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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 27, 2015
OR
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 1-9947
TRC COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [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 [X] 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 [X]
Non-accelerated filer [ ]
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 March 30, 2015 there were 30,432,977 shares of the registrant's common stock, $.10 par value, outstanding.
 
 
 
 
 
 
 
 
 
 



TRC COMPANIES, INC.
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED March 27, 2015


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibits
 
 

2


PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

TRC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Gross revenue
$
130,777

 
$
120,836

 
$
397,030

 
$
350,002

Less subcontractor costs and other direct reimbursable charges
29,783

 
32,755

 
103,579

 
89,538

Net service revenue
100,994

 
88,081

 
293,451

 
260,464

Interest income from contractual arrangements
23

 
73

 
67

 
26

Insurance recoverables and other income
753

 
5,008

 
6,238

 
17,613

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of services (exclusive of costs shown separately below)
83,486

 
80,127

 
247,275

 
234,914

General and administrative expenses
8,927

 
8,363

 
25,360

 
24,642

Depreciation and amortization
2,208

 
2,161

 
7,114

 
6,587

Total operating costs and expenses
94,621

 
90,651

 
279,749

 
266,143

Operating income
7,149

 
2,511

 
20,007

 
11,960

Interest expense
(73
)
 
(22
)
 
(125
)
 
(152
)
Income from operations before taxes
7,076

 
2,489

 
19,882

 
11,808

Provision for income taxes
(1,916
)
 
(1,060
)
 
(7,244
)
 
(4,830
)
Net income
5,160

 
1,429

 
12,638

 
6,978

Net loss applicable to noncontrolling interest
5

 
2

 
14

 
36

Net income applicable to TRC Companies, Inc.
$
5,165

 
$
1,431

 
$
12,652

 
$
7,014

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.17

 
$
0.05

 
$
0.42

 
$
0.24

Diluted earnings per common share
$
0.17

 
$
0.05

 
$
0.41

 
$
0.23

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
30,382

 
29,691

 
30,233

 
29,549

Diluted
30,737

 
30,166

 
30,551

 
30,088


See accompanying notes to condensed consolidated financial statements.

3


TRC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)

 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
March 27, 2015
 
March 28, 2014
 
March 27, 2015
 
March 28, 2014
Net income
$
5,160

 
$
1,429

 
$
12,638

 
$
6,978

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities
15

 
19

 
8

 
162

 
Tax effect on unrealized gain on available-for-sale securities
(6
)
 
(9
)
 
(3
)
 
(66
)
 
Reclassification for loss (gain) included in net income
(2
)
 
(67
)
 
5

 
(98
)
 
Tax effect on realized loss (gain) on available-for-sale securities
1

 
28

 
(2
)
 
40

 
 
Total other comprehensive income (loss)
8

 
(29
)
 
8

 
38

Comprehensive income
5,168

 
1,400

 
12,646

 
7,016

 
Comprehensive loss attributable to noncontrolling interests
5

 
2

 
14

 
36

Comprehensive income attributable to TRC Companies, Inc.
$
5,173

 
$
1,402

 
$
12,660

 
$
7,052


See accompanying notes to condensed consolidated financial statements.


4


TRC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
 
March 27,
2015
 
June 30,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
21,343

 
$
27,597

Restricted cash
277

 
5,756

Accounts receivable, less allowance for doubtful accounts
131,666

 
116,937

Insurance recoverable - environmental remediation
42,647

 
42,062

Restricted investments
6,892

 
2,934

Deferred income tax assets
12,281

 
12,293

Income taxes refundable
2,266

 
1,021

Prepaid expenses and other current assets
12,354

 
12,441

Total current assets
229,726

 
221,041

Property and equipment
63,501

 
60,240

Less accumulated depreciation and amortization
(50,283
)
 
(47,190
)
Property and equipment, net
13,218

 
13,050

Goodwill
36,354

 
31,679

Long-term deferred income tax assets
3,046

 
4,267

Long-term restricted investments
19,729

 
23,537

Long-term prepaid insurance
26,505

 
28,521

Other assets
15,076

 
13,490

Total assets
$
343,654

 
$
335,585

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
1,035

 
$
463

Current portion of capital lease obligations
261

 
562

Accounts payable
27,188

 
32,663

Accrued compensation and benefits
43,150

 
36,586

Deferred revenue
14,580

 
14,503

Environmental remediation liabilities
8,147

 
138

Other accrued liabilities
40,623

 
47,310

Total current liabilities
134,984

 
132,225

Non-current liabilities:
 
 
 
Long-term debt, net of current portion
60

 
105

Capital lease obligations, net of current portion

 
167

Income taxes payable and deferred income tax liabilities
1,481

 
1,539

Deferred revenue
66,538

 
70,398

Environmental remediation liabilities
527

 
6,268

Total liabilities
203,590

 
210,702

Commitments and contingencies


 


Equity:
 
 
 
Common stock, $.10 par value; 40,000,000 shares authorized, 30,436,459 and 30,432,977 shares issued and outstanding, respectively, at March 27, 2015, and 29,752,934 and 29,749,452 shares issued and outstanding, respectively, at June 30, 2014
3,044

 
2,975

Additional paid-in capital
190,214

 
187,748

Accumulated deficit
(52,702
)
 
(65,354
)
Accumulated other comprehensive loss
(69
)
 
(77
)
Treasury stock, at cost
(33
)
 
(33
)
Total stockholders' equity applicable to TRC Companies, Inc.
140,454

 
125,259

Noncontrolling interest
(390
)
 
(376
)
Total equity
140,064

 
124,883

Total liabilities and equity
$
343,654

 
$
335,585


See accompanying notes to condensed consolidated financial statements.

5


TRC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Nine Months Ended
 
March 27,
2015
 
March 28,
2014
Cash flows from operating activities:
 
 
 
Net income
$
12,638

 
$
6,978

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Non-cash items:
 
 
 
Depreciation and amortization
7,114

 
6,587

Stock-based compensation expense
3,746

 
3,513

Deferred income taxes
156

 
1,384

Other non-cash items
4

 
(1,127
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(9,582
)
 
(12,470
)
Insurance recoverable - environmental remediation
(585
)
 
(15,786
)
Income taxes
(1,291
)
 
(2,105
)
Restricted investments
(982
)
 
3,694

Prepaid expenses and other current assets
(1,913
)
 
19

Long-term prepaid insurance
2,016

 
2,262

Other assets
(107
)
 
518

Accounts payable
(5,456
)
 
(2,996
)
Accrued compensation and benefits
6,254

 
3,150

Deferred revenue
(3,783
)
 
(1,882
)
Environmental remediation liabilities
2,268

 
(799
)
Other accrued liabilities
2,083

 
12,237

Net cash provided by operating activities
12,580

 
3,177

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(4,996
)
 
