect 2 million to 3 million of additional acquisition related expenses in the third and fourth quarter. We’re on the middle of the table on Slide 14, the EBITDA to NSR market ratio that I always speak to is reported 8.5% in the quarter, while the adjusted EBITDA margin was 9.6%, up 0.1% compared to the 9.5% margin in the prior year second quarter. Inclusive of these second quarter margin results our six months year-to-date adjusted EBITDA margin of 10.2% continues to be above our 10% target and was 1% higher than the 9.2% margin in the prior year six months period.
Moving down to net income on Slide 12, net income was -- for the second quarter was 3.9 million down 0.1 million or 1.6% compared with the prior year, primarily as a result of the $1.2 million impact of the acquisition expenses. Excluding a tax affected acquisition integration expenses adjusted net income increased 0.7 million or 18% compared to the second quarter last year.
Still on Slide 14 but further up on line four, our G&A expenses show a decrease of 0.4 million or 4% year-over-year. The corresponding G&A expense to NSR ratio was 7.2% in the quarter, a nice decrease of 1.2% from the G&A cost ratio in the prior year and equivalent to our 7.2% G&A cost ratio for this six month period. Just to note while we continue to emphasis overall cost efficiencies as we grow it is very clear that the intensive acquisition integration process still ongoing, helped decrease the level of organic G&A functions in the short term and over the next several quarters as acquisition integration activities are completed. We expect the G&A ratio to normalize back to the 8% to 9% where we typically outgoing.
Let's move to Slide 18, I’ll continue on the G&A expense, a topic as it relates to pipeline services sector. The table on Slide 18 is intended to give investors a perspective on the acquisition and how our historical G&A cost line up with the G&A cost of the acquired company, as shown in the pro-forma and historical financial statement that were included in the 8K file -- 8KA filing of Tuesday, February 2nd. In that a fairly detail 8K filing exhibit 99.3 shows TRC and Willbros Professional Services, we refer to it as WPS in those statements. Unaudited historical results side-by-side including a pro-forma tabulation for the 12 month period ending June 30, 2015. A consolidated portion of that 8KA exhibit is included here on Slide 18 as a reference point.
Looking at the highlighted inset the G&A to NSR ratio for TRC in that historical time frame was 9.1% of NSR. While the G&A expense ratio for WPS in that time frame was around 22% -- 21.7% to be exact or about 2.4 time our ratio. In the case of the historical WPS expense their G&A costs are allocated from parent company as Chris said and we don’t expect much of that cost to required replication at TRC. In our scalable growth model built through 11 and now 12 acquisitions over the past four years. We have demonstrated the ability to both reduce and operate under a G&A cost model that is accretive to our margin goals while also being support of growing revenues via organic and inquisitive strategies. Thus we expect the new pipeline services segment to operate under our scalable operating model without significant impact toward going forward G&A ratio.
I’ll move past the six month results in the interest of time and take us to Slide 19 where I’ll update you on our acquisition financing activities. The table on Slide 19 shows that on November 30th, the closing date for the transaction we funded a 124 million cash out flow at closing inclusive of the initial purchase price, preliminary net working capital adjustments as well as the 4.5 million out of financing fees, legal expenses and payments due to the seller for employee benefit expenses, right under the transition services agreement. Note also that an additional 7.5 million will be the total acquisition purchase price was differed under the terms of the stock purchase agreement and will ultimately be due to the seller pending the earlier of completion of a reverse contract innovation for March 15th. The closing funds were supplied by 22 million of cash from our balance sheet a draw of 102 million on the credit facility including a full draw of the $75 million term loan and a $27 million draw on the revolving credit line.
Let's move to Slide 20, as reported in our 8K announcing the financial closing of the transaction, the acquisition was financed with eight [ph] bank $175 million five year tenure credit facility led by Citizen's Bank. The overall credit facilities comprised of $100 million revolving credit lines and $75 million amortizing term loan. Borrowing under the credit facility for both the term loan and revolving credit components occurs at a leveraged base spread over one to six month LIBOR rate. The current borrowing spread of 200 basis points that’s 2% and a current borrowing rate of 2.4%.
One of our key post-acquisition financial objectives is to apply operating cash flow to reduce debt leverage, accordingly we use cash flow generated in the quarter to reduce the revolving credit line balance by $18 million and according reduce the total debt outstanding in the credit facilities from 102 million to 84 million. And we will continue to apply cash flow on an opportunistic basis to reduce both debt and interest expense. If you’re interested in the full credit facility document it was included in the 8K filed back on December 4.
Let's move to Slide 21, and I have some final comments on DSO and cash flow. Our Day Sales Outstanding metric, DSO for short was a very nice 78 days at the end of the quarter, down 7 days compared with the prior year period and 4 days below the bottom end of our target range of 82 to 86 days.
