TRC Companies, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

| About: TRC Companies, (TRR)

TRC Companies, Inc. (NYSE:TRR)

F4Q08 Earnings Call

September 30, 2008 9:00 am ET


Martin H. Dodd – Senior Vice President, General Counsel & Secretary

Christopher P. Vincze – Chairman of the Board & Chief Executive Officer

Thomas W. Bennet, Jr. – Chief Financial Officer & Senior Vice President


Buzz Zaino – Royce & Associates

[Mike Brigg – MM Financial]


Welcome to TRC’s fourth quarter fiscal 2008 financial results conference call. (Operator Instructions) At this time for opening remarks and introductions, I’d like to turn the call over to TRC’s General Counsel, Mr. Martin Dodd.

Martin H. Dodd

With me today here in little old Massachusetts are our CEO Chris Vincze and our CFO Tom Bennett. As many of you know, Tom joined us in June and he’s been a tremendous addition to the team and we’re extremely delighted to have him on board. As you know, we’re going to be discussing this morning are the results for the fourth quarter and the year ended June 30, 2008.

As such, we will be talking principally about historical information but we’ll also give you some insight in to where we see the company going and where our markets are headed and therefore some of the things we’re going to talk about are what are considered forward-looking statements under the federal securities laws. We think it’s important to be able to talk about projections, trends and other forward-looking information but please be aware that forward-looking statements can change over time, they’re subject to risks and uncertainties and can change materially. Therefore, we would urge you to consult our press release and our public SEC filings for a more detailed listing of the source of considerations you should keep in mind with respect to forward-looking statements.

At this point I’d like to turn the call over to Chris.

Christopher P. Vincze

Welcome to TRC’s quarter four and fiscal 08 conference call and yes, we did make it. The agenda for today’s call, I’d like to begin with my review of TRC and its strategy and its three year journey, our quarter four and fiscal 08 financial highlights, I’ll discuss and update on our quarter four turnaround activities and our operations before I turn over the call to Tom I’ll give a brief business update. Tom will then review the financials and give a vision enterprise platform update, he’ll turn the call back to me and I’ll complete our prepared remarks with our business outlook. We will conclude the call as our operator Claudia said with some questions and answers.

Before I begin the formal remarks I’d like to begin by thanking a few constituents. First, I’d like to thank my colleagues here at TRC for their perseverance, determination on providing our clients the highest level of service this industry provides, all of this while enduring a vigorous transitioning environment both internally and now externally. Second, I’d like to thank our long term customers who represent 70% to 80% of our annual revenue stream. Even with some level of TRC uncertainty they have provided us with continual and in many cases additional opportunities to serve them. Importantly, we have not and will not fail them in any way. Third, I thank our shareholders who have similar sustained an uncertain time with TRC but yet have persevered with their patient and support. All this in an even greater uncertain investment and economic environment.

I’d like to shift to the overall TRC strategy and review of our three year journey. I was inspired with a number of conversations I’ve had with shareholders over the recent months to provide this historical review. I’ll try to be succinct while detailed enough that it will provide the understanding that TRC’s operating platform is significantly different, better than it was three years ago despite the earnings results in those periods. A quick history, fiscal 06 year number one of our journey; we executed a capital restructuring program, we had our own liquidity crisis back then, we had a number of restatement issues and we pretty much provided the assessment and long term solution design phase which we now call the turnaround. We really didn’t at that time push or prod the operations at this point. We concluded the year with enough liquidity and an improved debt structure so we could probably conduct ourselves through a complex three year turnaround time.

We realized the entire company including dozens of individual parts had to be integrated and reengineered. In some cases, that mean divestitures, shut downs or potential losses of key assets. Just how many or how much was still unknown. Many of the unknown legacy issues that have plagued the company for the past three years were still unknown or ill defined. Many management processes and controls were not in place. All of these issues in addition to the rebuilding of the company’s entire infrastructure was contemplated and our three year turnaround plan launched July 2006, announced during our first conference call.