(3,757
)
Withdrawals from restricted investments
874

 
1,441

Acquisition of businesses, net of cash acquired
(11,214
)
 
(3,788
)
Earnout and net working capital payments on acquisitions

 
(252
)
Proceeds from sale of fixed assets
51

 
95

Investments in and advances to unconsolidated affiliates

 
(17
)
Net cash used in investing activities
(15,285
)
 
(6,278
)
Cash flows from financing activities:
 
 
 
Payments on long-term debt and other
(4,634
)
 
(8,464
)
Payments on capital lease obligations
(468
)
 
(470
)
Proceeds from long-term debt and other
5,247

 
4,904

Net working capital and additional cash payments on acquisitions
(2,644
)
 
(872
)
Shares repurchased to settle tax withholding obligations
(1,628
)
 
(2,172
)
Excess tax benefit from stock-based awards
251

 
3,385

Proceeds on exchange of stock options
327

 
55

Net cash used in financing activities
(3,549
)
 
(3,634
)
Decrease in cash and cash equivalents
(6,254
)
 
(6,735
)
Cash and cash equivalents, beginning of period
27,597

 
18,136

Cash and cash equivalents, end of period
$
21,343

 
$
11,401

Supplemental cash flow information:
 
 
 
Non-cash consideration for assets acquired
$
994

 
$
1,903


See accompanying notes to condensed consolidated financial statements.

6


TRC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
(Unaudited)
 
 
TRC Companies, Inc. Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Total
 
 
 
 
 
 
Common Stock
 
Additional
 
 
 
Other
 
Treasury Stock
 
TRC
 
Non-
 
 
 
 
Number
 
 
 
Paid-in
 
Accumulated
 
Comp.
 
Number
 
 
 
Stockholders'
 
Controlling
 
Total
 
 
of Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
of Shares
 
Amount
 
Equity
 
Interest
 
 Equity
 Balances as of July 1, 2013
 
29,053

 
$
2,905

 
$
181,874

 
$
(77,405
)
 
$
(109
)
 
3

 
$
(33
)
 
$
107,232

 
$
(335
)
 
$
106,897

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
7,014

 

 

 

 
7,014

 
(36
)
 
6,978

Other comprehensive income
 

 

 

 

 
38

 

 

 
38

 

 
38

Issuance of common stock
 
4

 
1

 
29

 

 

 

 

 
30

 

 
30

Issuance of common stock in connection with business acquired
 
34

 
3

 
292

 

 

 

 

 
295

 

 
295

Exercise of stock options
 
13

 
1

 
54

 

 

 

 

 
55

 

 
55

Stock-based compensation
 
898

 
89

 
3,424

 

 

 

 

 
3,513

 

 
3,513

 Shares repurchased to settle tax withholding obligations
 
(293
)
 
(29
)
 
(2,162
)
 

 

 

 

 
(2,191
)
 

 
(2,191
)
Directors' deferred compensation
 
5

 
1

 
33

 

 

 

 

 
34

 

 
34

Stock-based compensation income tax benefits
 

 

 
3,385

 

 

 

 

 
3,385

 

 
3,385

 Balances as of March 28, 2014
 
29,714

 
$
2,971

 
$
186,929

 
$
(70,391
)
 
$
(71
)
 
3

 
$
(33
)
 
$
119,405

 
$
(371
)
 
$
119,034

 
 
TRC Companies, Inc. Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Total
 
 
 
 
 
 
Common Stock
 
Additional
 
 
 
Other
 
Treasury Stock
 
TRC
 
Non-
 
 
 
 
Number
 
 
 
Paid-in
 
Accumulated
 
Comp.
 
Number
 
 
 
Stockholders'
 
Controlling
 
Total
 
 
of Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
of Shares
 
Amount
 
Equity
 
Interest
 
 Equity
 Balances as of July 1, 2014
 
29,753

 
$
2,975

 
$
187,748

 
$
(65,354
)
 
$
(77
)
 
3

 
$
(33
)
 
$
125,259

 
$
(376
)
 
$
124,883

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
12,652

 

 

 

 
12,652

 
(14
)
 
12,638

Other comprehensive income
 

 

 

 

 
8

 

 

 
8

 

 
8

Issuance of common stock in connection with business acquired
 
50

 
5

 
318

 

 

 

 

 
323

 

 
323

Exercise of stock options
 
61

 
6

 
321

 

 

 

 

 
327

 

 
327

Stock-based compensation
 
862

 
86

 
3,660

 

 

 

 

 
3,746

 

 
3,746

 Shares repurchased to settle tax withholding obligations
 
(295
)
 
(29
)
 
(1,603
)
 

 

 

 

 
(1,632
)
 

 
(1,632
)
Directors' deferred compensation
 
5

 
1

 
37

 

 

 

 

 
38

 

 
38

Stock-based compensation income tax deficiencies
 

 

 
(267
)
 

 

 

 

 
(267
)
 

 
(267
)
 Balances as of March 27, 2015
 
30,436

 
$
3,044

 
$
190,214

 
$
(52,702
)
 
$
(69
)
 
3

 
$
(33
)
 
$
140,454

 
$
(390
)
 
$
140,064

See accompanying notes to condensed consolidated financial statements.

7


TRC COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 27, 2015 and March 28, 2014
(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 help its commercial and governmental 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 unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been omitted pursuant to those rules and regulations, but the Company's management believes that the disclosures included herein are adequate to make the information presented not misleading. 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 for the fiscal year ended June 30, 2014.

Note 2. New Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update related to an entity’s ability to continue as a going concern. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. The new standard applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. This guidance will be effective for the Company in fiscal year 2017. The Company does not expect that the adoption of this standard will have a material effect on its financial statements.
In June 2014, the FASB issued an accounting standards update related to stock compensation. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. This guidance is applicable to the Company's fiscal year beginning July 1, 2016. The Company is currently evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.
In May 2014, the FASB issued an accounting standards update that will supersede virtually all existing revenue recognition guidance under U.S. GAAP. The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. In addition, there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue recognition. This guidance will be effective for annual reporting periods beginning after

8


December 15, 2016, including interim reporting periods, and will be required to be applied retrospectively. Early application of the guidance is not permitted. This guidance is applicable to the Company's fiscal year beginning July 1, 2017. In April 2015, the FASB proposed a deferral of the effective date of the new revenue standard by one year, subject to the FASB's due process requirement. The Company is currently evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.
In April 2014, the FASB issued an accounting standards update for the requirements of reporting discontinued operations. The update amends the definition of a discontinued operation by raising the threshold for a disposal to qualify as discontinued operations. The standard will also require entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The pronouncement is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. The implementation of this standard did not have a material impact on the Company's condensed consolidated financial statements.

