TRC COMPANIES INC /DE/ - FORM 10-Q

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EX-31.1 - EX-31.1 - TRC COMPANIES INC /DE/	trr-ex311_20110325xq3.htm
EX-32.1 - EX-32.1 - TRC COMPANIES INC /DE/	trr-ex321_20110325xq3.htm
EX-31.2 - EX-31.2 - TRC COMPANIES INC /DE/	trr-ex312_20110325xq3.htm
EX-32.2 - EX-32.2 - TRC COMPANIES INC /DE/	trr-ex322_201103x25xq3.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 25, 2011

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

21 Griffin Road North
Windsor, Connecticut		06095
(Address of principal executive offices)		(Zip Code)

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

___________________________________________________

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, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]

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 [ ] NO [ ]

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 [ ]	Accelerated filer [ ]	Non-accelerated filer [X]	Smaller reporting company [ ]
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

On April 29, 2011 there were 27,270,455 shares of the registrant's common stock, $.10 par value, outstanding.

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TRC COMPANIES, INC.

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED MARCH 25, 2011



PART I - Financial Information

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Statements of Operations for the three and nine months ended March 25, 2011 and March 26, 2010	3

	Condensed Consolidated Balance Sheets as of March 25, 2011 and June 30, 2010	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended March 25, 2011 and March 26, 2010	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	38

PART II - Other Information

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 5.	Other Information	39

Item 6.	Exhibits	39

Signature		40

Exhibits

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PART I: FINANCIAL INFORMATION

TRC COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)



	Three Months Ended						Nine Months Ended
	March 25, 2011			March 26, 2010			March 25, 2011			March 26, 2010
Gross revenue	$	76,071		$	82,101		$	239,180		$	246,722
Less subcontractor costs and other direct reimbursable charges	18,323			27,524			63,519			80,945
Net service revenue	57,748			54,577			175,661			165,777
Interest income from contractual arrangements	95			108			308			475
Insurance recoverables and other income	392			2,999			3,302			8,925

Operating costs and expenses:
Cost of services	48,912			50,103			147,201			150,863
General and administrative expenses	6,713			6,127			19,563			19,176
Provision for doubtful accounts	449			600			1,622			1,710
Depreciation and amortization	1,025			1,251			3,486			5,047
Total operating costs and expenses	57,099			58,081			171,872			176,796
Operating income (loss)	1,136			(397		)	7,399			(1,619		)
Interest expense	(173		)	(242		)	(588		)	(768		)
Gain on extinguishment of debt	—			—			—			1,716
Income (loss) from operations before taxes and equity in (losses) earnings	963			(639		)	6,811			(671		)
Federal and state income tax (provision) benefit	(16		)	393			(702		)	4,818
Income (loss) from operations before taxes and equity in (losses) earnings	947			(246		)	6,109			4,147
Equity in (losses) earnings from unconsolidated affiliates, net of taxes	—			(23		)	10			(66		)
Net income (loss)	947			(269		)	6,119			4,081
Net loss applicable to noncontrolling interest	5			28			39			92
Net income (loss) applicable to TRC Companies, Inc.	952			(241		)	6,158			4,173
Accretion charges on preferred stock	—			(1,779		)	(7,261		)	(3,831		)
Net income (loss) applicable to TRC Companies, Inc.'s common shareholders	$	952		$	(2,020	)	$	(1,103	)	$	342

Basic earnings (loss) per common share	$	0.04		$	(0.10	)	$	(0.05	)	$	0.02
Diluted earnings (loss) per common share	$	0.03		$	(0.10	)	$	(0.05	)	$	0.02

Weighted-average common shares outstanding:
Basic	27,190			19,588			22,957			19,523
Diluted	27,921			19,588			22,957			19,906

See accompanying notes to condensed consolidated financial statements.

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TRC COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)



	March 25, 2011			June 30, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	12,210		$	14,709
Marketable securities	5,481			—
Accounts receivable, less allowance for doubtful accounts	79,182			87,104
Insurance recoverable - environmental remediation	35,955			35,664
Restricted investments	12,505			14,744
Prepaid expenses and other current assets	12,141			9,123
Income taxes refundable	65			388
Total current assets	157,539			161,732
Property and equipment	45,978			47,287
Less accumulated depreciation and amortization	(35,818		)	(35,535		)
Property and equipment, net	10,160			11,752
Goodwill	16,713			14,870
Investments in and advances to unconsolidated affiliates and construction joint ventures	111			117
Long-term restricted investments	41,604			46,426
Long-term prepaid insurance	42,029			44,529
Other assets	8,758			8,369
Total assets	$	276,914		$	287,795
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	3,144		$	3,629
Accounts payable	24,051			35,871
Accrued compensation and benefits	25,573			22,393
Deferred revenue	21,627			26,486
Environmental remediation liabilities	527			623
Other accrued liabilities	42,405			43,781
Total current liabilities	117,327			132,783
Non-current liabilities:
Long-term debt, net of current portion	6,096			5,815
Long-term income taxes payable	4,711			4,149
Long-term deferred revenue	98,350			102,452
Long-term environmental remediation liabilities	5,866			6,404
Total liabilities	232,350			251,603
Preferred stock, $.10 par value; 500,000 shares authorized, 7,209 shares issued and outstanding as convertible, liquidation preference value of $22,277 as of June 30, 2010	—			8,239
Commitments and contingencies
Equity:
Common stock, $.10 par value; 40,000,000 shares authorized, 27,272,075 and 27,268,593 shares issued and outstanding, respectively, at March 25, 2011, and 19,637,535 and 19,634,053 shares issued and outstanding, respectively, at June 30, 2010	2,727			1,964
Additional paid-in capital	173,380			163,897
Accumulated deficit	(131,725		)	(137,883		)
Accumulated other comprehensive income	379			133
Treasury stock, at cost	(33		)	(33		)
Total shareholders' equity applicable to TRC Companies, Inc.	44,728			28,078
Noncontrolling interest	(164		)	(125		)
Total equity	44,564			27,953
Total liabilities and equity	$	276,914		$	287,795

See accompanying notes to condensed consolidated financial statements.

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TRC COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



	Nine Months Ended
	March 25, 2011			March 26, 2010
Cash flows from operating activities:
Net income	$	6,119		$	4,081
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Non-cash items:
Depreciation and amortization	3,486			5,047
Stock-based compensation expense	1,935			1,567
Provision for doubtful accounts	1,622			1,710
Gain on extinguishment of debt	—			(1,716		)
Other non-cash items	(252		)	352
Changes in operating assets and liabilities:
Accounts receivable	6,143			12,472
Insurance recoverable - environmental remediation	(291		)	(8,763		)
Income taxes	866			(2,268		)
Restricted investments	6,579			11,520
Prepaid expenses and other current assets	(1,946		)	(645		)
Long-term prepaid insurance	2,500			2,486
Other assets	97			(52		)
Accounts payable	(11,911		)	(9,160		)
Accrued compensation and benefits	2,895			(9,016		)
Deferred revenue	(8,961		)	(12,863		)
Environmental remediation liabilities	(634		)	(929		)
Other accrued liabilities	(1,969		)	2,346
Net cash provided by (used in) operating activities	6,278			(3,831		)
Cash flows from investing activities:
Additions to property and equipment	(2,161		)	(2,181		)
Restricted investments	828			1,068
Acquisition of businesses	(700		)	(100		)
Earnout payments on acquisitions	(77		)	(656		)
Proceeds from sale of fixed assets	108			67
Investments in and advances to unconsolidated affiliates	(9		)	(10		)
Purchases of marketable securities	(5,681		)	—
Maturities and sales of marketable securities	200			—
Net cash used in investing activities	(7,492		)	(1,812		)
Cash flows from financing activities:
Payments on long-term debt and other	(3,557		)	(3,732		)
Proceeds from long-term debt and other	2,559			2,485
Shares repurchased to settle tax withholding obligations	(277		)	—
Payments on exchange of stock options	(10		)	—
Payments of issuance costs related to convertible preferred stock	—			(134		)
Net cash provided by financing activities	(1,285		)	(1,381		)
Increase (decrease) in cash and cash equivalents	(2,499		)	(7,024		)
Cash and cash equivalents, beginning of period	14,709			8,469
Cash and cash equivalents, end of period	$	12,210		$	1,445

Supplemental cash flow information:
Subordinated notes payable recorded in connection with businesses acquired	$	900		$	100
Future earnout consideration in connection with businesses acquired	362			—
Issuance of common stock in connection with businesses acquired	331			—

See accompanying notes to condensed consolidated financial statements.

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TRC COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 25, 2011 and March 26, 2010

(in thousands, except per share data)

(Unaudited)

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 reported net income (loss) applicable to the Company's common shareholders of $952 and $(1,103) for the three and nine months ended March 25, 2011, respectively. The loss applicable to the Company's common shareholders reported for the nine months ended March 25, 2011 was solely due to preferred stock accretion charges of $7,261. The preferred stock converted to common stock on December 1, 2010, and, as of that date, no further preferred stock accretion charges will be recorded. Although the Company incurred a net loss in the nine months ended March 25, 2011, it generated cash from operations of $6,278 during that period. The Company has a revolving credit facility with a maturity date of July 17, 2013 under which no amounts were outstanding as of March 25, 2011 and $25,802 was available for borrowings. The Company will continue to focus on improving operating profitability and cash flows from operations through reductions in general and administrative expenses and 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.

The condensed consolidated balance sheet as of March 25, 2011, the condensed consolidated statements of operations for the three and nine months ended March 25, 2011 and March 26, 2010, and the condensed consolidated statements of cash flows for the nine months ended March 25, 2011 and March 26, 2010 have been prepared pursuant to the interim period reporting requirements of Form 10-Q and in accordance with accounting principles generally accepted in the United States (“GAAP”). Consequently, the financial statements are unaudited but, in the opinion of the Company's management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for the interim periods. Also, certain information and footnote disclosures usually included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. The condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained, as well as variable interest entities in which the Company is considered the primary beneficiary. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K as of and for the fiscal year ended June 30, 2010.

