TRC Companies Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: TRC Companies, (TRR)
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TRC Companies (NYSE:TRR) Q4 2013 Earnings Call September 12, 2013 9:00 AM ET


Martin H. Dodd - Senior Vice President, General Counsel and Secretary

Christopher P. Vincze - Executive Chairman, Chief Executive Officer and President

Thomas W. Bennet - Chief Financial Officer, Principal Accounting Officer and Senior Vice President


Steve Shaw - Sidoti & Company, LLC

John H. Curti - Singular Research

William D. Bremer - Maxim Group LLC, Research Division


Good morning, and welcome to the TRC Companies' Fourth Quarter Fiscal 2013 Financial Results Conference Call. Today's call is being recorded. [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.

Martin H. Dodd

So thank you, Brenda. Welcome, everyone. We're glad you could join us today. I'm here at Lowell, Massachusetts with Chris Vincze, our Chairman and Chief Executive Officer; and Tom Bennet, our Chief Financial Officer. As you know, the primary purpose of today's call is to review the financial performance for the fiscal quarter and fiscal year ended June 30, 2013. But also in the course of today's discussion, we'll be giving you some of our thoughts on where we think the company is headed and where our markets are headed.

As such, to the extent we talk about future events, those remarks would constitute what are called forward looking statements under the federal securities laws. Forward looking statements are subject to risks and uncertainties and they could change materially over time for a variety of reasons, over which we may have no control. And for a more complete consideration of factors you should keep in mind with respect to forward looking statements, we urge you to refer to our public SEC filings, including the 10 K we filed this morning, our press release, as well as the presentation slides, which are posted on the Investor Center of our website.

With respect to those slides, we've prepared those as a visual supplemental to our discussion today and we hope you find them helpful. They should be considered in the full context of the 10 K, press release and our commentary on the call today.

And with that, I'd like to turn the call over to Chris.

Christopher P. Vincze

Thank you, Martin. Welcome again to TRC's fiscal '13 fourth quarter and overall year end earnings call. Our agenda will be similar to the past quarters. I'm going to provide some overview comments regarding the fourth quarter and the year, including TRC segment discussions. Tom is going to provide a thorough financial review of both the quarter and the year. And I'll finish the discussion on TRC's growth strategy and business outlook. As Martin mentioned, we're using a slide show for the first time, so we will probably be a little more deliberate about reviewing those slides, assuming that some of you may not be in a position to have those slides available. But they are very much illustrative of our conversation.

A few observations before I discuss some of the points on the slide regarding the fourth quarter and the year. The company had a very strong quarter and a very good year. We continue to exhibit improvements across the board from a financial metrics perspective. Growth, operating income, EBITDA, our balance sheet, our cash position, our credit facility, equity market cap, all have continued to improve over the course of the year and certainly from the last few years. Our strategic positions with our key accounts in our markets segments are stronger than ever. We have a focused, tested and talented team, showing their capacity to grow a company profitably, both organically and through acquisitions. We've now executed 8 transactions over the last 2 years. Needless to say, we have areas requiring improvement, certainly related to performance excellence on some project execution and margin improvement activities, which we are dedicated to work on over the course of the next year. All the while, the TRC markets, with slight exception, are still sluggish but improving. I will elaborate further in a moment as we go through the slide deck.

So specifically for the quarter. Historically, our fourth quarter is our best quarter, certainly the results shown to you on the slide with our NSR increasing 10% year-over-year, EBITDA increasing 8% year-over-year, our operating income 3% year-over-year and importantly, our future indicator of our backlog increasing 5% year-over-year. And I'll certainly speak to some recent wins supporting some of that backlog growth in a moment.

As you turn to the next slide, we have a distribution by segment and client. Just to point out some of the details of the slides. The first slide, net service revenue by segment is our actual financials from the fiscal year '13 and the estimated client distribution pie chart is an estimated amount of client revenues based on analysis, so those are estimated numbers.

Importantly, from the net revenue segment side, you can see our Energy business, consistent with the past quarters, has been growing most dramatically compared to the other 3 2 sectors, 14% year-over-year. Our largest segment of the business continues to show growth opportunities but not nearly to the level of our Energy business. And the same is true of our Infrastructure business. However, Infrastructure in the fourth quarter did grow by about 8% over the year and had a very nice bottom line growth year-over-year of about 40%. So all in all, we're seeing some very good trends on a quarterly basis on all 3 segments and continue to show growth across the board for the full year with Energy leading the charge.