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. The classification of a financial asset or liability 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 (e.g. the 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) or can be corroborated by observable market data.
Level 3 Inputs - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company's own assumptions about the assumptions that market participants would use.
The following tables present the level within the fair value hierarchy at which the Company's financial assets and certain liabilities were measured on a recurring basis as of March 27, 2015 and June 30, 2014:
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of March 27, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Restricted investments:
 
 
 
 
 
 
 
Mutual funds
$
101

 
$

 
$

 
$
101

Certificates of deposit

 
207

 

 
207

Municipal bonds

 
752

 

 
752

Corporate bonds

 
231

 

 
231

U.S. government obligations

 
117

 

 
117

Money market accounts and cash deposits
4,785

 

 

 
4,785

Total assets
$
4,886

 
$
1,307

 
$

 
$
6,193

 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
368

 
$
368

Total liabilities
$

 
$

 
$
368

 
$
368


9


Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Restricted investments:
 
 
 
 
 
 
 
Mutual funds
$
140

 
$

 
$

 
$
140

Certificates of deposit

 
209

 

 
209

Municipal bonds

 
740

 

 
740

Corporate bonds

 
236

 

 
236

Asset backed securities

 
130

 

 
130

Money market accounts and cash deposits
2,650

 

 

 
2,650

Total assets
$
2,790

 
$
1,315

 
$

 
$
4,105

 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
352

 
$
352

Total liabilities
$

 
$

 
$
352

 
$
352

A majority of the Company's investments are priced by pricing vendors and are generally Level 1 or Level 2 investments, as these vendors either provide a quoted market price in an active market or use observable input for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by the pricing vendors, or when a broker price is more reflective of fair value in the market in which the investment trades. The Company's broker priced investments are classified as Level 2 investments because the broker prices the investment based on similar assets without applying significant adjustments. The Company's restricted investment financial assets as of March 27, 2015 and June 30, 2014 are included within current and long-term restricted investments on the condensed consolidated balance sheets.
Reclassification adjustments for realized gains or losses from available for sale restricted investment securities out of accumulated other comprehensive income are included in the condensed consolidated statements of operations within the insurance recoverables and other income line item.
The Company's contingent consideration liabilities, included in other accrued liabilities on the condensed consolidated balance sheets, are associated with the acquisitions made in fiscal year ending June 30, 2015. The liabilities are measured at fair value using a probability weighted average of the potential payment outcomes that would occur should certain contract metrics be reached. There is no market data available to use in valuing the contingent consideration; therefore, the Company developed its own assumptions related to the achievement of the metrics to evaluate the fair value of these liabilities. As such, the contingent consideration is classified within Level 3 as described below.
Items classified as Level 3 within the valuation hierarchy, consisting of contingent consideration liabilities related to recent acquisitions, were valued based on various estimates, including probability of success, discount rates and amount of time until the conditions of the contingent payments are achieved. The table below presents a rollforward of the contingent consideration liabilities valued using Level 3 inputs:
Contingent consideration balance at July 1, 2014
$
352

Additions for fiscal year 2015 acquisitions
362

Reduction of liability for payments made
(346
)
Contingent consideration balance at March 27, 2015
$
368

The Company's long-term debt is not measured at fair value in the condensed consolidated balance sheets. The fair value of debt is the estimated amount the Company would have to pay to transfer its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on valuations of similar debt at the balance sheet date and supported by observable market transactions when available: Level 2 of the fair value hierarchy.  At March 27, 2015 and June 30, 2014 the fair value of the Company's debt was not materially different than its carrying value.

10


Note 4. Stock-Based Compensation

The Company has two plans under which outstanding stock-based awards have been issued: the TRC Companies, Inc. Restated Stock Option Plan (the "Restated Plan"), and the Amended and Restated 2007 Equity Incentive Plan (the "2007 Plan"), (collectively "the Plans"). The Company issues new shares or utilizes treasury shares, when available, to satisfy awards under the Plans. Awards are made by the Compensation Committee of the Board of Directors; however, the Compensation Committee has delegated to the Chief Executive Officer ("CEO") the authority to grant 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"). As of March 27, 2015, 3,111 shares remained available for grants under the 2007 Plan.

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 27, 2015 and March 28, 2014, the Company recognized stock-based compensation expense in cost of services ("COS") and general and administrative expenses within the condensed consolidated statements of operations as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Cost of services
$
670

 
$
515

 
$
1,799

 
$
1,603

General and administrative expenses
700

 
600

 
1,947

 
1,910

 
Total stock-based compensation expense
$
1,370

 
$
1,115

 
$
3,746

 
$
3,513


The benefits associated with the tax deductions in excess of recognized compensation cost are required to be reported as financing activities in the condensed consolidated statements of cash flows. This reduces reported operating cash flows and increases reported financing cash flows. As a result, net financing cash flows included $251 and $3,385 for the nine months ended March 27, 2015 and March 28, 2014, respectively, from the benefits of tax deductions in excess of recognized compensation cost. The tax benefit of any resulting excess tax deduction increases the additional paid-in capital ("APIC") pool. Any resulting tax deficiency is deducted from the APIC pool.

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 employee stock options. The average expected life is based on the contractual term of the option and expected employee exercise and historical post-vesting employment termination experience. The Company estimates the volatility of its stock using historical volatility in accordance with current accounting guidance. Management determined that historical volatility of TRC common 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

11


expected dividend payouts. There were no stock options granted during the nine months ended March 27, 2015 and March 28, 2014.
 
 
 
 
 
 
 
 
A summary of stock option activity for the nine months ended March 27, 2015 under the Plans is as follows:
 
 
 
 
 
Weighted-
 
 
 
 
 
 
 
Average
 
 
 
 
 
Weighted-
 
Remaining
 
 
 
 
 
Average
 
Contractual
 
Aggregate
 
 
 
Exercise
 
Term
 
Intrinsic
 
Options
 
 Price
 
 (in years)
 
Value
Outstanding options as of June 30, 2014 (649 exercisable)
654

 
$
9.62

 
 
 
 
Options exercised
(61
)
 
$
5.39

 
 
 
 
Options expired
(268
)
 
$
11.09

 
 
 
 
Outstanding options as of March 27, 2015
325

 
$
9.19

 
1.0
 
$
320

Options exercisable as of March 27, 2015
323

 
$
9.21

 
1.0
 
$
314

Options vested and expected to vest as of March 27, 2015
325

 
$
9.19

 
1.0
 
$
320


The aggregate intrinsic value is measured using the fair market value at the date of exercise (for options exercised) or as of March 27, 2015 (for outstanding options), less the applicable exercise price. The closing price of the Company's common stock on the New York Stock Exchange was $8.27 as of March 27, 2015. The total intrinsic value of options exercised for the nine months ended March 27, 2015 and March 28, 2014 was $134 and $33, respectively. The total proceeds received from option exercises for the nine months ended March 27, 2015 and March 28, 2014 was $327 and $55, respectively.

As of March 27, 2015, there was $4 of total unrecognized compensation expense related to unvested stock option grants under the Plans, and this expense is expected to be recognized over a weighted-average period of 1.0 years.