Note 2. New Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-28 an accounting pronouncement related to Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other (“ASC Topic 350”), which requires a company to consider whether there are any adverse qualitative factors indicating that an impairment may exist in performing step 2 of the impairment test for reporting units with zero or negative carrying amounts. The provisions of this pronouncement are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010, with no early adoption. The Company will adopt this pronouncement for its fiscal year beginning July 1, 2011. The adoption of this pronouncement is not expected to have a material impact on the Company's consolidated results of operations or financial condition.

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), which addresses diversity in practice about the interpretation of the pro forma revenue

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and earnings disclosure requirements for business combinations. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in ASU 2010-29 also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in ASU 2010-29 are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. If applicable, the Company will include the required disclosures for its fiscal year beginning July 1, 2011.

Note 3. Fair Value Measurements

The Company's financial assets or liabilities are measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

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 are measured on a recurring basis as of March 25, 2011 and June 30, 2010.

Assets Measured at Fair Value on a Recurring Basis as of March 25, 2011



	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
U.S. government obligations	$	5,999	$	—	$	—	$	5,999
Money market accounts	520		—		—		520
Total cash and cash equivalents	$	6,519	$	—	$	—	$	6,519

Marketable securities:
Trading securities	$	—	$	5,481	$	—	$	5,481

Restricted investments:
Mutual funds	$	—	$	3,959	$	—	$	3,959
Certificates of deposit	—		1,657		—		1,657
Corporate bonds	—		1,462		—		1,462
Money market accounts	638		—		—		638
Total restricted investments	$	638	$	7,078	$	—	$	7,716

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



	Level 1		Level 2		Level 3		Total
Restricted investments:
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 restricted investments	$	2,037	$	6,119	$	—	$	8,156

As of March 25, 2011, the Company believes that the carrying value of cash and cash equivalents, marketable securities, accounts receivable, and accounts payable approximate fair value, due to the short maturity of these financial instruments. The Company's restricted investment financial assets as of March 25, 2011 and June 30, 2010 are included within current and long-term restricted investments on the condensed consolidated balance sheets. The classification of mutual fund assets held by the Company as of June 30, 2010 was updated to conform to the current year classification.

Marketable securities include investments in variable rate demand obligations ("VRDO's). In March 2011, the Company invested a portion of its cash with a major financial institution with the intention of improving returns while maintaining a conservative portfolio and providing high liquidity. The maturity dates range from less than one year to long-term, however, the long-term securities can be actively traded in broker/dealer markets and also allow the Company to put the instruments back to the originator for principal plus accrued interest. All VRDO's are secured by letters of credit. The securities are held with the intent of maintaining an intended return on the investments while remaining within the Company's overall risk parameters, and therefore are bought and sold within the account to achieve such return. The investments have been classified as trading securities with all gains and losses, in addition to interest earned, being recorded through the condensed consolidated statements of operations in other income.

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Note 4. Changes in Equity and Noncontrolling Interest

Net income (loss) applicable to noncontrolling interests' share in income (loss) are classified below net income (loss) in the condensed consolidated statements of operations. Earnings (loss) per share continues to be determined after the impact of the noncontrolling interests' share in net income (loss) of the Company. In addition, the balance related to noncontrolling interests is presented as a separate caption within equity.

A reconciliation of consolidated changes in equity for the nine months ended March 25, 2011 is as follows:



	TRC Companies, Inc. Condensed Consolidated Statement of Changes in Equity
												Accumulated						Total
	Common Stock					Additional						Other		Treasury Stock				TRC			Non-
	Number					Paid-in			Accumulated			Comprehensive		Number				Shareholders'			Controlling			Total
	of Shares		Amount			Capital			Deficit			Income		of Shares	Amount			Equity			Interest			Equity
Balances as of July 1, 2010	19,638		$	1,964		$	163,897		$	(137,883	)	$	133	3	$	(33	)	$	28,078		$	(125	)	$	27,953

Net income (loss)	—		—			—			6,158			—		—	—			6,158			(39		)	6,119
Unrealized gain on available for sale securities	—		—			—			—			246		—	—			246			—			246
Total comprehensive income (loss)																		6,404			(39		)	6,365
Issuance of common stock	80		8			323			—			—		—	—			331			—			331
Accretion charges on preferred stock	—		—			(7,261		)	—			—		—	—			(7,261		)	—			(7,261		)
Stock-based compensation	435		43			1,892			—			—		—	—			1,935			—			1,935
Shares repurchased to settle tax withholding obligations	(99	)	(10		)	(267		)	—			—		—	—			(277		)	—			(277		)
Directors' deferred compensation	9		1			27			—			—		—	—			28			—			28
Preferred stock conversion	7,209		721			14,779			—			—		—	—			15,500			—			15,500
Cash paid related to option exchange	—		—			(10		)	—			—		—	—			(10		)	—			(10		)
Balances as of March 25, 2011	27,272		$	2,727		$	173,380		$	(131,725	)	$	379	3	$	(33	)	$	44,728		$	(164	)	$	44,564

A reconciliation of consolidated changes in equity for the nine months ended March 26, 2010 is as follows:



	TRC Companies, Inc. Condensed Consolidated Statement of Changes in Equity
												Accumulated							Total
	Common Stock					Additional						Other			Treasury Stock				TRC			Non-
	Number					Paid-in			Accumulated			Comprehensive			Number				Shareholders'			Controlling			Total
	of Shares		Amount			Capital			Deficit			Income (Loss)			of Shares	Amount			Equity			Interest			Equity
Balances as of July 1, 2009	19,358		$	1,936		$	168,459		$	(121,434	)	$	(305	)	3	$	(33	)	$	48,623		$	—		$	48,623

Net income (loss)	—		—			—			342			—			—	—			342			(92		)	250
Unrealized gain on available for sale securities	—		—			—			—			503			—	—			503			—			503
Total comprehensive income (loss)																			845			(92		)	753
Issuance of common stock	48		5			177			—			—			—	—			182			—			182
Accretion charges on preferred stock	—		—			(3,831		)	3,831			—			—	—			—			—			—
Stock-based compensation	255		26			1,541			—			—			—	—			1,567			—			1,567
Shares repurchased to settle tax withholding obligations	(71	)	(8		)	(260		)	—			—			—	—			(268		)	—			(268		)
Directors' deferred compensation	16		2			53			—			—			—	—			55			—			55
Balances as of March 26, 2010	19,606		$	1,961		$	166,139		$	(117,261	)	$	198		3	$	(33	)	$	51,004		$	(92	)	$	50,912

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Note 5. Restructuring Reserve

A summary of restructuring reserve activity for the nine months ended March 25, 2011 is as follows:



	Facility Closures
Liability balance as of July 1, 2010	$	888
Payments	(398		)
Adjustments	(77		)
Liability balance as of March 25, 2011	$	413

As of March 25, 2011, $413 of facility closure costs remain accrued and are expected to be paid over various remaining lease terms through fiscal 2013.

Note 6. Stock-Based Compensation

As of March 25, 2011, the Company had two plans under which stock-based compensation has been issued: the TRC Companies, Inc. Restated Stock Option Plan, and the Amended and Restated 2007 Equity Incentive Plan, collectively, (“the Plans”). The Company issues new shares or utilizes treasury shares, when available, to satisfy awards under the Plans. Stock-based compensation is awarded by the Compensation Committee of the Board of Directors, however, the Compensation Committee has delegated to the Chief Executive Officer the authority to grant stock-based awards for up to 10 shares to employees subject to a limitation of 100 shares in any 12 month period.

Stock-based awards under the Plans consist of stock options, restricted stock awards (“RSA's”), restricted stock units (“RSU's”) and performance stock units (“PSU's”).

Stock-Based Compensation

The Company measures stock-based compensation cost at the grant date based on the fair value of the award. 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 condensed 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. During the three and nine months ended March 25, 2011 and March 26, 2010, the Company recognized stock-based compensation expense in cost of services and general and administrative expenses within the condensed consolidated statements of operations as follows:



	Three Months Ended				Nine Months Ended
	March 25, 2011		March 26, 2010		March 25, 2011		March 26, 2010
Cost of services	$	240	$	205	$	819	$	697
General and administrative expenses	316		299		1,116		870
Total stock-based compensation expense	$	556	$	504	$	1,935	$	1,567

Stock Options

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

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experience. 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 historical and expected dividend payouts. The assumptions used to value stock options granted for the three and nine months ended March 25, 2011 and March 26, 2010 are as follows:



	Three Months Ended				Nine Months Ended
	March 25, 2011		March 26, 2010		March 25, 2011		March 26, 2010
Risk-free interest rate	1.57% - 1.81%		1.94% - 1.97%		1.57% - 1.81%		1.94% - 1.99%
Expected life	4.0 years		4.0 years		4.0 years		4.0 years
Expected volatility	76.6% - 77.0%		75.3%		76.6% - 77.0%		72.9% - 75.3%
Expected dividend yield	None		None		None		None
Weighted-average fair value of options granted	$	2.09	$	1.58	$	2.09	$	1.93

A summary of stock option activity for the nine months ended March 25, 2011 under the Plans is as follows:



					Weighted
					Average
			Weighted		Remaining	Aggregate
			Average		Contractual	Intrinsic
			Exercise		Term	Value
	Options		Price		(in years)	(in thousands)
Outstanding options as of June 30, 2010 (1,231 exercisable)	1,484		$	11.88	4.2	$	24
Options granted	11		3.65
Options forfeited	(419	)	13.39
Options expired	(146	)	12.13
Outstanding options as of March 25, 2011	930		$	11.06	3.7	$	156
Options exercisable as of March 25, 2011	799		$	11.82	3.6	$	68
Options vested and expected to vest as of March 25, 2011	914		$	11.17	3.7	$	139
Shares available for future grants	1,927

The aggregate intrinsic value is measured using the fair market value at the date of exercise (for options exercised) or as of March 25, 2011 (for outstanding options), less the applicable exercise price. The closing price of the Company's common stock on the New York Stock Exchange was $4.72 as of March 25, 2011. There were no options exercised during the three and nine months ended March 25, 2011 and March 26, 2010.