Moving in to year two, fiscal 07, this was really our first year of the turnaround program as we’ve defined it. We call it the heavy lifting stage certainly for the organization itself. In this year we had full integration of TRC branding, we developed all sorts of communication programs, consolidation of dozens of legal entities, consolidations of accounting platforms, 17 systems in to four. We established new business models, we established a new organizational structure, we launched cost reduction initiatives which we’ve referred to in the past has project efficiency. We virtually employed and entirely new management team, we restructured, renegotiated over 15 acquisition agreements, we designed our new enterprise platform which we call Vision. Many, many other initiatives included DSO improvement, real estate lease consolidation and various other elements to purchasing.

Like many initiatives go as plan, some exceed expectations and some proceed with below expectation. Meanwhile, we continued to provide some of the most innovative and sophisticated and professional services to a mature engineer and consulting and construction management market that was growing. The results of these activities had a number of positive effects; we established a more rationalized cost structure with ideas of future reductions. We prepared us for further development on the management process and management controls fully establishing the meaning of success in financial terms. From a marketplace, it solidified the TRC brand in our core markets: energy; environment; and infrastructure. It initiated business opportunities between the practices which has led to revenue growth in the company.

Some negatives and some of these actually could be positioned as long term positives. It required major investments both in capital and human resources from a management standpoint, losses of some successful business elements that did not want to play in an integrated environment which ended up being a loss of revenue and profits. Third, inability to reach financial objectives due to many legacy oriented issues and findings, bad contracts, earn out agreements, bad leases.

Enter year three, this past year, fiscal 08 which was our second year of the turnaround. Some of our most paramount initiatives included the conversion of the remaining four systems to one in which we now call the Vision enterprise platform. Centralization of our G&A functions, additional cost reductions through our operations and general and administrative duties, launching of strategic business plans, launching of a new incentive plan that actually rewards and aligns behaviors to principals and values of both management and the shareholders, revamping of the company’s benefit programs, establishing a true business planning budget process. Finally, achieving timely reporting both internally and externally and many others. Yesterday’s filings represents the beginning of a desired consistent pattern of execution.

All of this was done with capital constraints and uncertain markets specifically with major declines in the real estate sector. Once again, the results of the activities had a positive short term and long term effect. The cost structure of the company was further rationalized through restructuring activities, estimated annualized savings of $5 to $7 million. Additionally, we still have opportunities as we progress through year three of the turnaround. We certainly believe there will be some additional reductions as we streamline our administrative processes. Management controls and processes are far greater now so that a number of these legacy issues either could not exist or certainly they would be understood far earlier in the process. As an example, monthly variance reports, go or no go procedures for prospective opportunities and an ongoing internal audit function that was recently launched.

Continued growth in the business and further synergy initiatives in our core markets and I’ll be speaking to one of our strategic initiatives repower in a moment; a fully integrated business with a defined mission. Some negatives, it clearly took additional investment both in the use of capital, in management time to execute, a significant internal focus versus external focus continued to plaque the company. From a results perspective it did allow us to more aggressively deal with some of these legacy issues, contracts, execution, as well as changes in the market such as the real estate consolidation play that we had in Q4.

So, where are we now? Overall, results were below expectation due to ongoing legacy cleanup activities including restructuring consolidation of operations. Important and confidently the core businesses and practices underneath all the noise continue to improve in all regards. The amount of legacy issues and restructuring activity related to TRC issues should be winding down significantly. The ability of management to prevent new ones is far greater than ever before. Specifically, TRC’s net revenue for Q4 fiscal 08 was $65.2 million compared to $63.9 million in Q4 fiscal 07, a 2% growth. While not material to most, this continues to represent a major accomplishment and message. Despite TRC’s issues, on top of a declining economy and dealing in a trend and growth in our own industry, we continue to show strength with our brand.

