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TABLE OF CONTENTS
PART IV

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K


ý

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended June 30, 2010

or

o

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                                to                               

Commission file number 1-9947

TRC COMPANIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  06-0853807
(I.R.S. Employer
Identification No.)

21 Griffin Road North
Windsor, Connecticut

(Address of principal executive offices)

 

06095
(Zip Code)

Registrant's telephone number, including area code: (860) 298-9692

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered
Common Stock, $0.10 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes o    No ý.

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý.

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

         Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES o    NO o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý.

         The aggregate market value of the registrant's common stock held by non-affiliates on December 25, 2009 was approximately $22,393,000.

         On August 31, 2010, there were 19,657,046 shares of common stock of the registrant outstanding.


Table of Contents


TRC Companies, Inc.
Index to Annual Report on Form 10-K
Fiscal Year Ended June 30, 2010

 
   
   
  Page  

Part I

       

Item 1.

 

Business

   
3
 

     

General Description

    3  

     

Financial Highlights

    4  

     

Business Strategy

    4  

     

Services

    5  

     

Clients

    10  

     

Competition

    10  

     

Backlog

    10  

     

Employees

    11  

     

Contracts with the U.S. Government and Agencies of State and Local Governments

    11  

     

Regulatory Matters

    11  

     

Trademarks and Licenses

    11  

     

Environmental and Other Considerations

    11  

Item 1A.

 

Risk Factors

    12  

Item 1B.

 

Unresolved Staff Comments

    17  

Item 2.

 

Properties

    17  

Item 3.

 

Legal Proceedings

    17  

Part II

       

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities

   
18
 

Item 6.

 

Selected Financial Data

    20  

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    22  

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    47  

Item 8.

 

Financial Statements and Supplementary Data

    48  

Item 9.

 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

    96  

Item 9A.

 

Controls and Procedures

    96  

Item 9B.

 

Other Information

    99  

Part III

       

Item 10.

 

Directors, Executive Officers and Corporate Governance

   
99
 

Item 11.

 

Executive Compensation

    99  

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    100  

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

    100  

Item 14.

 

Principal Accountant Fees and Services

    100  

Part IV

       

Item 15.

 

Exhibits and Financial Statement Schedule

   
101
 

Signatures

   
103
 

2


Table of Contents


Forward-Looking Statements

        Certain information included in this report, or in other materials we have filed or will file with the Securities and Exchange Commission (the "SEC") (as well as information included in oral statements or other written statements made or to be made by us), contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). Such statements are being made pursuant to the 1995 Act and with the intention of obtaining the benefit of the "Safe Harbor" provisions of the 1995 Act. Forward-looking statements are based on information available to us and our perception of such information as of the date of this report and our current expectations, estimates, forecasts and projections about the markets in which we operate and the beliefs and assumptions of our management. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They contain words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "may," "can," "could," "might," or variations of such wording, and other words or phrases of similar meaning in connection with a discussion of our future operating or financial performance, and other aspects of our business, including growth, trends in our business and other characterizations of future events or circumstances. From time to time, forward-looking statements are also included in our other periodic reports on Forms 10-Q and 8-K, in press releases, in our presentations, on our website and in other material released to the public. Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are only predictions and are subject to risks, uncertainties and assumptions, including those identified below in the "Risk Factors" section, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, and other sections of this report and in other reports filed by us from time to time with the SEC as well as in press releases. Such risks, uncertainties and assumptions are difficult to predict and beyond our control and may cause actual results to differ materially from those that might be anticipated from our forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.


Part I

Item 1.    Business

        

General Description

        TRC Companies, Inc. (hereinafter collectively referred to as "we" "our" or "us"), was incorporated in 1971. We are a national consulting, engineering and construction management firm that provides integrated services to the environmental, energy, and infrastructure markets, primarily in the United States. A broad range of commercial, industrial and government clients depend on us to design solutions to their toughest business challenges. Our multidisciplinary project teams help our clients (i) implement complex projects from initial concept to delivery and commissioning, (ii) maintain and operate their facilities in compliance with regulatory standards and (iii) manage their assets through decommissioning, demolition, restoration and disposition.

        We are headquartered in Windsor, Connecticut and our corporate website is www.trcsolutions.com (information on our website has not been incorporated by reference into this Form 10-K). Through a link on the investor center section of our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(d) or 15(d) of the Securities and Exchange Act of 1934 (the "Exchange Act") as well as reports filed pursuant to Section 16 of the Exchange Act. All such filings are available free of charge. Under applicable SEC rules, because the

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aggregate market value of our stock held by non-affiliates was below $50.0 million as of December 25, 2009, the end of our second fiscal quarter, we could have foregone the auditor reporting requirements of Section 404 of the Sarbanes Oxley Act of 2002 for the fiscal year ended June 30, 2010. Nonetheless, we decided to proceed with that process, and the auditors' report on the effectiveness of our internal controls is included in Item 9A. Controls and Procedures.


Financial Highlights

        We incurred net losses applicable to our common shareholders of $22.9 million, $24.1 million and $109.1 million for fiscal years 2010, 2009 and 2008, respectively. The net loss applicable to our common shareholders for fiscal year 2010 included $20.2 million for a goodwill impairment charge and accretion charges on preferred stock of $6.4 million which were partially offset by a net tax benefit of $4.2 million and a $1.7 million gain on extinguishment of debt. The preferred stock accretion charges will continue until the preferred stock converts to common stock in December 2010. The net loss applicable to our common shareholders for fiscal year 2009 included a $21.4 million charge for goodwill and intangible asset write-offs and a provision for income taxes of $3.9 million. The net loss applicable to our common shareholders for fiscal year 2008 included a charge of $77.3 million for goodwill and intangible asset write-offs and a provision for income taxes of $12.3 million which included a valuation allowance against our income taxes due to the uncertainty of realization.


Business Strategy

        We understand our clients' goals and embrace them as our own, applying creativity, experience, integrity, and dedication to deliver superior solutions to the world's energy, environmental, and infrastructure challenges. We have continued to unify the Company, concentrating on national practices within our operating segments and a national sales and marketing organization, giving us the ability to respond to customer challenges and the current, dynamic market conditions. We are committed to safety, client satisfaction, project execution, and financial performance to help us win work in areas where our success rate is highest and maintain a growing presence in the future direction of our markets. In support of our clients and shareholders, we maintain our focus on technical excellence and excellence in all areas of the project cycle including bidding, sales, performance, and collection.

        Our objectives for fiscal year 2011 are:

    Achieve profitable growth in our operating segments.  We are continuing our move to a national focus for each operating segment. Our energy and infrastructure service offerings have been managed and marketed on a national basis since fiscal year 2010, and we are finalizing the national integration for our environmental service offerings in fiscal year 2011. Our national operating platform is linked to our corporate sales and marketing organization, providing information exchange on project execution, regulatory trends and market feedback to better deliver and communicate to our markets.

    Improve operating margins and increase positive operating cash flow.  The current uncertain economic conditions require us to continue our focus on efficiency by controlling and reducing operating costs. In the past several years we have taken steps to consolidate and reduce our general and administrative expenses as well as improve our project margins through increased productivity and better execution. These enhancements have created a foundation for maintaining or exceeding our current levels of operating margins in the midst of negative economic conditions.

    Attract and retain top talent.  We continue to add top performers to expand our expertise. Our objective is to maintain a workplace where top performers in our industry will be challenged by meaningful projects, rewarded for successful performance, and motivated to develop their entrepreneurial and project management skills for the benefit of the entire company.

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Services

        Our services are focused on three operating segments: Energy, Environmental, and Infrastructure.


Energy

        The Energy segment continues to be our leading operating segment in market potential. We are strategically positioned to serve those key areas within the energy market currently undergoing change and investment. These include shifts in public policy to renewable energy development, development of a smarter and more robust power grid, and end-user demand management. With energy representing one of the main drivers of the domestic economy, we have been one of the leading firms supporting the significant investment associated with the development of new sources of energy and the infrastructure required to deliver new and existing energy sources to consumers. This market, like all other markets dependent upon large capital investment, is influenced by cost and access to capital. While we believe access to private sources of credit and capital will remain constrained through calendar 2010 and possibly into calendar 2011, the American Recovery and Reinvestment Act of 2009 ("ARRA" or "stimulus bill"), targets, among other investments, those specific areas in which we concentrate our energy service offerings: energy efficiency, renewable generation, and transmission and distribution. While we believe ARRA may help bridge the gap currently existing in the credit markets for new energy-related capital projects, it may take several years to realize its full benefit.

        Services we provide to energy companies have evolved over the past decade to include support in the licensing and engineering design of new sources of power generation, electrical transmission system upgrades and natural gas and liquid products pipelines and terminals. Energy services are now provided by dedicated staff representing one-quarter of our total employees. As major investor owned utilities continue to consolidate and downsize their engineering and environmental staffs, we expect to continue to see long term growth in these service areas. In addition, we expect to see continued expansion of our expertise in energy efficiency and demand management programs.

        Key markets for our energy operating segment are:

    Energy Efficiency.  An integral part of the nation's energy plan will consist of more effectively managing our use of finite resources through efficiency, conservation, load management and shifting to renewable energy sources.

      We develop and manage statewide energy efficiency programs in New York and New Jersey that reduce energy use and cost-effectively manage demand. We provide comprehensive services including program design, program management, quality control, engineering, financial tracking and reporting. In addition to our statewide programs, we also design and manage portfolio energy efficiency programs including a broad range of services from program management to engineering, quality control and construction inspection for a broad spectrum of end users including commercial office buildings, hospitality chains, educational facilities, residential complexes and military installations.

      We are also actively focused on the relationship of energy conservation measures to the reduction in carbon footprints, and we are assisting a number of utilities in "greening" their operations against quantifiable objectives.

    Electric Transmission.  Investment in electric transmission and distribution infrastructure represents one of the largest financial commitments facing utilities over the upcoming decade. The age of the transmission and distribution network combined with continuing electric load growth has resulted in heightened concern over the reliability of the nation's transmission grid. Capital programs by utilities for necessary upgrades to the grid system are in the early stages of development and are expected to total several billion dollars.

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      During the past several years we have become one of the leading engineering and environmental licensing service providers supporting the extensive upgrade underway to the nation's electric transmission grid. We provide full scope engineering design, material procurement and construction management services. We also provide essential operations and management support to utilities as the trend towards outsourcing engineering functions continues. Our ability to provide integrated energy and environmental services has proven to be a key factor to our success in obtaining these projects.


Environmental

        The Environmental segment represents our largest operating segment in terms of both profitability and net service revenue ("NSR"). The demand for these services originally arose in response to the significant environmental legislation in the 1970's. Since that time it has largely been a compliance driven market, however mergers and acquisitions and the real estate market created economic drivers as well and enabled us to serve those markets on many fronts including support of property owners on a wide range of issues. We provide substantial support to buyers and sellers in the pre-acquisition due diligence and asset valuation process. Our Exit Strategy program grew to national prominence in response to the need for responsible parties, as well as buyers and sellers, to resolve environmental remediation uncertainties.

        We are also a national market leader in the areas of air quality modeling, air emissions testing and monitoring and cultural and natural resource management.

        The market drivers for our environmental services are dynamic and include:

    Enforcement and compliance in the contaminated site remediation market.  The Environmental Protection Agency estimates over 29,000 contaminated sites of all sizes still need to be evaluated and remediated. This fact combined with the emergence of economically distressed assets into the market will provide a strong impetus for assessing and resolving environmental impacts to real estate assets.

    Natural Gas Related Power Strategies.  Natural gas is a preferred fuel source for domestic power initiatives. While investment in development of new supplies, transmission pipelines and storage facilities is a function of price and economic conditions, we believe it will become increasingly important in the domestic power mix. We continue to be an industry leader in serving this market based upon our staff experience which includes Federal Energy Regulatory Commission ("FERC") licensing; federal and state media specific environmental permitting; electrical interconnection engineering; and construction management and oversight. With one of the most experienced national teams of environmental scientists, we have been responsible for the licensing and construction oversight of several of the largest multi-state gas transmission pipeline projects in development. We are currently providing services for the permitting of both land-based and offshore Liquefied Natural Gas ("LNG") terminals in the Northeast, Gulf and Northwest.

    Wind Power and Generation Source Licensing and Permitting.  The demand for licensing services and electrical interconnection for new electrical generation sources continues to increase due to several strong market factors. In load congested areas such as the Mid-Atlantic, Northeast, and California, utilities are pursuing development of new sources of electrical supply. Recognizing the importance of fuel diversity, fossil fuel plant development is focusing on both natural gas and coal. Coal plant development projects we are supporting include traditional pulverized coal, waste coal and Integrated Gas Coal Conversion technology.

      With over half of the States implementing renewable portfolio standards, we are providing licensing and engineering support to a number of wind power projects. Reflecting the breadth of

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      our staff capabilities and experience we are participating in both land-based and offshore wind power developments. Services provided have broadened to include feasibility studies, environmental permitting, site civil engineering, electric transmission interconnect/substation design, construction management and transactional support involving the sale or purchase of existing generation assets. We have provided due diligence and best management practices consulting support with respect to energy assets to a number of leading financial institutions, equity firms and diversified energy companies.

    Greenhouse gases.  There will be continuing pressure on the United States to reduce greenhouse gas emissions across all segments of the economy. This will provide us opportunities to support clients in the areas of air emissions consulting, project development, renewable energy permitting, and the development of sustainable business practices. The need to reduce greenhouse gas emissions represents a new starting point for businesses to "green" their processes and make them more efficient and environmentally friendly.

    Continued need for transaction support.  Our ability to evaluate environmental and regulatory risk in real property and business transfers continues to be one of our core strengths. We forecast a steady need for due diligence activities by public and private equity investors, financial institutions, regulatory agencies, and property owners as properties and businesses change ownership.

    Environmental compliance.  Industrial and commercial projects must comply with regulations covering, among other things, air quality, water quality, land use, wildlife, wetlands, cultural resources, and natural resource conservation. Many of these requirements are effective independent of economic circumstances.

    The pressing requirements to modernize our infrastructure.  Modernizing our national transportation and energy delivery systems continues to be a focus of both the public and the private sectors. Investment in these areas will include attention to the related environmental impacts associated with such modernization.

    Sustainability and Climate Change.  The market for climate change related services is being driven domestically from many fronts, most of which are not regulatory in nature. We have seen demand for services emerge in the areas of carbon emission assessment and verification, alternate energy development, and public and private sector programs which are designed around energy conservation and other green initiatives. We believe our expertise in air modeling and measurement, renewable energy project licensing, project environmental impact assessment and project engineering, as well as program design and management, provides us an advantage in this emerging market.

        In addition, other market factors are also creating opportunities in the following areas:

    Mercury monitoring of air emissions as a function of emerging legislation.

    Control technology requirements in the Clean Air Act, e.g., the Best Available Retrofit Technology requirements for certain air emission sources.

    Continued litigation over a variety of air issues such as facility compliance and operations or historic discharge enforcement and toxic tort claims.

    Indoor environmental exposures such as "sick building syndrome" and microbial issues (mold).

        The primary demand for environmental assessment and remediation services is driven by the regulatory obligations of our clients at existing operating facilities and by the real estate transfer and redevelopment process. We expect our assessment and remediation services market to grow as more of our clients adopt newer, more aggressive environmental management strategies as part of evolving

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corporate philosophies embracing sustainability and environmental accountability. These strategies require voluntary, accelerated assessment and remediation to lower costs and improve environmental conditions which meet increased societal and shareholder demands for better stewardship. While the market for this type of service has broadened due to increased availability of public-sector funded projects, the need for cleanup at affected sites in support of economic redevelopment opportunities has softened somewhat, due to the current conditions in the real estate market. Opportunities to support private sector development-related cleanup projects should expand once economic conditions in real estate and the associated transactional markets improve. We expect our assessment and remediation services market to continue to grow in support of the power generation industry as older facilities are retired or re-powered. Special services we offer are:

    Exit Strategy.  Our Exit Strategy program is one of the most innovative and valuable services we offer our clients. We pioneered this program and created a new national market of environmental risk transfers for contaminated properties. We remain a national market leader with over 100 sites under contract since inception. Traditionally our Exit Strategy offering has been especially attractive to clients in the following situations:

    Discontinued Operations.  We assume responsibility for the cleanup of contamination at closed or redundant facilities, allowing our clients to focus on their core business operations.

    Bankruptcy.  Debtors and the creditors are seeking the highest possible value for saleable assets and relief from lingering environmental liabilities. By assuming those liabilities, we can help them achieve a responsible financial solution.

    Acquisitions and Divestitures.  We assume responsibility for existing environmental cleanup liabilities which neither the buyer wants to assume nor the seller wants to retain.

    Multi-Party Superfund Sites.  By transferring responsibility for the cleanup of Superfund sites from groups of potentially responsible parties to us, the cleanup schedule can be accelerated and the legal and administrative cost burden substantially reduced.

    Brownfield Real Estate Development.  By assuming responsibility for site cleanup and defining the related cost with certainty, our Exit Strategy program aids in the settlement of the commercial issues among interested parties, such as property owners, lenders, developers, and municipalities, that often stall the redevelopment process.

    RE Power.  RE Power is a program where we, in conjunction with a decommissioning and demolition company, provide comprehensive dismantling, cleanup, liability transfer and asset optimization solutions to power and utility companies that elect to decommission and reposition their aging power plant assets. 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 community. This can include safely removing plants from service through demolition and environmental cleanup, and potentially into a redevelopment phase, or preparing the existing power plant for re-powering with more economical fuel sources or more efficient generating equipment.


Infrastructure

        We offer a wide variety of services to our infrastructure clients primarily related to: (1) rehabilitation of overburdened and deteriorating infrastructure systems, (2) design and construction management associated with new infrastructure projects, and (3) management of risks related to security of public and private facilities. We have a strong geographic presence in the Northeast corridor of the United States as well as Texas, Louisiana and California. Infrastructure related services are

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managed to recognize the importance of local market presence to maintain a diverse base of projects. The following is a listing of the general types of infrastructure services we offer:

    Construction Management.  We provide support to our clients in the areas of program management, project management, construction engineering and inspection, plant inspections, construction management, estimating and scheduling.

    Transportation.  We provide planning, design and construction management services in support of work on roads, highways, bridges and aviation facilities. In addition to performing basic design engineering, we also incorporate activities associated with completing environmental studies, marine engineering, seismic analysis, and traffic engineering.

    General Civil Engineering Services, Municipal and Land Development Engineering.  We provide land development support for commercial and residential real estate development projects by providing master planning, traffic studies, storm water design and management, utility design, and site engineering. We also can provide the basic engineering needs of small municipalities, and our civil engineering expertise is utilized on projects such as the planning, design and construction management of potable water and wastewater treatment systems; master drainage planning; street, roadway and site drainage; dam analysis and design; and master drainage planning.

    Geotechnical and Materials Engineering.  We provide subsurface exploration, laboratory testing, geotechnical assessments, seismic engineering and quality assurance testing.

    Hydraulics and Hydrological Studies.  We provide aquifer tests, ground water modeling and yield analysis, scour and erosion studies, design and analysis of storage and distribution systems, Federal Emergency Management Agency studies and watershed modeling.

    Security.  We provide vulnerability assessments, engineering and structural improvements for public and private infrastructure facilities, design and implementation of security and surveillance systems, blast resistance design, disaster recovery planning, and force protection analysis. Our market emphasis has shifted from providing these services in commercial buildings to a focus upon public and quasi-public infrastructure and energy-related facilities such as transit systems, utility companies and ports.

    Geographic Information Systems & Mapping.  We provide, among other services, data modeling, terrain analysis, shoreline management analysis, total station mapping and resource mapping.

        We believe that the long-term market for our infrastructure services will be stable and driven by population growth in certain geographic regions, continued aging and obsolescence of existing infrastructure, capacity shortfalls, and Federal stimulus funding for state and municipal projects. Spending by both private and government clients generally declined in recent years, reflecting economic conditions, and these conditions have not materially improved in the current calendar year. In addition, legislation regarding long term funding for Federal transportation projects still remains unresolved at this time. We expect this trend to continue in the near term with the exception being in the area of construction and construction management for Stimulus Bill-related projects and security-related initiatives. Of particular note is the continued lack of design-related projects in the "pipeline" for both public and private clients. Given the need to rebuild and modernize our aging national infrastructure, however, we do expect increased spending on public infrastructure programs over the intermediate and long term. The timing and extent of recovery in the private sector is, however, more uncertain in the short and mid-term. The pace of spending on private infrastructure projects has diminished and, as a result, during the past fiscal year we have experienced client initiated delays and/or cancellation of some assignments. We are focusing our activities where the pace of infrastructure development has remained somewhat robust, and therefore continue to be optimistic regarding the prospects for this market.

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Clients

        No single client accounted for 10% or more of our NSR during fiscal years ended 2010, 2009 and 2008.

        Representative clients during the past five years include:

AES Enterprises

 

Goodyear Tire and Rubber Company

 

SPX Corporation

AIMCO, Inc.

 

Hoffman La Roche, Inc.

 

Transwestern Pipeline Company, LLC

Alcoa

 

International Paper

 

Waste Management

Alyeska Pipeline Service Co.

 

J-Power

 

State Transportation/Authorities;

ASARCO

 

Kinder Morgan

 

•       California

BNSF

 

LS Power

 

•       Massachusetts

British Petroleum (ARCO/Amoco)

 

Lockheed Martin

 

•       New Jersey

Central Maine Power Company

 

Lower Manhattan

 

•       New York

Competitive Power Ventures

 

    Development Corporation

 

•       Pennsylvania

Connecticut Resources Recovery

 

Magellan Midstream Partners

 

•       Texas

 

Authority

 

Mirant

 

•       West Virginia

Conoco Phillips

 

National Grid

 

•       Louisiana

Consolidated Edison

 

New York State Energy Research and

 

U.S. Government:

Constellation Energy

 

    Development Authority

 

•       Environmental Protection Agency

Covanta

 

Northeast Utilities

 

•       Department of Defense

Duke Energy

 

NRG

 

•       Federal Aviation Administration

El Paso Energy

 

Orange County Transportation Authority

 

•       General Services Administration

Entergy

 

Pfizer

 

•       Minerals Management Service

ExxonMobil

 

PG&E Corporation

   

Florida Gas Transmission

 

Sempra Energy

   

Florida Power and Light

 

Spectra Energy

   


Competition

        The markets for many of our services are highly competitive. There are numerous engineering and consulting firms and other organizations that offer many of the same services offered by us. These firms range in size from small local firms to large national firms that have substantially greater resources than we do. Competitive factors include reputation, performance, price, geographic location and availability of skilled technical personnel. As a mid-size firm, we compete with both the large international firms and the small niche or geographically focused firms.