As of March 25, 2011, there was $310 of total unrecognized compensation expense related to non-vested stock option grants under the Plans, and this expense is expected to be recognized over a weighted-average period of 1.0 year.

In July 2009 the Company's shareholders approved amendments to the 2007 Equity Incentive Plan to permit option repricings, exchanges and similar programs. Directors and Executive Officers do not participate in such programs. On September 23, 2010 the Company commenced an option exchange program under which stock options with exercise prices in excess of $7.25 per share and expiration dates after June 30, 2011 were eligible for exchange into RSU's with a four year vesting schedule based on the Black-Scholes value of the exchanged stock options. Where a participant received less than five hundred RSU's they were entitled to a cash payment equal to the greater of the number of RSU's times $2.82 or one hundred dollars. On November 1, 2010, 415 stock options were forfeited and exchanged for 97 RSU's and an aggregate of $10 in cash.

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Restricted Stock Awards

Compensation expense for RSA's granted to employees is recognized ratably over the vesting term, which is generally four years. The fair value of the RSA's is determined based on the closing market price of the Company's common stock on the grant date. RSA grants totaled 5 shares at a weighted-average grant date fair value of $3.59 per share during the nine months ended March 25, 2011. During the three and nine months ended March 25, 2011, 19 and 212 shares vested with a fair value of $70 and $617, respectively.

A summary of non-vested RSA activity for the nine months ended March 25, 2011 is as follows:



			Weighted
	Restricted		Average
	Stock		Grant Date
	Awards		Fair Value
Non-vested awards as of June 30, 2010	607		$	3.67
Awards granted	5		3.59
Awards vested	(212	)	4.00
Awards forfeited	(1	)	11.47
Non-vested awards as of March 25, 2011	399		$	3.47

As of March 25, 2011, there was $1,063 of total unrecognized compensation expense related to non-vested RSA's under the Plans which is expected to be recognized over a weighted-average period of 1.4 years.

Restricted Stock Units

Compensation expense for RSU's granted to employees is recognized ratably over the vesting term, which is generally four years. The fair value of RSU's is determined based on the closing market price of the Company's common stock on the grant date. RSU grants totaled 791 shares at a weighted-average grant date fair value of $2.67 per share during the nine months ended March 25, 2011 including 108 shares granted to outside members of the Board of Directors at a weighted-average grant date fair-value of $2.77 per share which vest in equal increments quarterly over a one year period. During the three and nine months ended March 25, 2011, 27 and 223 shares vested with a fair value of $112 and $628, respectively. RSU grants totaled 583 shares at a weighted-average grant date fair value of $3.59 per share for the nine months ended March 26, 2010. In addition during the nine months ended March 26, 2010, RSU's for 97 shares were granted to outside members of the Board of Directors at a weighted-average grant date fair-value of $3.10 per share which vested in equal increments quarterly over a one year period.

A summary of non-vested RSU activity for the nine months ended March 25, 2011 is as follows:



			Weighted
	Restricted		Average
	Stock		Grant Date
	Units		Fair Value
Non-vested units as of June 30, 2010	617		$	3.51
Units granted	791		2.67
Units vested	(223	)	3.34
Non-vested units as of March 25, 2011	1,185		$	2.98

As of March 25, 2011, there was $3,158 of total unrecognized compensation expense related to non-vested RSU's, and this expense is expected to be recognized over a weighted-average period of 2.9 years.

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Performance Stock Units

Compensation expense for PSU's granted to employees is recognized if and when the Company concludes that it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each reporting period for awards with performance conditions and adjusts compensation expense based on its probability assessment. The fair value of the PSU's is determined based on the closing market price of the Company's common stock on the grant date. During the nine months ended March 25, 2011, the Company granted 551 PSU's to employees at a weighted-average grant date fair value of $2.88. The PSU's vest over four years upon meeting certain financial targets for the fiscal year ending June 30, 2011.

As of March 25, 2011, the Company determined that the achievement of the performance condition of the PSU's granted during the nine months ended March 25, 2011 is probable, and therefore $84 and $206 of compensation expense was recorded during the three and nine months ended March 25, 2011.

As of March 25, 2011, there was $1,381 of total unrecognized compensation expense related to non-vested PSU's under the Plans, and this expense is expected to be recognized over a weighted-average period of 2.1 years.

Warrants

During the nine months ended March 26, 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 condensed consolidated statement of cash flows for the nine months ended March 26, 2010 because the warrants related to a prior acquisition. The Company currently has 25 warrants outstanding with a strike price of $9.63 and an expiration date of July 13, 2011.

Note 7. 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 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 the nine months ended March 25, 2011 and the three months ended March 26, 2010, 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 the nine months ended March 25, 2011 were not allocated to the convertible preferred stock. The preferred stock converted to common stock on December 1, 2010, resulting in the inclusion of 3,204 shares in the basic weighted-average shares outstanding for the nine months ended March 25, 2011. Because the effects are anti-dilutive, 4,005 of the 7,209 common shares from the preferred stock conversion on December 1, 2010 were excluded from the calculation of diluted EPS for the nine months ended March 25, 2011. The number of outstanding stock options, warrants and non-vested RSA's, RSU's and PSU's excluded from the diluted EPS calculations (as they were anti-dilutive) were 2,360 and 2,946 for the three and nine months ended March 25, 2011, and 3,134 and

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2,962 for the three and nine months ended March 26, 2010, respectively.

The following table sets forth the computations of basic and diluted EPS for the three and nine months ended March 25, 2011 and March 26, 2010:



	Three Months Ended					Nine Months Ended
	March 25, 2011		March 26, 2010			March 25, 2011			March 26, 2010
Net income (loss) applicable to TRC Companies, Inc.	$	952	$	(241	)	$	6,158		$	4,173
Accretion charges on preferred stock	—		(1,779		)	(7,261		)	(3,831		)
Net income (loss) applicable to TRC Companies, Inc.'s common shareholders	$	952	$	(2,020	)	$	(1,103	)	$	342

Basic weighted-average common shares outstanding	27,190		19,588			22,957			19,523
Effect of dilutive stock options and restricted stock	731		—			—			383
Diluted weighted-average common shares outstanding	27,921		19,588			22,957			19,906

Earnings (loss) per common share applicable to TRC Companies, Inc.'s common shareholders:
Basic earnings (loss) per common share	$	0.04	$	(0.10	)	$	(0.05	)	$	0.02
Diluted earnings (loss) per common share	$	0.03	$	(0.10	)	$	(0.05	)	$	0.02

Note 8. Accounts Receivable

The current portion of accounts receivable as of March 25, 2011 and June 30, 2010 was comprised of the following:



	March 25, 2011			June 30, 2010
Billed	$	51,934		$	47,040
Unbilled	35,368			43,736
Retainage	3,019			6,241
	90,321			97,017
Less allowance for doubtful accounts	(11,139		)	(9,913		)
	$	79,182		$	87,104

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Note 9. Other Accrued Liabilities

As of March 25, 2011 and June 30, 2010, other accrued liabilities were comprised of the following:



	March 25, 2011		June 30, 2010
Contract costs and loss reserves	$	25,880	$	26,845
Legal costs	9,264		8,821
Lease obligations	2,919		2,955
Restructuring reserve	413		888
Other	3,929		4,272
	$	42,405	$	43,781

Note 10. Goodwill and Intangible Assets

In accordance with ASC Topic 350, 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 to compare the estimated fair value of each reporting unit to its carrying value of goodwill. The fair value of each reporting unit is determined by using valuation methods, including the discounted cash flow method, the guideline company approach, and the guideline transaction approach. 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 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.

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.

Since the adoption of ASC Topic 350, the Company's annual impairment review of goodwill had been completed at the end of the second quarter of each fiscal year. During the second quarter of fiscal 2011 the Company changed its accounting policy whereby the annual impairment review of goodwill will be performed as of each fiscal April month-end instead of the end of the second quarter of each fiscal year. This date coincides with the interim impairment analysis of goodwill for all reporting units with goodwill that was completed as of April 26, 2010. The change in the annual goodwill impairment testing date coincides with the Company's annual preparation of long range projections (budgets and forecasts), which are a significant component utilized in the goodwill impairment analysis. Accordingly, the Company believes the change in the annual impairment testing date is preferable in the circumstances. The change in the Company's annual goodwill impairment testing date is not intended to nor does it delay, accelerate or avoid an impairment charge. As it was impracticable to objectively determine long range projection and valuation estimates as of each fiscal April month-end for fiscal years ending on or prior to June 30, 2009, the Company has retrospectively applied the change in annual impairment testing date to the start of the fiscal year beginning July 1, 2009.

As of March 25, 2011, the Company had $16,713 of goodwill, and the Company does not believe there were any events or changes in circumstances since the last goodwill assessment on April 26, 2010 that would indicate the fair value of goodwill was more-likely-than-not reduced to below its carrying value, and therefore goodwill was not assessed for impairment during the current fiscal quarter.

In February 2011, the Company acquired the stock of privately-held Alexander Utility Engineering, Inc. (“AUE”), through a combination of cash, stock and subordinated debt. Headquartered in San Antonio, Texas, AUE is a professional

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engineering and design firm that specializes in providing a range of services to the electric utility marketplaces. AUE is integrated into the Company's business processes and systems as a part of the Company's Energy operating segment. The initial purchase price of approximately $2,293 consisted of cash of $700 payable at closing, a $900 subordinated note, 80 shares of the Company's common stock valued at $331, and future earnout consideration with a fair value of $362. Goodwill of $1,843 and other intangible assets of $549 were recorded as a result of this acquisition. The impact of this acquisition was not material to the Company's consolidated balance sheets and results of operation.