On an annual basis, even more of the story, TRC grew 5% year-to-year from $255.9 million in fiscal 07 to $268.2 million in fiscal 08. I’d like to point out that the true growth is greater due to the operational shutdowns that occurred during the second half of fiscal 08 and the later parts of fiscal 07, as an example, our land development forensic engineering services, putting TRC in comparable mode benchmarked against the industry which is in the 8% range of growth on an annualized basis. On the net losses TRC loss $16.1 million for Q4 fiscal 08 compared to $4.3 million for Q4 fiscal 07. On an annual basis TRC loss $109 million for fiscal 08 compared to $5.9 million for fiscal 07. I will let Tom reconcile those results in his presentation but the underlying issues of non-cash charges which occurred in Q2 and Q3 as well as a number of restructuring charges, contract losses and legal issues generally make up the vast majority of our losses and unfortunately mask the improved performances of so many parts of the business.

Importantly, it does provide for an improved platform for the future. From a turnaround perspective I highlighted earlier a number of the initiatives that were started and accomplished in fiscal 08. We are unwavering from our commitment to finish the turnaround program and properly establish TRC as a state of the art engineering consulting construction management firm strategically positioned in viable long term markets in energy, environment and infrastructure. We will continue to refine many of the processes and programs we set out two years ago.

As far as Q4 highlights, management is much more confident about our ability to achieve budget level performance based on our methodology of how we execute business planning. Our process includes reviews and inputs from all levels of the organization and not only have we rationalized each and every practice at the firm at all levels of the organization. Now, importantly the execution is the single paramount issue within our operating structure. All incentives are tied to its results.

Second, timely reporting which was finally accomplished in Q4. It is the management process that insures against failure. We can now more aggressively, more quickly respond to both positive and negative performance issues as opposed to months gone by. A critical new milestone that Tom will address further and also discuss the metrics program which we will be instituting in early fiscal 09.

The third highlight in our turnaround program for Q4 involves our cost rationalization and project efficiency activity that occurred primarily in Q3 and Q4 and recognized as part of the restructuring costs. It will clearly support and improved fiscal 09 structure. As stated earlier the company reduced $5 to $7 million of costs in fiscal 08. From a headcount perspective, TRC reduced its full time equivalents by 147 individuals, 72 are non-technical professionals. Total headcount of the firm is at approximately 2,000 full-time equivalent and approximately 550 part-time equivalents. Importantly stressing the shift from a fixed cost of the company on the full-time level to a variable cost at the part-time level. Meanwhile, we grew our energy practice headcount by over 20% focusing in on those parts of the market that continue to show vibrancy and growth for the company. Additionally, we closed and consolidated 17 offices as part of our Q4 initiative as discussed in the 8K announcement a few months ago.

Finally, before I turn the call over to Tom, I’ll briefly mention a couple of business perspectives. We accomplished a lot in defining our fiscal 09 strategy in Q4. In all three of our core markets we’re looking at significant pricing increase initiatives and go to market initiatives which I’ll expand on after Tom’s piece. TRC’s backlog continues to hold strong at greater than one times revenue levels at approximately $498 million gross revenues and $287 million net service revenues. I’ll describe some recent wins and business outlooks after Tom’s comments.

Thomas W. Bennet, Jr.

Since this is a yearend report I’ll review both the fourth quarter financial results as well as the full year results for fiscal 2008. First, to emphasize a point Chris just made, as of yesterday evening after the market closed we did timely file our 10K. You can see it both on our website as well as the SEC Edgar website.

Now, for the fourth quarter results review for the quarter ended June 30, 2008. Gross revenues for our fiscal fourth quarter were $122.5 million an increase of $7.5 million or 7% compared with gross revenue of $115 million in the same quarter of the prior fiscal year. The positive change in revenue resulted in organic growth of our overall business driven by projects in our environment, energy and infrastructure markets. This growth was partially offset by two other items: one, is the completion of our RPD joint venture at the end of the third quarter in this fiscal year whereas that project had still been quite active in the fourth quarter of fiscal 2007. Additionally offsetting the revenue growth was approximately $2.3 million of lower than anticipated revenue on a northeast based energy project.