As far as from a client perspective, we provided this pie chart to show a little bit more about our distribution of our business and where some of our strategies are being focused, which I'll be speaking to later. But you can see from an Energy related business, over 60% or approximately 60% of our business comes from the power utility and oil and gas space and hence, lots of our investments and strategies are related to that business. These are primarily investor owned utilities and many of the large energy developers and big oil companies. Transportation is a significant portion of our business. And this is a combination of private corporations, railroad in particular, as well as public transportation agencies. And then our other categories constitutes from industrial, state, municipal, some level of federal and various other types of corporations.

Our next slide and the next 3 slides, 5, 6 and 7, break down our segments and some of the drivers and challenges related to each. And I'll speak to the circumstances related to the quarter, in some cases, overriding issues for each of these businesses.

In the Environmental sector, we saw some strong growth for the quarter. Some portion of the growth was attributed to our GE air businesses, which we acquired in the third quarter. Nonetheless, we had a fourth quarter growth of 8% and a very nice bottom line growth of 10% for the quarter. We are seeing of 3 primary drivers right now in that business, both in the fourth quarter and ongoing in the future. The development of upstream, midstream and downstream activities related to the natural gas and shale activity is very significant right now. And the company is enjoying that opportunity as it continues to move forward. The reemergence of industrials and related capital spend, we're seeing lots of industrial campuses moving forward with energy transformations themselves, as well as consolidation activities as they reinvest into their inefficient processes. And TRC is a part of improving those circumstances. And then finally, another highlighted driver is the power plant decommissioning activities. I'll speak to a little more to that later. But clearly, as the coal plants are moving forward with decommissionings, TRC is involved in the complete repowering or decommissioning activities. And it certainly crosses a lot of our Environmental different businesses.

While we are enjoying nice growth in both revenues and profits for the quarter, we still see some present challenges. For example, litigation related to air regulations and other coal rules are continually happening; will the compliance dates of 2016 and '17 be held; discussions to clean up fly ash ponds, develop renewables, convert to natural gas or enhance APC devices are just some of discussions utilities are having. The exploration of natural gas and future exportation is a big question mark as to whether the market continues to grow as aggressively as it might. So these uncertainties are clearly going to help define the robust nature of our business going forward. Obviously, some of those activities are moving in a positive way for us certainly most recently. And we would hope over the near term that they will continue to improve.

Pricing pressures is continually an issue. Many companies have migrated into the space, especially some of the larger federal contractors. As they see the federal markets declining, they have certainly chosen this particular market segment to focus in and through acquisitions are now becoming viable players in the market. And that continues to support pricing pressure issues.

The federal and overall public expenditure markets are still lighter than we've seen historically. Certainly, the more local public market states in particular are starting to improve. And we'll talk about that in the next slide. But from a federal perspective, huge decline is estimated to be at about 20% a year certainly for the next year or 2.

Real estate and construction spending is improving. But certainly as a business, we're not seeing that yet as a real opportunity. And that is a still a very important element of our business. As urbanization takes place, brownfield development turns into new sites, those elements have not turned on yet and have not really contributed to our growth as of yet. But we're hoping again from a trend standpoint that, that will change soon.

On the next slide, good news on the Energy front. Again as you can see, we had continued nice growth on revenues in our Energy business of 11% and segment growth of about 5% on a year-over-year basis. Importantly, in this area of business for us, regardless of those other environmental drivers and discussions on the challenges, utility capital spend programs on aging transmission and distribution infrastructure have to happen. So ultimately, we are well positioned in those areas of the markets due to reliability demands and inefficient systems. So while more could be spent there, the important thing is there are continued capital spends in that area of the business and TRC is well positioned to continue to work there.

The second point, dynamic revolutions in domestic fuel continues to shift the paradigms of where that capital might be spent. And again while we aren't clear yet as to where everything will be spent, importantly all of those issues are being spent on as it relates to our Energy business. So we will continue to see strong opportunity related to energy efficiency and other elements of asset transformations within the utilities. So overall, the segment drivers, while uncertain in some ways, is still very positive for the TRC services provided to that market.