        Despite the competitive nature of our markets, the majority of our work comes from repeat orders from long-term clients, especially where we are one of the leading service providers in the markets we address. For example, we believe that we are one of the top providers of licensing services for large energy projects. Further, we believe we are the market leader in the complete outsourcing of site remediation services through our Exit Strategy program. By continuing to stay in front of emerging trends in our markets we believe our competitive position will remain strong.


Backlog

        As of June 30, 2010, our contract backlog based on gross revenue was approximately $361 million, compared to approximately $387 million as of June 30, 2009. Our contract backlog based on NSR was approximately $222 million as of June 30, 2010, compared to approximately $247 million as of June 30, 2009. The decline in backlog can be most directly attributed to the completion of several large EPC projects in our Energy operating segment as well as the reduction in project awards attributable to the economic slowdown. Approximately 60% of backlog is typically completed in one year. In addition to this net contract backlog, we hold open order contracts from various clients and government agencies. As work under these contracts is authorized and funded, we include this portion in our net contract backlog. While most contracts contain cancellation provisions, we are unaware of any material work included in backlog that will be canceled or delayed.

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Employees

        As of June 30, 2010, we had approximately 2,100 full- and part-time employees. Approximately 85% of these employees are engaged in performing professional services for clients. Many of these employees have advanced degrees. Our professional staff includes program managers, professional engineers and scientists, construction specialists, computer programmers, systems analysts, attorneys and others with degrees and experience that enable us to provide a diverse range of services. Other employees are engaged in executive, administrative and support activities. We consider the relationships with our employees to be favorable.


Contracts with the United States Government and Agencies of State and Local Governments

        We have contracts with agencies of the United States government and various state agencies that are subject to examination and renegotiation. We believe that adjustments resulting from such examination or renegotiation proceedings, if any, will not have a material impact on our operating results, financial position or cash flows.


Regulatory Matters

        Our businesses are subject to various rules and regulations at the federal, state and local government levels. We believe that we are in substantial compliance with these rules and regulations. We have the appropriate licenses to bid and perform work in the locations in which we operate. We have not experienced any significant limitations on our business as a result of regulatory requirements. We do not believe any currently proposed changes in law or anticipated changes in regulatory practices would limit bidding on future projects.


Trademarks and Licenses

        We have a number of trademarks, copyrights and licenses. None of these are considered material to our business as a whole.


Environmental and Other Considerations

        We do not believe that our own compliance with federal, state and local laws and regulations relating to the protection of the environment will have any material effect on our capital expenditures, earnings or competitive position.

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Item 1A.    Risk Factors

        The risk factors listed below, in addition to those described elsewhere in this report, could materially and adversely affect our business, financial condition, results of operations or cash flows.


Risks Related to Our Company

We incurred significant losses in fiscal years 2010, 2009, and 2008, and may incur such losses in the future. If we continue to incur significant losses or are unable to generate sufficient working capital from our operations or our revolving credit facility, we may have to seek additional external financing.

        As reflected in our consolidated financial statements, we incurred net losses applicable to our common shareholders of $22.9 million, $24.1 million and $109.1 million in fiscal years 2010, 2009 and 2008, respectively. Although a main factor in our losses has been non-cash goodwill and intangible asset impairment charges, we are continuing to take actions to be profitable, but if we are unable to improve our operating performance, we may incur additional losses. We depend on our core businesses to generate profits and cash flow to fund our working capital growth. Although the services that we provide are spread across a variety of industries, disruptions such as a general economic downturn or higher interest rates could negatively affect the demand for our services across a variety of industries which could adversely affect our ability to generate profits and cash flows.

        We finance our operations through cash generated by operating activities and borrowings under our revolving credit facility with Wells Fargo Capital Finance. During fiscal year 2009 we completed a preferred stock offering with gross proceeds of $15.5 million. While we have rarely used the credit facility since the preferred stock offering, we are dependent on this facility for any short term liquidity needs when available cash and cash equivalents and cash provided by operations are not adequate to support working capital requirements. The credit facility contains covenants which, among other things, require us to maintain minimum levels of earnings before interest, taxes, depreciation, and amortization as defined in the credit agreement ("EBITDA"), maintain a minimum fixed charge coverage ratio, maintain a minimum level of backlog, and limit capital expenditures.

        We believe that existing cash resources, cash forecasted to be generated from operations and availability under our credit facility are adequate to meet our requirements for the foreseeable future. The current uncertain state of the economy and the possibility that economic conditions could continue to be uncertain or deteriorate may affect businesses such as ours in a number of ways. While management cannot directly measure it, variability in the economy and any corollary impact on the availability of credit could affect the ability of our customers and vendors to obtain financing for significant purchases and operations and could result in a decrease in their business with us which could adversely affect our ability to generate profits and cash flows. We are unable to predict the likely duration of the current economic uncertainty and its potential impact on our clients. Management will continue to closely monitor the credit markets and our financial performance.

If we must write off a significant amount of intangible assets or long-lived assets, our earnings will be negatively impacted.

        Goodwill was approximately $14.9 million as of June 30, 2010. We also had other identifiable intangible assets of $0.6 million, net of accumulated amortization, as of June 30, 2010. Goodwill and identifiable intangible assets are assessed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We have recorded goodwill and intangible asset impairment charges of $20.2 million, $21.4 million and $77.3 million in the fiscal years 2010, 2009 and 2008, respectively. A decline in the estimated future cash flows of our reporting units, declines in market multiples of comparable companies and other

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factors may result in additional impairments of goodwill or other assets which would negatively impact our earnings.

We are and will continue to be involved in litigation. Legal defense and settlement expenses can have a material adverse impact on our operating results.

        We have been, and likely will be, named as a defendant in legal actions claiming damages and other relief in connection with engineering and construction projects and other matters. These are typically actions that arise in the normal course of business, including employment-related claims, contractual disputes, professional liability, or claims for personal injury or property damage. We have substantial deductibles on several of our insurance policies, and not all claims are insured. In addition, we have also incurred legal defense and settlement expenses related to prior acquisitions. Accordingly, defense costs, settlements and potential damage awards may have a material adverse effect on our business, operating results, financial position and cash flows in future periods.

Subcontractor performance and pricing could expose us to loss of reputation and additional financial or performance obligations that could result in reduced profits or losses.

        We often hire subcontractors for our projects. The success of these projects depends, in varying degrees, on the satisfactory performance of our subcontractors and our ability to successfully manage subcontractor costs and pass them through to our customers. If our subcontractors do not meet their obligations or we are unable to manage or pass through costs, we may be unable to profitably perform and deliver our contracted services. Under these circumstances we may be required to make additional investments and expend additional resources to ensure the adequate performance and delivery of the contracted services. These additional obligations have resulted in reduced profits or, in some cases, significant losses for us with respect to certain projects. In addition, the inability of our subcontractors to adequately perform or our inability to manage subcontractor costs on certain projects could hurt our competitive reputation and ability to obtain future projects.

Our operations could require us to utilize large sums of working capital, sometimes on short notice and sometimes without the ability to recover the expenditures.

        Circumstances or events which could create large cash outflows include losses resulting from fixed-price contracts, remediation of environmental liabilities, legal expenses and settlements, project completion delays, failure of clients to pay, income tax assessments including payments that may arise pursuant to the ongoing fiscal year 2003 - 2008 Internal Revenue Service ("IRS") audit if not resolved successfully, and professional liability claims, among others. We cannot provide assurance that we will have sufficient liquidity or the credit capacity to meet all of our cash needs if we encounter significant working capital requirements as a result of these or other factors.

Our services expose us to significant risks of liability and it may be difficult or more costly to obtain or maintain adequate insurance coverage.

        Our services involve significant risks that may substantially exceed the fees we derive from our services. Our business activities expose us to potential liability for professional negligence, personal injury and property damage among other things. We cannot always predict the magnitude of such potential liabilities. In addition, our ability to perform certain services is dependent on the availability of adequate insurance.

        We obtain insurance from insurance companies to cover a portion of our potential risks and liabilities subject to specified policy limits, deductibles or coinsurance. It is possible that we may not be able to obtain adequate insurance to meet our needs, may have to pay an excessive amount for the insurance coverage we want, or may not be able to acquire any insurance for certain types of business

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risks. As a result of the recent events in the financial markets, we face additional risks due to the continuing uncertainty and disruption in those markets. Much of our commercial insurance is underwritten by the regulated insurance subsidiaries of Chartis (formerly the American International Group). Chartis has also underwritten almost all of the cost cap and related insurance purchased by Exit Strategy clients which share some specific characteristics that present additional risk. The Exit Strategy related policies all tend to be long term; many are ten years or more. Some policies also serve to satisfy state and federal financial assurance requirements for certain projects, and without these policies alternative financial assurance arrangements for these projects would need to be arranged. Additionally, most of our Exit Strategy projects require us to perform the work in the event insurance limits are exhausted, directly exposing us to financial risks.

Our failure to properly manage projects may result in additional costs or claims.

        Our engagements involve a variety of projects, some of which are large-scale and complex. Our performance on projects depends in large part upon our ability to manage the relationship with our clients and to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner. If we miscalculate, or fail to properly manage, the resources or time we need to complete a project with capped or fixed fees, or the resources or time we need to meet contractual obligations, our operating results could be adversely affected. Furthermore, any defects, errors or failures to meet our clients' expectations could result in claims against us.

Our use of the percentage-of-completion method of accounting could result in reduction or reversal of previously recorded revenue and profits.

        We account for a significant portion of our contracts on the percentage-of-completion method of accounting. Generally, our use of this method results in recognition of revenue and profit ratably over the life of the contract based on the proportion of costs incurred to date to total costs expected to be incurred. The effect of revisions to revenue and estimated costs, including the achievement of award and other fees, is recorded when the amounts are known and can be reasonably estimated. The uncertainties inherent in the estimating process make it possible for actual costs to vary from estimates, or estimates to change, resulting in reductions or reversals of previously recorded revenue and profit. Such differences could be material.

Our business and operating results could be adversely affected by our inability to accurately estimate the overall risks, revenue or costs on a contract.

        We generally enter into three principal types of contracts with our clients: fixed-price, time-and-materials, and cost-plus. Under our fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur and, consequently, we are exposed to a number of risks. These risks include: underestimation of costs, problems with new technologies, unforeseen costs or difficulties, delays, price increases for materials, poor project management or quality problems, and economic and other changes that may occur during the contract period. Under our time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for other expenses. Profitability on these contracts is driven by billable headcount and cost control. Many of our time-and-materials contracts are subject to maximum contract values and, accordingly, revenue relating to these contracts is recognized as if these contracts were fixed-price contracts. Under our cost-plus contracts, some of which are subject to contract ceiling amounts, we are reimbursed for allowable costs and fees which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain reimbursement for all such costs. Accounting for a fixed-price contract requires judgments relative to assessing the contract's estimated risks, revenue and estimated costs as well as technical issues. Due to the size and nature of

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many of our contracts, the estimation of overall risk, revenue and cost at completion is complex and subject to many variables. Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance. If we are unable to accurately estimate the overall revenue or costs on a contract, we may experience a lower profit or incur a loss on the contract.

Our backlog is subject to cancellation and unexpected adjustments and is an uncertain indicator of future operating results.

        Our contract backlog based on NSR as of June 30, 2010 was approximately $222 million. We cannot guarantee that the NSR projected in our backlog will be realized or, if realized, will result in profits. In addition, project cancellations or scope adjustments may occur from time to time with respect to contracts reflected in our backlog. These types of backlog reductions could adversely affect our revenue and margins. Accordingly, our backlog as of any particular date is an uncertain indicator of our future earnings.


Risks Related to Our Industry

We are dependent on continued regulatory enforcement.

        While we increasingly pursue economically driven markets, our business is materially dependent on the continued enforcement by federal, state and local governments of various environmental regulations. Changes in environmental standards or enforcement could adversely impact our business.

Changes in existing environmental laws, regulations and programs could reduce demand for our environmental services which could cause our revenue to decline.

        A significant amount of our business is generated either directly or indirectly as a result of existing federal and state laws, regulations and programs related to pollution and environmental protection. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could result in a decline in demand for environmental services that may have a material adverse effect on our revenue.

We operate in highly competitive industries.

        The markets for many of our services are highly competitive. There are numerous professional architectural, engineering and consulting firms and other organizations which offer many of the services offered by us. We compete with many companies, some of which have greater resources. Competitive factors include reputation, performance, price, geographic location and availability of technically skilled personnel. In addition, many clients use in-house staff to perform the same types of services we do.

We are materially dependent on contracts with federal, state and local governments.

        We estimate that contracts with agencies of the United States government and various state and local governments represent approximately 25% of our NSR in fiscal year 2010. Therefore, we are materially dependent on various contracts with such governmental agencies. Companies engaged in government contracting are subject to certain unique business risks. Among these risks are dependence on appropriations and administrative allotment of funds as well as changing policies and regulations. These contracts may also be subject to renegotiation of profits or termination at the option of the government. The stability and continuity of that portion of our business depends on the periodic exercise by the government of contract renewal options, our continued ability to negotiate favorable terms and the continued awarding of task orders to us.

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Other Risks

The value of our equity securities could continue to be volatile.

        Over time our common stock has experienced substantial price volatility. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many companies that have often been unrelated to the operating performance of these companies. The overall market and the price characteristics of our common stock may continue to fluctuate greatly. The trading price of our common stock may be significantly affected by various factors, including:

    Our financial results, including revenue, profit, days sales outstanding, backlog, and other measures of financial performance or financial condition;

    Announcements by us or our competitors of significant events, including acquisitions;

    Threatened or pending litigation;

    Changes in investors' and analysts' perceptions of our business or any of our competitors' businesses;

    Investors' and analysts' assessments of reports prepared or conclusions reached by third parties;

    Changes in legislation;

    Broader market fluctuations; and

    General economic or political conditions.

        Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain or attract key employees. Many of these key employees are granted stock options and restricted stock as an element of compensation, the value of which is dependent on our stock price.

We may experience adverse impacts on our results of operations as a result of adopting new accounting standards or interpretations.

        Our adoption of, and compliance with, changes in accounting rules, including new accounting rules and interpretations, could adversely affect our operating results or cause unanticipated fluctuations in our operating results.

We are highly dependent on key personnel.

        The success of our business depends on our ability to attract and retain qualified employees. We need talented and experienced personnel in a number of areas to support our core business activities. An inability to attract and retain sufficient qualified personnel could harm our business. Turnover among certain critical staff could have a material adverse effect on our ability to implement our strategies and on our results of operations. There is currently a shortage of technical and engineering personnel.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, investors could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

        Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. We devote significant attention to establishing and maintaining effective internal controls. Implementing changes to our internal controls has required compliance training of our directors, officers and employees and has entailed substantial costs in order to modify our existing accounting systems. Although these measures are designed to do so, we cannot be certain that such measures and

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future measures will guarantee that we will successfully maintain adequate controls over our financial reporting processes and related reporting requirements. For example, in the past we have had material weaknesses, including a material weakness relating to the policies and procedures relating to the development, documentation and review of contract values and estimates of cost at completion, which we have remediated. However, internal controls that are found to be not operating effectively could affect our operating results or cause us to fail to meet our reporting obligations and could result in a breach of a covenant in our revolving credit facility in future periods. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the market price of our stock.

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        We provide our services through a network of approximately 85 offices located nationwide. We lease approximately 630,000 square feet of office and commercial space to support these operations. In addition, a subsidiary of ours owns a 26,000 square foot office/warehouse building in Austin, Texas. This property is subject to a deed of trust in favor of the lenders under our principal credit facility. All properties are adequately maintained and are suitable and adequate for the business activities conducted therein. In connection with the performance of certain Exit Strategy or real estate projects, some of our subsidiaries have taken title to sites on which environmental remediation activities are being performed.

Item 3.    Legal Proceedings

        See Note 17—Commitments and Contingencies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for information regarding legal proceedings in which we are involved.

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Part II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "TRR." The following table sets forth the high and low per share prices for the common stock for fiscal years 2010 and 2009 as reported on the NYSE:

 
  Fiscal 2010   Fiscal 2009  
 
  High   Low   High   Low  

First Quarter

  $ 4.97   $ 3.50   $ 4.46   $ 2.18  

Second Quarter

    3.86     2.55     3.28     1.16  

Third Quarter

    3.11     2.57     3.63     1.59  

Fourth Quarter

    3.56     2.66     4.45     2.32  

        As of July 15, 2010, there were 276 shareholders of record and, as of that date, we estimate there were approximately 1,768 beneficial owners holding our common stock in nominee or "street" name.

        To date we have not paid any cash dividends on our common stock, and the payment of dividends in the future will be subject to financial condition, capital requirements and earnings. Future earnings are expected to be used for expansion of our operations, and cash dividends are not currently anticipated. The terms of our credit agreement also prohibit the payment of cash dividends.

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Stock Performance Graph

Comparison of Five-Year Cumulative Total Return Among TRC, S&P 500 Total Return Index and Peer Companies

        The annual changes for the five-year period shown in the graph below are based upon the assumption (as required by SEC rules) that $100 had been invested in our Common Stock on June 30, 2005. The figures presented assume that all dividends, if any, paid over the performance periods were reinvested.

Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 2010

GRAPHIC

        Data and graph provided by Zacks Investment Research, Inc. Copyright© 2010, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. All rights reserved.

 
  Year Ended June 30,  
 
  2005   2006   2007   2008   2009   2010  

TRC

  $ 100   $ 90   $ 126   $ 34   $ 34   $ 26  

S&P 500 Index

    100     109     131     114     84     96  

Peer Group

    100     136     184     188     198     141  

        The companies included in the peer group are: Ecology & Environment, Inc.; ENGlobal Corp.; Tetra Tech, Inc.; Versar, Inc.; and, VSE Corp.

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Item 6.    Selected Financial Data

        The following table provides summarized information with respect to our operations and financial position. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto.

Statements of Operations Data, for the years ended June 30,
  2010   2009   2008   2007   2006  
 
  (in thousands, except per share data)
 

Gross revenue

  $ 330,575   $ 432,517   $ 465,079   $ 441,643   $ 396,091  
 

Less subcontractor costs and other direct reimbursable charges

    100,476     177,713     196,870     185,735     158,111  
                       

Net service revenue

    230,099     254,804     268,209     255,908     237,980  
                       

Interest income from contractual arrangements

    596     1,859     3,944     4,747     4,054  

Insurance recoverables and other income

    8,844     19,539     6,123     4,170     1,053  

Operating costs and expenses:

                               
 

Cost of services(1)

    203,221     227,217     241,647     231,025     228,556  
 

General and administrative expenses(1)

    27,128     32,936     40,077     23,969     24,350  
 

Provision for doubtful accounts

    2,344     3,952     3,708     1,318     7,971  
 

Goodwill and intangible asset write-offs(2)

    20,249     21,438     77,267         2,170  
 

Depreciation and amortization(3)

    8,049     7,322     8,051     8,311     6,925  
                       

Total operating costs and expenses

    260,991     292,865     370,750     264,623     269,972  
                       

Operating (loss) income

    (21,452 )   (16,663 )   (92,474 )   202     (26,885 )

Interest expense

    (1,003 )   (2,925 )   (3,936 )   (4,359 )   (4,545 )

Gain on extinguishment of debt(4)

    1,716                  

Registration penalties(5)

                (600 )    
                       

Loss from continuing operations before taxes and equity in (losses) earnings

    (20,739 )   (19,588 )   (96,410 )   (4,757 )   (31,430 )

Federal and state income tax (benefit) provision(6)

    (4,210 )   3,871     12,296     (1,337 )   (10,488 )
                       

Loss from continuing operations before equity in (losses) earnings

    (16,529 )   (23,459 )   (108,706 )   (3,420 )   (20,942 )

Equity in (losses) earnings from unconsolidated affiliates, net of taxes(7)

    (45 )   (449 )   (505 )   (161 )   9  
                       

Loss from continuing operations

    (16,574 )   (23,908 )   (109,211 )   (3,581 )   (20,933 )

Discontinued operations, net of taxes(8)

                (77 )   (2,914 )
                       

Net loss

    (16,574 )   (23,908 )   (109,211 )   (3,658 )   (23,847 )

Net loss attributable to noncontrolling interest

    (125 )       (62 )   (24 )    
                       

Net loss applicable to TRC Companies, Inc.

    (16,449 )   (23,908 )   (109,149 )   (3,634 )   (23,847 )

Dividends and accretion charges on preferred stock(9)

    6,431     215         2,233     751  
                       

Net loss applicable to TRC Companies, Inc.'s common shareholders

  $ (22,880 ) $ (24,123 ) $ (109,149 ) $ (5,867 ) $ (24,598 )
                       

Basic and diluted loss per common share:

                               
 

Loss from continuing operations

  $ (1.17 ) $ (1.25 ) $ (5.84 ) $ (0.33 ) $ (1.43 )
 

Discontinued operations, net of taxes

                    (0.19 )
                       

  $ (1.17 ) $ (1.25 ) $ (5.84 ) $ (0.33 ) $ (1.62 )
                       

Basic and diluted weighted average common shares outstanding

    19,548     19,272     18,700     17,563     15,168  
                       

Cash dividends declared per common share

                     
                       

Balance Sheet Data at June 30:

                               
 

Total assets

  $ 287,795   $ 336,896   $ 397,319   $ 485,982   $ 485,403  
                       
 

Long-term debt, including current portion

    9,444     12,501     39,310     42,670     40,453  
                       
 

Preferred stock

    8,239     1,808             15,000  
                       
 

Shareholders' equity

    27,953     48,623     57,671     161,729     145,156  
                       

(1)
Concurrent with the implementation of our new enterprise resource and planning system in fiscal year 2007, our processes and costs relating to financial, information technology and administrative functions were realigned and are now incurred by corporate functions. Beginning in fiscal year 2008, the related costs are classified as general and administrative expenses.

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    Previously, these processes and related expenses were performed by individuals in field locations and were included in cost of services. Management estimates that $5.6 million of expenses were included in general and administrative expenses in fiscal year 2008 that in the previous year were included in costs of services.