Going down the income statement the next item is subcontractor costs and other direct costs which increased to $57.3 million in the fourth quarter of fiscal 2008 from a level of $51.1 million in the fourth quarter of fiscal 2007 an increase of $6.2 million or 12.2%. During the quarter we experienced higher subcontractor requirements due to a change in project mix particularly in our energy related markets where we were working on three EPC or engineer, plan and construct projects which have significant material purchase and subcontracting components.

For net service revenue which we believe is the most important measure of TRC’s revenue generating capacity net service revenue, sometimes I’ll refer to it as NSR increased to $65.2 million from $63.9 million or 2% compared with same quarter of the prior year. Similar to the gross factors for gross revenue, net service revenue growth was driven by increased services for all of our markets and in particular those provided in the energy markets.

Moving down the income statement again to two other revenue related components the first item is interest income which was nearly flat versus the prior year quarter at $0.9 million. Insurance recoverable increased to $3.9 million in the quarter from a -$0.8 million in Q4 of fiscal 07. The insurance recoverable category is primarily associated with our exit strategy business and were higher in the quarter primarily due to exit strategy contracts that were incurring costs that are covered by and reimbursed by their underlying cost cap insurance.

Moving down the statement to the items of expense, cost of services for the fourth quarter was $66.7 million compared with $60.6 million in the fourth quarter of 07. That was an increase of $6.1 million or 10.4%. There are a number of components that I’ll ascribe to that increase. Part of the increase is attributable to an asset impairment charge of $0.5 billion related to the carrying cost of some electrical substation equipment that we jointly own. In addition, a $2.4 million project loss was recorded on an energy project in the Midwest area of our business. The remaining increase in the cost of services were primarily due to additional costs incurred as part of supporting the overall revenue growth of the company.

General and administrative expense for the quarter were $13.5 million an increase of $6.9 million from the $6.7 million level in 2007. The first point I need to make as we’ve made in the prior investor calls this year is that we’ve been transitioning throughout the fiscal year to a centralized management model and a common enterprise resource and planning system. As part of the financial planning process for fiscal 2008 we centralized and realigned under central management general and administrative functions that had been previously managed on a decentralized basis. As a result, we estimate that approximately $5.6 million of expenses that were previously included in cost of services in the same period of the prior year are now classified in G&A.

As far as the particular components of general and administrative expense, most of the increase in the fourth quarter can be accounted for by two items: unexpected litigation expenses of $4.4 million; and as you heard Chris mention before, restructuring related charges under our fourth quarter restructuring plan of $3.2 million. That plan included personnel severances as well as lease consolidations for 14 of our offices and exit from underperforming service lines. Notably we expect all of those changes to decrease future expense levels and I’ll talk about that more when we review full year results.

The provision for doubtful accounts increased by $2.6 million to $1.5 million compared to a $1.1 million credit in the same quarter of the prior year. This increase is a result of a specific review of uncollectable accounts and is consistent with our overall level of revenue for the quarter. As of quarter end we had a $6.2 million total allowance for doubtful accounts carried on the balance sheet as part of accounts receivable.

Depreciation and amortization expense for the quarter was $2 million, a decrease of $0.4 million or 17% from the $2.4 million level in the prior year. That decrease was the product of continued control over capital expenditures. Interest expense of $1.0 million decreased slightly by $0.1 million or 10% compared to the $1.1 million level in the same quarter of the prior year. Looking at the bottom line for the quarter, TRC reported a net loss of $16.1 million, $0.86 per share versus a net loss in the prior year of $4.3 million or $0.23 per share.

I’d like to move on now to the full year review of results. Gross revenue for the full year of fiscal 2008 was $465.1 million, an increase of $23 million or 5.3% compared with $441.6 million in fiscal 2007. As I described for the fourth quarter review the increases are attributable to organic growth for projects in all of our markets including environment, energy and infrastructure. The next item on the income statement is subcontractor costs and other direct costs. That category increased to $196.9 million for the year from a level of $185.7 million in the prior year, an increase of $11.1 million or 6%. This cost category contains costs that we directly incur and pass along to our clients as part of our project related services. During the year we experienced higher subcontracting requirements due to the type of project mix particularly in our energy related market where our work on EPC projects requires significant material purchase and subcontracting.