Again on the challenges side, I would say the latter points are really what we're seeing. The biggest issue of client capacity and strategy to manage projects is a major change. It's been occurring over the last couple of years. I was just recently with the one of those utilities over the weekend, speaking to some of their leadership. And they are having problems getting projects through the process. So while we are continually working on a number of design projects, they can't get it through the construction phase based on their manpower capacities and their utilities talent pool right now.

So what does that lead to? Migration of larger competitors into the market, and again, another new shift in how these projects are managed. These larger companies are coming in and acting as program managers of some of these businesses. So all of a sudden, we're not working necessarily directly for the client, but we're working for a major competitor that is now program managing these opportunities. So some of those activities are happening and changing the environment in which we're working. So clearly, those are challenges. As we understand those roles, clearly our objective is to continue to do both on the true engineering side and providing design documents, as well as on the program management side of managing some portfolio activity.

And then lastly, which is related to the same issue with the utilities, is finding talent and executing at the highest levels of performance while growing rapidly. Clearly, this has impacted us to some degree on project execution. Growing businesses at 10%, 20% a year certainly confound some execution skill sets as we grow into new clients and these new circumstances. So certainly something we are focused on.

Our third segment, Infrastructure, again is a very positive new slide. It does keep getting better here over the last couple of years. Net service revenue grew 8% year-over-year and our segment profit for the quarter grew over 40% year-over-year, again a dramatic improvement on the bottom line. Most noticeably, I think from a segment driver perspective, this marketplace has had the most real improvement over the course of the last 12 months. And I would apply the second bullet point of additional state funds for capital projects. We are seeing significant budget increases across many of the states in the country due to new revenue streams, either gas taxes that have been passed over the last couple of years or other related taxes that are now supporting infrastructure in those markets on top of frankly better managed states that have now realized the importance of an efficient infrastructure system in their state. So again we are certainly seeing a much more dynamic flow of capital being spent in the infrastructure market, again primarily at the local and regionalized levels.

Our expansion into the markets and investments over the last couple of years is also clearly helping us. Historically, we operated more as a regional business. But with many investments, some key hires, we expanded multiple services in geographies. So everything from highway design, structural bridge design to construction inspection services, we have expanded those across the country and we're really seeing the benefits of that activity. I would also add that we've expanded into the private sector markets of TRC's other areas of business within our Infrastructure service line. And I'll speak to a particular project in a second.

Finally, as it relates to segment challenges, significant competition. Frankly, this is the largest segment that TRC plays in despite it being our smallest segment of our business, it is loaded with every major competitor, locally, internationally and regionally. And again there is a significant investment that needs to be done if you participate in a state or in a particular market. So again it is a highly competitive market. But again the good news is the increase in spend is really supporting it.

Next slide, and before I turn the mic over to Tom, really provides a sense of where we're heading in the future as a metric, our backlog. And again it continues to be a very stable backlog. We've seen growth of 5% year-over-year, most materially, a 20% growth in our Infrastructure backlog, which certainly illustrates some of the discussion points I just made. While our Energy and Environmental are holding steady, again is a good indicator and again from my perspective, we certainly anticipate based on the volume of opportunities, which I've been mentioning on and off the last couple of calls, we certainly do believe our backlog has a great opportunity to grow over the next couple of quarters. So we will certainly keep our eye on that.

Some highlighted new wins, which again are some very exciting projects, indicating again some future growth opportunities for the company. EPC projects in Energy, we recently won a public service, a New Hampshire EPC project, again a $5 million to $6 million substation project that includes everything from design, procure and construct through subcontractors a fairly small substation. Again nice to see that, that particular market is returning. We have not seen a whole lot of EPC projects here over the last few years and they're starting to return. From the energy efficiency perspective, our NYSERDA multifamily win, we have historically been managing that particular project. It went out for another round, and we won it again. It's a multiyear $8 million to $9 million program management contract to manage energy efficiency programs in multifamily housing throughout the state of New York.

Probably one of the highlighted projects on the list, which we've been awarded, but we have not contracted yet, so it's not a part of the backlog, is the Sabal Trail natural gas pipeline project, a highly noted project in the country. It's 460 miles of interstate pipeline throughout the Southeast, basically Alabama, Georgia and Florida, and again requiring many of TRC's services, primarily in the permitting side. Again we anticipate multimillion dollars over the next few years. And certainly we will put out a press release and announcement as we close on that contract. Alabama Department of Environmental Management showed some unique skill set of the company. We're hired by the DEM in Alabama. It's a term contract to support expert advisory services and reviewing investigations and remediation activities that are occurring throughout the state of Alabama at the various bases in the state.