The changes in the carrying amount of goodwill for the nine months ended March 25, 2011 by operating segment are as follows:



	Gross								Gross
	Balance,		Accumulated			Balance,			Balance,		Accumulated			Balance,
	July 1,		Impairment			July 1,		Additions /	March 25,		Impairment			March 25,
Operating Segment	2010		Losses			2010		Adjustments	2011		Losses			2011
Energy	$	20,050	$	(14,506	)	$	5,544	1,843	$	21,893	$	(14,506	)	$	7,387
Environmental	27,191		(17,865		)	9,326		—	27,191		(17,865		)	9,326
Infrastructure	7,224		(7,224		)	—		—	7,224		(7,224		)	—
	$	54,465	$	(39,595	)	$	14,870	1,843	$	56,308	$	(39,595	)	$	16,713

The changes in the carrying amount of goodwill for the nine months ended March 26, 2010 by operating segment are as follows:



	Gross									Gross
	Balance,		Accumulated			Balance,				Balance,		Accumulated			Balance,
	July 1,		Impairment			July 1,		Additions /		March 26,		Impairment			March 26,
Operating Segment	2009		Losses			2009		Adjustments		2010		Losses			2010
Energy	$	26,433	$	—		$	26,433	(6,383	)	$	20,050	$	—		$	20,050
Environmental	20,808		(12,122		)	8,686		6,383		27,191		(12,122		)	15,069
Infrastructure	7,224		(7,224		)	—		—		7,224		(7,224		)	—
	$	54,465	$	(19,346	)	$	35,119	—		$	54,465	$	(19,346	)	$	35,119

During the three months ended September 25, 2009, 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 from the Energy operating segment to the Environmental operating segment. The Company had 16 reporting units as of September 25, 2009 compared to three reporting units as of June 30, 2009. This reallocation, in conjunction with the continued downturn in the Company's key markets, resulted in an interim impairment test. Accordingly, the Company assessed the recoverability of goodwill of $35,119 as of September 25, 2009 for the seven reporting units within its Energy and Environmental operating segments which had associated goodwill. The remaining nine reporting units, all in the Infrastructure operating segment, have no goodwill associated with them due to the impairment charge recorded in fiscal year 2009. As of September 25, 2009, the fair value of each of the Company's reporting units with goodwill exceeded its carrying value, and therefore no further analysis was required.

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Identifiable intangible assets as of March 25, 2011 and June 30, 2010 are included in other assets on the condensed consolidated balance sheets and were comprised of:



	March 25, 2011							June 30, 2010
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
Identifiable intangible assets	Amount		Amortization			Amount		Amount		Amortization			Amount
With determinable lives:
Customer relationships	$	675	$	(79	)	$	596	$	184	$	(25	)	$	159
Contract backlog	58		(9		)	49		—		—			—
	733		(88		)	645		184		(25		)	159

With indefinite lives:
Engineering licenses	426		—			426		426		—			426
	$	1,159	$	(88	)	$	1,071	$	610	$	(25	)	$	585

Identifiable intangible assets with determinable lives are amortized over the weighted-average period of approximately seven years. The weighted-average periods of amortization by intangible asset class is approximately eight years for client relationship assets and six months for contract backlog. The amortization of intangible assets during the three months ended March 25, 2011 and March 26, 2010 was $32 and $76, respectively. The amortization of intangible assets during the nine months ended March 25, 2011 and March 26, 2010 was $63 and $205, respectively. Estimated amortization of intangible assets for future periods is as follows: remainder of fiscal year 2011 - $66; fiscal year 2012 - $174; fiscal year 2013 - $137; fiscal year 2014 - $78; fiscal year 2015 - $57; fiscal 2016 and thereafter - $133.

On an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired, the fair value of the indefinite-lived intangible assets is evaluated by the Company to determine if an impairment charge is required. The fair value for intangible assets is based on discounted cash flows. There were no events or changes in circumstances that would indicate the fair value of intangible assets was reduced to below its carrying value during the nine months ended March 25, 2011, and therefore intangible assets were not assessed for impairment.

Note 11. Long-Term Debt

The Company and substantially all of its 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 the Borrower with a five-year senior revolving credit facility of up to $50,000 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 $15,000 syndication reserve was established which reduces the maximum revolver amount from $50,000 to $35,000 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 3.00% 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. The Company's obligations under the Credit Agreement are secured by a pledge of substantially all of its assets and guaranteed by substantially all of its subsidiaries that are not borrowers. The Credit Agreement also contains cross-default provisions which become effective if the Company defaults on other indebtedness.

Under the Credit Agreement the Company must maintain average monthly backlog of $190,000 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 $6,100, $9,200, $10,900 and $12,400, for the trailing twelve month periods ending on September 30, 2010, December 31, 2010, March 31, 2011 and June 30,

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2011, respectively; and $12,500 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, defined in the Credit Agreement as restructuring charges, in the amount of $1,250 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 $10,600 to $7,500 for fiscal year 2010 through fiscal year 2012 and $8,500 for fiscal year 2013; and (iii) a revision to the 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 $20,000.

The Credit Agreement was amended as of February 25, 2011 to allow the Company to purchase the stock of AUE and incur indebtedness in connection with that acquisition in the form of a subordinated promissory note in a principal amount not to exceed $900 (See Note 10).

As of March 25, 2011 and June 30, 2010, the Company had no borrowings outstanding pursuant to the Credit Agreement. Letters of credit outstanding were $3,768 and $3,668 as of March 25, 2011 and June 30, 2010, respectively. Based upon the borrowing base formula, the maximum availability was $29,570 and $30,195 as of March 25, 2011 and June 30, 2010, respectively. Funds available to borrow under the Credit Agreement after consideration of the reserve amount were $25,802 and $26,527 as of March 25, 2011 and June 30, 2010, respectively.

On July 19, 2006, the Company and substantially all of its subsidiaries entered into a three-year subordinated loan agreement with Federal Partners, L.P. (“Federal Partners”), a stockholder of the Company, pursuant to which the Company borrowed $5,000. 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 was an investor in the Company's preferred stock offering. On July 19, 2006, the Company also issued a ten-year warrant to Federal Partners to purchase up to 66 shares of its common stock at an exercise price equal to $0.10 per share. The estimated fair value of the warrant of $659 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 $5,000 was proportionately allocated to the note and the warrant in the amount of $4,418 and $582, respectively. The amount allocated to the warrant of $582 was recorded as a discount on the note and was amortized over the original three year life of the note. Interest expense amortized for the nine months ended March 25, 2011 and March 26, 2010, was $0 and $9, respectively.

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 modification followed by a second principal payment of $250 made on December 1, 2010 and extended the maturity date of the loan from January 31, 2010 until April 1, 2011. In April 2011, the Company entered into a modification of the credit agreement with the lender that extended the maturity date of the loan from April 1, 2011 until October 1, 2011 (See Note 12).

In July 2010, the Company financed $2,559 of insurance premiums payable in nine equal monthly installments of approximately $288 each, including a finance charge of 2.89%. As of March 25, 2011, the balance has been repaid.

In February 2011, the Company entered into a two-year subordinated promissory note with the principal owner of AUE pursuant to which the Company agreed to pay $900. The note bears interest at a fixed rate of 3.25% per annum. The principal amount outstanding under this note shall become due and payable in two equal installments of $450 on each of the first and second anniversaries of the note.

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Note 12. Variable Interest Entity

The Company's condensed consolidated financial statements include the financial results of a variable interest entity in which it is the primary beneficiary. In determining whether the Company is the primary beneficiary of an entity, it considers a number of factors, including its ability to direct the activities that most significantly affect the entity's economic success, the Company's contractual rights and responsibilities under the arrangement and the significance of the arrangement to each party. These considerations impact the way the Company accounts for its existing collaborative and joint venture relationships and determines the consolidation of companies or entities with which the Company has collaborative or other arrangements.

The Company consolidates the operations of CAH, as it retains the contractual power to direct the activities of CAH which most significantly and directly impact its economic performance. The activity of CAH is not significant to the overall performance of the Company. The assets of CAH are restricted, from the standpoint of the Company, in that they are not available for the Company's general business use outside the context of CAH.

The following table sets forth the assets and liabilities of CAH included in the condensed consolidated balance sheets of the Company:



	March 25, 2011		June 30, 2010
Current assets:
Cash and cash equivalents	$	32	$	64
Restricted investments	310		309
Total current assets	342		373
Other assets	4,344		4,336
Total assets	$	4,686	$	4,709
Current liabilities:
Current portion of long-term debt	$	2,450	$	2,700
Environmental remediation liabilities	15		50
Other accrued liabilities	14		693
Total current liabilities	2,479		3,443
Long-term environmental remediation liabilities	74		108
Total liabilities	$	2,553	$	3,551

The Company and its other partner do not generally have an obligation to make additional capital contributions to CAH. However, through the end of the third fiscal quarter ended March 25, 2011, the Company has provided approximately $956 of support it was not contractually obligated to provide. The additional support was primarily for debt service payments on the note payable. Ultimately, the Company expects the proceeds from the sale of the property (a component of other assets in the condensed consolidated balance sheets) will be sufficient to repay the debt and any remaining unfunded liabilities, however, to the extent a sale does not occur prior to maturity of the liabilities or the sales proceeds are insufficient to fund any remaining liabilities, the Company intends to fund CAH's obligations as they become due.

Note 13. Income Taxes

During the year ended June 30, 2008, the Company determined it to be more likely than not that its net deferred tax asset would not be realized and a valuation allowance was recorded against the Company's net deferred tax assets. The Company has reassessed this conclusion during the current quarter and concluded that it remains more likely than not that these assets will not be realized, and therefore a full valuation allowance remains.

The Company recorded a tax expense of $16 and $702 for the three and nine months ended March 25, 2011, respectively, primarily related to state income taxes, interest expense on its uncertain tax positions, foreign income taxes and a reduction in the valuation allowance of $218 due to the acquisition of AUE.