Net service revenue for fiscal 2008 grew $12.3 million or 5% to $268.2 million compared to $255.9 million for fiscal 2007. Net service revenue grew year-over-year and includes the impact of a large design build change order that we received during the year along with organic revenue growth in all of our core markets. For the cost of services line item, moving down to the expenses on the income statement, cost of service were $241.6 million an increase of $10.6 million or 4.6% compared to a level of $231 million in fiscal 2007. Overall, this growth was in line with and supportive of the $12.3 million growth in our net service revenue for the year and includes cost of services related to labor of $9.6 million incurred to support revenue growth. Additionally the change includes $1.5 million of increased claims cost associated with our self insured workers’ comp program and medical benefit plans as well as a project loss that was reported for a large project in the Midwest. The increases were partially offset by costs that are now accounted for as G&A under our centralized management model.

Now, I wanted to spend some time on general and administrative or what I call G&A which for the year were $40.1 million an increase of $16.1 million or 67.2% compared with $24 million in fiscal 2007. The first component of that increase is as I mentioned before, we have been transitioning to a centralized management model and costs that had been included as cost of services are now included as general and administrative expenses. We estimate that $5.6 million of expense that had been previously reported as cost of service is now classified and recorded in fiscal 2008 as a component of G&A.

A very large impact for us this year in G&A costs was $9.8 million of cost related to legal and litigation expenses as well as $3.2 million related to our restructuring charges taken in the fourth quarter of the fiscal year as part of our announced restructuring plan which I discussed earlier. Summing up these differences on a year-over-year comparative basis, G&A increased approximately $16.1 million however, the majority of the costs driving the increase are particular to 2008 and are not expected to be incurred at the same level in fiscal 2009. Specifically, the $3.2 million of restructuring charges incurred in fiscal 2008. We’ll also yield annual cost savings of an estimated $1.5 million on the leased facilities alone. As Chris mentioned earlier, many of the positions which we have reduced as part of restructuring as well as other initiatives are administrative and non-revenue earning positions which will yield additional prospective cost savings.

Our legal costs in 2008 were $5 to $6 million above what I would believe is our normal run rate of legal litigation costs. Further, $1.2 million of costs associated with the last stage of our enterprise resource and planning implementation project are particular to 2008. That project is now complete and I’ll brief you on its status later on. Thus, while 2008 experienced higher expenses related to our transformation efforts, we believe this will result in a leaner operation and will set up a lower operating cost structure for the future.

Going down the remainder of the income statement, provision for doubtful accounts increased by $2.4 million to $3.7 million compared to a level of $1.3 million in fiscal 2007. This level is consistent with overall revenues for the year and is the result of a specific review of uncollected accounts. The largest charge that we had on our income statement for fiscal 2008 related to goodwill and intangible asset write up expenses. We had a goodwill charge of $76.7 million to impair the value of the goodwill carried on our balance sheet. That goodwill impairment charge was the result of analysis conducted as of the end of the first quarter of fiscal 2008 and the charge was taken in that quarter.

Depreciation and amortization expense was $8.1 million decreasing $0.2 million or 3.1% from the prior year. That decrease was due to additional depreciation expense incurred in the prior fiscal year related to a reduction in the useful life of the older legacy accounting systems which were replaced by our new enterprise and resource planning system as well as continued control over capital expenditures. Interest expense for fiscal year was $3.9 million, a decrease of $0.4 million or 9.7% from the prior year. That decrease was primarily due to a $4 million decrease in the average outstanding loan balance on our credit facility as well as lower average interest rates incurred on that facility.