The DSO metric as I’ve said in the past is a key cash flow barometer and is typically higher in our fiscal first quarter and trends lower throughout the remainder of the fiscal year. This quarter’s favorable metric was the result of strong billing and collections and the first time we’ve achieve 80 days or better in more than two years.
Few days of the improvements [indiscernible] cooperation of the pipeline services segment, which as a nice DSO metric. Well five days of the improvement resulted from organic related activities and improvement. Free cash flow for the quarter was a seasonally negative 3 million consisting of operating cash flow of a negative 1 million, combined with 2 million of capital expenditures.
Overall free cash flow improved by 0.3 million or 8% compared to be negative 3.8 million free cash flow same quarter of the prior year. We ended the quarter with 9.5 million of cash on the balance sheet compared to 13.5 million last year. And one final note, I’ll note for -- with regard to our stock repurchase program that we did not have any activity under that repurchase program that had been authorized by the Board back in November of 2014. Finally note that a detail reconciliation of our GAAP to non-GAAP measure is provide beginning on Slide 22 and I think it goes on for six pages to show you each of the adjusted metric I cited.
That concludes my remarks today. We’ll now go back to Manny, the operator to open up the call for Q&A.
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question is from Dan Mannes of Avondale Partners. Please go ahead.
Couple of once here. First on the pipeline segment. Can you give us a little bit of historical precedence for the backlog, it looked like about 30 million at the end of this quarter. Can you give some indication of where that’s been historically and obviously the business is under some distress obviously through the sales process? And can you maybe give us some thought process as to when you would expect that to normalize?
Dan, this is Tom Bennet, I don’t have a whole a lot of data for you on historical backlog. We spent a good amount of our time over the past 60 days, just going back and putting together the estimated 40 million of growth revenue backlog and 30 million or net service revenue backlog that we show in the 10-Q and it’s going to take us a while to go through all those contracts, particularly some of that complex government contracts to establish the backlog. But that’s kind of point one. Certainly point two is that under the duress of the business that was going on as is the parent company, financial problems were elevated.
Clients began to award small and smaller contracts to pipeline services along the way and so that in my view probably decreased their backlog along the way, it’s those large contracts that typically give you your bumps upwards in backlog. One of the reasons we purchased the firm is we can now take on larger projects for our sophisticate clients. We expect over the year that roll off works to accretive the backlog, of course the caveats to all that, I’m sure you expect some of them are with the oil and gas prices and the companies that operate in the midstream and elsewhere are being very careful to their capital.
So we want to execute backlog growth, but don’t have enough information on the business and trends yet to give you a clean perspective and we’ll be talking to that topic over the next couple of quarters. Chris any comment?
Yes, I just wanted to enhance a little bit on how we look at backlog and the importance to us and it’s definition and we were just not comfortable yet providing that insights. So again we’re going to look very thoroughly to make sure these projects are financed, ready to go and moving forward and certainly we’ll be announcing that by next quarter. The broader point going forward and I think you mentioned it in your question on the distress side. Willbros Professional Services was pretty much bounced out of any EPS projects. If you recall back about eight years ago the TRC, we could no longer do EPS work on our balance sheet was in somewhat if a distressed mode back then. And then eventually as we cured that problem, again we regained our ability to execute on those clients. Those are the exact kinds of meetings we’re having with companies like Enterprise Products and a number of the other oil and gas businesses.
Again, still very permanent, still have many projects to move forward and ultimately with their new circumstance the pipeline services group certainly will be able to now compete and be successful and being awarded some of these projects, that they could not see over the last couple of years.
Dan, just one final add-on comment. In our industry and were our metrics typically show that you are around 69 months of your trailing revenue in your backlog, so that’s the metric that we certainly want to build to and you can take a look at that in terms of TRC's history.
A follow-up question as it relates to this business and Tom thanks for the commentary as it relates to the SG&A margins, clearly it sounds like you laying out a case that over time the aggregate SG&A as a percentage of revenue shouldn't change materially with this acquisition. Can you maybe -- is there anything you need to do in terms of integration or in terms of synergies to get there or is the pipeline services already kind of there and able to bolt in pretty quickly into your current G&A structure with a little bit of add?
It's just kind of latter, we in fact we actually focused down on the, what we call the plumbing [ph], the IT, the payroll, the accounting system, all those things are interrogated bolted on and we see -- we accomplished that in 60 days, so obviously it's new but that's done. So my comment about them operating under our G&A cost ratios is very informed, it was very [indiscernible] if I may say a large company where you’d have to look at the two equivalent G&A staff's and functions and figure out what they do here, we use the trunk bolted on, I kind of like that, bolted them on in ours and over time as we get everybody trained and normalized we expect a lot of efficiency out of what I called our scalable model.