(2)
During fiscal year 2010, we recorded an impairment charge of $20.2 million related to goodwill. During fiscal year 2009, we recorded impairment charges of $19.3 million related to goodwill and $2.1 million related to certain customer relationships intangible assets. During fiscal year 2008, we recorded impairment charges of $76.7 million related to goodwill and $0.6 million related to certain customer relationships intangible assets. During fiscal year 2006, we recorded an impairment charge of $2.2 million related to trade-name intangible assets.

(3)
During fiscal year 2010, we recorded amortization expense of $1.9 million of which $1.6 million was due to the acceleration of amortization expense relating to certain customer relationship intangible assets.

(4)
During fiscal year 2010, we recorded a $1.7 million gain on extinguishment of debt in connection with the dissolution of Co-Energy LLC, a consolidated entity.

(5)
The $0.6 million penalty related to our failure to obtain an effective registration statement related to our fiscal year 2006 private placement.

(6)
During fiscal year 2010, we recorded a net tax benefit of $4.2 million primarily due to: (i) the Worker, Homeownership, and Business Assistance Act of 2009 which amended I.R.C. §172(b)(1)(H), which allows taxpayers to elect to carry back an applicable net operating loss ("NOL") for a period of 3, 4, or 5 years, to offset taxable income in those preceding years enabling us to carry back our fiscal year 2008 NOL for a tax benefit of $2.8 million, which amount was collected in January 2010, and (ii) the re-assessment of our uncertain tax positions based on communications with the IRS relating to our examination including the impact of the NOL law change. The valuation allowance changed during fiscal years 2010 and 2009 to fully reserve for additional deferred tax assets by ($2.3) million and $1.0 million, respectively. During fiscal year 2008, we determined that it was more likely than not that our deferred tax assets would not be realized as a result of insufficient expected future taxable income or reversals of existing temporary differences and recorded a deferred tax provision of $12.1 million which included a valuation allowance to fully reserve for our deferred tax assets as of such date.

(7)
The fiscal years 2009, 2008 and 2007 equity in losses from unconsolidated affiliates includes impairment charges of $0.4 million, $0.5 million and $0.4 million, respectively.

(8)
We sold our wholly-owned subsidiaries Omni and Bellatrix in fiscal year 2007 and PacLand in fiscal year 2006.

(9)
We incurred a charge of approximately $6.4 million and $0.2 million in fiscal years 2010 and 2009, respectively, related to the accretion of the beneficial conversion charge recorded on the preferred stock issued in June 2009. In December 2006, preferred stock which was issued in fiscal 2001 was exchanged for approximately 1.1 million shares of common stock, resulting in a charge of approximately $2.0 million related to the induced conversion of the preferred stock. We incurred a charge of approximately $0.8 million in fiscal year 2006 related to dividend and accretion charges on preferred stock.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        You should read the following discussion of our results of operations and financial condition in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based upon current expectations and assumptions that are subject to risks and uncertainties. Actual results and the timing of certain events may differ materially from those projected in such forward-looking statements due to a number of factors, including those discussed in the section entitled "Forward-Looking Statements" on page 3.

OVERVIEW

        We are a firm that provides engineering, consulting, and construction management services. Our project teams assist our commercial, industrial and government clients implement environmental, energy and infrastructure projects from initial concept to delivery and operation. We provide our services to commercial organizations and governmental agencies almost entirely in the United States of America.

        We derive our revenue from fees for professional and technical services. As a service company, we are more labor-intensive than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding service to our clients and execute projects successfully. Our income or loss from operations is derived from our ability to generate revenue and collect cash under our contracts in excess of our direct costs, subcontractor costs, other contract costs, and general and administrative ("G&A") expenses.

        The following table presents the approximate percentage of net service revenue ("NSR") by contract type:

 
  Fiscal Year  
 
  2010   2009   2008  

Time-and-materials

    58 %   54 %   59 %

Fixed-price

    41 %   44 %   37 %

Cost-plus

    1 %   2 %   4 %

        In the course of providing our services, we routinely subcontract services. Generally these subcontractor costs are passed through to our clients and, in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and consistent with industry practice, are included in gross revenue. Because subcontractor services can change significantly from project to project, changes in gross revenue may not be indicative of business trends. Accordingly, we also report NSR, which is gross revenue less the cost of subcontractor services and other direct reimbursable costs, and our discussion and analysis of financial condition and results of operations uses NSR as a point of reference.

        Our cost of services ("COS") includes professional compensation and related benefits together with certain direct and indirect overhead costs such as rents, utilities and travel. Professional compensation represents the majority of these costs. Our G&A expenses are comprised primarily of our corporate headquarters costs related to corporate executive management, finance, accounting, information technology, administration and legal. These costs are generally unrelated to specific client projects and can vary as expenses are incurred to support corporate activities and initiatives.

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        Our revenue, expenses and operating results may fluctuate significantly from year to year as a result of numerous factors, including:

    Unanticipated changes in contract performance that may affect profitability, particularly with contracts that are fixed-price or have funding limits;

    Seasonality of the spending cycle, notably for state and local government entities, and the spending patterns of our commercial sector clients;

    Budget constraints experienced by our federal, state and local government clients;

    Divestitures or discontinuance of operating units;

    Employee hiring, utilization and turnover rates;

    The number and significance of client contracts commenced and completed during the period;

    Creditworthiness and solvency of clients;

    The ability of our clients to terminate contracts without penalties;

    Delays incurred in connection with contracts;

    The size, scope and payment terms of contracts;

    Contract negotiations on change orders and collection of related accounts receivable;

    The timing of expenses incurred for corporate initiatives;

    Competition;

    Litigation;

    Changes in accounting rules;

    The credit markets and their effects on our customers; and

    General economic or political conditions.

Divestitures

        In June 2010 we sold our 50% ownership position in Environmental Restoration, LLC, an unconsolidated affiliate formed to develop a habitat mitigation bank. We received cash payments of $25 thousand and a $275 thousand five-year promissory note. Profit on the transaction was deferred as the buyer's initial financial commitment was insufficient to provide economic substance to the transaction. As a result, the profit will be recognized under the installment method, which recognizes profit as collections of principal are received.

        In fiscal year 2007 we sold our 50% ownership position in Metuchen Realty Acquisition, LLC, an unconsolidated affiliate. We received cash payments of $3.2 million, and the transaction resulted in a $17 thousand loss during fiscal year 2008.

Operating Segments

        During fiscal year 2009 our accounting system was configured to provide revenue and earnings information that allowed us to initiate reporting to our chief operating decision maker ("CODM") under three operating segments. Management established these operating segments based upon the type of project, the client and market to which those projects are delivered, the different marketing strategies associated with the services provided and the specialized needs of the respective clients. Effective in the first quarter of fiscal year 2010, we made certain changes to our operating segments in our continuing efforts to align businesses around markets and customers. Operating segment

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information for all periods presented has been reclassified to reflect the new operating segment structure. The operating segments are as follows:

            Energy:     The Energy operating segment provides services to a range of clients including energy companies, utilities, other commercial entities, and state and federal governments. Our services include program management, engineer/procure/construct projects, design, and consulting. Our typical projects involve upgrade and new construction for electrical transmission and distribution systems, energy efficiency program design and management, and alternative energy development. This operating segment also provides services to support energy savings projects for state government entities and end users.

            Environmental:     The Environmental operating segment provides services to a wide range of clients, including industrial, transportation, energy and natural resource companies, as well as federal, state and municipal agencies, and is organized to focus on key areas of demand including: environmental management of buildings, air quality measurements and modeling of potential air pollution impacts, assessment and remediation of contaminated sites, environmental licensing and permitting of a wide variety of projects, and natural and cultural resource assessment and management.

            Infrastructure:    The Infrastructure operating segment provides services related to the expansion of infrastructure capacity, the rehabilitation of overburdened and deteriorating infrastructure systems, and the management of risks related to security of public and private facilities. Our client base is predominantly state and municipal governments as well as selected commercial developers. Primary services include: roadway and surface transportation design; structural design of bridges; construction engineering inspection and construction management for roads and bridges; civil engineering for municipalities and public works departments; and geotechnical engineering services. Major markets include the northeast United States, Texas, Louisiana and California.

        Our CODM is our Chief Executive Officer ("CEO"). Our CEO manages the business by evaluating the financial results of the three operating segments, focusing primarily on segment revenue and segment profit. We utilize segment revenue and segment profit because we believe they provide useful information for effectively allocating resources among operating segments; evaluating the health of our operating segments based on metrics that management can actively influence; and gauging our investments and our ability to service, incur or pay down debt. Specifically, our CEO evaluates segment revenue and segment profit and assesses the performance of each operating segment based on these measures, as well as, among other things, the prospects of each of the operating segments and how they fit into our overall strategy. Our CEO then decides how resources should be allocated among our operating segments. We do not track our assets by operating segment, and consequently, it is not practical to show assets by operating segment. Segment profit includes all operating expenses except the following: costs associated with providing corporate shared services (including certain depreciation and amortization), goodwill and intangible asset write-offs, stock-based compensation expense and amortization of intangible assets. Depreciation expense is primarily allocated to operating segments based upon their respective use of total operating segment office space. Inter-segment balances and transactions are not material. The accounting policies of the operating segments are the same as those for us as a whole, except as discussed herein.

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        The following table presents the approximate percentage of our NSR by operating segment for fiscal years 2010 and 2009:

 
  2010   2009  

Energy

    26 %   27 %

Environmental

    53 %   52 %

Infrastructure

    21 %   21 %

Business Trend Analysis

        Energy:    The utilities in the United States are in the early stages of a multi-year upgrade of the electric transmission grid to improve capacity, reliability and dispatch of renewable sources of generation. Years of underinvestment coupled with an increasingly favorable regulatory environment have provided a good business opportunity for those serving this market. Electric utilities throughout the United States will be investing over $50 billion in the performance of this work over the next several years. The current downturn within the US economy has slowed the pace of this investment, yet it does not appear to have affected the long term plan of investment. Energy efficiency services continue to benefit from increasing state and federal funds targeted at energy efficiency. The American Recovery and Reinvestment Act of 2009 ("ARRA"), Regional Green House Gas Initiative and newly established System Benefit Charges at the state or utility level are significantly expanding the marketplace for energy efficiency program management services. Investment within the renewable portfolios also remains strong. We are well established in the Northeast and Mid-Atlantic regions and are focused on growing our presence in the Texas and California markets where demand for services is the highest.

        Environmental:    Market demand for environmental services has stabilized following a recent decline caused by general economic conditions. While the economic decline served to temporarily halt the long term pattern of growth historically enjoyed by this operating segment, the fundamental compliance drivers for environmental services remained in place. A rapidly evolving regulatory compliance arena (more recently focused upon climate change issues and clean power usage and development), the continuing need to support transactions, and the need to enhance our aging transportation and energy infrastructure all remain as critical drivers for environmental services. Due to ARRA and other factors it now appears that historical long term growth rates in the environmental market may return in the near future.

        Infrastructure:    Demand for services is expected to continue to be flat for fiscal year 2011 due to general economic conditions, heavy budget cuts and deficit issues, the lack of a new federal transportation bill, and revenue shortfalls at state and municipal levels. Recent estimates indicate that approximately $2.0 trillion needs to be invested over the next five years in national infrastructure alone to restore the system to a state of good repair. In January 2010, the current administration committed $8 billion in federal stimulus to high speed rail. The Senate version of the Jobs Bill passed in mid March 2010 included $15 billion for infrastructure funding (plus a $20 billion Highway Trust Fund Transfer to maintain Federal Obligations through 2010), and the Transportation Reauthorization Act has included several short extensions and $500 billion in long term commitments. The long-term outlook for the infrastructure operating segment also remains strong due to alternative funding mechanisms (e.g., a proposed National Infrastructure Bank); the continued attractiveness of Public Private Partnerships; potential additional economic stimulus initiatives; and the continued need to upgrade, replace or repair aging transportation infrastructure.

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Critical Accounting Policies

        Our financial statements have been prepared in accordance with U.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates and assumptions. We use our best judgment in the assumptions used to compile these estimates, which are based on current facts and circumstances, prior experience and other assumptions that are believed to be reasonable. Our accounting policies are described in Note 2 to the consolidated financial statements contained in Item 8 of this report. We believe the following critical accounting policies reflect the more significant judgments and estimates used in preparation of our consolidated financial statements and are the policies which are most critical in the portrayal of our financial position and results of operations:

        Revenue Recognition:    We recognize contract revenue in accordance with Accounting Standards Codification ™ ("ASC") Topic 605, Revenue Recognition. Specifically, we follow the guidance in ASC Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, which establishes five criteria for using the percentage of completion method. The five criteria are (1) work is performed based on written contracts executed by the parties that clearly specify the goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement, (2) buyers have the ability to satisfy their obligations under the contracts, (3) the contractor has the ability to perform its contractual obligations, (4) the contractor has an adequate estimating process and the ability to estimate reliably both the costs to complete the project and the percentages of contract performance completed and (5) the contractor has a cost accounting system that adequately accumulates and allocates costs in a manner consistent with the estimates produced by the estimating process. We earn our revenue from fixed-price, time-and-materials and cost-plus contracts.

Fixed-Price Contracts

        We recognize revenue on fixed-price contracts using the percentage-of-completion method. Under this method of revenue recognition, we estimate the progress towards completion to determine the amount of revenue and profit to recognize on all significant contracts. We generally utilize an efforts-expended, cost-to-cost approach in applying the percentage-of-completion method under which revenue is earned in proportion to total costs incurred divided by total costs expected to be incurred.

        Under the percentage-of-completion method, recognition of profit is dependent upon the accuracy of a variety of estimates including engineering progress, materials quantities, achievement of milestones and other incentives, penalty provisions, labor productivity and cost estimates. Such estimates are based on various judgments we make with respect to those factors and can be difficult to accurately determine until the project is significantly underway. Due to uncertainties inherent in the estimation process, actual completion costs often vary from estimates. If estimated total costs on any contract indicate a loss, we charge the entire estimated loss to operations in the period the loss first becomes known. If actual costs exceed the original fixed contract price, recognition of any additional revenue will be pursuant to a change order, contract modification, or claim.

        We have fixed-price Exit Strategy contracts to remediate environmental conditions at contaminated sites. Under most Exit Strategy contracts, the majority of the contract price is deposited into a restricted account with an insurer. The funds in the restricted account are held by the insurer and used to pay us as work is performed. The arrangement with the insurer provides for the deposited funds to earn interest at the one-year constant maturity United States Treasury Bill rate. The interest is recorded when earned and reported as interest income from contractual arrangements on the consolidated statements of operations.

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        The Exit Strategy funds held by the insurer, including any interest growth thereon, are recorded as an asset (current and long-term restricted investment) on our consolidated balance sheets, with a corresponding liability (current and long-term deferred revenue) related to the funds. Consistent with our other fixed-price contracts, we recognize revenue on Exit Strategy contracts using the percentage-of-completion method. When determining the extent of progress towards completion on Exit Strategy contracts, prepaid insurance premiums and fees are amortized, on a straight-line basis, to cost incurred over the life of the related insurance policy. Certain Exit Strategy contracts are classified as pertaining to either remediation or operation, maintenance and monitoring, and, in addition, certain Exit Strategy contracts are segmented, and remediation and operation, maintenance and monitoring are separately accounted for.

        Under most Exit Strategy contracts, additional payments are made by the client to the insurer, typically through an insurance broker, for insurance premiums and fees for a policy to cover potential cost overruns and other factors such as third party liability. For Exit Strategy contracts where we establish that (1) costs exceed the contract value and interest growth thereon and (2) such costs are covered by insurance, we record an insurance recovery up to the amount of insured costs. An insurance gain, that is, an amount to be recovered in excess of our recorded costs, is not recognized until the receipt of insurance proceeds. Insurance recoveries are reported as insurance recoverables and other income on our consolidated statements of operations. If estimated total costs on any contract indicate a loss, we charge the entire estimated loss to operations in the period the loss first becomes known.

        Unit price contracts are a subset of fixed-price contracts. Under unit price contracts, our clients pay a set fee for each service or unit of production. We recognize revenue under unit price contracts as we complete the related service transaction for our clients. If our costs per service transaction exceed original estimates, our profit margins will decrease, and we may realize a loss on the project unless we can receive payment for the additional costs.

Time-and-Materials Contracts

        Under time-and-materials contracts we negotiate hourly billing rates and charge our clients based on the actual time that we expend on a project. In addition, clients reimburse us for actual out-of-pocket costs of materials and other direct reimbursable expenses that we incur in connection with our performance under the contract. Our profit margins on time-and-materials contracts fluctuate based on actual labor and overhead costs that we directly charge or allocate to contracts compared to negotiated billing rates. Revenue on time-and-materials contracts is recognized based on the actual number of hours we spend on the projects plus any actual out-of-pocket costs of materials and other direct reimbursable expenses that we incur on the projects.

Cost-Plus Contracts

        Cost-Plus Fixed Fee Contracts.    Under our cost-plus fixed fee contracts we charge clients for our costs, including both direct and indirect costs, plus a fixed negotiated fee. In negotiating a cost-plus fixed fee contract we estimate all recoverable direct and indirect costs and then add a fixed profit component. The total estimated cost plus the negotiated fee represents the total contract value. We recognize revenue based on the actual labor and non-labor costs we incur plus the portion of the fixed fee we have earned to date. We invoice for our services as revenue is recognized or in accordance with agreed upon billing schedules.

        Cost-Plus Fixed Rate Contracts.    Under our cost-plus fixed rate contracts we charge clients for our costs plus negotiated rates based on our indirect costs. In negotiating a cost-plus fixed rate contract we estimate all recoverable direct and indirect costs and then add a profit component, which is a percentage of total recoverable costs, to arrive at a total dollar estimate for the project. We recognize revenue based on the actual total costs we have expended plus the applicable fixed rate. If the actual

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total costs are lower than the total costs we have estimated, our revenue from that project will be lower than originally estimated.

Change Orders/Claims

        Change orders are modifications of an original contract that change the provisions of the contract. Change orders typically result from changes in scope, specifications or design, manner of performance, facilities, equipment, materials, sites, or period of completion of the work. Claims are amounts in excess of the agreed contract price that we seek to collect from our clients or others for client-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes.

        Costs related to change orders and claims are recognized when they are incurred. Change orders are included in total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated. Claims are included in total estimated contract revenues only to the extent that contract costs related to the claims have been incurred and when it is probable that the claim will result in a bona fide addition to contract value which can be reliably estimated. No profit is recognized on claims until final settlement occurs. As of June 30, 2010 and 2009, we did not recognize any revenue related to claims.

Other Contract Matters

        Federal Acquisition Regulations ("FAR"), which are applicable to our federal government contracts and may be incorporated in many local and state agency contracts, limit the recovery of certain specified indirect costs on contracts. Cost-plus contracts covered by FAR or with certain state and local agencies also require an audit of actual costs and provide for upward or downward adjustments if actual recoverable costs differ from billed recoverable costs. Most of our federal government contracts are subject to termination at the discretion of the client. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination.

        Contracts with the federal government are subject to audit, primarily by the Defense Contract Audit Agency ("DCAA"), which reviews our overhead rates, operating systems and cost proposals. During the course of its audits, the DCAA may disallow costs if it determines that we have accounted for such costs in a manner inconsistent with Cost Accounting Standards. Our last audit was for fiscal year 2004 and resulted in a $14 thousand adjustment. Historically we have not had any material cost disallowances by the DCAA as a result of audit; however there can be no assurance that DCAA audits will not result in material cost disallowances in the future.

        Allowance for Doubtful Accounts—An allowance for doubtful accounts is maintained for estimated losses resulting from the failure of our clients to make required payments. The allowance for doubtful accounts has been determined through reviews of specific amounts deemed to be uncollectible and estimated write-offs as a result of clients who have filed for bankruptcy protection plus an allowance for other amounts for which some loss is determined to be probable based on current circumstances. If the financial condition of clients or our assessment as to collectability were to change, adjustments to the allowances may be required.

        Income Taxes—We are required to estimate the provision for income taxes, including the current tax expense together with assessing temporary differences resulting from differing treatments of assets and liabilities for tax and financial accounting purposes. These differences between the financial statement and tax bases of assets and liabilities, together with net operating loss ("NOL") carryforwards and tax credits are recorded as deferred tax assets or liabilities on the consolidated balance sheets. An assessment is required to be made of the likelihood that the deferred tax assets will be recovered from future taxable income. To the extent that we determine that it is more likely than

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not that the deferred asset will not be utilized, a valuation allowance is established. Taxable income in future periods significantly above or below that projected will cause adjustments to the valuation allowance that could materially decrease or increase future income tax expense.

        We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial statements.

        Goodwill and Other Intangible Assets—In accordance with ASC Topic 350, Intangibles—Goodwill and Other, goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to impairment testing at least, annually or more frequently if events or changes in circumstances indicate that goodwill might be impaired. We perform impairment reviews for our reporting units utilizing valuation methods, including the discounted cash flow method, the guideline company approach and the guideline transaction approach, as the best evidence of fair value. The valuation methodology used to estimate the fair value of the total Company and our reporting units requires inputs and assumptions (i.e. revenue growth, operating profit margins and discount rates) that reflect current market conditions. The estimated fair value of each reporting unit is compared to the carrying amount of the reporting unit, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the goodwill of the reporting unit is potentially impaired, and we then determine the implied fair value of goodwill, which is compared to the carrying value of goodwill to determine if impairment exists.

        Other intangible assets are included in other assets and consist primarily of purchased customer relationships and other intangible assets acquired in acquisitions. The costs of intangible assets with determinable useful lives are amortized on a straight-line basis over the estimated periods benefited. We review the economic lives of our intangible assets annually.

        Management judgment and assumptions are required in performing the impairment tests for all reporting units with goodwill and in measuring the fair value of goodwill, indefinite-lived intangibles and long-lived assets. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values or the amount of the recognized impairment losses.