On the Infrastructure side, a private sector account providing a water/wastewater treatment plant, again a confidential client, that we were just awarded. So again some of our breakthroughs in water/wastewater work, as well as the breakthrough as it relates to private clients in our Infrastructure businesses. And then finally, more of a typical contract win, we won another district in Pennsylvania DOT, doing some highway design work and construction engineering inspection work.

So with that, a good picture of our backlog and recent wins. One last point before again I turn it over to Tom is headcount is a metric I provide frequently. And at the end of June, we are hovering in the 2,800 to 2,900 full time equivalents, and since time, have acquired another firm or 2. We're really close of that 3,000 number, which again is a new milestone for the company.

So with that, Tom?

Thomas W. Bennet

Thanks, Chris. Good morning, everyone. Starting with Slide 9 of the presentation package, I'll review some financial details of our fiscal fourth quarter compared to same quarter of the prior fiscal year, along with some highlights on the full year comparison.

As Chris mentioned, we closed the last quarter of fiscal 2013 strongly, achieving new quarterly net service revenue record of $86.9 million, up 10% compared to the prior fourth quarter and driven by growth in each of our 3 sectors. EBITDA for the quarter was $8.1 million, up $0.6 million or 8% compared to the fourth quarter of the prior year. I always talk about EBITDA as a percentage of NSR. That margin ratio was relatively flat at 9.3% compared to the 9.4% in the prior year quarter. Note that the EBITDA statistic is non GAAP and is calculated by adding depreciation and amortization expense to the operating income amount.

Operating income of $6.2 million was achieved in the quarter, up $0.2 million or 3% compared to the fourth quarter of the prior year. The increase in the operating income was net of a number of factors, including the NSR growth, lower doubtful account provisions, offset in part by higher intangible asset amortization cost stemming from recent acquisitions. Going to the bottom line, a net income of 28 $24.8 million or $0.83 per diluted share was significantly and positively affected by the tax benefit in the quarter and accounts for much of the comparative difference between the $0.20 per diluted share achieved in the prior year fourth quarter.

Moving to Slide 10 for some more details on the income statement. Cost of services as a percentage of NSR was 80.4% in the quarter compared with 78.5% in the same quarter of the prior year. Accordingly, our non GAAP measure of gross margin percent was 19.6% in the quarter compared to 21.5% achieved in the same quarter of the prior year. Gross margin percentage was negatively impacted in the fourth quarter due to cost performance on several large fixed priced projects in our Energy and Environmental segments, as well as growth related impacts from staffing costs and acquisition integration costs. But continuing the pattern of improvement I mentioned in the May webcast, gross margin for the quarter was up 4.4% sequentially compared to the 15.2% gross margin in the immediately prior third quarter.

The G&A expense to NSR ratio was 11.2% in the quarter compared to 10.8% in the same quarter of the prior year. The G&A ratio was negatively impacted due to cost incurred in the quarter for replacement of our credit facility, including acceleration of the remaining unamortized cost for the prior credit facility. The $18.7 million in our income tax benefit for the quarter stemmed from release of the $25.6 million valuation allowance on our deferred tax assets, net of the $6.9 million of our current period deferred income tax provision. If you divide the $18.7 million tax benefit by the 29.8 million weighted average diluted share count for the quarter, the income tax benefit is about $0.63 per diluted share. In fiscal 2014 and beyond, we will diminish and then exhaust our federal tax loss carryforward. Accordingly, our income tax provision will progress rapidly to the 40% state and federal effective tax rate that is typical of companies in our space.

Moving to some of the full year data on Page 11 in the presentation package. The $320.4 million NSR total for the year was up $18.6 million or 6% compared to the prior fiscal year and includes growth in each of our 3 segments with about 62% or 1/3 of the growth coming from organic activities and the remainder from acquisition related activities. Looking at EBITDA, a non GAAP metric, for the year, it was $25.5 million compared to adjusted EBITDA of $24.4 million in the prior year. The 7.9% EBITDA to NSR ratio for the year was slightly below the 8.1% ratio in the prior year. And note that for comparative clarity that EBITDA in the prior year is adjusted for the Arena litigation reversal item.