Restricted Stock Awards

Compensation expense for RSA's 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. There were 6 non-vested RSA's as of March 27, 2015. There were no RSA's granted during the nine months ended March 27, 2015. As of March 27, 2015, there was $25 of total unrecognized compensation expense related to unvested RSA's under the Plans, and this expense is expected to be recognized over a weighted-average period of 1.4 years.
 
 
 
 
Restricted Stock Units

Compensation expense for RSU's 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.


12


A summary of non-vested RSU activity for the nine months ended March 27, 2015 is as follows:
 
 
 
Weighted-
 
Restricted
 
Average
 
Stock
 
Grant Date
 
Units
 
Fair Value
Non-vested units as of June 30, 2014
1,007

 
$
6.06

Units granted
403

 
$
6.90

Units vested
(489
)
 
$
5.24

Units forfeited
(6
)
 
$
6.89

Non-vested units as of March 27, 2015
915

 
$
6.87


RSU grants totaled 26 and 403 shares with a total weighted-average grant date fair value of $203 and $2,781 during the three and nine months ended March 27, 2015, respectively. RSU grants totaled 14 and 336 shares with a total weighted-average grant date fair value of $93 and $2,622 during the three and nine months ended March 28, 2014, respectively. The total fair value of RSU's vested during the three and nine months ended March 27, 2015 was $202 and $2,797, respectively. The total fair value of RSU's vested during the three and nine months ended March 28, 2014 was $128 and $4,407, respectively.

As of March 27, 2015, there was $4,887 of total unrecognized compensation expense related to unvested RSU's under the Plans, and this expense is expected to be recognized over a weighted-average period of 2.6 years.

Performance Stock Units

Compensation expense for PSU's is recognized ratably over the vesting term, which is generally four years, 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.

The number of PSU's earned is determined based on the Company's performance against predefined targets. The range of payout is zero to 150% of the number of granted PSU's. The number of PSU's earned is determined based on actual performance at the end of the performance period. PSU grants totaled 464 shares with a total weighted-average grant date fair value of $2,986 during the nine months ended March 27, 2015. These PSU's will vest over four years upon meeting certain financial targets for the fiscal year ending June 30, 2015. PSU grants totaled 355 shares with a total weighted-average grant date fair value of $2,827 during the nine months ended March 28, 2014. The total fair value of PSU's vested during the nine months ended March 27, 2015, was $1,977. The total fair value of PSU's vested during the nine months ended March 28, 2014, was $2,234.

At March 27, 2015, there was $6,496 of total unrecognized compensation expense related to non-vested PSU's; this expense is expected to be recognized over a weighted-average period of 1.9 years.


13


A summary of non-vested PSU activity for the nine months ended March 27, 2015 is as follows:
 
 
 
 
 
 
 
Weighted-
 
PSU
 
 
 
Total
 
Average
 
Original
 
PSU
 
PSU
 
Grant Date
 
Awards
 
Adjustments (1)
 
Awards
 
Fair Value
Non-vested units as of June 30, 2014
879

 

 
879

 
$
6.50

Units granted
433

 
31

 
464

 
$
6.90

Units vested
(337
)
 
(31
)
 
(368
)
 
$
5.14

Units forfeited
(34
)
 

 
(34
)
 
$
7.41

Non-vested units as of March 27, 2015
941

 

 
941

 
$
7.10

 
 
 
 
 
 
 
 
(1)
Represents the additional number of PSU's issued based on the final performance condition achieved at the end of the respective performance period.


Note 5. Earnings per Share

Basic earnings per share ("EPS") is computed based on the weighted-average number of shares of common stock outstanding during the period. 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.

The following table sets forth the computations of basic and diluted EPS for the three and nine months ended March 27, 2015 and March 28, 2014:
 
Three Months Ended
 
Nine Months Ended
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Net income applicable to TRC Companies, Inc.
$
5,165

 
$
1,431

 
$
12,652

 
$
7,014

 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
30,382

 
29,691

 
30,233

 
29,549

Effect of dilutive stock options, RSA's, RSU's and PSU's
355

 
475

 
318

 
539

Diluted weighted-average common shares outstanding
30,737

 
30,166

 
30,551

 
30,088

 
 
 
 
 
 
 
 
Earnings per common share applicable to TRC Companies, Inc.
 
 
 
 
 
 
 
Basic earnings per common share
$
0.17

 
$
0.05

 
$
0.42

 
$
0.24

Diluted earnings per common share
$
0.17

 
$
0.05

 
$
0.41

 
$
0.23

Anti-dilutive stock options, RSA's, RSU's and PSU's, excluded from the calculation
1,832

 
2,153

 
1,868

 
2,088




14


Note 6. Accounts Receivable

The current portion of accounts receivable as of March 27, 2015 and June 30, 2014, were comprised of the following:
 
 
March 27,
2015
 
June 30,
2014
Billed
$
83,930

 
$
69,730

Unbilled
51,760

 
50,743

Retainage
4,394

 
5,184

 
Total accounts receivable - gross
140,084

 
125,657

Less allowance for doubtful accounts
(8,418
)
 
(8,720
)
 
Total accounts receivable, less allowance for doubtful accounts
$
131,666

 
$
116,937



Note 7. Other Accrued Liabilities

As of March 27, 2015 and June 30, 2014, other accrued liabilities were comprised of the following:

 
 
March 27,
2015
 
June 30,
2014
Contract costs
$
28,266

 
$
26,289

Legal accruals
3,761

 
5,903

Lease obligations
3,741

 
3,420

Other
4,855

 
11,698

 
Total other accrued liabilities
$
40,623

 
$
47,310



Note 8. Goodwill and Other Intangible Assets

Goodwill

As of March 27, 2015, the Company had $36,354 of goodwill, and the Company does not believe there were any events or changes in circumstances since the last goodwill assessment on April 25, 2014 that would indicate the fair value of goodwill was more likely than not reduced to below its carrying value. Accordingly, goodwill was not tested for impairment during the current fiscal quarter.

On September 29, 2014, the Company acquired all of the outstanding stock of NOVA Training Inc. and all of the outstanding membership interests of NOVA Earthworks, LLC (collectively "NOVA") based in Midland, Texas. NOVA provides safety training and environmental services as well as oil spill response, remediation and general oil field construction services to customers in the oil and gas industry. The initial purchase price consisted of (i) a cash payment of $7,198 payable at closing, (ii) a second cash payment of $2,600 placed into escrow, of which $508 was payable in six months and the remaining $2,092 is due in 18 months subject to withholding for various contractual issues, (iii) 50 shares of the Company's common stock valued at $323 on the closing date, and (iv) a $560 net working capital adjustment. The sellers are also entitled to up to $1,500 in contingent cash consideration through an earn-out provision based on the NSR performance of the acquired firm over the 24 month period following closing. The Company estimated the fair value of the contingent earn-out liability to be $287 based on the projections and probabilities of reaching the performance goals through September 2016. Goodwill of $3,683, none of which is expected to be tax deductible, and other intangible assets of $3,622 were recorded as a result of this acquisition. The goodwill is primarily attributable to the synergies and ancillary growth opportunities expected to arise after the acquisition. The fair values of assets and liabilities of the NOVA acquisition have been recorded in the Environmental operating segment. The impact of this acquisition was not material to the Company's condensed consolidated balance sheets and results of operations.