        Insurance Matters, Litigation and Contingencies—In the normal course of business, we are subject to certain contractual guarantees and litigation. Generally, such guarantees relate to project schedules and performance. Most of the litigation involves us as a defendant in contractual disputes, professional liability, personal injury and other similar lawsuits. We maintain insurance coverage for various aspects of our business and operations, however, we have elected to retain a portion of losses that may occur through the use of substantial deductibles, limits and retentions under our insurance programs. This practice may subject us to some future liability for which we are only partially insured or are completely uninsured. In accordance with ASC Topic 450, Contingencies, we record in our consolidated balance sheets amounts representing our estimated losses from claims and settlements when such losses are deemed probable and estimable. Otherwise, these losses are expensed as incurred. Costs of defense are expensed as incurred. If the estimate of a probable loss is a range, and no amount within the range is more likely, we accrue the lower limit of the range. As additional information about current or future litigation or other contingencies becomes available, management will assess whether such information warrants the recording of additional expenses relating to those contingencies. Such additional expenses could potentially have a material impact on our results of operations and financial position.

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Results of Operations

        We incurred significant losses during fiscal years 2010, 2009, and 2008 and may continue to incur losses in the future.

Fiscal Year 2010

        We continued to experience the effects of the economic downturn resulting in lower revenues for fiscal year 2010, as compared to fiscal year 2009. The challenging economic conditions led to delays, curtailments and cancellations of proposed and existing projects, thus decreasing overall demand and new project awards in all three of our operating segments. We continue to see signs of renewed client interest in the early phases of major capital investments, but the timing and award of these projects remains uncertain.

        Net loss applicable to our common shareholders for fiscal year 2010 of $22.9 million included:

    a $20.2 million impairment charge for goodwill and $1.6 million due to the acceleration of amortization expense relating to certain customer relationship intangible assets;

    $6.4 million of accretion charges on preferred stock;

    a $4.2 million tax benefit; and

    a $1.7 million gain on extinguishment of debt.

        Goodwill and Intangible Assets:    During fiscal year 2010, we recorded a charge of $20.2 million for the impairment of goodwill related to reporting units within our Environmental and Energy operating segments. The key factor contributing to the goodwill impairment was a decline in actual and forecasted financial performance as a result of weak economic conditions as our clients take a cautious approach to starting large-scale capital improvement projects. During fiscal year 2010, we incurred $1.6 million of accelerated amortization expense relating to certain customer relationship intangible assets.

        Accretion Charges on Preferred Stock:    On June 1, 2009, we sold 7,209 shares of a new Series A Convertible Preferred Stock, $0.10 par value (the "Preferred Stock"), for $2,150 per share (the "2009 Private Placement") pursuant to a stock purchase agreement by and among us and three of our existing shareholders and related entities. The 2009 Private Placement resulted in proceeds of $15.3 million, net of issuance costs of $0.2 million of which $0.1 million were paid as of June 30, 2009. In accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options, and ASC 470-20-55-20, it was determined that the conversion price was at a discount to fair value. The value of this discount (the beneficial conversion feature) was $13.7 million. The beneficial conversion feature, a non-cash item, was deducted from the carrying value of the Preferred Stock and is being accreted over 18 months, the period at the end of which the Preferred Stock converts to common stock. The accretion is treated as a preferred stock dividend. During the fiscal years 2010 and 2009, we recorded accretion charges on preferred stock of $6.4 million and $0.2 million, respectively.

        Federal and State Income Tax Benefit:    The federal and state income tax benefit was $4.2 million for fiscal year 2010 from a tax provision of $3.9 million for the same period in the prior year primarily related to uncertain tax positions. We recognized a net tax benefit of $4.2 million in fiscal year 2010 primarily due to: (i) the Worker, Homeownership, and Business Assistance Act of 2009 which amended I.R.C. §172(b)(1)(H), allowing taxpayers to elect to carry back an applicable NOL for a period of 3, 4, or 5 years, to offset taxable income in those preceding years and enabling us to carry back our fiscal year 2008 NOL for a tax benefit of $2.8 million, which amount was collected in fiscal year 2010, and (ii) the re-assessment of our uncertain tax positions based on communications with the IRS relating to

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its examination including the impact of the NOL law change which resulted in an income tax benefit of $1.9 million.

        We are currently under an IRS examination for the fiscal years 2003 through 2008. During fiscal year 2009, the IRS formally assessed us certain adjustments related to Exit Strategy projects. We do not agree with these adjustments and have protested the assessments. If the IRS prevails in its position, our federal income tax due for the fiscal years 2003 through 2008 would be $9.9 million (including interest). Although the final resolution of the adjustment is uncertain, management increased the gross unrecognized tax benefits under the measurement principles of ASC Topic 740, Income Taxes, during fiscal year 2009.

        Gain on Extinguishment:    In fiscal year 2001 we made an investment in a privately held energy services contracting company ("Co-Energy LLC") that specialized in the installation of ground source heat pump systems. Over its history, Co-Energy LLC incurred significant losses. During December 2009, in connection with the dissolution of Co-Energy LLC, a consolidated entity, we were legally released from an aggregate of $1.7 million of loans extended to Co-Energy LLC by a party unrelated to us. The loans were extinguished because Co-Energy LLC had no assets at the time of dissolution. The lender did not have an equity interest in us and received no claims, rights or enhancement as a result of the extinguishment. Consequently, we recognized a $1.7 million gain on extinguishment of debt during fiscal year 2010.

Fiscal Year 2009

        The net loss applicable to our common shareholders of $24.1 million for fiscal year 2009 included:

    a $21.4 million impairment charge for goodwill and intangible assets; and

    a $3.9 million provision for income taxes primarily related to uncertain tax positions.

        Goodwill and Intangible Assets:    During fiscal year 2009, we performed a goodwill assessment and concluded that an impairment of goodwill existed and recorded a non-cash goodwill impairment charge of $19.3 million and an intangible asset impairment charge of $2.1 million.

        Federal and State Income Tax Provision:    During fiscal year 2009, we recorded a provision for income taxes of $3.9 million primarily related to uncertain tax positions. We are currently under an IRS examination for the fiscal years 2003 through 2008. During fiscal year 2009, the IRS formally assessed us certain adjustments related to Exit Strategy projects. Although the final resolution of the adjustment is uncertain, management increased the gross unrecognized tax benefits under the measurement principles of ASC Topic 740, Income Taxes ("ASC Topic 740"), during fiscal year 2009.

Fiscal Year 2008

        The net loss applicable to our common shareholders of $109.1 million for fiscal year 2008 included:

    a $77.3 million impairment charge for goodwill and intangible assets;

    a $12.1 million deferred tax provision which included a valuation allowance to fully reserve for our deferred tax assets;

    a $3.2 million charge for restructuring actions initiated in fiscal year 2008;

    $9.8 million of legal expenses, including defense and settlement expenses; and

    $7.4 million of losses on certain joint ventures and contracts.

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        Goodwill and Intangible Assets:    During fiscal year 2008, we performed a goodwill assessment and concluded that an impairment of goodwill existed and recorded a non-cash goodwill impairment charge of $76.7 million and an intangible asset impairment charge of $0.6 million during fiscal year 2008.

        Deferred Tax Assets:    During fiscal year 2008, we determined that it was more likely than not that our deferred tax assets would not be realized as a result of insufficient expected future taxable income generated from pretax book income or reversals of existing temporary differences. Accordingly, a deferred tax provision of $12.1 million was recorded in fiscal year 2008 to provide a valuation allowance against our deferred tax assets.

        Restructuring:    In order to reduce operating costs and improve our operating efficiency, we implemented a restructuring plan in the fourth quarter of fiscal year 2008. Under the restructuring plan, we reduced our workforce by 71 employees and consolidated or closed 14 office facilities. A charge of $3.2 million was recorded in fiscal year 2008 related to those actions.

        Legal Costs:    Legal and related costs included approximately $4.8 million for legal defense costs and $5.0 million for reserves and uninsured settlements.

        Certain Joint Ventures and Project Losses:    Approximately $3.8 million of the loss was related to our investment in the Rochester Power Delivery Joint Venture ("RPD JV"). In fiscal year 2006, we formed the RPD JV with two other companies to design and construct a $114.8 million electrical transmission and distribution system for Rochester Gas and Electric. During fiscal year 2008, the joint venture substantially increased the estimated contract costs to an amount in excess of the contract value by approximately $10.0 million of which our proportionate share was 33.3%, or $3.3 million. Approximately $3.6 million of the loss for fiscal year 2008 was related to a significant loss incurred on another project.

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Consolidated Results

    Fiscal Year 2010 Compared to Fiscal Year 2009

        The following table presents the dollar and percentage changes in certain items in the consolidated statements of operations for fiscal years 2010 and 2009:

 
  Years Ended June 30,   Change  
(Dollars in thousands)
  2010   2009   $   %  

Gross revenue

  $ 330,575   $ 432,517   $ (101,942 )   (23.6 )%

Less subcontractor costs and other direct reimbursable charges

    100,476     177,713     (77,237 )   (43.5 )
                   

Net service revenue

    230,099     254,804     (24,705 )   (9.7 )

Interest income from contractual arrangements

    596     1,859     (1,263 )   (67.9 )

Insurance recoverables and other income

    8,844     19,539     (10,695 )   (54.7 )

Cost of services

    203,221     227,217     (23,996 )   (10.6 )

General and administrative expenses

    27,128     32,936     (5,808 )   (17.6 )

Provision for doubtful accounts

    2,344     3,952     (1,608 )   (40.7 )

Goodwill and intangible asset write-offs

    20,249     21,438     (1,189 )   (5.5 )

Depreciation and amortization

    8,049     7,322     727     9.9  
                   

Operating loss

    (21,452 )   (16,663 )   4,789     28.7  

Interest expense

    (1,003 )   (2,925 )   (1,922 )   (65.7 )

Gain on extinguishment of debt

    1,716         1,716     100.0  
                   

Loss from operations before taxes and equity in losses

    (20,739 )   (19,588 )   1,151     5.9  

Federal and state income tax (benefit) provision

    (4,210 )   3,871     (8,081 )   (208.8 )
                   

Loss from operations before equity in losses

    (16,529 )   (23,459 )   (6,930 )   (29.5 )

Equity in losses from unconsolidated affiliates

    (45 )   (449 )   (404 )   (90.0 )
                   

Net loss

    (16,574 )   (23,908 )   (7,334 )   (30.7 )

Net loss applicable to noncontrolling interest

    (125 )       (125 )   (100.0 )
                   

Net loss applicable to TRC Companies, Inc. 

    (16,449 )   (23,908 )   (7,459 )   (31.2 )

Accretion charges on preferred stock

    6,431     215     6,216     2,891.2  
                   

Net loss applicable to TRC Companies, Inc.'s common shareholders

  $ (22,880 ) $ (24,123 ) $ (1,243 )   (5.2 )%
                   

        Gross revenue decreased $101.9 million, or 23.6%, to $330.6 million for fiscal year 2010 from $432.5 million for fiscal year 2009. Overall, requirements for work performed by our subcontractors that generated much of our gross revenue growth in prior years have declined. Specifically, current year revenue in our Environmental operating segment decreased $47.0 million due primarily to the wind-down of a large commercial development Exit Strategy project and the completion of several large environmental compliance projects. Gross revenue in our Energy operating segment declined by $39.8 million primarily due to reduced activity on electric transmission and distribution projects and, in particular, engineering, procurement and construction ("EPC") contracts which generate significant amounts of gross revenue due to the large amount of equipment and substantial subcontracting requirements. The remainder of the decrease was primarily attributable to the wind-down of a large transportation design project in our infrastructure operating segment.

        NSR decreased $24.7 million, or 9.7%, to $230.1 million for fiscal year 2010 from $254.8 million for fiscal year 2009. The decrease was partially due to a $9.3 million reduction in our environmental operating segment primarily related to: (1) the completion of several large environmental compliance contracts which reduced NSR by approximately $6.3 million and (2) the wind-down of a large

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commercial development Exit Strategy project which reduced NSR by approximately $4.0 million. These contracts have not been replaced at the same level primarily due to the economic downturn. In addition, NSR in our Energy operating segment declined by $8.4 million as work associated with certain EPC contracts was lower than the prior year by approximately $10.2 million, and NSR for our Infrastructure operating segment decreased by $7.4 million primarily due to: (1) personnel departures resulting from certain actions taken to eliminate low margin work and (2) the wind-down of a large transportation design project.

        Interest income from contractual arrangements decreased $1.3 million, or 67.9%, to $0.6 million for fiscal 2010 from $1.9 million for fiscal year 2009 primarily due to lower one-year constant maturity T-Bill rates and a lower average balance of restricted investments in fiscal year 2010 compared to fiscal year 2009.

        Insurance recoverables and other income decreased $10.7 million, or 54.7%, to $8.8 million for fiscal year 2010 from $19.5 million for fiscal year 2009. During fiscal year 2009, three Exit Strategy projects had estimated cost increases which were not expected to be funded by the project-specific restricted investments and, therefore, are projected to be funded by the project-specific insurance policies procured at project inception to cover, among other things, cost overruns. In fiscal year 2010, we did not experience similar estimated cost increases.

        COS decreased $24.0 million, or 10.6%, to $203.2 million for fiscal year 2010 from $227.2 million for fiscal year 2009. The decrease was related, in part, to a $9.8 million decrease in Exit Strategy contract loss reserves. As discussed above, increases to our Exit Strategy cost estimates did not occur at the same level in the current year as compared to the prior year. The remainder of the decrease in COS, to a large extent, corresponded to the reduction in NSR. Specifically, the decrease was related to an $11.7 million decrease in labor and fringe costs and a $3.2 million decrease in bonus expense. As a percentage of NSR, COS was 88.3% and 89.2% for fiscal years 2010 and 2009, respectively.

        G&A expenses decreased $5.8 million, or 17.6%, to $27.1 million for fiscal year 2010 from $32.9 million for fiscal year 2009. The decrease was primarily attributable to a $2.5 million decrease in external legal fees and litigation settlement costs and a $1.3 million decrease in accounting fees. In addition, corporate salary expense, bonus expense and fringe benefit costs decreased $1.0 million primarily due to reduced headcount and incentive compensation costs. The remainder of the decrease was primarily attributable to reduced facility costs.

        The provision for doubtful accounts decreased $1.6 million, or 40.7%, to $2.3 million for fiscal year 2010 from $3.9 million for fiscal year 2009. The decrease was primarily due to the corresponding decrease in revenues and the collection of a receivable in the current year that was reserved for in a prior year.

        We assessed the recoverability of goodwill during the first, second and fourth quarters of fiscal year 2010. In performing the goodwill assessments, we utilized valuation methods, including the discounted cash flow method, the guideline company approach, and the guideline transaction approach as the best evidence of fair value. The aggregate fair value of our reporting units declined from the December 25, 2009 valuation to the April 26, 2010 valuation primarily due to a decline in the estimated future cash flows of the reporting units and declines in market multiples of comparable companies. These declines were primarily driven by the U.S recession and its negative impact on several of our key markets, resulting in delays, curtailments and cancellations of proposed and existing projects, which decreased the overall demand for our services. The fair value of three of our reporting units with goodwill did not exceed its carrying value in the fourth quarter of fiscal year 2010, resulting in a goodwill impairment charge of $20.2 million. During fiscal year 2009, an impairment charge of $19.3 million was recorded to write down the carrying value of goodwill, and an impairment charge of $2.1 million was recorded related to certain customer relationships intangible assets.

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        Management judgment and assumptions are required in performing the impairment tests for all reporting units with goodwill and in measuring the fair value of goodwill, indefinite-lived intangibles and long-lived assets. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values or the amount of the recognized impairment losses.

        Depreciation and amortization increased $0.7 million, or 9.9%, to $8.0 million for fiscal year 2010 from $7.3 million for fiscal year 2009. The increase was primarily related to $1.6 million of accelerated amortization expense relating to certain customer relationship intangible assets which was partially offset by a decrease due to technology equipment becoming fully depreciated in the prior year.

        Interest expense decreased $1.9 million, or 65.7%, to $1.0 million for fiscal year 2010 from $2.9 million for fiscal year 2009. We received $15.3 million of net proceeds from the preferred stock offering in June 2009 and utilized the proceeds to pay down our revolving credit facility. The average outstanding balance on our credit facility during fiscal year 2010 was zero compared to an average outstanding balance of $18.4 million for the same period in the prior year.

        Federal and state income tax benefit was $4.2 million for fiscal year 2010 from a tax provision of $3.9 million for the same period in the prior year primarily related to uncertain tax positions. We recognized a net tax benefit of $4.2 million in fiscal year 2010 primarily due to: (i) the Worker, Homeownership, and Business Assistance Act of 2009 which amended I.R.C. §172(b)(1)(H), allowing taxpayers to elect to carry back an applicable NOL for a period of 3, 4, or 5 years to offset taxable income in those preceding years and enabling us to carry back our fiscal year 2008 NOL for a tax benefit of $2.8 million, which amount was collected in fiscal year 2010, and (ii) the re-assessment of our uncertain tax positions based on communications with the IRS relating to its examination including the impact of the NOL law change which resulted in an income tax benefit of $1.9 million.

        Equity in losses from unconsolidated affiliates, net of taxes, decreased $0.4 million, to $0.1 million in fiscal year 2010 from $0.5 million in fiscal year 2009. The fiscal year 2009 results were negatively impacted by a $0.4 million impairment charge on our investment in Environmental Restoration, LLC.

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    Fiscal Year 2009 Compared to Fiscal Year 2008

        The following table presents the dollar and percentage changes in certain items in the consolidated statements of operations for fiscal years 2009 and 2008:

 
  Years Ended June 30,   Change  
(Dollars in thousands)
  2009   2008   $   %  

Gross revenue

  $ 432,517   $ 465,079   $ (32,562 )   (7.0 )%

Less subcontractor costs and other direct reimbursable charges

    177,713     196,870     (19,157 )   (9.7 )
                   

Net service revenue

    254,804     268,209     (13,405 )   (5.0 )

Interest income from contractual arrangements

    1,859     3,944     (2,085 )   (52.9 )

Insurance recoverables and other income

    19,539     6,123     13,416     219.1  

Cost of services

    227,217     241,647     (14,430 )   (6.0 )

General and administrative expenses

    32,936     40,077     (7,141 )   (17.8 )

Provision for doubtful accounts

    3,952     3,708     244     6.6  

Goodwill and intangible asset write-offs

    21,438     77,267     (55,829 )   (72.3 )

Depreciation and amortization

    7,322     8,051     (729 )   (9.1 )
                   

Operating loss

    (16,663 )   (92,474 )   (75,811 )   (82.0 )

Interest expense

    (2,925 )   (3,936 )   (1,011 )   (25.7 )
                   

Loss from operations before taxes and equity in losses

    (19,588 )   (96,410 )   (76,822 )   (79.7 )

Federal and state income tax provision

    3,871     12,296     (8,425 )   (68.5 )
                   

Loss from operations before equity in losses

    (23,459 )   (108,706 )   (85,247 )   (78.4 )

Equity in losses from unconsolidated affiliates

    (449 )   (505 )   (56 )   (11.1 )
                   

Net loss

    (23,908 )   (109,211 )   (85,303 )   (78.1 )

Net loss applicable to noncontrolling interest

        (62 )   62     (100.0 )
                   

Net loss applicable to TRC Companies, Inc. 

    (23,908 )   (109,149 )   (85,241 )   (78.1 )

Accretion charges on preferred stock

    215         215     100.0  
                   

Net loss applicable to TRC Companies, Inc.'s common shareholders

  $ (24,123 ) $ (109,149 ) $ (85,026 )   (77.9 )%
                   

        Gross revenue decreased $32.6 million, or 7.0%, to $432.5 million for fiscal year 2009 from $465.1 million for fiscal year 2008. The wind-down of a large EPC contract in our Energy operating segment resulted in approximately $19.3 million of the decrease. The EPC project was replaced by traditional energy service engineering projects which had lower levels of subcontracting requirements and, therefore, generated less gross revenue. In addition, fiscal year 2009 gross revenue decreased by approximately $11.0 million from the effect of personnel departures resulting from the restructuring plan that was implemented at the end of fiscal year 2008 and the associated decline in billable hours. Further, in fiscal year 2008 we received a change order for approximately $5.1 million for several outstanding claims related to a design-build infrastructure project on which we were a subcontractor, and there was no similar event in fiscal year 2009. The reductions in gross revenue were partially offset by revenue growth of $3.9 million from our Exit Strategy contracts, particularly work associated with a commercial development site in New York.

        NSR decreased $13.4 million, or 5.0%, to $254.8 million for fiscal year 2009 from $268.2 million for fiscal year 2008. The decrease was primarily attributable to the effect of the $5.1 million design-build change order which was received in fiscal year 2008. In addition, fiscal year 2009 NSR decreased by approximately $9.1 million from the effect of personnel departures resulting from the restructuring plan that was implemented at the end of fiscal year 2008.

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        Interest income from contractual arrangements decreased $2.1 million, or 52.9%, to $1.8 million for fiscal year 2009 from $3.9 million for fiscal year 2008 primarily due to lower one-year constant maturity T-Bill rates and a lower average balance of restricted investments in fiscal year 2009 compared to fiscal year 2008.

        Insurance recoverables and other income increased $13.4 million, or 219.1%, to $19.5 million for fiscal year 2009 from $6.1 million for fiscal year 2008. The increase primarily relates to three Exit Strategy projects that had estimated cost increases which are expected to exceed the project specific restricted investments and be funded by the project specific insurance policies procured at project inception to cover, among other things, cost overruns.

        COS decreased $14.4 million, or 6.0%, to $227.2 million for fiscal year 2009 from $241.6 million for fiscal year 2008. The decrease was primarily attributable to costs savings realized from various restructuring activities undertaken in fiscal year 2008. Specifically, payroll and fringe benefit costs decreased $13.0 million and facility/occupancy costs decreased $2.2 million. In addition, marketing and travel expenses decreased by $2.2 million primarily related to our ongoing initiative to reduce operating costs. These decreases were partially offset by a $5.5 million increase in contract loss reserves primarily related to certain Exit Strategy projects that had estimated cost increases during fiscal year 2009. As a percentage of NSR, COS was 89.2% and 90.1% for fiscal years 2009 and 2008, respectively.

        G&A expenses decreased $7.2 million, or 17.8%, to $32.9 million for fiscal year 2009 from $40.1 million for fiscal year 2008. The decrease was primarily related to a $3.1 million decrease in costs related to litigation. Legal and related costs were substantially higher in fiscal year 2008 compared to fiscal year 2009 and included expenses of approximately $4.8 million for legal defense costs and $5.0 million for reserves and uninsured settlements. In fiscal year 2009, we did not incur these costs to the same extent. In addition, corporate labor and fringe benefit costs decreased $1.0 million due to headcount reductions. Further, charges related to restructuring activities, principally severance and facility costs, decreased by $1.6 million during the current fiscal year.