And then my final question if you’ll indulge me is, as you look at your environmental segment obviously some headwinds on the oil and gas side, can you give us some sort of reference, Tom what percentage of that segment historically relates to oil and gas permitting work, et cetera, versus other items?
From a client perspective prior to the pipeline services business we were at 15% of our environmental business was attached to that industry and again in many different areas, so it's hard to just assume because much of it is compliance work and other things that even in downturns of economies those things still happen, but approximately 15% I think above the revenue stream of our environmental business is related to oil and gas. The good news as I said in my comments is transitioning into the power generation side which again with the aggressive movement towards renewable which really is an inflection of the oil and gas market. It is really robust, again our desire to have clean energy, shutdown coal plants, they're going to be replaced by natural gas in many cases. Obviously renewable energy, et cetera, is really where a lot more attention is being played and again our services are very adaptable to these shifting those market force changes. And again move in slightly different directions. So, again we're still feeling some pains of certainly the oil and gas downturn but certainly don't view it as at this point catastrophe.
Thank you. [Operator Instructions] Thank you, the next question is from Walter Rudnick [ph] of -- a private investor. Please go ahead.
Just have a question here, I'm glad you’re paying down debt on this acquisition, but roughly can you tell me now the number of employees that TRC employs?
Yes, Walter we're north of 4,000 and again some portion of the staff both in our environmental businesses and our pipeline businesses are here on a part-time basis or a nomadic basis based on these projects, so again looks call it 4,200, 4,300 from a total employee base something in that range and it's really is fluctuating based on some of the activity on these capital projects.
I understand that, but basically will it be fair to say that you've got minimum 4,000 full time equivalent employees?
That sounds about right.
Thank you. The next question is from Jim [indiscernible] of RBC Capital. Please go ahead.
The pro forma's are including the Willbros acquisition show about 50 million in NSR in the first six months of the fiscal year, I'm just kind of curious with the I guess with the decline in oil and gas sector. If we should expect that that run rate to kind of the -- go down I guess over the next 12 months and could you give us little comments on just what impact that might have on that run rate?
Jim this is Tom, let me take the first slice to that and turn it over to Chris for some furtherance of it, you probably said we don't give guidance in that historic information is certainly we have to take it with the context of their existent that is apparent of the different economic environment. Here we have only four weeks of activity, in-hand, the $6 million that we talked about. We’ll be reporting this segment separately, so you’ll be able to see it in the 10-Q documents and we really have to get a quarter through our belts [ph] before you can see that picture. So we’re not really position doing extrapolation or tie back to historical financial statements that produce by that parent company to different environment. Chris any comments you have. Chris any comments on that?
Yes. Again, I would, I think the observations of the marketplace is certainly a negative towards robust growth. But very positively they’re leaving a distress sort of circumstances into a highly synergistic one and again with solutions that clients want. So again it’s going to take time for that message to get out, projects to be awarded positioning for those activities. But we are still very optimistic from a strategic level, that this is absolutely in our wheelhouse now to move to a new level and it’s just going to be a matter of time.
And I’ll obviously be great if the markets came back soon than later, but we still are very confident that what we provide to the market is highly needed. And we are uniquely qualify to get it. So even as markets decline or contract. We think, we certainly have a secure solution and opportunity to get our market share. Then last piece of that, which again I think is indicative of that revenue number, is there is no EPC work.
There are still EPC projects in the space, we are pursuing them as we speak, in those fundamentally can change that revenue circumstance very quickly if we are fortunate to be awarded in the next three or six months, some of those EPC projects. So again a lot of different dynamics and as Tom said, I think the next one or two quarters we’ll give us much more backdrop to how things will be playing out and as we track to market.
So you just answer my second part of the question. So three to six months, you think that, I mean regardless of how the market is looking, we all know it’s the bad state right now. But from internal perspective between the two companies being integrated, you’re thinking that, you’re back in the game as far as being seriously looked at is for this bids?
Yes. We not only think, we know it, again we’re dealing with the highest level of executives throughout the industry. And it is clear they need people, companies like ours that look at the environmental issues, look at the engineering, look at the management consulting side of all the things they do. And again they’re looking for more effective and efficient ways to solve issues and not only do we have feet on the underground and technology that is different, we also have again the broader still sets across the board.
So again we’re sure, it’s a matter of time between all these things coming together which is why we were. So excited about the opportunity to acquire this business and continue to move it forward. Even in a difficult set of circumstance timing level.
And just one final [indiscernible] doesn’t have the 8-K often and was able to reference what you’re talking about that 50 million on a number, you decided there growth revenue for the July 1, through September 30 period under their sort of financial statements. Under the pro forma that was calculated 33 NSR well this three months rather than I believe in, say six months.