15



On July 1, 2014, the Company acquired all of the outstanding stock of Covino Environmental Associates, Inc. ("Covino"), based in Woburn, Massachusetts. Covino provides building sciences, industrial hygiene and related consulting services to private and public clients including major educational institutions. The initial purchase price of $1,994 consisted of cash of $1,500 payable at closing, a second cash payment of $309 payable on the one-year anniversary of the closing date subject to withholding for various contractual issues, and a $110 net working capital adjustment. The selling shareholder is also entitled to contingent cash consideration through an earn-out provision based on net service revenue ("NSR") performance of the acquired firm over the twelve month period following closing. The Company estimated the fair value of the contingent earn-out liability to be $75 based on the projections and probabilities of reaching the performance goals through July 2015. Goodwill of $992, none of which is expected to be tax deductible, and other intangible assets of $601 were recorded as a result of this acquisition. The goodwill is primarily attributable to the synergies and ancillary growth opportunities expected to arise after the acquisition. The fair values of assets and liabilities of the Covino acquisition have been recorded in the Environmental operating segment. The impact of this acquisition was not material to the Company's condensed consolidated balance sheets and results of operations.

The changes in the carrying amount of goodwill for the nine months ended March 27, 2015 by operating segment are as follows:
 
 
Gross
 
 
 
 
 
 
 
Gross
 
 
 
 
 
 
Balance,
 
Accumulated
 
Balance,
 
 
 
Balance,
 
Accumulated
 
Balance,
 
 
July 1,
 
Impairment
 
July 1,
 
Additions /
 
March 27,
 
Impairment
 
March 27,
Operating Segment
 
2014
 
Losses
 
2014
 
Adjustments
 
2015
 
Losses
 
2015
Energy
 
$
27,836

 
$
(14,506
)
 
$
13,330

 
$

 
$
27,836

 
$
(14,506
)
 
$
13,330

Environmental
 
36,214

 
(17,865
)
 
18,349

 
$
4,675

 
40,889

 
(17,865
)
 
23,024

Infrastructure
 
7,224

 
(7,224
)
 

 
$

 
7,224

 
(7,224
)
 

 
 
$
71,274

 
$
(39,595
)
 
$
31,679

 
$
4,675

 
$
75,949

 
$
(39,595
)
 
$
36,354


Other Intangible Assets

Identifiable intangible assets as of March 27, 2015 and June 30, 2014 are included in other assets on the condensed consolidated balance sheets and were comprised of:
 
 
March 27, 2015
 
June 30, 2014
 
 
Gross
 
 
 
Net
 
Gross
 
 
 
Net
 
 
Carrying
 
Accumulated
 
Carrying
 
Carrying
 
Accumulated
 
Carrying
Identifiable intangible assets
 
Amount
 
Amortization
 
Amount
 
Amount
 
Amortization
 
Amount
With determinable lives:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
16,213

 
$
(6,871
)
 
$
9,342

 
$
12,125

 
$
(4,400
)
 
$
7,725

Contract backlog
 

 

 

 
110

 
(83
)
 
27

 
 
16,213

 
(6,871
)
 
9,342

 
12,235

 
(4,483
)
 
7,752

With indefinite lives:
 
 
 
 
 
 
 
 
 
 
 
 
Engineering licenses
 
426

 

 
426

 
426

 

 
426

 
 
$
16,639

 
$
(6,871
)
 
$
9,768

 
$
12,661

 
$
(4,483
)
 
$
8,178


Identifiable intangible assets with determinable lives are amortized over their estimated useful lives and are also reviewed for impairment if events or changes in circumstances indicate that their carrying amount may not be realizable.

Identifiable intangible assets with determinable lives are being amortized over a weighted-average period of approximately 6 years. The weighted-average periods of amortization by intangible asset class is approximately 6 years for customer relationship assets and 4 months for contract backlog. The amortization of intangible assets for the

16


three and nine months ended March 27, 2015 was $905 and $2,633, respectively. The amortization of intangible assets for the three and nine months ended March 28, 2014 was $755 and $2,127, respectively.

Estimated amortization expense of intangible assets for the remainder of fiscal year 2015 and succeeding fiscal years is as follows:
Fiscal Year
 
Amount
2015
 
$
852

2016
 
2,915

2017
 
2,335

2018
 
1,748

2019
 
948

2020 and Thereafter
 
544

 
Total
 
$
9,342


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 Company performed its most recent annual impairment review as of April 25, 2014. 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 27, 2015, and therefore intangible assets were not tested for impairment.

Note 9. Long-Term Debt and Capital Lease Obligations

Revolving Credit Facility

On April 16, 2013, the Company and substantially all of its subsidiaries (the "Borrower"), entered into a secured credit agreement (the "Credit Agreement") and related security documentation with Citizens Commercial Banking as lender, administrative agent, sole lead arranger, and sole book runner and JP Morgan Chase Bank, N.A. as lender and syndication agent. The Credit Agreement provides the Company with a $75,000 five-year secured revolving credit facility with a sublimit of $15,000 available for the issuance of letters of credit. Pursuant to the terms of the Credit Agreement, the Company may request an increase in the amount of the credit facility up to $95,000. The expiration date of the Credit Agreement is April 16, 2018.

Amounts outstanding under the Credit Agreement bear interest at the Base Rate (as defined, generally the prime rate) plus a margin of 1.00% to 1.50% or at LIBOR plus a margin of 2.00% to 2.50%, based on the ratio (measured over a trailing four-quarter period) of consolidated total debt to 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 its principal operating subsidiaries. The Credit Agreement also contains cross-default provisions which become effective if the Company defaults on other indebtedness.

Under the Credit Agreement the Company is required to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00 and to not permit its leverage ratio to exceed 2.00 to 1.00. The Credit Agreement also requires the Company to achieve minimum levels of Consolidated Adjusted EBITDA of $20,000 for the twelve-month periods ending June 30, 2015 and thereafter. The Company was in compliance with the financial covenants under the Credit Agreement as of March 27, 2015.

As of March 27, 2015 and June 30, 2014, the Company had no borrowings outstanding under the Credit Agreement. Letters of credit outstanding were $2,648 and $3,148 as of March 27, 2015 and June 30, 2014, respectively. Based upon the leverage covenant, the maximum availability under the Credit Agreement was $75,000 and $68,536 as of March 27, 2015 and June 30, 2014, respectively. Funds available to borrow under the Credit Agreement, after

17


consideration of the letters of credit outstanding and other indebtedness outstanding of $261 and $701, were $72,091 and $64,687 as of March 27, 2015 and June 30, 2014, respectively.