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The Company records a liability for uncertain tax positions under the measurement criteria of ASC Topic 740, Income Taxes. As of March 25, 2011 the recorded liability was $4,711. The Company is currently under Internal Revenue Service (“IRS”) examination for the fiscal years 2003 through 2008. On December 18, 2009, the IRS formally assessed the Company certain adjustments related to Exit Strategy projects. The Company did not agree with these adjustments and filed an appeal on February 19, 2010. If the IRS prevails in its position, the Company would owe additional federal taxes of $10,274 (including interest) for these periods.

The Company expects that the total amount of unrecognized tax benefits could increase or decrease within the next twelve months. It is reasonably possible that the unrecognized tax benefits could decrease by approximately $3,000 or increase by approximately $6,000 due to the timing of the resolution of the IRS examination.

Note 14. Operating Segments

The Company manages its business under the following three operating segments:

Energy: The Energy operating segment provides services to a range of clients including energy companies, utilities, other commercial entities, and state and federal governments. The Company's services include program management, engineer/procure/construct projects, design, and consulting. The Company's 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: air quality measurements and modeling of potential air pollution impacts, assessment and remediation of contaminated sites and buildings, 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. The Company's client base is predominantly state and municipal governments as well as select 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.

The Company's chief operating decision maker is its Chief Executive Officer (“CEO”). The Company's CEO manages the business by evaluating the financial results of the three operating segments focusing primarily on segment revenue and segment profit. The Company utilizes segment revenue and segment profit because it believes they provide useful information for effectively allocating resources among operating segments; evaluating the health of its operating segments based on metrics that management can actively influence; and gauging its investments and its ability to service, incur or pay down debt. Specifically, the Company's 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 the Company's overall strategy. The Company's CEO then decides how resources should be allocated among its operating segments. The Company does not track its 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. Assets solely used by Corporate are not allocated to the operating segments. Inter-segment balances and transactions are not material. The accounting policies of the operating segments are the same as those for the Company as a whole, except as discussed herein.

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The following tables present summarized financial information for the Company's operating segments (as of and for the periods noted below):



	Energy		Environmental		Infrastructure		Total

Three months ended March 25, 2011:
Gross revenue	$	22,331	$	42,416	$	11,760	$	76,507
Net service revenue	18,031		29,858		9,402		57,291
Segment profit	4,223		4,339		1,017		9,579
Depreciation and amortization	203		375		127		705

Three months ended March 26, 2010:
Gross revenue	$	18,041	$	51,077	$	13,050	$	82,168
Net service revenue	14,431		29,202		10,196		53,829
Segment profit	2,422		4,926		565		7,913
Depreciation and amortization	203		428		200		831



	Energy		Environmental		Infrastructure		Total

Nine months ended March 25, 2011:
Gross revenue	$	62,022	$	135,124	$	41,031	$	238,177
Net service revenue	50,769		92,697		30,430		173,896
Segment profit	11,074		19,608		3,819		34,501
Depreciation and amortization	681		1,277		437		2,395

Nine months ended March 26, 2010:
Gross revenue	$	55,222	$	146,432	$	45,146	$	246,800
Net service revenue	43,352		84,845		35,143		163,340
Segment profit	5,465		16,130		3,667		25,262
Depreciation and amortization	715		1,991		723		3,429

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	Three Months Ended						Nine Months Ended
Gross revenue	March 25, 2011			March 26, 2010			March 25, 2011			March 26, 2010
Gross revenue from reportable operating segments	$	76,507		$	82,168		$	238,177		$	246,800
Reconciling items (1)	(436		)	(67		)	1,003			(78		)
Total consolidated gross revenue	$	76,071		$	82,101		$	239,180		$	246,722

Net service revenue
Net service revenue from reportable operating segments	$	57,291		$	53,829		$	173,896		$	163,340
Reconciling items (1)	457			748			1,765			2,437
Total consolidated net service revenue	$	57,748		$	54,577		$	175,661		$	165,777

Income (loss) from operations before taxes and equity in (losses) earnings
Segment profit	$	9,579		$	7,913		$	34,501		$	25,262
Corporate shared services (2)	(7,567		)	(7,386		)	(24,076		)	(23,696		)
Stock-based compensation expense	(556		)	(504		)	(1,935		)	(1,567		)
Unallocated depreciation and amortization	(320		)	(420		)	(1,091		)	(1,618		)
Interest expense	(173		)	(242		)	(588		)	(768		)
Gain on extinguishment of debt	—			—			—			1,716
Total consolidated income (loss) from operations before taxes and equity in (losses) earnings	$	963		$	(639	)	$	6,811		$	(671	)

Depreciation and amortization
Depreciation and amortization from reportable operating segments	$	705		$	831		$	2,395		$	3,429
Unallocated depreciation and amortization	320			420			1,091			1,618
Total consolidated depreciation and amortization	$	1,025		$	1,251		$	3,486		$	5,047


(1)	Amounts represent certain unallocated corporate amounts not considered in the CODM's evaluation of operating segment performance.


(2)	Corporate shared services consist of centrally managed functions in the following areas: accounting, treasury, information technology, legal, human resources, marketing, internal audit and executive management such as the CEO and various executives. These costs and other items of a general corporate nature are not allocated to the Company’s three operating segments.

Note 15. Legal Matters

The Company and its subsidiaries are subject to claims and lawsuits typical of those filed against engineering and consulting companies. The Company carries liability insurance, including professional liability insurance, against such claims, subject to certain deductibles and policy limits. Except as described herein, management is of the opinion that the resolution of these claims and lawsuits will not likely have a material adverse effect on the Company's operating results, financial position and cash flows.

The Arena Group v. TRC Environmental Corporation and TRC Companies, Inc., District Court Harris County, Texas, 2007. A former landlord of a subsidiary of the Company has sued for damages alleging breach of a lease for certain office space in Houston, Texas which the subsidiary vacated. The plaintiff is alleging substantial damages. This case is scheduled for trial in May 2011, and the Company believes that it has meritorious defenses, however an adverse determination in this matter could have a material adverse effect on the Company's business, operating results, financial

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position and cash flows.

In re: World Trade Center Lower Manhattan Disaster Site Litigation, United States District Court for the Southern District of New York, 2006. A subsidiary of the Company has been named as a defendant (along with a number of other defendants) in a number of cases which are pending in the United States District Court for the Southern District of New York and are styled under the caption “In Re World Trade Center Lower Manhattan Disaster Site Litigation.” The Complaints allege that the plaintiffs were workers involved in construction, demolition, excavation, debris removal and clean-up in the buildings surrounding the World Trade Center site, allege that plaintiffs were injured and seek unspecified damages for those injuries. The Company believes the subsidiary has meritorious defenses and is adequately insured, however an adverse determination in this matter could have a material adverse effect on the Company's business, operating results, financial position and cash flows.

Luis Gonzalez, Jr. et al v. Pacific Gas & Electric, TRC Solutions, Inc., et al; Marie Esther Gonzalez v. Pacific Gas & Electric, TRC Solutions, Inc., et al; Jamie Ramos v. Pacific Gas & Electric, TRC Solutions, Inc., et al, California Superior Court, San Francisco County, 2008. A subsidiary of the Company was named as a defendant in three lawsuits concerning a boiler structure that collapsed on or about January 28, 2008 during planned demolition work at the Hunters Point Power Plant in California. Two employees of subcontractor LVI/ICONCO were injured and one was killed. The two injured workers as well as the deceased employee's representatives filed lawsuits. The Company's subsidiary was hired as the prime contractor by site owner PG&E. The Company's subsidiary subcontracted the demolition work to LVI/ICONCO who procured insurance on behalf of the Company and PG&E which provided coverage to the subsidiary for these claims. In March of 2011, the court in this case granted a summary judgment motion and a judgment thereon in favor of the subsidiary against all plaintiff's.

Paul Clark v. TRC Environmental Corporation; United States District Court, Western District of Washington, 2009. A subsidiary of the Company is named as defendant in a lawsuit for wrongful termination by a former employee who seeks unspecified damages arising out of his at-will employment with the Company's subsidiary. The Company believes that it has meritorious defenses and is adequately insured, however an adverse determination in this matter could have a material adverse effect on the Company's business, operating results, financial position and cash flows.

Judy Kroshus et al v. United Sates of America, et al, United States District Court, District of Nevada, 2009. A subsidiary of the Company and three of its current and former employees have been named as defendants in an action brought by various plaintiffs who live in or around a residential subdivision that sustained flood damage on or about January 5, 2008. Plaintiffs allege that the flood was caused by the breach of a nearby canal and that the City of Fernley retained the Company's subsidiary to provide engineering services, including review and approval of certain residential subdivision plans. Plaintiffs claim that they sustained unspecified personal injuries and that their homes and real property were damaged as a result of the negligence and errors and omission of various defendants including the Company's subsidiary. Two plaintiffs voluntarily discontinued their claims against the Company's subsidiary and its employees in May 2010. The Company believes that it has meritorious defenses and is adequately insured, however an adverse determination in this matter could have a material adverse effect on the Company's business, operating results, financial position and cash flows.

Obie Matthews v. National Grid Utility Services, LLC., et al,; Supreme Court of the State of New York, New York County, 2010. A subsidiary of the Company is named as a defendant in a personal injury lawsuit concerning an accident that occurred on or about September 13, 2010 at a construction project located in Queens, New York. The plaintiff was employed by the general contractor who hired the Company's subsidiary to perform certain consulting services at the project. The Company believes that it has meritorious defenses and is adequately insured, however an adverse determination in this matter could have a material adverse effect on the Company's business, operating results, financial position and cash flows.

The Company records actual or potential litigation-related losses in accordance with ASC Topic 450, Contingencies. As of March 25, 2011 and June 30, 2010, the Company had recorded $7,638 and $7,126, respectively, of reserves in the Company's condensed consolidated financial statements for probable and estimable liabilities related to the litigation-related losses in which the Company was then involved, the principal of which are described above. The Company also has insurance recovery receivables related to the aforementioned litigation-related reserves of $3,895 and $2,840

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as of March 25, 2011 and June 30, 2010, respectively.