Moving to Slide 12 to give you some more details on the full year income statement. Operating income of $18.6 million in the fiscal 2013 compares to $30 million in the prior fiscal year. As you can see, the prior year was significantly affected by the reversal of the Arena litigation item and increased operating income in that year by $11.1 million. Also affecting operating income was the $1.4 million increase in depreciation and amortization expense due primarily to increased intangible asset amortization stemming from recent acquisitions.

Looking at the bottom line for the full year. Net income was $36.3 million or $1.23 per diluted share compared to $33.6 million or $1.16 per diluted share in the prior year. As I mentioned, both fiscal years were affected by significant items related to litigation and income taxes. Net income for fiscal 2013 was affected positively by the large tax benefit that I mentioned earlier. If you again divide the $18 million tax benefit for the full year by the 29.6 million weighted average diluted share count for the year, the tax benefit accounts for $0.61 per diluted share in the year. Note also the prior year had a tax benefit of $3.9 million or about $0.14 per diluted share. And in addition, the prior year EPS was positively impacted by the Arena litigation reversal of $11.1 million, and assuming the 28.8 million diluted share count in the prior year, accounts for about $0.38 per share of that year's EPS.

Looking at Slide 13. As I do each quarter, looking at DSO and cash and the balance sheet, our DSO or days sales outstanding metric was 83 days at the end of the year compared with 78 days in the prior year and 88 days in the immediately prior third quarter. Back in May, I mentioned that we intended to make progress on improving the then 88 day DSO metric to be more in line with our target of 80 days or less. We did end up reducing DSO by 5 days in the fourth quarter, but we ended up slightly north of our 80 day target and higher than the prior year. And in any case, we're still pleased with our year end cash balance.

We ended the quarter and year with $18.1 million of cash compared with $16.6 million in the prior year. Free cash flow, which is a non GAAP measure, was $10.5 million and is based on $14.4 million of positive cash flow from operating activities, offset by $3.9 million of capital expenditure activity. Note also that our year end cash balance was affected by the $7 million of cash used for acquisition related activities during the year compared to the $3.5 million of cash used for acquisition activities in the prior year.

Chris, those are my comments on the financial statements. Back to you.

Christopher P. Vincze

Thank you, Tom. If you go to the slide, Page 14, our growth strategy over the past few years. TRC has invested significantly in our growth strategy. And as you can see by the chart on the slide, we are very balanced in our approach between organic and acquisitive growth strategies. We now have an established national key account program, a number of key national initiatives, as well as regional account programs. In fiscal '14, we're actually launching TRC's power/utility group, which will be specifically focused on strategy, business development, marketing and sales of all TRC services to the power/utility markets. The small team of former utility leaders will be comprised of experts across the TRC service portfolio in which they will be supporting all elements of our business.

In addition to those internal initiatives, we are continually pursuing some strategic acquisitions, which support our service offerings and our geographical footprint. Listed 3 of the acquisitions we did in fiscal '13. Just as a reminder, Ocampo Esta is our power delivery engineering business that's located in Southern California, supporting our power delivery and energy engineering businesses. GE air emissions testing business, which we acquired at the beginning of the third quarter, supports some of our air measurements and air quality businesses. And then our Heschong Mahone Group acquisition, which occurred again in the third quarter, based in Sacramento, really supports our buildout of our energy efficiency businesses in California. So all in, again we are pursuing high margin organic opportunities in 2 primary markets, utility/power and oil and gas with both our internal and our organic investments.

If you turn to the next slide, a recent acquisition, which we announced on, I believe on July 22, is Utility Support Systems. Again an engineering based company based in Atlanta, Georgia, adds critical mass to our distribution engineering business, really supports our emergency response activities. Hurricanes continue to be an unfortunate good thing for our business. And certainly, we have geared up as well to support those needs of utilities and our customer base. The acquisition supports our geographical footprints, both in the Southeast and also in Texas locations, also providing us some additional new client bases, such as Georgia Power and Oncor as examples. Total employee base is about 130 full time employees and the remaining staff in a part time emergency response basis. Additionally, they have databases to bring on quite a few more people as storms happen. Last year's revenues were about $12.2 million, which I think we announced during the course of the press release. So again very excited to have another element in starting to build up our Southeast and Southwest presence in our Energy businesses.

Next slide is a comprehensive slide on the market outlooks. Again as you read through it, it's very positive from our perspective, although I do caution with that positiveness that there are improving conditions across the board, but there's still great amounts of uncertainty that are occurring both at the federal policy level to corporate spend levels. And I would only add that the international economy and social crises that are occurring clearly are going to potentially impact these markets.