The income tax provision for the year was $12.3 million compared to a tax benefit of $1.3 million reported in the prior year. The $13.6 million swing in the year-over-year tax provision amounts it the result of a $12.1 million charge that was reported in the first quarter of fiscal 2008 to completely offset all of the deferred tax assets as of June 30, 2007. In addition, we have offset the value of any deferred tax assets created in fiscal 2008. [Inaudible] valuation allowance was reported because we have determined that it was more likely than not at that time that our deferred tax assets would not be realized as a result of insufficient estimated future taxable income. The valuation allowance now stands at $36.3 million and offset all deferred tax assets.

Bottom line for the year was a net loss of $109.1 million or $5.84 per share compared to a loss of $5.9 million or $0.33 per share for the same period in 2007. The loss for the year is inclusive of the $16.1 million quarter four loss I described earlier as well as the other significant charges incurred in prior quarters, primarily the goodwill impairment charge of $76.7 million and the $12.1 million deferred tax asset valuation charge. I should note in closing that those two charges for goodwill and tax evaluation allowance totaled $88.8 million and are non-cash in nature and while significantly impacting earnings did not impact the cash resources of the company.

I’d like to cover two items on the balance sheet that are of significance. First, accounts receivable ended the year with a balance of $124.2 million compared with a balance of $132.9 million as of the end of the prior fiscal year. That $8.7 million or 6.5% decrease in accounts receivable took place despite the earnings growth that I noted earlier. The primary factor driving the decrease was a measure called days sales outstanding or DSO for short. DSO decreased to 91 days as of June 30, 2008 from 110 days as of the quarter ended March, 2007 and 104 days for the year ended June, 2007. We’ve made great progress on that front. Improvement of DSO is a priority for the company. In 2008 we continued to achieve meaningful progress compared to both the prior year as well as industry benchmarks. Our goal is to continue to accelerate billing and collections in order to continue improving our overall cash position. Specifically we want to reduce DSO to a level below 90 days which would be in line with industry norms.

I should note that in reducing our DSO we benefit from the resulting cash flow and reduction in working cash flow requirements halved the unbilled component of accounts receivable to $29 million as of the end of the year from a balance of $54 million as of the end of fiscal 2007. Improvement on that front is the prime reason why we were able to reduce the level of debt outstanding on our revolving bank line this year and keep our payables flat despite the increased revenue.

Accounts payable ended the year at $55.5 million compared with $55.0 million in fiscal 2007 nearly flat despite the increased revenue and the increased direct reimbursable cost which drive this balance sheet item. The flat growth in accounts payable is a sign that while we experienced revenue growth we were able to maintain a balance on the working capital relationship driven by accounts payable and accounts receivable.

Moving on to other items beyond the income statement and balance sheet, I wanted to update you on both the Vision system, our bank agreement and our New York Stock Exchange listing compliance. Beginning first with Vision, the conversion to the new enterprise resource and planning system called Vision is now complete. We have been conducting regular monthly financial closings since April and have now timely filed our 10K. As we now turn our focus to using that system to improve our management of the company, we are now also implementing other tools and modules available in that vision ERP system. In fiscal 2009 we’ll be implementing the purchasing module in Vision so we can track purchasing commitments and better management our project cost tracking. We will begin using the so called dashboard tool in Vision which will allow us to host and analyze performance metrics in our business. The dashboard in Vision allows us to give rise to visibility of key performance data and importantly accountability in the management ranks for understanding and improving results.

Our bank agreement with Wells Fargo has been in place now for over two years. Wells Fargo, our lead banker is a AAA rated bank and we’re very satisfied with the relationship we have with them. We amended our bank agreement with Wells a number of times during the year and most recently in August, 2008 to implement our 2009 financial plan and waive the 2008 financial plan related covenants in that agreement.

One other item, we had issued an 8K earlier this month or earlier in August regarding a notification from the New York Stock Exchange that we did not meet their minimum continued listing criteria. Under their criteria we must meet one of two requirements for shareholder equity of $75 million or market capitalization of $75 million. Under their rules we had 45 days to supply a compliance plan and we did so by filing the plan with the Exchange yesterday.

That’s it for the financial results and Chris I’d like to turn it back over to you.