The Company periodically adjusts the amount of such reserves when such actual or potential liabilities are paid or otherwise discharged, new claims arise, or additional relevant information about existing or potential claims becomes available. The Company believes that it is reasonably possible that the amount of potential litigation related liabilities could increase by as much as approximately $9,500, of which approximately $3,000 would be covered by insurance.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Three and Nine Months Ended March 25, 2011 and March 26, 2010

Beginning with the fiscal quarter ended September 28, 2007, we established our fiscal quarter end based on a consecutive pattern of five week, four week, and four week months (“5-4-4”), with the fiscal week running from Saturday to Friday. We believe that 5-4-4 reporting is more consistent with our operating cycle as well as the reporting periods of our industry peers. The three months ended March 25, 2011 is comparable to the same period in the prior year, however, the nine months ended March 25, 2011 contains one less day than the same period in the prior fiscal year.

You should read the following discussion of our results of operations and financial condition in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended June 30, 2010. This discussion contains forward-looking statements that are based upon current expectations and assumptions, and, by their nature, such forward-looking statements are subject to risks and uncertainties. We have attempted to identify such statements using words such as “may”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, or other words of similar import. We caution the reader that there may be events in the future that management is not able to accurately predict or control which may cause actual results to differ materially from the expectations described in the forward-looking statements. The factors in the sections captioned “Critical Accounting Policies” and “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 and below in this Form 10-Q provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in the forward-looking statements.

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.

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 net service revenue (“NSR”), which is gross revenue less subcontractor costs and other direct reimbursable charges, and our discussion and analysis of financial condition and results of operations uses NSR as a primary 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.

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

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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 effect on our customers; and


•	General economic or political conditions.

We experience seasonal trends in our business. Our revenue is typically lower in the second and third fiscal quarters, as our business is, to some extent, dependent on field work and construction scheduling and is also affected by federal holidays such as Thanksgiving, Christmas and New Year's. Our revenues are lower during these times of the year because many of our clients' employees, as well as our own employees, do not work during these holidays, resulting in fewer billable hours charged to projects and thus, lower revenues recognized. In addition to holidays, harsher weather conditions that occur in the fall and winter occasionally cause some of our offices to close temporarily and can significantly affect our project field work. Conversely, our business generally benefits from milder weather conditions in our first and fourth fiscal quarters which allow for more productivity from our field services.

Operating Segments

We manage our business under the following three operating segments:

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.

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 select 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.

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Our chief operating decision maker 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.

The following table presents the approximate percentage of our NSR by operating segment for the three and nine months ended March 25, 2011 and March 26, 2010:



	Three Months Ended				Nine Months Ended
Operating Segment	March 25, 2011		March 26, 2010		March 25, 2011		March 26, 2010
Energy	31.5	%	26.8	%	29.2	%	26.5	%
Environmental	52.1	%	54.2	%	53.3	%	52.0	%
Infrastructure	16.4	%	19.0	%	17.5	%	21.5	%
	100.0	%	100.0	%	100.0	%	100.0	%

Business Trend Analysis

Energy: The utilities in the United States are in the midst 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 system benefit charges at the state or utility level are 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 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 remain 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

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at state and municipal levels. Recent estimates indicate that approximately $2 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. In the long-term the Infrastructure operating segment may also benefit from 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.

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 value these estimates which are based on current facts and circumstances, prior experience and other assumptions that are believed to be reasonable. Further detail regarding our critical accounting policies can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes included in our Annual Report on Form 10-K, as filed with the SEC on September 13, 2010. Management has determined that no material changes concerning our critical accounting policies have occurred since June 30, 2010.

Results of Operations

We reported net income (loss) applicable to our common shareholders of $1.0 million and $(1.1) million for the three and nine months ended March 25, 2011. The loss applicable to our common shareholders reported for the nine months ended March 25, 2011 was solely due to preferred stock accretion charges of $7.3 million. The preferred stock converted to common stock on December 1, 2010, and, as of that date, no further preferred stock accretion charges will be recorded.

Overall, operating results for the three and nine months ended March 25, 2011 improved compared to the same periods in the prior year despite a continuation of the challenging economic and industry trends we have seen over the past year. Although we are seeing indications of the recovery in spending by our clients, many remain cautious regarding spending on new capital projects. A decline in work performed by our subcontractors is the primary reason for the decrease in gross revenue for the three and nine months ended March 25, 2011. During the time that subcontractor work has declined, the demand for work performed by our employees, which typically has a higher profit margin, has increased resulting in a 5.8% and 6.0% increase in NSR for the three and nine months ended March 25, 2011, respectively, compared to the same periods in the prior year. While the demand environment is beginning to recover, we continued to further streamline our cost structure during the period. As a percentage of NSR, operating income improved to 2.0% and 4.2% for the three and nine months ended March 25, 2011, respectively, from operating losses of (0.7)% and (0.9)% for the same periods in the prior year.

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Consolidated Results

The following table presents the dollar and percentage changes in the condensed consolidated statements of operations for the three and nine months ended March 25, 2011 and March 26, 2010:



	Three Months Ended											Nine Months Ended
	Mar. 25,			Mar. 26,			Change					Mar. 25,			Mar. 26,			Change
(Dollars in thousands)	2011			2010			$			%		2011			2010			$			%
Gross revenue	$	76,071		$	82,101		$	(6,030	)	(7.3	)%	$	239,180		$	246,722		$	(7,542	)	(3.1	)%
Less subcontractor costs and other direct reimbursable charges	18,323			27,524			(9,201		)	(33.4	)	63,519			80,945			(17,426		)	(21.5	)
Net service revenue	57,748			54,577			3,171			5.8		175,661			165,777			9,884			6.0
Interest income from contractual arrangements	95			108			(13		)	(12.0	)	308			475			(167		)	(35.2	)
Insurance recoverables and other income	392			2,999			(2,607		)	(86.9	)	3,302			8,925			(5,623		)	(63.0	)
Cost of services	48,912			50,103			(1,191		)	(2.4	)	147,201			150,863			(3,662		)	(2.4	)
General and administrative expenses	6,713			6,127			586			9.6		19,563			19,176			387			2.0
Provision for doubtful accounts	449			600			(151		)	(25.2	)	1,622			1,710			(88		)	(5.1	)
Depreciation and amortization	1,025			1,251			(226		)	(18.1	)	3,486			5,047			(1,561		)	(30.9	)
Operating income (loss)	1,136			(397		)	1,533			(386.1	)	7,399			(1,619		)	9,018			(557.0	)
Interest expense	(173		)	(242		)	69			(28.5	)	(588		)	(768		)	180			(23.4	)
Gain on extinguishment of debt	—			—			—			—		—			1,716			(1,716		)	(100.0	)
Income (loss) from operations before taxes and equity in (losses) earnings	963			(639		)	1,602			NM		6,811			(671		)	7,482			NM
Federal and state income tax (provision) benefit	(16		)	393			(409		)	(104.1	)	(702		)	4,818			(5,520		)	(114.6	)
Income (loss) from operations before taxes and equity in (losses) earnings	947			(246		)	1,193			(485.0	)	6,109			4,147			1,962			47.3
Equity in (losses) earnings from unconsolidated affiliates, net of taxes	—			(23		)	23			(100.0	)	10			(66		)	76			(115.2	)
Net income (loss)	947			(269		)	1,216			(452.0	)	6,119			4,081			2,038			49.9
Net loss applicable to noncontrolling interest	5			28			(23		)	(82.1	)	39			92			(53		)	(57.6	)
Net income (loss) applicable to TRC Companies, Inc.	952			(241		)	1,193			(495.0	)	6,158			4,173			1,985			47.6
Accretion charges on preferred stock	—			(1,779		)	1,779			(100.0	)	(7,261		)	(3,831		)	(3,430		)	89.5
Net income (loss) applicable to TRC Companies, Inc.'s common shareholders	$	952		$	(2,020	)	$	2,972		(147.1	)%	$	(1,103	)	$	342		$	(1,445	)	(422.5	)%

NM - Not Meaningful

Three Months Ended March 25, 2011

Gross revenue decreased $6.0 million, or 7.3%, to $76.1 million for the three months ended March 25, 2011 from $82.1 million for the same period in the prior year. Current quarter gross revenue in our Energy operating segment increased $4.3 million primarily due increased activity on electric transmission and distribution projects as our clients began to resume investments in capital projects that were delayed throughout fiscal year 2010. Current quarter gross revenue in our Environmental operating segment decreased $8.7 million primarily due to a decline in work performed by our subcontractors. In the comparable period in fiscal year 2010, our projects experienced higher levels of subcontracting and procurement activity and, therefore, generated higher gross revenues and other direct costs (“ODC's”).

NSR increased $3.2 million, or 5.8%, to $57.7 million for the three months ended March 25, 2011 from $54.6 million

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for the same period in the prior year. Current quarter NSR in our Energy operating segment increased $3.6 million primarily due to the above-mentioned increased activity on electric transmission and distribution projects. This increase was offset, in part, by a $0.8 million decrease in NSR in our Infrastructure operating segment, which experienced lower overall demand due primarily to revenue shortfalls at state and municipal levels.

Interest income from contractual arrangements decreased $0.01 million, or 12.0%, to $0.10 million for the three months ended March 25, 2011 from $0.11 million for the same period in the prior year primarily due to lower one-year constant maturity T-Bill rates and a lower average balance of restricted investments in fiscal year 2011 compared to fiscal year 2010.

Insurance recoverables and other income decreased $2.6 million, or 86.9%, to $0.4 million for the three months ended March 25, 2011 from $3.0 million for the same period in the prior year. In the third quarter of fiscal year 2010, certain 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 the third quarter of fiscal year 2011, we did not experience the same level of estimated cost increases.