        The provision for doubtful accounts increased $0.2 million, or 6.6%, to $3.9 million for fiscal year 2009 from $3.7 million for fiscal year 2008. The increase was primarily due to bad debt expense recorded for increased collections risk in light of economic uncertainty.

        Impairment charges of $19.3 million and $76.7 million were recorded to write down the carrying value of goodwill, and impairment charges of $2.1 million and $0.6 million were recorded related to certain customer relationships intangible assets during fiscal years 2009 and 2008, respectively, as previously discussed.

        Depreciation and amortization decreased $0.7 million, or 9.1%, to $7.3 million for fiscal year 2009 from $8.1 million for fiscal year 2008. The decrease in depreciation and amortization expense for fiscal year 2009 is primarily due to the fact that we consolidated or closed 14 offices and impaired certain assets associated with those offices in fiscal year 2008. Also, we impaired certain intangible assets during fiscal years 2009 and 2008 resulting in a decrease in amortization expense.

        Interest expense decreased $1.0 million, or 25.7%, to $2.9 million for fiscal year 2009 from $3.9 million for fiscal year 2008. The decrease was primarily due to a decrease in the average outstanding balance on our credit facility from $29.3 million for fiscal year 2008 to $18.4 million for fiscal year 2009. The decrease in the average outstanding balance on our credit facility from fiscal year 2008 is primarily due to the $15.3 million of net proceeds received from the preferred stock offering.

        The federal and state income tax provision decreased $8.4 million to $3.9 million for fiscal year 2009 from a tax provision of $12.3 million for the same period of the prior year. During fiscal year 2008 we determined that it was more likely than not that our deferred tax assets would not be realized as a result of insufficient expected future taxable income generated from pretax book income or reversals of existing temporary differences. Accordingly, we recorded a deferred tax provision of

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$12.1 million which included a valuation allowance to fully reserve for our deferred tax assets. In fiscal year 2009 we realized a $1.0 million federal income tax refund related to a prior year amended federal tax return. During fiscal year 2009 the IRS formally assessed us certain adjustments related to Exit Strategy projects. We do not agree with these adjustments and have protested the assessments. If the IRS prevails in its position, our federal income tax due for the fiscal years 2003 through 2008 would be $9.9 million (including interest). Although the final resolution of the adjustment is uncertain, management has increased the gross unrecognized tax benefits under the measurement principles of ASC Topic 740 during fiscal year 2009.

        Equity in losses from unconsolidated affiliates, net of taxes, decreased $0.1 million, to $0.4 million in fiscal year 2009 from $0.5 million in fiscal year 2008. The fiscal year 2009 and 2008 results were negatively impacted by a $0.4 million and a $0.5 million impairment charge, respectively, on an investment in Environmental Restoration, LLC.

    Costs and Expenses as a Percentage of NSR

        The following table presents the percentage relationships of items in the consolidated statements of operations to NSR for fiscal years 2010, 2009 and 2008:

 
  2010   2009   2008  

Net service revenue

    100.0 %   100.0 %   100.0 %
               

Interest income from contractual arrangements

    0.3     0.7     1.5  

Insurance recoverables and other income

    3.8     7.7     2.3  

Operating costs and expenses:

                   
 

Cost of services

    88.3     89.2     90.1  
 

General and administrative expenses

    11.8     12.9     14.9  
 

Provision for doubtful accounts

    1.0     1.6     1.4  
 

Goodwill and intangible asset write-offs

    8.8     8.4     28.8  
 

Depreciation and amortization

    3.5     2.9     3.0  
               

Total operating costs and expenses

    113.4     115.0     138.2  
               

Operating loss

    (9.3 )   (6.6 )   (34.4 )

Interest expense

    (0.4 )   (1.1 )   (1.5 )

Gain on extinguishment of debt

    0.7          
               

Loss from operations before taxes and equity in losses

    (9.0 )   (7.7 )   (35.9 )

Federal and state income tax (benefit) provision

    (1.8 )   1.5     4.6  
               

Loss from operations before equity in losses

    (7.2 )   (9.2 )   (40.5 )

Equity in losses from unconsolidated affiliates

        (0.2 )   (0.2 )
               

Net loss

    (7.2 )   (9.4 )   (40.7 )

Net loss applicable to noncontrolling interest

    (0.1 )        
               

Net loss applicable to TRC Companies, Inc

    (7.1 )   (9.4 )   (40.7 )

Accretion charges on preferred stock

    2.8     0.1      
               

Net loss applicable to TRC Companies, Inc.'s common shareholders

    (9.9 )%   (9.5 )%   (40.7 )%
               

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Additional Information by Reportable Operating Segment

    Energy Operating Segment Results

 
  Fiscal Year  
 
  2010   2009   Change  

Gross revenue

  $ 77,035   $ 116,868   $ (39,833 )   (34.1 )%

Net service revenue

  $ 59,554   $ 67,964   $ (8,410 )   (12.4 )%

Segment profit

  $ 8,572   $ 15,327   $ (6,755 )   (44.1 )%

        Gross revenue decreased $39.8 million, or 34.1%, to $77.0 million for fiscal year 2010 from $116.9 million for fiscal year 2009. The Energy operating segment experienced a decline in gross revenue in fiscal year 2010 due to a slowdown in electric transmission and distribution spending and a reduction of large project awards throughout fiscal year 2010. Specifically, gross revenue generated by engineer, procure and construct ("EPC") contracts for fiscal year 2010 was lower than fiscal year 2009 by approximately $41.1 million. EPC projects were, to some extent, replaced by traditional energy service projects which had lower levels of subcontracting requirements and, therefore, generated less gross revenue.

        NSR decreased $8.4 million, or 12.4%, to $59.6 million for fiscal year 2010 from $68.0 million for fiscal year 2009. The Energy operating segment experienced a decline in NSR in fiscal year 2010, due to the aforementioned slowdown in electric transmission and distribution spending. In particular, many of our clients have delayed previously scheduled investments in large, multi-year capital projects throughout fiscal year 2010. Consequently, as several of our major EPC contracts wound down, we experienced a decline in NSR. We are seeing the early signs of renewed client interest in large scale capital investments which have historically resulted in EPC contract awards; however, the timing and award of these projects remains uncertain. The decrease in NSR related to delayed EPC contract awards was, in part, replaced by an increase in demand for our energy efficiency program management services.

        The Energy operating segment's profit decreased $6.7 million, or 44.1%, to $8.6 million for fiscal year 2010 from $15.3 million for fiscal year 2009. The decline in the Energy operating segment's profit for fiscal year 2010 is primarily related to the decline in NSR. As described above, our clients are delaying large scale capital investments and, alternatively, are focusing on smaller, competitively bid maintenance projects. Increased competition for these smaller maintenance projects and reduced bookings of new awards resulted in lower segment profit margins. As a percentage of NSR, the Energy operating segment's profit decreased to 14.4% in fiscal year 2010 from 22.6% in the prior year.

    Environmental Operating Segment Results

 
  Fiscal Year  
 
  2010   2009   Change  

Gross revenue

  $ 195,332   $ 242,301   $ (46,969 )   (19.4 )%

Net service revenue

  $ 120,431   $ 129,698   $ (9,267 )   (7.1 )%

Segment profit

  $ 25,170   $ 24,532   $ 638     2.6 %

        Gross revenue decreased $47.0 million, or 19.4%, to $195.3 million for fiscal year 2010 from $242.3 million for fiscal year 2009. We experienced lower activity in our Environmental operating segment due, in part, to the completion of several major compliance projects which reduced revenue by approximately $19.5 million for fiscal year 2010 when compared to fiscal year 2009. In addition, the wind-down of a large commercial development Exit Strategy project reduced gross revenue by approximately $17.8 million for fiscal year 2010 when compared to fiscal year 2009. The remainder of

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the decrease was primarily attributable to a change in project mix, particularly with remediation projects where we experienced lower subcontracting requirements.

        NSR decreased $9.3 million, or 7.1%, to $120.4 million for fiscal 2010 from $129.7 million for fiscal year 2009. The decrease in NSR for fiscal year 2010 was primarily related to (1) adjustments to the estimates at completion on certain Exit Strategy contracts which reduced NSR by approximately $2.8 million and (2) the wind-down of a large commercial development Exit Strategy project which reduced NSR by approximately $4.0 million. The remainder of the decrease was due to lower activity in our environmental operating segment due to the completion of several major compliance projects These contracts have not been replaced at the same level primarily due to the decrease in capital spending on oil and gas pipelines, energy exploration and distribution projects, and new electrical generation sources.

        The Environmental operating segment's profit increased $0.6 million, or 2.6%, to $25.2 million for fiscal year 2010 from $24.5 million for fiscal year 2009. The increase in the Environmental operating segment's profit for fiscal year 2010 was primarily due to improved execution resulting in higher margins as compared to the same period in the prior year as well as the positive impact of cost saving measures implemented during fiscal year 2010. As a percentage of NSR, the Environmental operating segment's profit increased to 20.9% in fiscal year 2010 from 18.9% in the prior year.

    Infrastructure Operating Segment Results

 
  Fiscal Year  
 
  2010   2009   Change  

Gross revenue

  $ 59,446   $ 70,305   $ (10,859 )   (15.4 )%

Net service revenue

  $ 46,636   $ 54,034   $ (7,398 )   (13.7 )%

Segment profit

  $ 4,565   $ 5,696   $ (1,131 )   (19.9 )%

        Gross revenue decreased $10.9 million, or 15.4%, to $59.4 million for fiscal year 2010 from $70.3 million for fiscal year 2009. The decrease in gross revenue for our Infrastructure operating segment was primarily due the wind-down of a large transportation design project.

        NSR decreased $7.4 million, or 13.7%, to $46.6 million for fiscal year 2010 from $54.0 million for fiscal year 2009. The decrease in NSR for our Infrastructure operating segment was primarily due to the aforementioned personnel departures resulting from certain actions taken to limit low margin work and the wind-down of a large transportation design project.

        The Infrastructure operating segment's profit decreased $1.1 million, or 19.9%, to $4.6 million for fiscal year 2010 from $5.7 million for fiscal year 2009. The Infrastructure operating segment's profit decreased primarily due to the above described decrease in NSR. This decrease was partially mitigated by $6.3 million of lower costs, principally labor and fringe. The reduction in costs was due to the implementation of various cost-control measures in response to the current economic downturn. As a percentage of NSR, the Infrastructure operating segment's profit decreased to 9.8% in fiscal year 2010 from 10.5% in the prior year.


Impact of Inflation

        Our operations have not been materially affected by inflation or changing prices because most contracts of a longer term are subject to adjustment or have been priced to cover anticipated increases in labor and other costs, and the remaining contracts are short term in nature.

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Liquidity and Capital Resources

        We primarily rely on cash from operations and financing activities, including borrowings under our revolving credit facility, to fund our operations. Our liquidity is assessed in terms of our overall ability to generate cash to fund our operating and investing activities and to reduce debt.

    Fiscal Year 2010 Compared to Fiscal Year 2009

        Cash flows provided by operating activities were $11.1 million for fiscal year 2010, compared to $21.0 million of cash provided for fiscal year 2009. Sources of cash provided by operating assets and liabilities for fiscal year 2010 totaled $38.2 million and primarily consisted of the following: (1) a $19.3 million decrease in restricted investments primarily due to work performed on Exit Strategy projects; (2) a $10.5 million decrease in accounts receivable due to a reduction in gross revenue; and (3) a $3.2 million decrease in long-term prepaid insurance. Sources of cash provided by operating assets and liabilities during fiscal year 2010 were offset by uses of cash from operating assets and liabilities totaling $41.9 million consisting primarily of the following: (1) a $14.8 million decrease in deferred revenue primarily related to revenue earned on Exit Strategy projects; (2) an $8.3 million increase in insurance recoverable due to estimated cost increases on certain Exit Strategy projects that will be funded by project-specific insurance policies; (3) an $8.2 million decrease in accounts payable primarily due to a reduction in the subcontractor costs and other direct reimbursable charges and the timing of payments to vendors; and (4) a $7.5 million decrease in accrued compensation and benefits primarily due to the payment of employee bonuses. In addition, non-cash items during this period resulted in net expenses of $31.3 million. The non-cash expense items of $33.2 million consisted primarily of the following: (1) $20.2 million for goodwill impairment charges; (2) $8.0 million for depreciation and amortization of which $1.6 million was due to the acceleration of amortization expense relating to certain customer relationship intangible assets; (3) $2.3 million for the provision for doubtful accounts; and (4) $1.9 million for stock-based compensation expense. The non-cash expense items were offset by non-cash income of $1.9 million primarily related to a $1.7 million gain on extinguishment of debt in connection with the dissolution of Co-Energy LLC.

        Accounts receivable include both: (1) billed receivables associated with invoices submitted for work performed and (2) unbilled receivables (work in progress). The unbilled receivables are primarily related to work performed in the last month of the quarter. The efficiency of the billing and collection process is commonly evaluated as days sales outstanding ("DSO"), which we calculate by dividing current receivables by the most recent three-month average of daily gross revenue. DSO, which measures the collections turnover of both billed and unbilled receivables, increased to 93 days as of June 30, 2010 from 85 days as of June 30, 2009 primarily due to the decrease in gross revenue and the timing of collections. Our goal is to maintain DSO at less than 90 days.

        Under Exit Strategy contracts the majority of the contract price is typically deposited into a restricted account with an insurer. The funds in the restricted account are held by the insurer and used to pay us as work is performed. The arrangement with the insurer provides for deposited funds to earn interest at the one-year constant maturity T-Bill rate. If the actual interest rate earned on the deposited funds is less than the rate anticipated when the contract was executed, over time the balance in the restricted account may be less than originally expected. However, there is typically an insurance policy paid for by the client which provides coverage for cost increases from unknown or changed conditions up to a specified maximum amount which is typically significantly in excess of the estimated cost of remediation.

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        Cash used in investing activities was approximately $2.7 million during fiscal year 2010, compared to $2.2 million used in fiscal year 2009. Cash used consisted primarily of $3.4 million for property and equipment, $0.7 million for earnout payments made on a prior year acquisition, and $0.1 million for the acquisition of a business, which were primarily offset by $1.3 million from restricted investments and $0.1 million of proceeds from the sale of fixed assets.

        Cash used in financing activities was approximately $2.2 million during fiscal year 2010, compared to $11.6 million used in fiscal year 2009. Cash used consisted of $4.2 million for payments made on long-term debt, $0.3 million for payments made for employee tax withholdings related to the cancellation of shares, and $0.1 million for issuance costs related to convertible preferred stock which was offset by $2.5 million of borrowings in fiscal year 2010 which have been repaid as of June 30, 2010.

    Fiscal Year 2009 Compared to Fiscal Year 2008

        Cash flows provided by operating activities were $21.0 million for fiscal year 2009, compared to $3.8 million provided for fiscal year 2008. Sources of cash provided by operating assets and liabilities for fiscal year 2009 totaled $64.2 million and primarily consisted of the following: (1) a $24.8 million decrease in restricted investments primarily due to work performed on Exit Strategy projects; (2) a $15.6 million decrease in accounts receivable due to a reduction in gross revenue and a reduction in the number of days sales outstanding; and (3) a $10.2 million increase in other accrued liabilities primarily related to contract losses recorded on Exit Strategy projects to be funded from the insurance recoverable discussed below. Sources of cash provided by operating assets and liabilities during fiscal year 2009 were offset by uses of cash from operating assets and liabilities totaling $57.1 million consisting primarily of the following: (1) a $24.3 million decrease in our deferred revenues due primarily to work performed on Exit Strategy contracts; (2) an $18.4 million increase in insurance recoverable due to estimated cost increases on certain Exit Strategy projects that will be funded by project specific insurance policies; and (3) an $11.4 million decrease in accounts payable primarily due to a reduction in subcontractor costs. In addition, non-cash expenses during this period were $37.7 million. These non-cash expenses consisted primarily of the following: (1) $21.4 million for impairment charges of which $19.3 million related to goodwill and $2.1 million related to certain customer relationships intangible assets; (2) $7.3 million for depreciation and amortization; (3) $4.0 million for the provision for doubtful accounts; and (4) $2.3 million for stock-based compensation expense.

        Cash used in investing activities was approximately $2.2 million during fiscal year 2009, compared to $2.3 million used in fiscal year 2008. Cash used consisted primarily of $3.8 million for property and equipment additions, which was offset by $1.6 million of cash collected from restricted investments and $0.1 million of proceeds received from the sale of fixed assets.

        Cash used in financing activities was approximately $11.6 million during fiscal year 2009, compared to $0.6 million used in fiscal year 2008. Cash used consisted of $27.0 million to pay down the balance outstanding on our credit facility and $0.1 million for payments on long-term debt which was offset by $15.4 million of net proceeds from the issuance of preferred stock and $0.1 million of proceeds from the exercise of stock options.

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    Long-Term Debt

        Long-term debt as of June 30, 2010 and 2009 is comprised of the following (in thousands):

 
  2010   2009  

Revolving credit facility

  $   $  

Subordinated debt:

             
 

Federal Partners note payable, net of unamortized discount of $0 and $9 as of June 30, 2010 and 2009, respectively

    5,000     4,991  
 

CAH note payable

    2,700     3,200  
 

Registration rights notes payable

        600  
 

Other notes payable

    1,016     2,788  

Lease financing obligations

    728     906  

Capital lease obligations

        16  
           

    9,444     12,501  

Less current portion

    3,629     4,632  
           

Long-term debt

  $ 5,815   $ 7,869  
           

        On July 17, 2006, we and substantially all of our subsidiaries, (the "Borrower"), entered into a secured credit agreement (the "Credit Agreement") and related security documentation with Wells Fargo Capital Finance ("Wells Fargo") as the lead lender and administrative agent with Textron Financial Corporation ("Textron") subsequently participating as an additional lender. The Credit Agreement, as amended, provided us with a five-year senior revolving credit facility of up to $50.0 million based upon a borrowing base formula on accounts receivable. In connection with the closing of the preferred stock offering and as a result of previously announced plans to exit the asset based lending business, Textron elected to no longer participate in the credit facility. In June 2009, a $15.0 million syndication reserve was established which reduces the maximum revolver amount from $50.0 million to $35.0 million subject to increase upon Wells Fargo completing a syndication to replace Textron as a participant in the facility. Any amounts outstanding under the Credit Agreement bear interest at the greater of 5.75% and the prime rate plus a margin of 2.50% to 3.50%, or the greater of 4.50% and LIBOR plus a margin of 3.50% to 4.50%, based on Trailing Twelve Month Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), as defined. Our obligations under the Credit Agreement are secured by a pledge of substantially all of our assets and guaranteed by substantially all of our subsidiaries that are not borrowers. The Credit Agreement also contains cross-default provisions which become effective if we default on other indebtedness.

        Under the Credit Agreement we must maintain average monthly backlog of $190.0 million and, depending on borrowing capacity, maintain a minimum fixed charge ratio of 1:00 to 1:00. The Credit Agreement was amended as of January 19, 2010 to extend the expiration date of the facility by two years from July 17, 2011 to July 17, 2013. The amendment also changed the Consolidated Adjusted EBITDA covenant to $4.2 million for the trailing 12 month periods measured at the end of each fiscal quarter in fiscal year 2010; and $6.1 million, $9.2 million, $10.9 million and $12.4 million, for the trailing twelve month periods ending on September 30, 2010, December 31, 2010, March 31, 2011 and June 30, 2011, respectively; and $12.5 million for each 12 month period ending each fiscal quarter thereafter. The definition of Consolidated Adjusted EBITDA also provides an aggregate allowance for cost reduction efforts, as defined in the Credit Agreement as restructuring charges, in the amount of $3.0 million in fiscal year 2010 and $1.25 million in fiscal year 2011 at the Permitted Discretion of the lender as defined in the Credit Agreement. Additional changes in the January 2010 amendment included: (i) an increase to the fee for unused borrowing capacity depending on borrowing usage; (ii) a reduction of the maximum annual capital expenditure covenant from $10.6 million to $7.5 million for fiscal year 2010 through fiscal year 2012 and $8.5 million for fiscal year 2013; and (iii) a revision to the

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fixed charge ratio covenant which now requires the ratio to be computed and the covenant applied only if available borrowing capacity under the facility, measured on a trailing 30 day average basis, is less than $20.0 million.

        Management presents Consolidated Adjusted EBITDA, which is a non-GAAP measure, because we believe that it is a useful tool for us and our investors to measure our ability to meet debt service, capital expenditure and working capital requirements. Consolidated Adjusted EBITDA, as presented, may not be comparable to similarly titled measures reported by other companies, because not all companies necessarily calculate EBITDA in an identical manner. Consolidated Adjusted EBITDA is not intended to represent cash flows for the period or funds available for management's discretionary use, nor is it represented as an alternative to operating income (loss) as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Our Consolidated Adjusted EBITDA should be evaluated in conjunction with GAAP measures such as operating income (loss), net income (loss), cash flow from operations and other measures of equal importance. Consolidated Adjusted EBITDA is presented below based on both the definition used in our Credit Agreement as well as the typical calculation method. Set forth below is a reconciliation of Consolidated Adjusted EBITDA, as calculated under the Credit Agreement, to EBITDA and operating loss for the trailing twelve month periods ended June 30, 2010 and 2009 (in thousands):

 
  Trailing Twelve Months  
 
  June 30,
2010
  June 30,
2009
 

Operating loss

  $ (21,452 ) $ (16,663 )

Depreciation and amortization

    8,049     7,322  
           
 

EBITDA

    (13,403 )   (9,341 )

Goodwill and intangible asset write-offs

    20,249     21,438  

Permitted discretionary cost reduction efforts

    1,722     1,500  
           
 

Consolidated Adjusted EBITDA under the Credit Agreement

  $ 8,568   $ 13,597  
           

        The actual covenant results as compared to the covenant requirements under the Credit Agreement as of June 30, 2010 for the measurement periods described below are as follows (in thousands):

 
  Measurement Period   Actual   Required  

Consolidated Adjusted EBITDA

  Trailing 12 months   $ 8,568   Must Exceed   $ 4,200  

Average Monthly Backlog

  Trailing 3 months   $ 363,549   Must Exceed   $ 190,000  

Capital Expenditures

  Fiscal 2010 year   $ 3,362   Not to Exceed   $ 7,500  

Fixed Charge Ratio(1)

  Trailing 12 months     Not Applicable   Must Exceed     1:00 to 1:00  

(1)
As of June 30, 2010, the fixed charge ratio covenant is not applicable as the available borrowing capacity under the facility, measured on a trailing 30 day average basis, was greater than $20.0 million.