Other Notes Payable

In March 2012, the Company financed $2,195, of which $161 was being accounted for as a capital lease obligation, for a three-year software license agreement payable in twelve equal quarterly installments of approximately $190 each, including a finance charge of 2.74%. As of March 27, 2015, the balance outstanding under this agreement was $0.

In July 2014, the Company financed $5,247 of insurance premiums payable in eleven equal monthly installments of approximately $482 each, including a finance charge of 1.99%. As of March 27, 2015, the balance outstanding under this agreement was $961.

Capital Lease Obligations

During fiscal years 2013 and 2012, the Company financed $1,160 and $756, respectively, of furniture, office equipment, and computer equipment under capital lease agreements expiring in fiscal years 2015 and 2016. The assets and liabilities under capital lease agreements are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized over the shorter of their related lease terms or their estimated useful lives. Amortization of assets under capital leases is included in depreciation and amortization in the condensed consolidated statements of operations. The cost of assets under capital leases was $1,916, and accumulated amortization was $1,440 at March 27, 2015. The average interest rates on the capital leases is 2.55% and is imputed based on the lower of the Company's incremental borrowing rate at the inception of each lease or the implicit interest rate of the respective lease.

Note 10. 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 Center Avenue Holdings ("CAH") a limited liability company, 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.

18


The following table sets forth the assets and liabilities of CAH included in the condensed consolidated balance sheets of the Company:
 
March 27,
2015
 
June 30,
2014
Current assets:
 
 
 
Restricted investments
$
63

 
$
63

    Total current assets
63

 
63

Other assets
4,344

 
4,344

    Total assets
$
4,407

 
$
4,407

Current liabilities:
 
 
 
Environmental remediation liabilities
$
2

 
$
7

    Total current liabilities
2

 
7

Long-term environmental remediation liabilities
18

 
16

    Total liabilities
$
20

 
$
23


The Company and the other member of CAH do not generally have an obligation to make additional capital contributions to CAH. However, through the end of the fiscal quarter ended March 27, 2015, the Company has provided approximately $4,023 of support it was not contractually obligated to provide. The additional support was primarily for debt service payments on a note payable. CAH repaid this loan balance in the amount of $2,448 in full on October 1, 2013. The Company intends to continue funding CAH's obligations as they become due.



Note 11. Income Taxes

The Company's effective tax rate was approximately 27.1% and 42.6% for the three months ended March 27, 2015 and March 28, 2014, respectively. The primary reconciling items between the federal statutory rate of 35.0% and the Company's overall effective tax rate for the three months ended March 27, 2015 were the effect of state income taxes offset by discrete tax benefits related to the U.S. Research and Development credit. The discrete impact of research and development credits is the result of a change in estimate resulting from the finalization of a new research and development credit study during the three months ended March 27, 2015. A tax benefit for the change in estimate was reflected in its entirety in the three months ended March 27, 2015. For the three months ended March 28, 2014, the primary reconciling item between the federal statutory rate of 35.0% and the Company's overall effective tax rate was the effect of state income taxes.

The Company's effective tax rate was approximately 36.4% and 40.8% for the nine months ended March 27, 2015 and March 28, 2014, respectively. The primary reconciling items between the federal statutory rate of 35.0% and the Company's overall effective tax rate were the effect of state income taxes offset by discrete tax benefits related to research and development tax credits for the nine months ended March 27, 2015, as well as the effect of state income taxes for the nine months ended March 28, 2014.

As of March 27, 2015, the recorded liability for uncertain tax positions under the measurement criteria of Accounting Standards Codification ("ASC") Topic 740, Income Taxes, was $1,481. The Company does not expect the amount of unrecognized tax benefits to materially change within the next twelve months.
As of March 27, 2015, the Company had a tax benefit of approximately $3,321 related to excess tax benefits from stock compensation. Pursuant to ASC Topic 718, a benefit of $251 was recorded to increase APIC as it reduced income taxes payable during the nine months ended March 27, 2015; in addition, a tax deficiency of $518 related to the expiration of vested stock options was recorded to decrease APIC as it reduced deferred tax assets.



19


Note 12. 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 government agencies. The Company's Energy services include program management, engineer/procure/construct projects, design, and consulting. The Company's typical Energy projects involve upgrades, design and new construction for electric transmission and distribution systems and substations; energy efficiency program design and management; and renewable energy development and power generation.

Environmental: The Environmental operating segment provides services to a range of clients including industrial, transportation, energy and natural resource companies, as well as federal, state and municipal agencies. The Environmental operating segment is organized to focus on key areas of demand including: environmental management of buildings and facilities; air quality measurements and modeling of potential air pollution impacts; water quality and water resource management; assessment and remediation of contaminated sites and buildings; hazardous waste management; construction monitoring, inspection and management; environmental, health and safety management and sustainability advisory services; compliance auditing and strategic due diligence; environmental licensing and permitting of a wide variety of projects; and natural and cultural resource assessment, protection 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. In addition, the Company provides infrastructure services on projects originating in its Energy and Environmental operating segments. Primary services include: roadway, bridge and related surface transportation design; structural design and inspection of bridges; program management; construction engineering inspection and construction management for roads and bridges; civil engineering for municipalities and public works departments; geotechnical engineering services; and security assessments, design and construction management.

The Company's chief operating decision maker ("CODM") 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, and stock-based compensation expense. Depreciation expense is primarily allocated to operating segments based upon their respective use of total operating segment office space. Assets solely used at the Corporate level 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.


20


The following tables present summarized financial information for the Company's operating segments (for the periods noted below): 
 
 
Energy
 
Environmental
 
Infrastructure
 
Total
 
 
 
 
 
 
 
 
 
Three months ended March 27, 2015:
 
 
 
 
 
 
 
 
Gross revenue
 
$
41,643

 
$
70,711

 
$
16,696

 
$
129,050

Net service revenue
 
36,413

 
51,172

 
12,425

 
100,010

Segment profit
 
8,676

 
9,942

 
2,806

 
21,424

Depreciation and amortization
 
733

 
941

 
98

 
1,772

 
 
 
 
 
 
 
 
 
Three months ended March 28, 2014:
 
 
 
 
 
 
 
 
Gross revenue
 
$
44,480

 
$
60,750

 
$
14,223

 
$
119,453

Net service revenue
 
34,632

 
41,939

 
10,403

 
86,974

Segment profit
 
7,908

 
7,787

 
1,413

 
17,108

Depreciation and amortization
 
835

 
633

 
106

 
1,574

 
 
 
 
 
 
 
 
 
 
 
Energy
 
Environmental
 
Infrastructure
 
Total
 
 
 