Christopher P. Vincze

I’d like to conclude my prepared remarks by reviewing our business outlook. TRC’s core marketplace energy, environment and infrastructure continue to be favorable long term sectors. Currently all three areas continue to exhibit robust activities with only samplings of market issues. The dynamics of infrastructure fatigue for both the energy and infrastructure markets are still requiring hundreds of billions of dollars to achieve a designation of state of good repair. Another round of hundreds of billions of dollars are required for expansion. Add to that the country’s desire for foreign oil independence and climate change in greening efficiency initiatives, Alaska pipeline offshore drilling and renewable energy and nuclear power initiatives all continue to place TRC in a better position from a technical services perspective. TRC is as well positioned in long term markets as can be in our industry.

A note of caution, with the material dynamic shift occurring with the credit markets, financial institutions and eventually other related circumstances the funding and financings of these markets could be impaired or delayed but it does not change the long term viability and opportunity. Specifically on the energy front we continue to have more work than we are capable of performing in all four elements of our energy markets: generation; related energy capacity; electric transmission; natural gas; and energy management. Some recent wins since our last call include a $3 million substation design to bolster electric service reliability in a New England state, another $3.5 to $4 million energy efficiency project in New York regarding a multifamily program. I discussed in our last call our energy efficiency initiative that won the energy star partner award. We continue to see tremendous growth opportunity in that particular service line.

With regard to infrastructure the dynamics hold as previously stated with additional upside as a likely stimulus package will eventually receive approval. Timing will be the issue. As far as our land development side, we certainly have been impacted with the recent real estate market decline. Land development business is a small part of the TRC portfolio, clearly has been impacted in particular in the west coast and southwest and we shut down some of those activities in June as part of our restructuring. Recent wins in TRC’s infrastructure business include multimillion dollar awards within three major departments of transportation: California, Penn DOT; New York State; and this is typical transportation type work we perform. Also recently TRC was awarded another stage in the securities engineering servicing contract for a command center for a transit program in the northeast.

Finally, with regard to our environmental businesses which still represents the majority of our overall business and many times services as the introduction or incubator of other TRC services, maintains a strong pipeline of activity. While the basis of this business in years past was motivated by regulatory issues, now they’re motivated by things such as climate change, sustainability and merger activity to name a few. The firm is certainly a market leader in many specific areas such as air consulting, cultural natural resources and environmental remediation. Overall and reputationally one of the top firms in the country and we are certainly in the top 50 environmental based firms in the US by environmental revenues.

Recent wins in the environmental space include a $6 million award from the Bureau of Land Management for some cultural resources work in the Southwest, a $4 million add on litigation support project for health risk assessment and air consulting work in Missouri, another $3 million additional work for a power plant repositioning which includes a full scale demolition and new environmental remediation work. This phase of the project is already on top of a $30 million contract we were awarded a few years ago and another $20 to $30 million contract ending future timetables. This particular initiative is one that the company has chosen to take forward as a fiscal ‘09 and beyond market initiative.

In our expertise overseeing decommission, demolition and environmental remediation of power stations alongside our energy related services including licensing, permitting and project engineering we launched RE Power. The goal of RE Power is to provide energy companies with a one stop resource to gain maximum value for power plant assets within any constraints imposed by the power grid and the larger communities. These projects can include safely removing the plant from service to demolition and environmental cleanup in to a redevelopment phase or preparing the existing power plant for repowering with more economical fuel sources or more efficient generating equipment. We are currently pursuing a number of plants throughout the US that meet these needs. I will report back in a quarter or two of our successes in this area.

Operationally we have a number of initiatives for fiscal 09 which are generally focused on improved profitability and improved cash flow. With the use of our functioning Vision enterprise system, as Tom updated, we are confident that our management processes and our attention to execution are now in place. I will provide more specific highlights of our Q1 initiatives during our next call.

In closing, I would like to reiterate the fundamentals of the company continue to improve. The marketplace in which we participate is poised for long term growth. The strategies we are employing and the company’s strengths provide us with a unique advantage and now we have the systems to manage our progress effectively.