        As of June 30, 2010 and 2009, we had no borrowings outstanding pursuant to the Credit Agreement. Letters of credit outstanding were $3.7 million and $6.9 million as of June 30, 2010 and 2009, respectively. Based upon the borrowing base formula, the maximum availability was $30.2 million and $35.0 million as of June 30, 2010 and 2009, respectively. Funds available to borrow under the

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Credit Agreement after consideration of the reserve amount were $26.5 million and $28.1 million as of June 30, 2010 and 2009, respectively.

        On July 19, 2006, we and substantially all of our subsidiaries entered into a three-year subordinated loan agreement with Federal Partners, L.P. ("Federal Partners"), a stockholder of ours, pursuant to which we borrowed $5.0 million. The loan bears interest at a fixed rate of 9% per annum. The loan was amended on June 1, 2009 in connection with the preferred stock offering to extend the maturity date from July 19, 2009 to July 19, 2012. Federal Partners is an investor in our preferred stock offering. On July 19, 2006, we also issued a ten-year warrant to Federal Partners to purchase up to 66 thousand shares of our common stock at an exercise price equal to $0.10 per share. The estimated fair value of the warrant of $0.7 million was determined using the Black-Scholes option pricing model and the following assumptions: term of 10 years, a risk free interest rate of 4.94%, a dividend yield of 0%, and volatility of 50%. The face amount of the note payable of $5.0 million was proportionately allocated to the note and the warrant in the amount of $4.4 million and $0.6 million, respectively. The amount allocated to the warrants of $0.6 million was recorded as a discount on the note and was amortized over the original three year life of the note. Interest expense amortized for fiscal years 2010 and 2009, was $9 thousand and $0.2 million, respectively. The warrant was exercised in fiscal year 2007, for approximately $7 thousand.

        In fiscal year 2007, we formed a limited liability company, Center Avenue Holdings, LLC ("CAH"), to purchase and remediate certain property in New Jersey. We maintain a 70% ownership position in CAH. CAH entered into a term loan agreement with a commercial bank in the amount of approximately $3.2 million which bore interest at a fixed rate of 10.0% annually. The loan is secured by the CAH property and is non-recourse to the members of CAH. The proceeds from the loan were used to purchase and are currently funding the remediation of the property. In June 2010, we entered into a modification of the credit agreement with the lender that reduced the interest rate from 10.0% to 6.5% in return for a principal payment of $0.5 million made upon consummation of the extension followed by a second principal payment of $0.25 million due in six months and extended the maturity date of the loan from January 31, 2010 until April 1, 2011. CAH is consolidated into our consolidated financial statements with the other party's ownership interest recorded as a noncontrolling interest.

        In July 2009, we financed $2.5 million of insurance premiums payable in nine equal monthly installments of approximately $0.3 million each, including a finance charge of 2.969%. As of June 30, 2010, the balance has been repaid.

        On March 3, 2008, we entered into subordinated notes with Federal Partners, Peter R. Kellogg, Lee I. Kellogg and Charles K. Kellogg pursuant to which we agreed to pay an aggregate of $0.6 million in consideration for the extension of the deadline for registering common stock issued in a fiscal year 2006 private placement. The loans bore interest at a fixed rate of 12.5% per annum and matured on July 19, 2009 at which time they were repaid.

        Based on our current operating plans, we believe that existing cash resources as well as cash forecasted to be generated from operations and availability under our revolving credit facility are adequate to meet our requirements for the foreseeable future, in addition we expect to remain in full compliance with the covenant requirements under the Credit Agreement over the next twelve months.

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        Future minimum long-term debt payments as of June 30, 2010 are as follows (in thousands):

Year
  Debt   Lease
Financing
Obligations
  Total  

2011

  $ 3,450   $ 179   $ 3,629  

2012

    53     178     231  

2013

    5,058     145     5,203  

2014

    63     97     160  

2015

    68     97     165  

Thereafter

    24     32     56  
               

  $ 8,716   $ 728   $ 9,444  
               


Contractual Obligations

        The following table sets forth, as of June 30, 2010, certain information concerning our obligations to make future principal and interest payments (variable interest components used interest rates for estimating future interest payment obligations of between 6.50% to 9.25%) under contracts, such as debt and lease agreements.

 
  Payments due by period(1)  
Contractual Obligations
  Total   Year 1   Years 2 - 3   Years 4 - 5   Beyond  

Revolving credit facility

  $   $   $   $   $  

Subordinated debt:

                               
   

Federal Partners note payable

    5,937     456     5,481          
   

CAH note payable

    2,828     2,828              
   

Other notes payable

    1,090     780     146     146     18  

Operating leases

   
49,919
   
10,826
   
16,027
   
10,282
   
12,784
 

Lease financing obligations

    728     179     323     194     32  

Unrecognized tax benefits(2)

    4,149                 4,149  
                       
 

Total contractual obligations

  $ 64,651   $ 15,069   $ 21,977   $ 10,622   $ 16,983  
                       

(1)
Includes estimated interest.

(2)
Represents liabilities for unrecognized tax benefits related to uncertain tax positions. We are unable to reasonably predict the timing of tax settlements, as tax audits can involve complex issues and the resolution of those issues may span multiple years, particularly if subject to negotiation or litigation.

        We enter into long-term contracts pursuant to our Exit Strategy program under which we are obligated to complete the remediation of environmental conditions at sites.

        On June 1, 2009, we sold 7,209.302 shares of a new Series A Convertible Preferred Stock, $0.10 par value, for $2,150 per share pursuant to a stock purchase agreement by and among us and three of our existing shareholders and related entities. On December 1, 2010, each share of the preferred stock will automatically convert into 1,000 shares of common stock, or an aggregate of 7,209,302 shares of common stock, subject to adjustment for splits and recapitalization and subject to other anti-dilution protection. Prior to conversion, holders of the preferred stock will be entitled to receive, in preference to holders of common stock or other preferred stock, in the event of a liquidation or sale of the Company, the greater of (i) the original purchase price for the preferred stock; or (ii) the amount they

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would have received if the preferred stock had been converted to common stock immediately prior to the transaction.


Off-Balance Sheet Arrangements

        As of June 30, 2010, our "Off-Balance Sheet" arrangements, as that term is defined by the Securities and Exchange Commission, included $3.7 million of standby letters of credit issued primarily for outstanding performance or payment bonds. The letters of credit were issued by our bank and renew annually. We also have operating leases for most of our office facilities and certain equipment. Rental expense for operating leases was approximately $11.4 million in fiscal year 2010, $11.4 million in fiscal year 2009, and $12.9 million in fiscal year 2008. Minimum operating lease obligations payable in future years (i.e., primarily base rent) are included above in Contractual Obligations.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        We currently do not utilize derivative financial instruments that expose us to significant market risk. We are exposed to interest rate risk under our credit agreement. Our credit facility provides for borrowings bearing interest at the greater of 5.75% and the prime rate plus a margin of 2.50% to 3.50%, or the greater of 4.50% and LIBOR plus a margin of 3.50% to 4.50%, based on Trailing Twelve Month EBITDA.

        Borrowings at the base rate have no designated term and may be repaid without penalty any time prior to the facility's maturity date. Under its term, the facility matures on July 17, 2013 or earlier at our discretion, upon payment in full of loans and other obligations.

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Item 8.    Financial Statements and Supplementary Data

        

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
TRC Companies, Inc.
Windsor, Connecticut

        We have audited the accompanying consolidated balance sheets of TRC Companies, Inc. and subsidiaries (the "Company") as of June 30, 2010 and 2009, and the related consolidated statements of operations, changes in equity, and cash flows for each of the three years in the period ended June 30, 2010. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of TRC Companies, Inc. and subsidiaries as of June 30, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 13, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Hartford, Connecticut
September 13, 2010

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TRC Companies, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

In thousands, except per share data

Years ended June 30,
  2010   2009   2008  

Gross revenue

  $ 330,575   $ 432,517   $ 465,079  
 

Less subcontractor costs and other direct reimbursable charges

    100,476     177,713     196,870  
               

Net service revenue

    230,099     254,804     268,209  
               

Interest income from contractual arrangements

    596     1,859     3,944  

Insurance recoverables and other income

    8,844     19,539     6,123  

Operating costs and expenses:

                   
 

Cost of services

    203,221     227,217     241,647  
 

General and administrative expenses

    27,128     32,936     40,077  
 

Provision for doubtful accounts

    2,344     3,952     3,708  
 

Goodwill and intangible asset write-offs

    20,249     21,438     77,267  
 

Depreciation and amortization

    8,049     7,322     8,051  
               

Total operating costs and expenses

    260,991     292,865     370,750  
               

Operating loss

    (21,452 )   (16,663 )   (92,474 )

Interest expense

    (1,003 )   (2,925 )   (3,936 )

Gain on extinguishment of debt

    1,716          
               

Loss from operations before taxes and equity in losses

    (20,739 )   (19,588 )   (96,410 )

Federal and state income tax (benefit) provision

    (4,210 )   3,871     12,296  
               

Loss from operations before equity in losses

    (16,529 )   (23,459 )   (108,706 )

Equity in losses from unconsolidated affiliates, net of taxes

    (45 )   (449 )   (505 )
               

Net loss

    (16,574 )   (23,908 )   (109,211 )

Net loss attributable to noncontrolling interest

    (125 )       (62 )
               

Net loss applicable to TRC Companies, Inc

    (16,449 )   (23,908 )   (109,149 )

Accretion charges on preferred stock

    6,431     215      
               

Net loss applicable to TRC Companies, Inc.'s common shareholders

  $ (22,880 ) $ (24,123 ) $ (109,149 )
               

Basic and diluted loss per common share

  $ (1.17 ) $ (1.25 ) $ (5.84 )
               

Basic and diluted weighted average common shares outstanding

    19,548     19,272     18,700  
               

See accompanying notes to consolidated financial statements.

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TRC Companies, Inc.

CONSOLIDATED BALANCE SHEETS

In thousands, except share data

 
  June 30,
2010
  June 30,
2009
 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 14,709   $ 8,469  
 

Accounts receivable, less allowance for doubtful accounts

    87,104     99,903  
 

Insurance recoverable—environmental remediation

    35,664     27,379  
 

Restricted investments

    14,744     28,214  
 

Prepaid expenses and other current assets

    9,123     11,032  
 

Income taxes refundable

    388     224  
           
   

Total current assets

    161,732     175,221  
           

Property and equipment:

             
 

Land and building

    480     480  
 

Equipment, furniture and fixtures

    41,946     46,727  
 

Leasehold improvements

    4,861     4,909  
           

    47,287     52,116  
 

Less accumulated depreciation and amortization

    (35,535 )   (37,075 )
           
   

Property and equipment, net

    11,752     15,041  
           

Goodwill

    14,870     35,119  

Investments in and advances to unconsolidated affiliates and construction joint ventures

    117     119  

Long-term restricted investments

    46,426     53,295  

Long-term prepaid insurance

    44,529     47,766  

Other assets

    8,369     10,335  
           
   

Total assets

  $ 287,795   $ 336,896  
           

LIABILITIES AND EQUITY

             

Current liabilities:

             
 

Current portion of long-term debt

  $ 3,629   $ 4,632  
 

Accounts payable

    35,871     44,106  
 

Accrued compensation and benefits

    22,393     30,029  
 

Deferred revenue

    26,486     38,684  
 

Environmental remediation liabilities

    623     566  
 

Other accrued liabilities

    43,781     41,959  
           
   

Total current liabilities

    132,783     159,976  
           

Non-current liabilities:

             
 

Long-term debt, net of current portion

    5,815     7,869  
 

Long-term income taxes payable

    4,149     6,079  
 

Long-term deferred revenue

    102,452     105,008  
 

Long-term environmental remediation liabilities

    6,404     7,533  
           
   

Total liabilities

    251,603     286,465  
           

Preferred stock, $.10 par value; 500,000 shares authorized, 7,209 shares issued and outstanding as convertible, liquidation preference value of $22,277 and $28,837 as of June 30, 2010 and 2009, respectively

    8,239     1,808  
           

Commitments and contingencies

             

Equity:

             
   

Common stock, $.10 par value; 40,000,000 shares authorized, 19,637,535 and 19,634,053 shares issued and outstanding, respectively, at June 30, 2010, and 19,357,573 and 19,354,091 shares issued and outstanding, respectively, at June 30, 2009

    1,964     1,936  
 

Additional paid-in capital

    163,897     168,459  
 

Accumulated deficit

    (137,883 )   (121,434 )
 

Accumulated other comprehensive income (loss)

    133     (305 )
 

Treasury stock, at cost

    (33 )   (33 )
           
   

Total shareholders' equity attributable to TRC Companies, Inc. 

    28,078     48,623  
 

Noncontrolling interest

    (125 )    
           
   

Total equity

    27,953     48,623  
           
   

Total liabilities and equity

  $ 287,795   $ 336,896  
           

See accompanying notes to consolidated financial statements.

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TRC Companies, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands

Years ended June 30,
  2010   2009   2008  

Cash flows from operating activities:

                   
 

Net loss

  $ (16,574 ) $ (23,908 ) $ (109,211 )
 

Adjustments to reconcile net loss to net cash provided by operating activities:

                   
   

Non-cash items:

                   
     

Depreciation and amortization

    8,049     7,322     8,051  
     

Directors deferred compensation

    65     106     157  
     

Stock-based compensation expense

    1,917     2,256     2,065  
     

Provision for doubtful accounts

    2,344     3,952     3,708  
     

Non-cash interest income

    145     93     (55 )
     

Deferred income taxes

            12,137  
     

Equity in losses from unconsolidated affiliates and construction joint ventures

    50     2,000     4,819  
     

Goodwill and intangible asset write-offs

    20,249     21,438     77,267  
     

Gain on extinguishment of debt

    (1,716 )        
     

Impairment of other assets

        340      
     

Loss on disposals of assets

    402     192     699  
     

Gain on sale of land

            (788 )
     

Other non-cash items

    (193 )   10     (110 )
   

Changes in operating assets and liabilities:

                   
     

Accounts receivable

    10,455     15,591     4,969  
     

Insurance recoverable—environmental remediation

    (8,285 )   (18,351 )   (2,647 )
     

Income taxes

    (2,094 )   5,477     373  
     

Restricted investments

    19,274     24,836     (16,559 )
     

Prepaid expenses and other current assets

    1,994     (1,564 )   161  
     

Long-term prepaid insurance

    3,237     3,315     3,314  
     

Other assets

    227     (70 )   6  
     

Accounts payable

    (8,243 )   (11,417 )   2,060  
     

Accrued compensation and benefits

    (7,454 )   4,795     2,780  
     

Deferred revenue

    (14,754 )   (24,315 )   1,629  
     

Environmental remediation liabilities

    (1,072 )   (1,343 )   (3,048 )
     

Other accrued liabilities

    3,054     10,199     11,982  
               

Net cash provided by operating activities

    11,077     20,954     3,759  
               

Cash flows from investing activities:

                   
 

Additions to property and equipment

    (3,362 )   (3,816 )   (6,294 )
 

Restricted investments

    1,334     1,627     1,529  
 

Acquisition of assets of Blue Wave Ventures, LLC

    (100 )        
 

Earnout payments on acquisitions

    (656 )   (110 )   (1,926 )
 

Proceeds from sale of fixed assets

    126     133     328  
 

Investments in and advances to unconsolidated affiliates

    (19 )   (41 )   (126 )
 

Land improvements

        (6 )   (907 )
 

Proceeds from sale of land

            1,845  
 

Proceeds from sale of businesses, net of cash sold

            3,246  
               

Net cash used in investing activities

    (2,677 )   (2,213 )   (2,305 )
               

Cash flows from financing activities:

                   
 

Net repayments under revolving credit facility

        (26,996 )   (3,990 )
 

Payments on long-term debt and other

    (4,244 )   (118 )   (453 )
 

Borrowings of long-term debt and other

    2,485         50  
 

Payments of issuance costs related to convertible preferred stock

    (134 )   (75 )    
 

Shares repurchased to settle tax withholding obligations

    (267 )        
 

Proceeds from issuance of convertible preferred stock

        15,500      
 

Proceeds from exercise of stock option and warrants

        111     3,815  
               

Net cash used in financing activities

    (2,160 )   (11,578 )   (578 )
               

Increase in cash and cash equivalents

    6,240     7,163     876  

Cash and cash equivalents, beginning of year

    8,469     1,306     430  
               

Cash and cash equivalents, end of year

  $ 14,709   $ 8,469   $ 1,306  
               

Supplemental cash flow information:

                   
 

Interest paid

  $ 990   $ 2,800   $ 3,706  
 

Income taxes refunded

    2,354     747     377  
 

Capital expenditures included in accounts payable

    176     168     164  
 

Issuance of common stock

    182         78  
 

Beneficial conversion feature charge related to convertible preferred stock

        13,698      
 

Net settlement of amount due to/from construction joint venture

        4,756      

See accompanying notes to consolidated financial statements.

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TRC Companies, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

In thousands, except share data

 
  Common Stock    
   
   
  Treasury Stock    
   
   
 
 
   
  Retained
Earnings
(Accumulated
Deficit)
  Accumulated
Other
Comprehensive
Income (Loss)
  Total
TRC
Shareholders'
Equity
   
   
 
 
  Number
of Shares
  Amount   Additional
Paid-in
Capital
  Number
of Shares
  Amount   Non-
Controlling
Interest
  Total
Equity
 

Balance, June 30, 2007

    18,240,509   $ 1,824   $ 147,229   $ 12,453   $ 256     3,482   $ (33 ) $ 161,729   $ 62   $ 161,791  
 

Net loss

   
   
   
   
(109,149

)
 
   
   
   
(109,149

)
 
(62

)
 
(109,211

)
 

Unrealized losses on available for sale securities

                    (194 )           (194 )       (194 )
                                                         
 

Total comprehensive loss

                                              (109,343 )   (62 )   (109,405 )

Adoption of ASC Topic 740

                (830 )               (830 )       (830 )

Issuance of common stock in connection with businesses acquired

    9,779     1     77                     78         78  

Common stock warrants issued with debt

                                         

Exercise of stock options

    818,574     82     3,733                     3,815         3,815  

Dividends and accretion charges on preferred stock

                                         

Conversion of convertible redeemable preferred stock into common stock

                                         

Stock-based compensation

    6,667         2,065                     2,065         2,065  

Directors' deferred compensation

    18,026     2     155                     157         157  
                                           

Balance, June 30, 2008

    19,093,555   $ 1,909   $ 153,259   $ (97,526 ) $ 62     3,482   $ (33 ) $ 57,671   $   $ 57,671  
 

Net loss

   
   
   
   
(24,123

)
 
   
   
   
(24,123

)
 
   
(24,123

)
 

Unrealized losses on available for sale securities

                    (367 )           (367 )       (367 )
                                                         
 

Total comprehensive loss

                                              (24,490 )       (24,490 )

Exercise of stock options

    40,500     4     107                     111         111  

Beneficial conversion feature charge related to convertible preferred stock

            13,698                     13,698         13,698  

Accretion charges on preferred stock

            (215 )   215                          

Warrants

            (656 )                   (656 )       (656 )

Stock-based compensation

    200,868     20     2,236                     2,256         2,256  

Shares repurchased to settle tax withholding obligations

    (14,804 )   (1 )   (72 )                   (73 )       (73 )

Directors' deferred compensation

    37,454     4     102                     106         106  
                                           

Balance, June 30, 2009

    19,357,573   $ 1,936   $ 168,459   $ (121,434 ) $ (305 )   3,482   $ (33 ) $ 48,623   $   $ 48,623  
 

Net loss

   
   
   
   
(16,449

)
 
   
   
   
(16,449

)
 
(125

)
 
(16,574

)
 

Unrealized gain on available for sale securities

                    438             438         438  
                                                         
 

Total comprehensive loss

                                              (16,011 )   (125 )   (16,136 )

Issuance of common stock

    47,998     5     177                     182         182  

Accretion charges on preferred stock

            (6,431 )                   (6,431 )       (6,431 )

Stock-based compensation

    283,763     28     1,889                     1,917         1,917  

Shares repurchased to settle tax withholding obligations

    (71,324 )   (7 )   (260 )                   (267 )       (267 )

Directors' deferred compensation

    19,525     2     63                     65         65  
                                           

Balance, June 30, 2010

    19,637,535   $ 1,964   $ 163,897   $ (137,883 ) $ 133     3,482   $ (33 ) $ 28,078   $ (125 ) $ 27,953  
                                           

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except per share data

Note 1. Company Background and Basis of Presentation

        TRC Companies, Inc., through its subsidiaries (collectively, the "Company"), provides integrated engineering, consulting, and construction management services. Its project teams assist its commercial, industrial and government clients implement environmental, energy and infrastructure projects from initial concept to delivery and operation. The Company provides its services almost entirely in the United States of America.

        The Company has a history of losses and incurred net losses applicable to the Company's common shareholders of $22,880, $24,123 and $109,149 for fiscal years 2010, 2009 and 2008, respectively. A significant portion of the net losses are the result of non-cash charges related to asset impairments and accretion charges on preferred stock. Although we have incurred net losses in these periods we have generated cash from operations of $11,077, $20,954 and $3,759 in fiscal years 2010, 2009 and 2008, respectively. Additionally, the Company has a revolving credit facility with no amounts outstanding as of June 30, 2010 and $26,527 available for borrowings. The revolving credit facility has a maturity date of July 19, 2012. The Company will continue to focus on improving operating profitability and cash flows from operations through reductions in administrative and general expenses and improvements in cost of services through enhanced project management. The Company believes that existing cash resources, cash forecasted to be generated from operations and availability under its credit facility are adequate to meet its requirements for the duration of the credit facility and the foreseeable future.