Overall, Energy is solid from our perspective, both the short, medium and long term. And again a number of things continue to drive that opportunity for our business. Most recently, NERC, which is a new kind of a regulatory agency, is looking forward to potentially find utilities that are not moving forward with fairly rigorous reliability standards, hence, the continued capital spend in reliability issues. If FERC 1000 goes forward, it really opens up a competitive nature of transmission across the country, which again will drive quite a bit of capital investment in areas that have typically might have been static. Again there's a number of environmental regulations that will continue to provide opportunity. And certainly our energy efficiency business is well positioned in a very good market that is showing much better returns than, I think, originally estimated to the utilities. And we anticipate 10% growth at least a year for the upcoming years.

From an Environmental standpoint, again short term, still sluggish as I've indicated. Clearly, our results show that. But again solid medium term outlooks certainly as it relates to energy in the power markets. As it relates to environmental services, decommissioning, in particular, is a great opportunity for TRC. There's over 150 plants being contemplated. We are in the middle of discussions on numbers of those plants and certainly would anticipate additional wins there in the course of the next upcoming quarters and years. Non federal markets are estimated to grow by third party analysts of upwards of 4% to 5% a year. And certainly, we think that is consistent with our view of our client base.

Infrastructure, as I said earlier, probably the most dynamic shift, short term, really has improved in terms of outlook and again continue to have very solid medium and long term outlooks. The amount of capital needed to just get the country's infrastructures to state of good repair is enormous. Again the historic problem is where does the funding come from? Again we're now starting to see states able to fund these things at a higher level than they have the last 4 or 5 years, which is certainly a good indication of growth. And then the use of public private partnerships in combination of commercial process is really starting to take hold in a number of states. And then again the potential for other programs as the economy improves is great, specifically with a National Infrastructure Bank. So with all that said, we are very bullish on the markets that we sit in and where they're heading, primarily in the medium and long terms but also now beginning to see short term improvements.

Last slide, and then we'll open up to questions, is really a summary, a recap of where we are. Again as I just said, TRC is very well positioned in markets with solid opportunities, both short term and long term. And again as I said, the last couple of quarters, we are seeing momentum to the positive, at least as we see it. The company has continued to focus the last couple of years, in particular, on a focused profitable growth strategy. The management team has shown the ability to have transformed itself from restructuring and repositioning to a real growth company. And the results, I think, exhibit that. We continue to move forward with a very strong balance sheet with our cash position, our credit availability to further our investment strategy, so we are well positioned to continue to do the right things moving forward. And again with a stable backlog that we anticipate should grow over the course of the next few quarters, signifying a strengthening business.

So with that, I'd like to turn the microphone over to Brenda for questions.

Question-and-Answer Session


[Operator Instructions] And our first question comes from the line of Steve Shaw with Sidoti & Company.

Steve Shaw - Sidoti & Company, LLC

Do you have the headcount from the same time a year ago?

Christopher P. Vincze

I don't have it at my fingertips, Steve. Certainly we'd be happy to get [indiscernible].

Steve Shaw - Sidoti & Company, LLC

Okay. And then Tom, I think you mentioned that part of the SG&A increase was related to the replacement of the credit facility. Do you have a dollar amount related to that?

Thomas W. Bennet

Yes. It's about $350,000 of cost that we amortized and the legal fees associated with it to get the new deal closed. So about, call it, $0.4 million rounded.

Steve Shaw - Sidoti & Company, LLC

Okay. And lastly, the last few acquisitions sort of hit your primary target regions. Are you guys still focused on the same regions? Or is there new footprint you guys might be looking at?

Christopher P. Vincze

Well, we're really building from positions of strength and then exploring out from there. But the Southwest markets, California markets and then breakthroughs in the Mid Continent and Southeast. Again being a national player, we are very strong up and down the Northeast quarters, down through the Mid Atlantic. So California has historically been a strong suit as is Texas. Now we're venturing into again Southeast, which is probably our weakest geography. By the way, we have the answer on the headcounts, approximately 2,600 a year ago.


And our next question comes from the line of John Curti with Singular Research.

John H. Curti - Singular Research

I am new to the story. I'm trying to get a little bit of maybe a longer term perspective in terms of where gross and operating margins can go. I know you've had some you've come through a very tough period. So I'm trying to get a handle on maybe where things can ultimately go in terms of gross margins and then operating margins for a service business of this type. That's my first question. What are your...