COS decreased $1.2 million, or 2.4%, to $48.9 million for the three months ended March 25, 2011 from $50.1 million for the same period in the prior year. The decrease was primarily related to a $2.3 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 period as compared to the same period last year. This decrease was offset, in part, by a $1.2 million increase to bonus and fringe benefit costs. The increase in our bonus expense was due to improved operating performance, whereas the increase to fringe benefit costs was primarily attributable to increased health care costs and an increase to our 401K match percentage. As a percentage of NSR, COS was 84.7% and 91.8% for the three months ended March 25, 2011 and March 26, 2010, respectively.

G&A expenses increased $0.6 million, or 9.6%, to $6.7 million for the three months ended March 25, 2011 from $6.1 million for the same period in the prior year. In fiscal 2010, our G&A expenses benefited from the reduction of a legal reserve due to a settlement that was more favorable than originally expected. As a percentage of NSR, G&A expenses were 11.6% and 11.2% for the three months ended March 25, 2011 and March 26, 2010, respectively.

The provision for doubtful accounts decreased $0.2 million, or 25.2%, to $0.4 million for the three months ended March 25, 2011 from $0.6 million for the same period in the prior year. The decrease was primarily due to the corresponding decrease in gross revenue.

Depreciation and amortization expense decreased $0.2 million, or 18.1%, to $1.0 million for the three months ended March 25, 2011 from $1.3 million for the same period in the prior year. The decrease in depreciation expense was primarily related to technology equipment becoming fully depreciated since the same period in the prior year. Also, amortization expense decreased during the three months ended March 25, 2011 due to accelerated amortization expense on certain intangible assets in the fourth quarter of fiscal year 2010.

Interest expense decreased $0.07 million, or 28.5%, to $0.17 million for the three months ended March 25, 2011 from $0.24 million for the same period in the prior year. The decrease was primarily due to lower interest expense incurred on the CAH loan due to the modification agreement entered into in June 2010 which reduced the interest rate from 10.0% to 6.5% in return for principal payments made on the loan.

The federal and state income tax provision was $0.02 million for the three months ended March 25, 2011 compared to tax benefit of $0.39 million for the same period in the prior year. We recognized a net tax benefit of $0.39 million in the three months ending March 26, 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 net operating loss 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 net operating loss 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 its examination including the impact of the net operating loss law change which resulted in an income tax benefit of $1.9

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million.

Nine Months Ended March 25, 2011

Gross revenue decreased $7.5 million, or 3.1%, to $239.2 million for the nine months ended March 25, 2011 from $246.7 million for the same period in the prior year. Current period gross revenue in our Environmental operating segment decreased $11.3 million primarily due to a decline in work performed by our subcontractors. In the comparable period in fiscal year 2010, our projects experienced higher levels of subcontracting and procurement activity and, therefore, generated higher gross revenues and ODC's. In addition, current period gross revenue in our Infrastructure operating segment decreased $4.1 million primarily due to the wind-down of a large transportation design project, certain actions taken in the prior fiscal year to eliminate lower margin work and lower overall demand due primarily to revenue shortfalls at state and municipal levels. This increase was offset, in large part, by increased gross revenue in our Energy operating segment primarily due to increased activity on electric transmission and distribution projects.

NSR increased $9.9 million, or 6.0%, to $175.7 million for the nine months ended March 25, 2011 from $165.8 million for the same period in the prior year. NSR in our Energy operating segment increased $7.4 million in the nine months ended March 25, 2011 primarily due to the above-mentioned increased activity on electric transmission and distribution projects. Current year NSR in our Environmental operating segment also increased $7.9 million primarily due to the improved project performance on certain Exit Strategy contracts and a moderate increase in demand for our environmental services. In addition, we made a favorable adjustment to the estimate at completion on a large air monitoring contract which contributed approximately $0.7 million to NSR and operating income during the current period. These increases were offset, in part, by a $4.7 million decrease in our Infrastructure operating segment, the result of the wind-down of a significant transportation design project and lower overall demand from state and municipal clients which have experienced significant revenue shortfalls.

Interest income from contractual arrangements decreased $0.2 million, or 35.2%, to $0.3 million for the nine months ended March 25, 2011 from $0.5 million for the same period in the prior year primarily due to lower one-year constant maturity T-Bill rates and a lower average balance of restricted investments in fiscal year 2011 compared to fiscal year 2010.

Insurance recoverables and other income decreased $5.6 million, or 63.0%, to $3.3 million for the nine months ended March 25, 2011 from $8.9 million for the same period in the prior year. In the first and third quarter of fiscal year 2010, certain 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 2011 we did not experience the same level of estimated cost increases.

COS decreased $3.7 million, or 2.4%, to $147.2 million for the nine months ended March 25, 2011 from $150.9 million for the same period in the prior year. The decrease was related, in part, to a $4.2 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 period as compared to the same period last year. In addition, the decrease in COS was attributable to a $2.0 million reduction in payroll and fringe benefit costs due to headcount reductions primarily in our Infrastructure operating segment. These decreases were partially offset by higher bonus costs and a charge incurred for the early termination of an office lease. As a percentage of NSR, COS was 83.8% and 91.0% for the nine months ended March 25, 2011 and March 25, 2011, respectively.

G&A expenses increased $0.4 million, or 2.0%, to $19.6 million for the nine months ended March 25, 2011 from $19.2 million for the same period in the prior year. The increase was primarily attributable to an increase in legal fees. As a percentage of NSR, G&A expenses were 11.1% and 11.6% for the nine months ended March 25, 2011 and March 26, 2010, respectively.

Depreciation and amortization expense decreased $1.6 million, or 30.9%, to $3.5 million for the nine months ended March 25, 2011 from $5.0 million for the same period in the prior year. The decrease in depreciation expense was principally related to technology equipment becoming fully depreciated since the same period in the prior year. Also,

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amortization expense decreased during the three months ended March 25, 2011 due to accelerated amortization expense on certain intangible assets in the fourth quarter of fiscal year 2010.

Interest expense decreased $0.2 million, or 23.4%, to $0.6 million for the nine months ended March 25, 2011 from $0.8 million for the same period in the prior year. The decrease was primarily due to lower interest expense incurred on the CAH loan due to the modification agreement entered into in June 2010 that reduced the interest rate from 10.0% to 6.5% in return for principal payments made on the loan.

The federal and state income tax provision was $0.7 million for the nine months ended March 25, 2011 compared to a tax benefit of $4.8 million for the same period in the prior year. We recognized a net tax benefit of $4.8 million in the nine months ending March 26, 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 net operating loss 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 net operating loss 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 its examination including the impact of the net operating loss law change which resulted in an income tax benefit of $1.9 million.

Costs and Expenses as a Percentage of NSR

The following table presents the percentage relationships of items in the condensed consolidated statements of operations to NSR for the three and nine months ended March 25, 2011 and March 26, 2010:



	Three Months Ended				Nine Months Ended
	March 25, 2011		March 26, 2010		March 25, 2011		March 26, 2010
Net service revenue	100.0	%	100.0	%	100.0	%	100.0	%

Interest income from contractual arrangements	0.2		0.2		0.2		0.3
Insurance recoverables and other income	0.7		5.5		1.9		5.4

Operating costs and expenses:
Cost of services	84.7		91.8		83.8		91.0
General and administrative expenses	11.6		11.2		11.1		11.6
Provision for doubtful accounts	0.8		1.1		1.0		1.0
Depreciation and amortization	1.8		2.3		2.0		3.0
Total operating costs and expenses	98.9		106.4		97.9		106.6
Operating income (loss)	2.0		(0.7	)	4.2		(0.9	)
Interest expense	(0.3	)	(0.5	)	(0.3	)	(0.5	)
Gain on extinguishment of debt	—		—		—		1.0
Income (loss) from operations before taxes and equity in (losses) earnings	1.7		(1.2	)	3.9		(0.4	)
Federal and state income tax (provision) benefit	—		0.7		(0.4	)	2.9
Income (loss) from operations before taxes and equity in (losses) earnings	1.7		(0.5	)	3.5		2.5
Equity in (losses) earnings from unconsolidated affiliates, net of taxes	—		—		—		—
Net income (loss)	1.7		(0.5	)	3.5		2.5
Net loss applicable to noncontrolling interest	—		0.1		—		—
Net income (loss) applicable to TRC Companies, Inc.	1.7		(0.4	)	3.5		2.5
Accretion charges on preferred stock	—		(3.3	)	(4.1	)	(2.3	)
Net income (loss) applicable to TRC Companies, Inc.'s common shareholders	1.7	%	(3.7	)%	(0.6	)%	0.2	%

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Additional Information by Reportable Operating Segment

Energy Operating Segment Results



	Three Months Ended								Nine Months Ended
	Mar. 25,		Mar. 26,		Change				Mar. 25,		Mar. 26,		Change
	2011		2010		$		%		2011		2010		$		%
Gross revenue	$	22,331	$	18,041	$	4,290	23.8	%	$	62,022	$	55,222	$	6,800	12.3	%
Net service revenue	$	18,031	$	14,431	$	3,600	24.9	%	$	50,769	$	43,352	$	7,417	17.1	%
Segment profit	$	4,223	$	2,422	$	1,801	74.4	%	$	11,074	$	5,465	$	5,609	102.6	%

Gross revenue increased $4.3 million, or 23.8%, and $6.8 million, or 12.3%, for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year. The increase in gross revenue in the three and nine months ended March 25, 2011, is due to the increase in electric transmission and distribution spending and, to a lesser extent, increased demand for our energy efficiency program management services

NSR increased $3.6 million, or 24.9%, and $7.4 million, or 17.1%, for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year. The increase in NSR was primarily due to increased activity on electric transmission and distribution projects as our clients began to resume investments in capital projects that were delayed throughout fiscal year 2010.