Note 2. Summary of Significant Accounting Policies and New Accounting Pronouncements

        Revenue Recognition:    The Company recognizes contract revenue in accordance with Accounting Standards Codification ™ ("ASC") Topic 605, Revenue Recognition ("ASC Topic 605"). Specifically, the Company follows the guidance in ASC Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts which establishes five criteria for using the percentage of completion method. The five criteria are (1) work is performed based on written contracts executed by the parties that clearly specify the goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement, (2) buyers have the ability to satisfy their obligations under the contracts, (3) the contractor has the ability to perform its contractual obligations, (4) the contractor has an adequate estimating process and the ability to estimate reliably both the costs to complete the project and the percentages of contract performance completed and (5) the contractor has a cost accounting system that adequately accumulates and allocates costs in a manner consistent with the estimates produced by the estimating process. The Company earns its revenue from fixed-price, time-and-materials and cost-plus contracts.

Fixed-Price Contracts

        The Company recognizes revenue on fixed-price contracts using the percentage-of-completion method. Under this method of revenue recognition, the Company estimates the progress towards completion to determine the amount of revenue and profit to recognize on all significant contracts. The Company generally utilizes an efforts-expended, cost-to-cost approach in applying the percentage-of-completion method under which revenue is earned in proportion to total costs incurred divided by total costs expected to be incurred.

        Under the percentage-of-completion method, recognition of profit is dependent upon the accuracy of a variety of estimates including engineering progress, materials quantities, achievement of milestones and other incentives, penalty provisions, labor productivity and cost estimates. Such estimates are based

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In thousands, except per share data

Note 2. Summary of Significant Accounting Policies and New Accounting Pronouncements (Continued)

on various judgments the Company makes with respect to those factors and can be difficult to accurately determine until the project is significantly underway. Due to uncertainties inherent in the estimation process, actual completion costs often vary from estimates. If estimated total costs on any contract indicate a loss, the Company charges the entire estimated loss to operations in the period the loss first becomes known. If actual costs exceed the original fixed contract price, recognition of any additional revenue will be pursuant to a change order, contract modification, or claim.

        The Company has fixed-price Exit Strategy contracts to remediate environmental conditions at contaminated sites. Under most Exit Strategy contracts, the majority of the contract price is deposited into a restricted account with an insurer. The funds in the restricted account are held by the insurer and used to pay the Company as work is performed. The arrangement with the insurer provides for the deposited funds to earn interest at the one-year constant maturity U.S. Treasury Bill rate. The interest is recorded when earned and reported as interest income from contractual arrangements on the Company's consolidated statements of operations.

        The Exit Strategy funds held by the insurer, including any interest growth thereon, are recorded as an asset (current and long-term restricted investment) on the Company's consolidated balance sheets, with a corresponding liability (current and long-term deferred revenue) related to the funds. Consistent with the Company's other fixed-price contracts, the Company recognizes revenue on Exit Strategy contracts using the percentage-of-completion method. When determining the extent of progress towards completion on Exit Strategy contracts, prepaid insurance premiums and fees are amortized, on a straight-line basis, to cost incurred over the life of the related insurance policy. Certain Exit Strategy contracts are classified as pertaining to either remediation or operation, maintenance and monitoring, and, in addition, certain Exit Strategy contracts are segmented, and remediation and operation, maintenance and monitoring are separately accounted for.

        Under most Exit Strategy contracts, additional payments are made by the client to the insurer, typically through an insurance broker, for insurance premiums and fees for a policy to cover potential cost overruns and other factors such as third party liability. For Exit Strategy contracts where the Company establishes that (1) costs exceed the contract value and interest growth thereon and (2) such costs are covered by insurance, the Company will record an insurance recovery up to the amount of insured costs. An insurance gain, that is, an amount to be recovered in excess of the Company's recorded costs, is not recognized until the receipt of insurance proceeds. Insurance recoveries are reported as insurance recoverables and other income on the Company's consolidated statements of operations. If estimated total costs on any contract indicate a loss, the Company charges the entire estimated loss to operations in the period the loss first becomes known.

        Unit price contracts are a subset of fixed-price contracts. Under unit price contracts, the Company's clients pay a set fee for each service or unit of production. The Company recognizes revenue under unit price contracts as it completes the related service transaction for its clients. If the Company's costs per service transaction exceed original estimates, its profit margins will decrease, and it may realize a loss on the project unless it can receive payment for the additional costs.

Time-and-Materials Contracts

        Under time-and-materials contracts the Company negotiates hourly billing rates and charges its clients based on the actual time that it expends on a project. In addition, clients reimburse the Company for actual out-of-pocket costs of materials and other direct reimbursable expenses that it

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In thousands, except per share data

Note 2. Summary of Significant Accounting Policies and New Accounting Pronouncements (Continued)


incurs in connection with its performance under the contract. The Company's profit margins on time-and-materials contracts fluctuate based on actual labor and overhead costs that it directly charges or allocates to contracts compared to negotiated billing rates. Revenue on time-and-materials contracts is recognized based on the actual number of hours the Company spends on the projects plus any actual out-of-pocket costs of materials and other direct reimbursable expenses that it incurs on the projects.

Cost-Plus Contracts

        Cost-Plus Fixed Fee Contracts.    Under the Company's cost-plus fixed fee contracts it charges clients for its costs, including both direct and indirect costs, plus a fixed negotiated fee. In negotiating a cost-plus fixed fee contract the Company estimates all recoverable direct and indirect costs and then adds a fixed profit component. The total estimated cost plus the negotiated fee represents the total contract value. The Company recognizes revenue based on the actual labor and non-labor costs it incurs plus the portion of the fixed fee it has earned to date. The Company invoices for its services as revenue is recognized or in accordance with agreed upon billing schedules.

        Cost-Plus Fixed Rate Contracts.    Under the Company's cost-plus fixed rate contracts it charges clients for its costs plus negotiated rates based on its indirect costs. In negotiating a cost-plus fixed rate contract the Company estimates all recoverable direct and indirect costs and then adds a profit component, which is a percentage of total recoverable costs, to arrive at a total dollar estimate for the project. The Company recognizes revenue based on the actual total costs it has expended plus the applicable fixed rate. If the actual total costs are lower than the total costs the Company has estimated, its revenue from that project will be lower than originally estimated.

Change Orders/Claims

        Change orders are modifications of an original contract that change the provisions of the contract. Change orders typically result from changes in scope, specifications or design, manner of performance, facilities, equipment, materials, sites, or period of completion of the work. Claims are amounts in excess of the agreed contract price that the Company seeks to collect from its clients or others for client-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes.

        Costs related to change orders and claims are recognized when they are incurred. Change orders are included in total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated. Claims are included in total estimated contract revenues only to the extent that contract costs related to the claims have been incurred and when it is probable that the claim will result in a bona fide addition to contract value which can be reliably estimated. No profit is recognized on claims until final settlement occurs. As of June 30, 2010 and 2009, the Company did not recognize any revenue related to claims.

Other Contract Matters

        Federal Acquisition Regulations ("FAR"), which are applicable to the Company's federal government contracts and may be incorporated in many local and state agency contracts, limit the recovery of certain specified indirect costs on contracts. Cost-plus contracts covered by FAR or with certain state and local agencies also require an audit of actual costs and provide for upward or

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In thousands, except per share data

Note 2. Summary of Significant Accounting Policies and New Accounting Pronouncements (Continued)


downward adjustments if actual recoverable costs differ from billed recoverable costs. Most of the Company's federal government contracts are subject to termination at the discretion of the client. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination.

        Contracts with the federal government are subject to audit, primarily by the Defense Contract Audit Agency ("DCAA"), which reviews the Company's overhead rates, operating systems and cost proposals. During the course of its audits, the DCAA may disallow costs if it determines that the Company has accounted for such costs in a manner inconsistent with Cost Accounting Standards. The Company's last audit was for fiscal 2004 and resulted in a $14 adjustment. Historically the Company has not had any material cost disallowances by the DCAA as a result of audit, however there can be no assurance that DCAA audits will not result in material cost disallowances in the future.

        Allowance for Doubtful Accounts—An allowance for doubtful accounts is maintained for estimated losses resulting from the failure of the Company's clients to make required payments. The allowance for doubtful accounts has been determined through reviews of specific amounts deemed to be uncollectible and estimated write-offs as a result of clients who have filed for bankruptcy protection plus an allowance for other amounts for which some loss is determined to be probable based on current circumstances. If the financial condition of clients or the Company's assessment as to collectability were to change, adjustments to the allowances may be required.

        Stock-Based Compensation—The Company accounts for stock-based awards in accordance with ASC Topic 718, Compensation—Stock Compensation ("ASC Topic 718"), which requires the measurement and recognition of compensation expense for all stock-based awards made to the Company's employees and directors including stock options, restricted stock, and other stock-based awards based on estimated fair values.

        The Company estimates the fair value of stock-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statements of operations. Stock-based compensation expense includes the estimated effects of forfeitures, and estimates of forfeitures will be adjusted over the requisite service period to the extent actual forfeitures differ or are expected to differ from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of expense to be recognized in future periods. Total stock-based compensation expense for fiscal years 2010, 2009 and 2008, was $1,917, $2,256 and $2,065, respectively, which consisted of stock-based compensation expense related to stock option awards, restricted stock awards and restricted stock units. There were no stock options exercised during fiscal 2010. For fiscal years 2009 and 2008 stock options and warrants for 41 and 825 shares of the Company's common stock were exercised for proceeds of $111 and $3,815, respectively.

        The Company uses the Black-Scholes option pricing model for determining the estimated grant-date fair value for stock options. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the Company's employee stock options. The average expected life is based on the contractual term of the option and expected employee exercise and historical post-vesting employment termination experience.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In thousands, except per share data

Note 2. Summary of Significant Accounting Policies and New Accounting Pronouncements (Continued)


The Company estimates the volatility of its stock using historical volatility in accordance with current accounting guidance. Management determined that historical volatility of TRC Companies, Inc. stock is most reflective of market conditions and the best indicator of expected volatility. The dividend yield assumption is based on the Company's history and expected dividend payouts. The assumptions used to value stock options granted for fiscal years 2010, 2009 and 2008 are as follows:

 
  Year Ended June 30,
 
  2010   2009   2008

Risk-free interest rate

  1.94% - 2.25%   1.37% - 2.92%   2.18% - 4.62%

Expected life

  4.0 years   4.0 - 4.1 years   3.8 - 5.4 years

Expected volatility

  72.9% - 75.3%   50.3% - 72.5%   41.0% - 49.3%

Expected dividend yield

  None   None   None

        The approximate weighted-average grant date fair values using the Black-Scholes option pricing model of all stock options granted during fiscal years 2010, 2009 and 2008 were $1.88, $1.41 and $3.86, respectively.

        Income Taxes—The Company is required to estimate the provision for income taxes, including the current tax expense together with an assessment of temporary differences resulting from differing treatments of assets and liabilities for tax and financial accounting purposes. These differences between the financial statement and tax bases of assets and liabilities, together with net operating loss ("NOL") carryforwards and tax credits are recorded as deferred tax assets or liabilities on the consolidated balance sheets. An assessment is required to be made of the likelihood that the deferred tax assets will be recovered from future taxable income. To the extent that the Company determines that it is more likely than not that the deferred asset will not be utilized, a valuation allowance is established. Taxable income in future periods significantly above or below that projected will cause adjustments to the valuation allowance that could materially decrease or increase future income tax expense.

        The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact the Company's financial statements.

        Goodwill and Other Intangible Assets—In accordance with ASC Topic 350, Intangibles—Goodwill and Other, goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to impairment testing at least, annually or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company performs impairment reviews for its reporting units utilizing valuation methods, including the discounted cash flow method, the guideline company approach and the guideline transaction approach, as the best evidence of fair value. The valuation methodology used to estimate the fair value of the total Company and its reporting units requires inputs and assumptions (i.e. revenue growth, operating profit margins and discount rates) that reflect

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In thousands, except per share data

Note 2. Summary of Significant Accounting Policies and New Accounting Pronouncements (Continued)


current market conditions. The estimated fair value of each reporting unit is compared to the carrying amount of the reporting unit, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the goodwill of the reporting unit is potentially impaired, and the Company then determines the implied fair value of goodwill, which is compared to the carrying value of goodwill to determine if impairment exists.

        Other intangible assets are included in other assets and consist primarily of purchased customer relationships and other intangible assets acquired in acquisitions. The costs of intangible assets with determinable useful lives are amortized on a straight-line basis over the estimated periods benefited. The Company reviews the economic lives of its intangible assets annually.

        Management judgment and assumptions are required in performing the impairment tests for all reporting units with goodwill and in measuring the fair value of goodwill, indefinite-lived intangibles and long-lived assets. While the Company believes its judgments and assumptions are reasonable, different assumptions could change the estimated fair values or the amount of the recognized impairment losses.

        Preferred Stock—The Company applies the guidance in ASC Topic 480, Distinguishing Liabilities from Equity ("ASC Topic 48"), and Accounting Standards Update ("ASU") 2009-04, Accounting for Redeemable Equity Instruments ("ASU 2009-04"),when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value in accordance with ASC Topic 480. The Company does not have any preferred shares subject to mandatory redemption. Preferred shares not subject to ASC Topic 480 are subject to the classification and measurement principles of ASU 2009-04. In accordance with ASU 2009-04, the Company classified its convertible preferred stock, which is subject to redemption upon the occurrence of a liquidation or sale, events not solely within the Company's control, as temporary equity. Because a liquidation or sale was not probable as of June 30, 2010, an adjustment from the preferred stock's carrying amount to the redemption amount was not required.

        The Company also evaluated whether or not its convertible preferred stock contained embedded conversion features that meet the definition of derivatives under ASC Topic 815, Derivatives and Hedging, and related interpretations. ASC Subtopic 815-15 states that an embedded derivative instrument shall be separated from the host contract and accounted for as a derivative instrument pursuant to the statement if certain criteria are met. The Company's convertible preferred stock did not contain embedded conversion features requiring bifurcation from the host.

        Property and Equipment—Property and equipment are recorded at cost, including costs to bring the equipment into operation. Major improvements to and betterments that extend the useful life of existing equipment are capitalized. Maintenance and repairs are charged to expense as incurred. The Company provides for depreciation of property and equipment using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are amortized over the shorter of the life of the lease or the useful life of the improvements.

        In accordance with ASC Topic 360, Property, Plant and Equipment, the Company periodically evaluates whether events or circumstances have occurred that indicate that long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such events or circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In thousands, except per share data

Note 2. Summary of Significant Accounting Policies and New Accounting Pronouncements (Continued)


use of the asset. In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. The long-term nature of these assets requires the estimation of cash inflows and outflows several years into the future.

        Consolidation—The consolidated financial statements include the Company and its wholly-owned subsidiaries after elimination of intercompany accounts and transactions. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity ("VIE") under generally accepted accounting principles.

        Voting Interest Entities.    Voting interest entities are entities in which: (i) the total equity investment at risk is insufficient to enable the entity to finance its activities independently and (ii) the equity holders have the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity's activities. Voting interest entities are consolidated in accordance with ASC Topic 810, Consolidation Variable Interest Entities ("ASC Topic 810"). ASC Topic 810 states that the usual condition for a controlling financial interest in an entity is ownership of a majority voting interest. Accordingly, the Company consolidates voting interest entities in which it has a majority voting interest.

        Variable Interest Entities ("VIE's").    VIE's are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. In accordance with ASC Topic 810, the Company consolidates all VIEs of which it is the primary beneficiary.

        The Company determines whether it is the primary beneficiary of a VIE by performing a qualitative analysis of the VIE that includes, among other factors, a review of its capital structure, contractual terms, which interests create or absorb variability, related party relationships and the design of the VIE.

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        Equity-Method Investments.    When the Company does not have a controlling financial interest in an entity but exerts significant influence over the entity's operating and financial policies (generally defined as owning a voting interest of 20% to 50% for a corporation or 3% - 5% to 50% for a partnership or Limited Liability Company) and has an investment in common stock or in-substance common stock, the Company accounts for its investment in accordance with the equity method of accounting prescribed by ASC Topic 323, Investments—Equity Method and Joint Ventures.

        Joint Venture Arrangements.    The Company executes certain engineering and construction projects through joint venture arrangements with unrelated third parties. The project specific joint ventures are formed in the ordinary course of business to share risks and/or to secure specialty skills required for project execution. In fiscal 2006, the Company, E.S. Boulos Company and O'Connell Electric Company, Inc. formed the Rochester Power Delivery Joint Venture ("RPD JV") to design and construct an electrical transmission and distribution system for Rochester Gas and Electric. The construction of the electrical transmission and distribution system was the single business purpose of the RPD joint venture arrangement. Each joint venture member had a 33.33% interest in RPD JV. The project was completed in fiscal year 2009. The RPD JV was accounted for using the proportionate consolidation method.

        Metuchen Realty Acquisition, LLC ("Metuchen") was a VIE, however, Metuchen was not consolidated because the Company was not the primary beneficiary. The Company had a 50% interest in Metuchen which was established to acquire, remediate, improve and sell a commercial real estate site located in Metuchen, New Jersey. The Company accounted for the investment using the equity method. The Company sold its interest in Metuchen in July 2007 for approximately $3,246. The sale resulted in the recognition of a loss of approximately $17 during fiscal year 2008.

        The Company had a 50% interest in Environmental Restoration LLC ("ER LLC"), which was established to develop a wetland mitigation bank. The Company accounted for the investment using the equity method of accounting. The Company recorded impairment losses related to its investment in ER LLC of $449 and $502 in fiscal years 2009 and 2008, respectively, which are included in equity in losses from unconsolidated affiliates, net of taxes, in the consolidated statements of operations. The impairment loss recorded in fiscal year 2009 resulted in the full impairment of the Company's investment in ER LLC. In June 2010 the Company sold its 50% ownership position in ER, LLC for cash of $25 and a $275 five-year promissory note. The gain on the transaction was deferred as the buyer's initial financial commitment was insufficient to provide economic substance to the transaction. As a result, the gain will be recognized under the installment method, which recognizes income as collections of principal are received.

        In fiscal year 2007, the Company formed a limited liability company, Center Avenue Holdings, LLC ("CAH") to purchase and remediate certain property in New Jersey. The Company maintains a 70% ownership position in CAH. CAH entered into a term loan agreement with a commercial bank in the amount of approximately $3,200 which bore interest at a fixed rate of 10.0% annually. The loan is secured by the CAH property and is non-recourse to the members of CAH. The proceeds from the loan were used to purchase and are currently funding the remediation of the property. In June 2010, the Company entered into a modification of the credit agreement with the lender that reduced the interest rate from 10.0% to 6.5% in return for a principal payment of $500 made upon consummation of the extension followed by a second principal payment of $250 due in six

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months and extended the maturity date of the loan from January 31, 2010 until April 1, 2011. CAH is consolidated into the Company's consolidated financial statements with the other party's ownership interest recorded as a noncontrolling interest.

        Insurance Matters, Litigation and Contingencies—In the normal course of business, the Company is subject to certain contractual guarantees and litigation. Generally, such guarantees relate to project schedules and performance. Most of the litigation involves the Company as a defendant in contractual disputes, professional liability, personal injury and other similar lawsuits. The Company maintains insurance coverage for various aspects of its business and operations, however the Company has elected to retain a portion of losses that may occur through the use of substantial deductibles, limits and retentions under our insurance programs. This practice may subject the Company to some future liability for which it is only partially insured or is completely uninsured. In accordance with ASC Topic 450, Contingencies,("ASC Topic 450") the Company records in its consolidated balance sheets amounts representing its estimated losses from claims and settlements when such losses are deemed probable and estimable. Otherwise, these losses are expensed as incurred. Costs of defense are expensed as incurred. If the estimate of a probable loss is a range, and no amount within the range is more likely, the Company accrues the lower limit of the range. As additional information about current or future litigation or other contingencies becomes available, management will assess whether such information warrants the recording of additional expenses relating to those contingencies. Such additional expenses could potentially have a material impact on the Company's results of operations and financial position.

        Restricted Investments—Current and long-term restricted investments relate primarily to the Company's Exit Strategy contracts. Under the terms of the majority of Exit Strategy contracts, the contract proceeds are paid by the client to an insurer at inception. A portion of these proceeds, generally five to ten percent, are remitted to the Company. The balance of contract proceeds, less any insurance premiums and fees for a policy to cover potential cost overruns and other factors, are deposited into a restricted investment account with the insurer and are used to pay the Company as services are performed. Upon expiration of the related insurance policies, any remaining funds are remitted to the Company as provided in the policy. The deposited funds are recorded as restricted investments with a corresponding amount shown as deferred revenue on the Company's consolidated balance sheets. The current portion of the restricted investments represents the amount the Company estimates it will collect from the insurer over the next year.

        As of June 30, 2010 and 2009, $52,564 and $72,840, respectively, of the restricted investments represent deposits which earn interest at the one-year constant maturity U.S. Treasury Bill rate, which rate is reset on the anniversary of each policy. As of June 30, 2010 and 2009 the one-year constant maturity U.S. Treasury Bill rate, for such deposits, ranged from 0.32% to 2.12% and from 0.34% to 2.12% respectively.

        Properties Available for Sale—Included in other assets are certain properties acquired in connection with certain Exit Strategy contracts that are available for sale in the amounts of $6,836 and $6,835 as of June 30, 2010 and 2009, respectively. The properties were recorded at fair value upon acquisition.

        The Company reviews its properties available for sale for impairment when there is an event, or change in circumstances that indicates that the carrying amount may not be recoverable. The Company records impairment losses and reduces the carrying value of properties when indicators of impairment

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are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where the Company does not expect to recover its carrying costs on properties available for sale, the Company reduces its carrying value to the fair value less costs to sell. During fiscal years 2010, 2009 and 2008, no impairment losses were recognized.

        Capitalized Software—Internally used software, whether purchased or developed, is capitalized and amortized using the straight-line group method over its estimated useful life. In accordance with ASC Subtopic 350-40, Internal-Use Software, the Company capitalizes certain costs associated with software such as costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with internally developed software to be used internally are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the period in which they are incurred. The capitalization of software requires judgment in determining when a project has reached the development stage and the period over which the Company expects to benefit from the use of that software. The Company reviews the economic lives of its capitalized software annually. During fiscal years 2010 and 2009, capitalized software was amortized over three to five years.

        Leases and Lease Financing Obligations—The Company accounts for leases in accordance with ASC Topic 840, Leases. For lease agreements that provide for escalating rent payments and rent holidays, the Company recognizes rent expense on a straight-line basis over the non-cancellable lease term and option renewal periods where failure to exercise such options would result in an economic penalty such that renewal appears, at the inception of the lease, to be reasonably assured. The lease term commences when the Company becomes obligated under the terms of the lease agreement.