Thomas W. Bennet

This is go ahead. Did you want to pose your second question as well?

John H. Curti - Singular Research

The second question refers to your Infrastructure segment, very early on, you mentioned your smallest segment but with lots of potential but lots of competition. Wondering, is that a segment that could see acquisitions to try to become a larger player in that market? Or does the strengthening market give you an opportunity to maybe exit that business since it is relatively small to your total?

Thomas W. Bennet

Right. John, this is Tom Bennet. Let me follow up on your margin question. I'll turn it over to Chris for the Infrastructure related question. John, in prior calls, since we don't give guidance, I have spoke to margin in the form of the EBITDA to NSR ratio, which a number of people in our space focus on. I've said that over a multiyear horizon, the company's goal is to hit 10%. And certainly, when you hit something, you want to go beyond it. But 10% is the goal we're seeking on the EBITDA to NSR ratio that I'll mention that in every webcast as we track toward it. Any kind of follow up on that? That was kind of the brief touch.

John H. Curti - Singular Research

That's fine for that. And just an unrelated follow up is you mentioned the tax rate would begin to ramp up rather quickly now that you've exhausted most of your deferred tax allowance. Over what timeframe do you anticipate that? And what would you anticipate at least maybe for a preliminary tax rate for the upcoming fiscal year?

Thomas W. Bennet

Yes. I think taxes are somewhat tied to details of the income statement. But for this year, I expect us to progress rapidly to the 40% typical rate that you see of companies in our space. Well, we'll probably do that, progress through first quarter, second quarter. And by the full year, we'll look like a 40% taxpayer, both as it relates to the provision but also as it relates to the cash outflow for taxes.

Christopher P. Vincze

John, on the Infrastructure story, certainly historically, we've looked at that business in many different ways. And it was not nearly performing to the levels it is now. Secondly, we've really integrated a lot of their strategies into our commercial market clients. And again while we look at our 3 segments, they're very well integrated in strategies, activities, sales and marketing, et cetera. So overall, it's a growing marketplace at this point. We've challenged certainly the team to continue to do its great performance. The recent investment strategy, certainly from an acquisition standpoint, are really to build around our Energy play. We continue to believe that's the case certainly in the near term, and we'll reevaluate certainly as time goes forward as to our ability to step into the acquisition game for Infrastructure. But right now, we're really focused on our Energy play, which supports our Energy and Environmental service businesses, and continue to invest organically into the Infrastructure space.

John H. Curti - Singular Research

You mentioned that it's all 3 of our segments are well integrated in terms of various activities. So even though it remains right now, it's a fairly small portion, there's benefit to having it integrated with the other 2 segments and maybe possibly helping gain additional business for the other segments in some form or fashion.

Christopher P. Vincze

That's exactly right. As markets verticalize, a lot of our client markets, for example, a wind farm in Pennsylvania, and I'll keep the client nameless, hired us to do the geotechnical engineering and the roadway design to get to the wind farm and throughout the wind farm. So our ability to now bring that skill set to that project, in addition to permitting it and the various power delivery engineering services, we really have an envelope of services that are becoming more unique and a differentiator than most of our peers, especially on the Energy play. So we really view the Infrastructure business as very strategic now they are a company. And again as we continue to push its commercialization, not only is it getting better in its regular markets, it's supported the rest of the TRC's portfolio.

John H. Curti - Singular Research

And then one last question. You mentioned now, I guess, kind of given the delays and funding issues, et cetera, that in many instances now you're working as, I guess, kind of maybe almost like a subcontractor to some of your competition. Does that in any way depress margins? And is that a potential for pressure on margins going forward if more of your work ends up being handled in that way?

Christopher P. Vincze

Well, whenever you add another layer of, let's say, bureaucracy to a process, there are inefficiencies that happen, one; and the relationship between the 2 organizations and the individuals responsible; three, the understanding with the client and how involved is that client now as opposed to just the other vendor or supplier that's providing the program management activity. So clearly, there is opportunity to depress some margin more because of the scope and other kinds of interpretational issues. But at the same time, again it's our challenge to make sure we understand those things as we become a part of the program like that. And then two, more of the challenge is how do we become that entity as opposed to just the supplier and again provide comprehensive service. And again all 3 models are being used right now. So again it's a change in the paradigm. It definitely is an uncertainty element of how we're going to execute. But again I think very doable from the perspective of knowing it now.