The Energy operating segment's profit increased $1.8 million, or 74.4%, and $5.6 million, or 102.6%, for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year. The increase in the Energy operating segment's profit for the three and nine months ended March 25, 2011 is primarily related to the increase in NSR. As a percentage of NSR, the Energy operating segment's profit increased to 23.4% from 16.8% and to 21.8% from 12.6% for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year.

Environmental Operating Segment Results



	Three Months Ended									Nine Months Ended
	Mar. 25,		Mar. 26,		Change					Mar. 25,		Mar. 26,		Change
	2011		2010		$			%		2011		2010		$			%
Gross revenue	$	42,416	$	51,077	$	(8,661	)	(17.0	)%	$	135,124	$	146,432	$	(11,308	)	(7.7	)%
Net service revenue	$	29,858	$	29,202	$	656		2.2	%	$	92,697	$	84,845	$	7,852		9.3	%
Segment profit	$	4,339	$	4,926	$	(587	)	(11.9	)%	$	19,608	$	16,130	$	3,478		21.6	%

Gross revenue decreased $8.7 million, or 17.0%, and $11.3 million, or 7.7%, for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year. The decline was primarily due to the wind down of subcontractor activity on two large environmental projects, which resulted in both decreased gross revenue and subcontractor costs. This decrease was partially offset by increased demand for work performed by our employees.

NSR increased $0.7 million, or 2.2%, and $7.9 million, or 9.3%, for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year. The increase in NSR for the three months ended March 25, 2011 was primarily related to improved project performance on certain Exit Strategy contracts which increased NSR by approximately $1.6 million. This increase was offset, in part, by the wind-down of a large environmental remediation project. The increase in NSR for the nine months ended March 25, 2011 was primarily related to: (1) improved project performance on certain Exit Strategy contracts which increased NSR by approximately $5.3 million; (2) a decrease to our estimate at completion for a large air monitoring contract which increased NSR by approximately $0.7; and (3) a moderate increase in demand for our environmental services.

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The Environmental operating segment's profit decreased $0.6 million, or 11.9%, and increased $3.5 million, or 21.6%, for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year. The decrease in the Environmental operating segment's profit for the three months ended March 25, 2011 was primarily related to the completion of large remediation project, which generated significant profit in the comparable period of the prior year. The increase in the Environmental operating segment's profit for the nine months ended March 25, 2011 was related to the above-mentioned discussed increase in NSR. As a percentage of NSR, the Environmental operating segment's profit decreased to 14.5% from 16.9% and increased to 21.2% from 19.0% for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year.

Infrastructure Operating Segment Results



	Three Months Ended									Nine Months Ended
	Mar. 25,		Mar. 26,		Change					Mar. 25,		Mar. 26,		Change
	2011		2010		$			%		2011		2010		$			%
Gross revenue	$	11,760	$	13,050	$	(1,290	)	(9.9	)%	$	41,031	$	45,146	$	(4,115	)	(9.1	)%
Net service revenue	$	9,402	$	10,196	$	(794	)	(7.8	)%	$	30,430	$	35,143	$	(4,713	)	(13.4	)%
Segment profit	$	1,017	$	565	$	452		80.0	%	$	3,819	$	3,667	$	152		4.1	%

Gross revenue decreased $1.3 million, or 9.9%, and $4.1 million, or 9.1%, for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year. The decrease in gross revenue for our Infrastructure operating segment was primarily due the wind-down of a large transportation design project and certain actions taken in the prior fiscal year to eliminate lower margin work.

NSR decreased $0.8 million, or 7.8%, and $4.7 million, or 13.4%, for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year. The decrease in NSR for our Infrastructure operating segment was due to the reasons described above in addition to lower overall demand due primarily to revenue shortfalls at state and municipal levels.

The Infrastructure operating segment's profit increased $0.5 million, or 80.0%, and $0.2 million, or 4.1%, for the three and nine months ended March 25, 2011, respectively, compared to the same periods of the prior year. Our Infrastructure operating segment experienced stronger performance for the three and nine months ended March 25, 2011, as compared to the same period of the prior year, despite a reduction in the overall volume of business, as we continue to reduce low margin work. As a percentage of NSR, the Infrastructure operating segment's profit increased to 10.8% from 5.5% and increased to 12.6% from 10.4% for the three and nine months ended March 25, 2011, respectively, compared to the same periods of 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.

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 service debt.

Cash flows provided by operating activities were $6.3 million for the nine months ended March 25, 2011, compared to $3.8 million of cash used in the same period of the prior year. Sources of cash used in operating assets and liabilities for the nine months ended March 25, 2011 totaled $25.7 million and primarily consisted of the following: (1) an $11.9 million decrease in accounts payable primarily due to the timing of payments to vendors; and (2) a $9.0 million decrease

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in deferred revenue primarily related to revenue earned on Exit Strategy projects. Sources of cash used in operating assets and liabilities for the nine months ended March 25, 2011 were offset by cash provided by operating assets and liabilities totaling $19.1 million consisting primarily of the following: (1) a $6.6 million decrease in restricted investments primarily due to work performed on Exit Strategy projects; and (2) a $6.1 million decrease in accounts receivable due to timing of collections. In addition, non-cash items for the nine months ended March 25, 2011 resulted in net expenses of $6.8 million consisting primarily of the following: (1) $3.5 million for depreciation and amortization; (2) $1.9 million for stock-based compensation expense; and (3) $1.6 million for the provision for doubtful accounts.

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 94 days as of March 25, 2011 from 93 days as of June 30, 2010. 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.

Cash used in investing activities was approximately $7.5 million for the nine months ended March 25, 2011, compared to $1.8 million used in the same period of the prior year. Cash used consisted primarily of (1) purchases of marketable securities of $5.7 million; (2) $2.2 million for property and equipment; and (3) $0.7 million for the acquisition of AUE, which were primarily offset by $0.8 million from restricted investments and maturities and sales of marketable securities of $0.2 million.

Cash used in financing activities was approximately $1.3 million for the nine months ended March 25, 2011, compared to $1.4 million for the same period of the prior year. Cash used consisted of $3.6 million for payments made on long-term debt and the short-term insurance related to fiscal year 2011 insurance premiums offset by $2.6 million of short-term financing related to fiscal year 2011 insurance premiums.

Long-Term Debt

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 3.00% 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

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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 $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, 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 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.

The Credit Agreement was amended as of February 25, 2011 to allow us to purchase the stock of AUE and incur indebtedness in connection with that acquisition in the form of a subordinated promissory note in a principal amount not to exceed $0.9 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) income for the trailing twelve month periods ended March 25, 2011 and March 26, 2010 (in thousands):



	Trailing Twelve Months
	March 25, 2011			March 26, 2010
Operating (loss) income	$	(12,434	)	$	(1,215	)
Depreciation and amortization	6,488			7,077
EBITDA	(5,946		)	5,862
Goodwill and intangible asset write-offs	20,249			—
Permitted discretionary cost reduction efforts	1,845			1,292
Consolidated Adjusted EBITDA under the Credit Agreement	$	16,148		$	7,154

The actual covenant results as compared to the covenant requirements under the Credit Agreement as of March 25, 2011 for the measurement periods described below are as follows (in thousands):



	Measurement Period	Actual		Required
Consolidated Adjusted EBITDA	Trailing 12 months	$	16,148	Must Exceed	$	10,900
Average Monthly Backlog	Trailing 3 months	$	375,481	Must Exceed	$	190,000
Capital Expenditures	Fiscal year 2011	$	2,161	Not to Exceed	$	7,500
Fixed Charge Ratio (1)	Trailing 12 months	Not Applicable		Must Exceed	1.00 to 1.00


(1)	As of March 25, 2011, 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 March 25, 2011 and June 30, 2010, we had no borrowings outstanding pursuant to the Credit Agreement. Letters

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of credit outstanding were $3.8 million and $3.7 million as of March 25, 2011 and June 30, 2010, respectively. Based upon the borrowing base formula, the maximum availability was $29.6 million and $30.2 million as of March 25, 2011 and June 30, 2010, respectively. Funds available to borrow under the Credit Agreement after consideration of the reserve amount were $25.8 million and $26.5 million as of March 25, 2011 and June 30, 2010, 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 was 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 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 warrant 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 the nine months ended March 25, 2011 and March 26, 2010, was $0 and $9 thousand, respectively.

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 modification followed by a second principal payment of $0.25 million made on December 1, 2010 and extended the maturity date of the loan from January 31, 2010 until April 1, 2011. In April 2011, we entered into a modification of the credit agreement with the lender that extended the maturity date of the loan from April 1, 2011 until October 1, 2011.

In July 2010, we financed approximately $2.6 million of insurance premiums payable in nine equal monthly installments of approximately $0.3 million each, including a finance charge of 2.89%. As of March 25, 2011, the balance has been repaid.

In February 2011, we entered into a two-year subordinated promissory note with the principal owner of AUE pursuant to which we agreed to pay $0.9 million. The note bears interest at a fixed rate of 3.25% per annum. The principal amount outstanding under this note shall become due and payable in two equal installments of $0.45 million on each of the first and second anniversaries of the note.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We currently do not utilize derivative financial instruments. While we currently do not have any borrowings outstanding under our credit agreement, to the extent we have borrowings, we would be exposed to interest rate risk under that 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 3.00% and LIBOR plus a margin of 3.50% to 4.50%, based on Trailing Twelve Month EBITDA.

Borrowings at these rates have no designated term and may be repaid without penalty any time prior to the facility's maturity date. Under its term as amended, 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 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company has evaluated, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of March 25, 2011. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of March 25, 2011.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the Company's quarter ended March 25, 2011 that has significantly affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

See Note 15 under Part I, Item 1, Financial Information.

Item 1A. Risk Factors

No material changes.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

None.

Item 6. Exhibits



31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

32.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		TRC COMPANIES, INC.

May 4, 2011	by:	/s/ Thomas W. Bennet, Jr.

		Thomas W. Bennet, Jr.
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

Attached files

TRC COMPANIES INC /DE/ Reports

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