        ASC Subtopic 840-40-55, Sale-Leaseback Transactions ("ASC Subtopic 840-40-55"), is applied if the Company pays or can be required to pay any portion of construction costs generally associated with tenant improvement costs. ASC Subtopic 840-40-55 requires the Company to be considered the owner, for accounting purposes, of the tenant improvements. Accordingly, the Company records a construction-in-process asset for the tenant improvements with an offsetting lease finance obligation which is included in current and long-term debt in the Company's consolidated balance sheets. These leases typically do not qualify for sale-leaseback treatment in accordance with ASC Subtopic 840-40-55 generally due to the Company's continuing involvement with the property. As a result, the tenant improvements and associated lease financing obligations remain on the Company's consolidated balance sheets when construction is completed. The lease financing obligation is amortized over the lease term based on the payments designated in the lease agreement, and the tenant improvement assets are amortized on a straight line basis over the lesser of their useful lives or the lease term.

        Self-Insurance Reserves—The Company is self-insured for certain losses related to workers' compensation and employee medical benefits. Costs for self-insurance claims are accrued based on known claims and historical experience. Management believes that it has adequately reserved for its self-insurance liability, which is capped through the use of stop-loss contracts with insurance companies. However, any significant variation of future claims from historical trends could cause actual results to differ from the amount recorded. Once the stop-loss limit is reached for a given loss, the Company records a recoverable based on the terms of the self-insured plans.

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        Environmental Remediation Liabilities—The Company records environmental remediation liabilities for properties available for sale. The environmental remediation liabilities are initially recorded at fair value. The liability is reduced for actual costs incurred in connection with the clean-up activities for each property. In accordance with ASC Topic 405, Liabilities, upon completion of the capital phase of the clean-up, the environmental remediation liability is adjusted to equal the fair value of the remaining operation, maintenance and monitoring activities to be performed for the properties. The reduction in the liability resulting from the completion of the capital phase is included in insurance recoverables and other income. No such income was recorded during the fiscal years ended June 30, 2010 and 2009.

        If it is determined that the expected costs of the clean-up activities are greater than the remaining environmental remediation liability for a specific property, the environmental remediation liability is adjusted pursuant to ASC Topic 410 Asset Retirement and Environmental Obligations ("ASC Topic 410"). Environmental remediation liabilities recorded pursuant to ASC Topic 410 are discounted when the amount and timing of the clean-up activities can be reliably determined. As of June 30, 2010 and 2009, the environmental liability for one project was discounted as the amount and timing of the remaining monitoring activities could be reliably determined. A discount of $388 and $393 was calculated using a risk-free discount rate of 4.9% as of June 30, 2010 and 2009, respectively. Estimated remediation costs for clean-up activities are based on experience, site conditions and the remedy selected. The liability is regularly adjusted as estimates are revised and as clean-up proceeds. The undiscounted environmental liability as of June 30, 2010 and 2009 was $7,415 and $8,491, respectively.

        Employee Benefit Plan—The Company has a 401(k) savings plan covering substantially all employees. The Company's matching formula has two components. The basic match is up to 50% of each Participant's first 4% of contributed compensation, and the discretionary match of up to another 1% of contributed compensation is based on the Company's performance for the previous fiscal year. In fiscal years 2010, 2009 and 2008, the Company's contributions to the plan were approximately $2,834, $3,210 and $3,125, respectively. The Company does not provide post-employment or other post-retirement benefits.

        Comprehensive Loss—The Company reports comprehensive loss in accordance with ASC Topic 220, Comprehensive Income. Comprehensive loss consists of net loss and other gains and losses affecting equity that are not the result of transactions with owners.

        Earnings per Share—Upon issuance of the convertible preferred stock in June 2009, accounting guidance defining participating securities and the two class method of calculating EPS became applicable to the Company. The relevant guidance establishes standards regarding the computation of earnings (loss) per share by companies that have securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the Company. The guidance also requires that earnings applicable to common shareholders for the period, after deduction of preferred stock dividends and accretion charges, be allocated between the common and preferred shareholders based on their respective rights to receive dividends. Basic earnings (loss) per share is then calculated by dividing the net income (loss) applicable to the Company's common shareholders by the weighted-average number of common shares outstanding.

        Diluted EPS is computed using the treasury stock method for stock options, warrants, non-vested restricted stock awards and units, and non-vested performance stock units. The treasury stock method

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assumes conversion of all potentially dilutive shares of common stock with the proceeds from assumed exercises used to hypothetically repurchase stock at the average market price for the period. Diluted EPS is computed by dividing net income applicable to the Company by the weighted-average common shares and potentially dilutive common shares that were outstanding during the period.

        For fiscal years 2010, 2009 and 2008, the Company reported a net loss applicable to common shareholders; therefore, the potentially dilutive shares are anti-dilutive and are excluded from the calculation of diluted earnings (loss) per share in accordance with ASC Topic 260, Earnings Per Share. The holders of the convertible preferred stock do not have a contractual obligation to share in the net losses of the Company, and, as such, the undistributed net losses for fiscal years 2010 and 2009 were not allocated to the convertible preferred stock. Because the effects are anti-dilutive, 7 preferred shares were excluded from the calculation of diluted EPS for each of fiscal years 2010 and 2009 (prior to conversion). The number of outstanding stock options, warrants and non-vested restricted stock awards excluded from the diluted EPS calculations (as they were anti-dilutive) in fiscal years 2010, 2009 and 2008 were 2,810, 2,959 and 2,042, respectively.

        The following table sets forth the computations of basic and diluted EPS for the fiscal years ended June 30:

 
  2010   2009   2008  

Net loss applicable to TRC Companies, Inc. 

  $ (16,449 ) $ (23,908 ) $ (109,149 )

Accretion charges on preferred stock

    6,431     215      
               

Net loss applicable to TRC Companies, Inc.'s common shareholders

  $ (22,880 ) $ (24,123 ) $ (109,149 )
               

Weighted average common shares outstanding

    19,548     19,272     18,700  
               

Net loss per common share

  $ (1.17 ) $ (1.25 ) $ (5.84 )
               

        Credit Risks—Financial instruments which subject the Company to credit risk consist primarily of cash, accounts receivable, restricted investments, insurance recoverables, investments in and advances to unconsolidated affiliates and construction joint ventures. The Company performs credit evaluations of its clients as required and maintains an allowance for estimated credit losses.

        Fair Value of Financial Instruments—Cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities as reflected in the consolidated financial statements, approximate their fair values because of the short-term maturity of those instruments. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying amounts of the Company's revolving credit facility and subordinated notes payable as of June 30, 2010 and 2009, approximate fair value because the interest rates on the instruments change with market interest rates or because of the short term nature of their maturities. The carrying amount of the Company's remaining notes payable as of June 30, 2010 and 2009 approximate fair value as either the fixed interest rates approximate current rates for these obligations or the remaining term is not significant.

        Use of Estimates—The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States ("U.S. GAAP") necessarily requires management

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to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

        New Accounting Pronouncements—In June 2009, the Financial Accounting Standards Board ("FASB") issued the ASC as the sole source of authoritative non-governmental GAAP. The ASC supersedes all non-grandfathered, non-SEC accounting literature but does not change how the Company accounts for transactions or the nature of related disclosures made. Instead, when referring to guidance issued by the FASB, the Company refers to topics in the ASC rather than individual pronouncements. The Company adopted the ASC, which became effective for interim and annual periods ending after September 15, 2009, and adoption did not have a material impact on its consolidated financial statements.

        On July 1, 2009, the Company adopted amended guidance in ASC Topic 810, Consolidation, pertaining to the accounting and reporting of noncontrolling interests in financial statements. The amended guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. As required by the amended guidance, the Company retrospectively applied the guidance to all periods presented. The net losses attributable to noncontrolling interests is now presented as a separate line item on the consolidated statements of operations. The presentation of net losses and amounts attributable to noncontrolling interests in our consolidated statements of cash flows has been retrospectively revised to reflect the impact of this guidance.

        In June 2009, the FASB issued guidance to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. The guidance eliminates the exemption from consolidation for qualifying special-purpose entities ("QSPEs"). As a result, a transferor must evaluate existing QSPEs to determine whether they must be consolidated in the reporting entity's financial statements. This statement limits the circumstances in which a financial asset or portion of a financial asset should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor's continuing involvement with transferred financial assets. The guidance applies prospectively to financial asset transfers occurring in fiscal years beginning after November 15, 2009 which will require the Company to adopt these provisions on July 1, 2010. The Company is currently evaluating the effect, if any, that the adoption will have on its consolidated financial statements.

        In June 2009, the FASB issued an amendment that requires an enterprise to perform an analysis to determine whether the enterprise's variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: (1) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable

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interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct activities of the variable interest entity that most significantly impact the entity's economic performance. The guidance applies prospectively to variable interest entities occurring in fiscal years beginning after November 15, 2009 which requires the Company to adopt these provisions on July 1, 2010. The Company is currently evaluating the effect, if any, that the adoption will have on its consolidated financial statements.

        In October 2009, the FASB issued ASU 2009-13, Multiple Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This update provides amendments to the criteria of ASC Topic 605, Revenue Recognition, for separating consideration in multiple-deliverable arrangements. The amendments to this update establish a selling price hierarchy for determining the selling price of a deliverable. ASU 2009-13 is effective for the Company's fiscal year beginning July 1, 2010, and either prospective or retrospective application is permitted. The Company is currently evaluating the effect, if any, that the adoption will have on its consolidated financial statements.

        In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820)—Improving Disclosures about Fair Value Measurements. This amendment to Topic 820 has improved disclosures about fair value measurements on the basis of input received from the users of financial statements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the Company with the reporting period beginning December 26, 2009, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the Company with the reporting period beginning July 1, 2011. There have been no significant transfers of assets and liabilities, therefore adoption of this new guidance will not have a material impact on the Company's consolidated financial statements.

        In April 2010, the FASB issued ASU 2010-17, Revenue Recognition—Milestone Method (ASC Topic 605). ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The guidance in this ASU applies to milestones in both single-deliverable and multiple-deliverable arrangements involving research or development transactions. ASU 2010-17 is effective for fiscal years (and interim periods within those fiscal years) beginning on or after June 15, 2010. Entities can apply this guidance prospectively to milestones achieved after adoption, however retrospective application to all prior periods is also permitted. ASU 2010-17 is effective for the Company's fiscal year beginning July 1, 2010. The Company is currently evaluating the effect, if any, that the adoption will have on its consolidated financial statements.

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Note 3. Fair Value Measurements

        Effective July 1, 2008, the Company adopted standards set forth in ASC Topic 820, Fair Value Measurements and Disclosures ("ASC Topic 820"), which includes a new framework for measuring fair value of financial and non-financial instruments and expands related disclosures. The Company does not have any non-financial instruments accounted for at fair value on a recurring basis. Broadly, the framework within ASC Topic 820 requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. These standards establish market or observable inputs as the preferred source of values. Assumptions based on hypothetical transactions are used in the absence of market inputs.

        The valuation techniques required are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy:

        Level 1 Inputs—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Generally this includes debt and equity securities and derivative contracts that are traded on an active exchange market (i.e. New York Stock Exchange) as well as certain U.S. Treasury and U.S. Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

        Level 2 Inputs—Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, credit risks, etc.) or can be corroborated by observable market data.

        Level 3 Inputs—Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company's own assumptions about the assumptions that market participants would use.

        The following tables present the level within the fair value hierarchy at which the Company's financial assets and liabilities are measured on a recurring basis as of June 30, 2010 and 2009.


Assets Measured at Fair Value on a Recurring Basis as of June 30, 2010

 
  Level 1   Level 2   Level 3   Total  

Assets

                         
 

Mutual funds

  $ 3,796   $   $   $ 3,796  
 

Certificates of deposit

        1,656         1,656  
 

Corporate bonds

        667         667  
 

Money market accounts

    1,927             1,927  
 

U.S. government obligations

    110             110  
                   
 

Total

  $ 5,833   $ 2,323   $   $ 8,156  
                   

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In thousands, except per share data

Note 3. Fair Value Measurements (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2009

 
  Level 1   Level 2   Level 3   Total  

Assets

                         
 

Mutual funds

  $ 3,854   $   $   $ 3,854  
 

Certificates of deposit

        3,012         3,012  
 

Corporate bonds

        627         627  
 

Money market accounts

    449             449  
 

U.S. government obligations

    447             447  
                   
 

Total

  $ 4,750   $ 3,639   $   $ 8,389  
                   

Liabilities

                         
 

Warrant obligation

  $   $   $ 656   $ 656  
                   
 

Total

  $   $   $ 656   $ 656  
                   

        As of June 30, 2010 and 2009, $1,927 and $449, respectively, of the restricted investments represented deposits in money market accounts under escrow arrangements. The carrying value of these investments approximated the fair market value as of such dates. Additionally, mutual funds, bonds, certificates of deposit and U.S. Treasury Notes under escrow arrangements with a cost of $5,816 and a fair value of $6,229, respectively, as of June 30, 2010 and a cost of $8,245 and a fair value of $7,940, respectively, as of June 30, 2009 are also included in restricted investments. These investments are recorded at fair value with changes in unrealized appreciation reported as a separate component of equity. During fiscal years 2010, 2009 and 2008, realized gains of $0, $3 and $57 were reported, respectively. If the Company determines that any unrealized losses are other than temporary, they will be charged to earnings. Gross unrealized losses included in other comprehensive income (loss) were $139, $418 and $52 in fiscal years 2010, 2009 and 2008, respectively.

        The restricted investments under escrow arrangements earned dividends and interest of approximately $258, $145 and $187 during fiscal years 2010, 2009 and 2008, respectively, which are recorded as income and reflected as an operating activity in the consolidated statements of cash flows.

        During fiscal year 2010, warrants to purchase 73 shares of the Company's common stock were redeemed for cash of $656. The redemption of the warrants was treated as an investing outflow in the consolidated statement of cash flows for fiscal year 2010 since the warrants related to a prior acquisition.


Assets Measured at Fair Value on a Non-Recurring Basis as of June 30, 2010

        Certain assets were measured at fair value on a non-recurring basis and are not included in the table below. These assets include the assessment of the recoverability of goodwill and certain intangible assets as of the end of the second quarter, which has been the annual impairment date, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The

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following table presents, by caption on the consolidated balance sheets, the fair value hierarchy for those assets measured at fair value on a non-recurring basis during fiscal year 2010.

 
  Carrying
Value
  Level 1   Level 2   Level 3   Total   Total Fair Value
Loss for the Year
Ended June 30,
2010
 

Assets

                                     
 

Goodwill

  $ 14,870   $   $   $ 14,870   $ 14,870   $ 20,249  
                           
 

Total

  $ 14,870   $   $   $ 14,870   $ 14,870   $ 20,249  
                           

        In determining the fair value of goodwill, the Company utilized valuation methods, including the discounted cash flow method, the guideline company approach and the guideline transaction approach as the best evidence of fair value.

Note 4. Restructuring Reserve

        The Company recorded charges to cost of services and general and administrative expenses for restructuring costs of $143, $569 and $3,161 for fiscal years 2010, 2009 and 2008, respectively. The following table details accrued restructuring obligations and related activities for fiscal years 2010, 2009 and 2008:

 
  Facility
Closures
  Employee
Severance
  Asset
Write-offs
  Total  

Liability balance at July 1, 2007

  $ 173   $   $   $ 173  

Total charge to operating costs and expenses

    2,168     516     477     3,161  

Payments

            (477 )   (477 )

Adjustments

    (44 )   (186 )       (230 )
                   

Liability balance at June 30, 2008

    2,297     330         2,627  

Total charge to operating costs and expenses

    574     (5 )       569  

Payments

    (1,461 )   (325 )       (1,786 )
                   

Liability balance at June 30, 2009

    1,410             1,410  

Total charge to operating costs and expenses

    143             143  

Payments

    (665 )           (665 )
                   

Liability balance at June 30, 2010

  $ 888   $   $   $ 888  
                   

        On June 23, 2008, the Board of Directors of the Company authorized management to implement a restructuring plan (the "Plan"). Management committed to the Plan as of June 30, 2008. The Plan was part of the Company's ongoing initiative to reduce operating costs and improve the efficiency of the Company's organization. Under the Plan, the Company reduced its workforce by 71 employees and consolidated or closed 14 office facilities.

        In connection with the Plan, the Company recorded asset impairment, facility exit and restructuring costs of $3,161 in fiscal year 2008. This included approximately $2,168 for facility closures, $516 for severance and personnel-related costs and $477 for asset write-offs. Total facility closure costs include lease liabilities offset by estimated sublease income, when applicable, and are based on market

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In thousands, except per share data

Note 4. Restructuring Reserve (Continued)


information. As of June 30, 2010, $888 of facility closure costs remain accrued (net of $612 of actual sublease payments due under non-cancelable subleases) and are expected to be paid over the various remaining lease terms through fiscal year 2013. During fiscal year 2010 the Company revised its estimates for sublease rental rate projections on several office facilities to reflect less favorable sublease income, resulting in a charge of $143.

Note 5. Accounts Receivable

        As of June 30, 2010 and 2009 accounts receivable were comprised of the following:

 
  2010   2009  

Billed

  $ 47,040   $ 62,761  

Unbilled

    43,736     40,542  

Retainage

    6,241     6,615  
           

    97,017     109,918  

Less allowance for doubtful accounts

    9,913     10,015  
           

  $ 87,104   $ 99,903  
           

        A substantial portion of unbilled receivables represents billable amounts recognized as revenue in the last month of the fiscal period. Management expects that almost all unbilled amounts will be billed and collected within one year. Retainage represents amounts billed but not paid by the client which, pursuant to contract terms, are due at completion.

        Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from clients or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes. Costs attributable to claims are treated as costs of contract performance as incurred.

Note 6. Long-Term Prepaid Insurance

        Long-term prepaid insurance relates to insurance premiums and other fees paid by the client to the insurer, typically through an insurance broker, for environmental remediation cost cap and pollution legal liability insurance policies related to the Company's Exit Strategy contracts. The insurance premiums and fees are amortized over the life of the policies which have terms ranging from ten to thirty-two years. The portion of the premiums and fees paid for the insurance policies that will be amortized over the next year are included in prepaid expenses and other current assets in the Company's consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In thousands, except per share data

Note 7. Other Accrued Liabilities

        As of June 30, 2010 and 2009, other accrued liabilities were comprised of the following:

 
  2010   2009  

Contract costs and loss reserves

  $ 26,845   $ 24,986  

Legal costs

    8,821     7,511  

Lease obligations

    2,955     2,421  

Audit costs

    1,467     1,422  

Restructuring reserve

    888     1,410  

Other

    2,805     4,209  
           

  $ 43,781   $ 41,959  
           

Note 8. Deferred Revenue

        Deferred revenue represents amounts billed or collected in accordance with contractual terms in advance of when the work is performed. These advance payments primarily relate to the Company's Exit Strategy program. The current portion of deferred revenue represents the balance the Company estimates will be earned as revenue during the next fiscal year.

Note 9. Acquisitions

        During fiscal year 2010, the Company acquired the assets of Blue Wave Ventures, LLC ("Blue Wave"), a consulting firm headquartered in Boston, Massachusetts. Blue Wave advises brownfield developers and environmental and renewable energy companies in the areas of project management, financing and capital sourcing, regulatory approvals, community and government relations, and business development. This acquisition was made in support of the Company's strategic growth plan to expand its services and capabilities within the Energy and Environmental operating segments in which it competes. Blue Wave is part of the Company's Environmental operating segment. The initial purchase price of $200 consisted of cash of $100 payable at closing and $100 on the first anniversary thereof, which was recorded net of imputed interest of $9. There was no goodwill recorded as a result of this acquisition, however other intangible assets of $189 were recorded.

        During fiscal years 2010, 2009 and 2008, the Company made additional purchase price cash payments of $656, $110 and $1,926, respectively, related to acquisitions completed in prior years. In addition, during fiscal year 2008, the Company issued 10 shares of common stock valued at $78, related to acquisitions completed in prior years. The additional purchase price payments were earned as a result of the acquired entities achieving certain financial objectives, primarily operating income targets, as well as pursuant to amendments to earnout arrangements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In thousands, except per share data

Note 10. Goodwill and Other Intangible Assets

        The changes in the carrying amount of goodwill for fiscal years 2010 and 2009 by operating segment are as follows:

 
  Energy   Environmental   Infrastructure   Total  

Balance as of July 1, 2008

  $ 26,433   $ 20,808   $ 7,224   $ 54,465  
 

Impairment losses

        (12,122 )   (7,224 )   (19,346 )
                   

Balance as of June 30, 2009

                         
 

Goodwill

    26,433     20,808     7,224     54,465  
 

Accumulated impairment losses

        (12,122 )   (7,224 )   (19,346 )
                   
 

Goodwill, as reported

    26,433     8,686         35,119  
                   
 

Reallocation of goodwill

    (6,383 )   6,383          
 

Impairment losses

    (14,506 )   (5,743 )       (20,249 )
                   

Balance as of June 30, 2010

                         
 

Goodwill

    20,050     27,191     7,224     54,465  
 

Accumulated impairment losses

    (14,506 )   (17,865 )   (7,224 )   (39,595 )
                   
 

Goodwill, as reported

  $ 5,544   $ 9,326   $   $ 14,870  
                   

        In fiscal year 2009, the Company performed its annual goodwill impairment testing as of December 26, 2008. In performing the goodwill assessment, the Company utilized valuation methods, including the discounted cash flow method, the guideline company approach and the guideline transaction approach as the best evidence of fair value. The weighting of the valuation methods used by the Company was 40% discounted cash flows, 40% guideline company approach and 20% guideline transaction approach. Less weight was given to the guideline transaction approach due to the limited number of recent transactions within the Company's industry. The aggregate fair value of the Company's reporting units declined from the June 30, 2008 carrying value to the December 26, 2008 valuation primarily due to a decline in the estimated future cash flows of the reporting units and declines in market multiples of comparable companies and resulted in non-cash goodwill impairment charges in the Environmental and Infrastructure operating segments of $19,346 during fiscal year 2009.

        During fiscal year 2010, the Company made certain changes to its management reporting structure, which resulted in a change in the composition of the Company's operating segments and to the number of reporting units. The Company reallocated goodwill to its newly formed reporting units using the relative fair value allocation approach. As a result, there was a reallocation of goodwill in the amount of $6,383 fro