 
 
 
 
 
 
Nine months ended March 27, 2015:
 
 
 
 
 
 
 
 
Gross revenue
 
$
122,124

 
$
219,960

 
$
53,142

 
$
395,226

Net service revenue
 
104,789

 
151,383

 
36,978

 
293,150

Segment profit
 
22,224

 
30,252

 
6,483

 
58,959

Depreciation and amortization
 
2,376

 
2,764

 
329

 
5,469

 
 
 
 
 
 
 
 
 
Nine months ended March 28, 2014:
 
 
 
 
 
 
 
 
Gross revenue
 
$
118,050

 
$
182,692

 
$
46,692

 
$
347,434

Net service revenue
 
98,339

 
124,860

 
34,430

 
257,629

Segment profit
 
19,313

 
25,898

 
6,238

 
51,449

Depreciation and amortization
 
2,385

 
2,039

 
318

 
4,742


21


 
 
Three Months Ended
 
Nine Months Ended
Gross revenue
 
March 27, 2015

March 28, 2014
 
March 27, 2015
 
March 28, 2014
Gross revenue from reportable operating segments
 
$
129,050

 
$
119,453

 
$
395,226

 
$
347,434

Reconciling items (1)
 
1,727

 
1,383

 
1,804

 
2,568

  Total consolidated gross revenue
 
$
130,777

 
$
120,836

 
$
397,030

 
$
350,002

 
 
 
 
 
 
 
 
 
Net service revenue
 
 
 
 
 
 
 
 
Net service revenue from reportable operating segments
 
$
100,010

 
$
86,974

 
$
293,150

 
$
257,629

Reconciling items (1)
 
984

 
1,107

 
301

 
2,835

  Total consolidated net service revenue
 
$
100,994

 
$
88,081

 
$
293,451

 
$
260,464

 
 
 
 
 
 
 
 
 
Income from operations before taxes
 
 
 
 
 
 
 
 
Segment profit from reportable operating segments
 
$
21,424

 
$
17,108

 
$
58,959

 
$
51,449

Corporate shared services (2)
 
(12,469
)
 
(12,895
)
 
(33,561
)
 
(34,131
)
Stock-based compensation expense
 
(1,370
)
 
(1,115
)
 
(3,746
)
 
(3,513
)
Unallocated depreciation and amortization
 
(436
)
 
(587
)
 
(1,645
)
 
(1,845
)
Interest expense
 
(73
)
 
(22
)
 
(125
)
 
(152
)
  Total consolidated income from operations before taxes
 
$
7,076

 
$
2,489

 
$
19,882

 
$
11,808

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
 
Depreciation and amortization from reportable operating segments
 
$
1,772

 
$
1,574

 
$
5,469

 
$
4,742

Unallocated depreciation and amortization
 
436

 
587

 
1,645

 
1,845

  Total consolidated depreciation and amortization
 
$
2,208

 
$
2,161

 
$
7,114

 
$
6,587

 
 
 
 
 
 
 
 
 
(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.


22


Note 13. Change in Estimate

In October 2013, the regulatory agency charged with oversight of one of the Company’s Exit Strategy projects issued a letter requiring the Company to evaluate modifications to its current site remedy. While it is premature to predict the outcome of this evaluation, the Company’s best estimate of the cost of such modifications is $12,439. As a result, the Company updated its estimate to complete for this project during the three months ended September 27, 2013. There were no significant changes to the estimate to complete during the three months ended March 28, 2014. This adjustment resulted in a reduction of gross revenue and NSR of $5,093 and a $7,346 charge to COS as a provision for future losses during the nine months ended March 28, 2014. Because these additional costs are expected to be covered by insurance, the Company also recorded an insurance recoverable of $12,439 during the nine months ended March 28, 2014. Therefore, this change in estimate had no impact on operating income or EPS.

In February 2014, the regulatory agency charged with oversight of another of the Company’s Exit Strategy projects requested the addition of a significant alternative remedy with respect to a supplemental feasibility study. While the Company cannot predict which alternative will ultimately be chosen by the regulatory agency, the Company’s best estimate of the cost of such alternate remedy is $4,877. As a result, the Company updated its estimate to complete for this project during the three months ended March 28, 2014. This adjustment resulted in a reduction of gross revenue and NSR of $1,855 and a $3,022 charge to COS as a provision for future losses during the three and nine months ended March 28, 2014. Because these additional costs are expected to be covered by insurance, the Company also recorded an insurance recoverable of $4,877 during the three and nine months ended March 28, 2014. Therefore, this change in estimate had no impact on operating income or EPS.


Note 14. Commitments and Contingencies

Exit Strategy Contracts

The Company has entered into a number of long-term contracts pursuant to its Exit Strategy program under which it is obligated to complete the remediation of environmental conditions at covered sites. The Company assumes the risk for remediation costs for pre-existing environmental conditions and believes that through in-depth technical analysis, comprehensive cost estimation and creative remedial approaches it is able to execute strategies which protect the Company's return on these projects. The Company's client pays a fixed price and, as additional protection, for a majority of the contracts the client also pays for a cleanup cost cap insurance policy. The policy, which includes the Company as a named or additional named insured party, provides coverage for cost increases from unknown or changed conditions up to a specified maximum amount significantly in excess of the estimated cost of remediation. The Company believes that it is adequately protected from risk on these projects and that it is not likely that it will incur material losses in excess of applicable insurance. However, because several projects are near or beyond the term or financial limits of the insurance, the Company believes it is reasonably possible that events could occur under certain circumstances which could be material to the Company's condensed consolidated financial statements. With respect to these projects, there is a wide range of potential outcomes that may result in material costs being incurred beyond the limits or term of insurance, such as: (i) greater than expected volumes of contaminants requiring remediation; (ii) treatment systems requiring operation beyond the insurance term; and (iii) greater than expected allocable share of the ultimate remedy. The Company does not believe these outcomes are likely, and the exact nature, impact and duration of any such occurrence could vary due to a number of factors. Accordingly, the Company is unable to provide an estimate of potential loss with a reasonable degree of accuracy. Nevertheless, if these events were to occur, the Company believes that it is reasonably possible that the amount of costs currently accrued, which represents the Company's best estimate, could increase by as much as $28,200, of which $4,800 would be covered by insurance.
 
With respect to one of the projects noted above, the regulatory agency charged with oversight of the project approved a remedial plan that is more expensive than the remedy that had been proposed by the Company. A cost allocation among the potentially responsible parties has not been finalized. However, the Company (and the party from whom it assumed site responsibility) did not contribute in any way to the site contamination, and the Company believes that it has meritorious defenses to liability and that it will not ultimately be responsible for any material remedial costs

23


attributable to the more costly selected remedy. Nevertheless, due to uncertainty over the cost allocation process, it is reasonably possible that the Company's recorded estimate could change. With respect to another one of these projects, the regulatory agency charged with oversight of the project selected a remedy that is consistent with regulatory guidance and the Company’s estimates. However, until the final remedy is actually implemented, it remains reasonably possible that the volumes associated with the selected remedial alternative could change and the related costs could increase. The Company's estimated share of the potential remedial cost changes related to these two projects range from $0 to $21,200.