[Operator Instructions] And our next question comes from the line of William Bremer with Maxim Group.

William D. Bremer - Maxim Group LLC, Research Division

All right. So I appreciate the color on the backlog for segment. Can you give us a sense of how the pricing per segment has developed? And is it better year-over-year?

Christopher P. Vincze

As I mentioned in the challenges side, and I would say it's across the board, pricing continues to be a challenge. Again the economy is not in a place where I see a lot of our clients at the point yet where the supply demand issue has allowed them, will allow us to really push for increased pricing. Again I think we're winning some battles certainly on cost of living increases. And we're very conscious about those things as we procure work with clients. But there is lots of pressure from our clients across the board, all 3 segments of not increasing prices. So again I would certainly say that while we're bullish about the opportunities growing and the momentum shifting, we've not seen any relaxation of pricing for 5 years now, and in a couple of occasions, is actually clamping down.

William D. Bremer - Maxim Group LLC, Research Division

Are you finding any labor pressures from your employees?

Christopher P. Vincze

In what sense, retention issues or...

William D. Bremer - Maxim Group LLC, Research Division

Definitely retention issues. But just in terms of there's a definite need for laborers in these fields, so I was just wondering are you guys able to keep key employees at this point. Are you finding some issues in terms of providing them a healthy comp?

Christopher P. Vincze

Yes. Certainly, over the last few years, as we exited our troubled phases, the company's retention rates are among the best in the industry. Certainly, having a successful circumstance allows that to happen. I think our alignments of how we have created our organization really provides a successful scenario for the company and for our employees. So good alignment, it makes a big difference. And all those things have been instituted at this point and have worked. So certainly, the retention piece we feel very strong about here at TRC. The difficulty or challenge that we see most, in particular to the question, is in the Energy space and the need for new talent. Again you have a demographic population of utility, and even in the oil scenario, big oil, where the aging population of that particular industry is retiring from the workforce. And yet the demands for the capital infrastructure, both in the growth of midstream and upstream and soon to be downstream work on top of utility, reliability and capital expansion programs. Again there just aren't enough people to do the engineering and execution at all levels. So I would say in the long term that eventually will affect the pricing scheme. But right now, we're just launching into clearly seeing a shortage of talented people that execute at high levels of those kinds of things.

William D. Bremer - Maxim Group LLC, Research Division

Agreed. And my final question is on CapEx. Can you sort of give us a view of how, first, the magnitude of the CapEx going forward? But how are you going to break it down into the 3 segments?

Thomas W. Bennet

Most of our first of all, let's start with CapEx at kind of a run rate. I think I've been asked that on the call, what's kind of our normal carry. If you look at the cash flow statement, you'll see our capital expenditure, close to $4 million this year. Prior year, a little bit higher due to as acquisitions come on, we have a typical burst of activity related to equipping their workforce. But most of our capital expenditure activity, believe it or not, is driven by back office infrastructure needs, such as IT and that type of thing, as opposed to investments in the sectors. We do so that's kind of a steady state capital expense for us is kind of right now, it's about between $4 million and $6 million, depending on acquisitions, most of it driven by back office. The only sector where we do have, let's say, cyclical capital investment requirements is in our Environmental sector. Some of the businesses use testing equipment and things like that for air testing and the like. And then in our Infrastructure segment, the drilling equipment and the like has a capital life cycle. But those still don't rise to the same level, let's say, our basic infrastructure of IT equipment, cyber risk investments, laptops, that type of thing.


At this time, we have reached the end of the Q&A session. I would like to turn the conference back over to Mr. Vincze for any closing remarks.

Christopher P. Vincze

Thank you, Brenda. Again, I want to first reach out to my colleagues, thank them for another strong year here at TRC. We are in the midst of our first quarter already, so thank you for last year. And let's make sure we continue on with our successful venture in fiscal '14. I also want to thank our shareholders for their continued participation. I'm glad to see we have some new folks following the company. And hopefully, you will see the positive elements of what we've created so far continue to move forward in an improving way in the future. So with that, we will see you guys after our first quarter, I believe, in November.

Thomas W. Bennet

That's correct.

Christopher P. Vincze

Thank you very much.


Thank you. And ladies and gentlemen, that concludes our conference call. Thank you for joining us today.

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