Okay. All right.
Its number straight. Any way. Thanks Jim.
I appreciate that. And just one more question on the environmental segment if I may. I missed part you comment, I think that you said something about environmental summit [ph] by the upstream oil and gas as well. Could you give us kind of your outlook on maybe a little bit of growth rate there I know you don’t give guidance. But do you expect that environmental segment to come back and be an organic growth area for you?
[Multiple speakers] repurchase, we’re one of the leading companies providing consultation in permitting services of major pipeline projects across the country and these are billion dollar, hundreds of million dollar projects. Again those projects in many cases or either going to be differed, held back slowdown in the course of this certainly the next six months maybe a year.
So historically, certainly in the last few years, we’ve been fortunate to have a number of those projects going including second quarter of last year. We had a couple of projects very much like that this year that have been deferred for a quarter or two. So that’s where I think we’re feeling the pain in particular in our area of business. We also support the oil and gas companies from a construction remediation perspective, tank farms and truck stops and some of those kinds of things. Certainly some of those marketplaces are slowing down. As the total marketplace is taking a step back seen where things play out and that nobody going forward.
There is no doubt that all these things have to continue forward at some point. So the question is how much is deferred, how much is delayed, when is you’re going to turn and how much is related to just the pricing of oil as oppose to some of the other dynamics that impact natural gas. When are we going to start exporting natural gas, these are the things that will change these dynamics much closer. So again the good news again as I said in my comments you have the ability to be adaptable to other markets that are growing more rapidly such as transmission line permitting, as oppose to pipeline permitting. Again, we’re working on those things obviously, it’s less efficient just based on the sequence of events and episodic nature of new words and things but again we are still very comfortable that we have nice diverse portfolio that can move and adapt to that market as they shift.
Thank you. The next question is from Jeff Reda of Eagle Asset Management. Please go ahead.
I guess I was hoping you could kind of give me a run down on your thoughts on new balance sheet leverage. What level of leverage you are comfortable within and whether or not this precludes additional acquisition in the near term or you try to pay that debt down? Or if it's small bolt-ons, is kind of in the mold of what you’ve done historically or still possible?
Jeff this is Tom, and let me take the first mechanical part of that and then Chris will talk about strategic piece of it. Under our credit facility the capacity, the $175 million is dependent on maximum leverage ratio of three times, our trailing consolidated EBITDA as calculated under the bank agreement, that exclude non-cash charges like stock comp. So from a capacity point of view as such 47 million of trailing EBITDA we are well under that 3.0 [ph] leverage, in fact if you take look at it where we are at that now under the bank calculations we are at about 1.8 -1.83 leverage factor under the bank agreement. And it does -- that does leave us room in the facilities, the revolving credit line is evergreen if you continue to use it. We’ll amortize the term loan piece of it. And we have the financial capacity to apply the revolver for working capital and growth strategies as well.
And I would add to that Jeff, part of it is optimizing which you require. This was our first test as a management team and an organization to take on a much bigger acquisition and this group together was accustomed to. We are feeling very good about how well we have executed the transition so far. We are excited about the new management team in the market place that is now a part of us. And we want to make sure that we fully optimize our opportunity with everything from point [ph] strategies solutions to making sure our new colleagues are probably footed into our culture and strategy and much of which was consistent with theirs.
And in the meantime we are continually looking at the market place, obviously we’ve been an acquirer for years. A lots of people come to us with opportunity and we are scoping out our own sets of circumstances and we will continue to track how we are progressing, how we are performing, what our execution ability is and then we will move forward. And I would say from size perspective we are still interested in strategic bolt-ons that continue to allow us to be more uniquely qualify. We are somewhat regionally oriented. So we are North America strain from our own perspective for that purpose. And we are also looking at other more transforming transactions if they can make sense for us as I mentioned in my comments.
So right now we are really optimizing the focus on making sure the Willbros Professional Services performs and executes within our strategy.
Thank you. Ladies and gentlemen at this time I would like to turn the conference back over to Mr. Vincze for any closing comments.
Thank you, Manny. One of our longest call, but certainly deservedly so. Complex filing, we gave you guys an extra night to think about some of that, purposely. Hopefully we illustrated what's going on and our excitement about where we’re heading despite a little upheaval in one of our markets. So again the company feels strongly about its current performance, the management team is really gone to task over the holidays to execute integration strategies, so my shout out to the team.
And again my continue thanks for all those support of our investors many of which continue to participate and being a part of us and continually coming on board in greater volumes. So we are thrilled about that, so again we will talk to you in May and everyone have a pleasant -- I believe it's a shorter winter the groundhog saw his shadow. So I think we are all happy about that up here in the Northeast, again we’ll see you guys in May. Thanks everybody.
Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.
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