With that, I’d like to turn it over to questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Buzz Zaino – Royce & Associates.

Buzz Zaino – Royce & Associates

Can we address cash flow? Are we cash flow positive now or do we expect that to progress towards that as it goes on?

Thomas W. Bennet, Jr.

We’re cash flow positive as [inaudible] before, our operating cash flow for the year was a positive about $3.9 million and our net outstanding on our credit facilities dropped by a similar amount.

Buzz Zaino – Royce & Associates

There is a seasonality to your business during the winter months where business is not as robust if one, is that true? And two, if that is true would you be cash flow positive in that environment?

Christopher P. Vincze

The seasonality decline usually occurs during our third quarter. In Q1 which we’re just in the process of completing and Q2 are generally very positive quarters for the firm. Tom, would you like to address that?

Thomas W. Bennet, Jr.

Our cash flow varies throughout the year. I haven’t studied the seasonality curve of it in a way that I could interpolate an answer for your question. You’ll notice that as far as our quarters go that cash flow typically follows our revenue and accounts receivable balances so that the best thing to monitor as far as cash flow is not necessarily seasonality but I would look at our account receivable changes as they relate to revenue as a measure of cash flow.

Buzz Zaino – Royce & Associates

Obviously we have an election coming up, both candidates seem to have environmental concerns, how much of your business would be somewhat reflective of government activity? Any one philosophy better suited to your business?

Christopher P. Vincze

According to both of the platforms provided by the candidates they both appear to be environmental friendly. Now, historical business for us, in particular in our environmental divisions have been regulatory oriented or certainly they were major drivers in our opportunities but over time that really has changed to more market dynamics, sustainability, more efficient operating and maintenance of conglomerates in which case impairment issues are dealt with more proactively. So, while I do believe some sort of environmental regulatory process climate change issues driven by the federal government will certainly support our business we really do believe the general pursuit of a greener, cleaner, better performing operation is really what’s driving our industry right now.


Our next question comes from [Mike Brigg – MM Financial].

[Mike Brigg – MM Financial]

I noticed that the auditors letter still indicates a material deficiency in accounting system or in accounting methods despite the implementation of your Vision system. Can you tell us what those deficiencies are and how they might be addressed?

Thomas W. Bennet, Jr.

The material weaknesses that you’re referring to are weaknesses on control over financial reporting and we actually reduced that list from nine to seven. Not that I’m proud of having seven but we knocked a few off the list. Section 9A of the 10K details each particular weakness. We have taken steps to both form a plan to remediate those weaknesses, test that and our plan for fiscal 2009 is to have those weaknesses remediated. The Vision system to answer your particular question has only been fully operational now for about six months. Under, I don’t want to get in to accounting standards and things like that but to declare a material weakness finished and corrected you have to have not only a system that’s been up and operating but the appropriate controls designed and in place and a period of time to operate under to conduct the testing necessary to provide verification.

It’s our plan in 2009 to have all of those things in place, the Vision system fully operating, the appropriate controls in place, operation activities conducted and then as part of our plan testing. A number of other steps have been taken, we appointed a director of internal audit in July. We hadn’t had that function previously, it’s an important part of what I call trust and verify. That is verifying that your internal management systems are working well and working within your prophecies and controls. We’ve also hired a firm to conduct and enterprise risk assessment which is a standard action by companies to assess all of their risk so that you can have your most thorough controls apply to areas where you see the greatest risk and lesser controls in areas where there is reduced risk.

That plan will also inform an internal audit plan that we will not only use our director of internal audit to conduct audits but we’ve also contracted with an outside firm to supply us with additional internal audit resources which we’ll use early on in the fiscal year to test our SOXs weakness remediation status and track it through to completion.


At this time we’ve reached the end of the Q&A session.

Christopher P. Vincze

Thank you. Once again thank you everybody for participating on our investor call. We appreciate everyone’s patience and support and look forward to speaking with everyone again in November. Thank you and goodbye.

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