The Company adjusts all of its recorded liabilities as further information develops or circumstances change. The Company is unable to accurately project the time period over which these amounts would ultimately be paid out, however the Company estimates that any potential payments could be made over a 1 to 5 year period.  

Contract Damages

The Company has entered into contracts which, among other things, require completion of the specified scope of work within a defined period of time or a defined budget. Certain of those contracts provide for the assessment of liquidated or other damages if certain project objectives are not met pursuant to the terms of the contract. At present, the Company does not believe a material assessment of such damages is reasonably possible.

Government Contracts

The Company's indirect cost rates applied to contracts with the U.S. Government and various state agencies are subject to examination and renegotiation. Contracts and other records of the Company with respect to federal contracts have been examined through June 30, 2008. The Company believes that adjustments resulting from such examination or renegotiation proceedings, if any, will not likely have a material impact on the Company's business, operating results, financial position and cash flows.

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 effect on the Company's operating results, financial position and cash flows.

TRC Environmental Corporation v. LVI Group Services, Inc., United States District Court for the Western District of Texas, Austin Division 2014. TRC was the prime contractor on a project to demolish and decommission a power plant in Austin, Texas. LVI was a subcontractor on that project, and TRC sued LVI for approximately $3,000 for breaches in connection with LVI’s work. LVI filed a number of responsive pleadings in this lawsuit including a counterclaim for approximately $9,600. TRC believes that its claims against LVI are meritorious and that LVI’s counterclaim is without merit. Nevertheless, an adverse determination on LVI’s counterclaim 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. As of March 27, 2015 and June 30, 2014, the Company had recorded litigation accruals of $3,337 and $5,410, respectively. The Company also had insurance recovery receivables related to the aforementioned litigation-related accruals of $2,004 and $4,098 as of March 27, 2015 and June 30, 2014, respectively.

The Company periodically adjusts the amount of such liabilities 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 $12,000, of which $2,500 would be covered by insurance.

24


Note 15. Subsequent Events

Effective April 30, 2015, the Company acquired all of the outstanding stock X-Line, Inc. (X-Line), based in Villa Rica, Ga. The initial purchase price consisted of a cash payment of $800 payable at closing, and a second payment of $200 placed in escrow, of which $50 is payable in six months, and the remaining balance due in 12 months. The purchase price is subject to a working capital adjustment, which is expected to be finalized within the next several months. The sellers are also entitled to up to $300 in contingent cash consideration through an earnout provision based on NSR performance of the acquired firm over the 12 month period following closing. X-Line is being integrated into the Company's Energy operating segment. Due to the limited time since the closing of the X-Line acquisition, the related acquisition accounting is incomplete at this time. As a result, the Company is unable to provide amounts recognized as of the acquisition date for major classes of assets and liabilities acquired and resulting from the transaction. The impact of this acquisition is not expected to be material to the Company's condensed consolidated balance sheets and results of operations.



25


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

Three and Nine Months Ended March 27, 2015 and March 28, 2014

Our fiscal quarters end on the last Friday of the quarter except for the last quarter of the fiscal year which always ends on June 30. The nine months ended March 27, 2015 contained one less business day than the prior fiscal year period.

The following discussion of our results of operations and financial condition should be read 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, 2014. 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 described 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, 2014 as well as 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 integrated engineering, consulting, and construction management services. Our project teams help our commercial and governmental clients implement environmental, energy and infrastructure projects from initial concept to delivery and operation. We provide our services almost entirely in the United States of America.

We generate revenue and cash flows from fees for professional and technical services. As a service company, we are more labor-intensive than capital-intensive. Our revenue and cash flow 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 from operations is derived from our ability to generate revenue 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 are fixed-price or have funding limits;

26


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;
The timing and impact of acquisitions;
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;
General economic or political conditions; and
Employee expenses such as medical and other benefits.

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 holidays. Our revenue is lower during these times of the year because many of our clients' employees, as well as our own employees, do not work during those holidays, resulting in fewer billable hours charged to projects and thus, lower revenue recognized. In addition to holidays, harsher weather conditions that occur in the fall and winter can cause some of our offices to close 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 employees.
Acquisitions

We continuously evaluate the marketplace for strategic acquisition opportunities. A fundamental component of our profitable growth strategy is to pursue acquisitions that will expand our platform in key markets. Where the impact of acquisitions is noted in discussing results, it refers to acquisitions effected within the twelve months prior to the end of the relevant period.

On September 29, 2014, we acquired all of the outstanding stock of NOVA Training Inc. and all of the outstanding membership interests of NOVA Earthworks, LLC (collectively "NOVA") based in Midland, Texas. NOVA provides safety training and environmental services as well as oil spill response, remediation and general oil field construction services to customers in the oil and gas industry. The initial purchase price consisted of (i) a cash payment of $7.2 million payable at closing, (ii) a second cash payment of $2.6 million placed into escrow, of which $0.5 million was payable in six months and the remaining $2.1 million is due in 18 months subject to withholding for various contractual issues, (iii) 50 shares of our common stock valued at $0.3 million on the closing date, and (iv) a $0.6 million net working capital adjustment. The sellers are also entitled to up to $1.5 million in contingent cash consideration through an earn-out provision based on the NSR performance of the acquired firm over the 24 month period following closing. We estimated the fair value of the contingent earn-out liability to be $0.3 million based on the projections and probabilities of reaching the performance goals through September 2016. Goodwill of $3.7 million, none of which is expected to be tax deductible, and other intangible assets of $3.6 million were recorded as a result of this acquisition. The goodwill is primarily attributable to the synergies and ancillary growth opportunities expected to arise after the acquisition. The fair values of assets and liabilities of the NOVA acquisition have been recorded in the Environmental operating segment. The impact of this acquisition was not material to our condensed consolidated balance sheets and results of operations.


27


On July 1, 2014, we acquired all of the outstanding stock of Covino Environmental Associates, Inc. ("Covino"), based in Woburn, Massachusetts. Covino provides building sciences, industrial hygiene and related consulting services to private and public clients including major educational institutions. The initial purchase price of $2.0 million consisted of cash of $1.5 million payable at closing, a second cash payment of $0.3 million payable on the one-year anniversary of the closing date subject to withholding for various contractual issues, and a $0.1 million net working capital adjustment. The selling shareholder is also entitled to contingent cash consideration through an earn-out provision based on NSR performance of the acquired firm over the twelve month period following closing. We estimated the fair value of the contingent earn-out liability to be $0.1 million based on the projections and probabilities of reaching the performance goals through July 2015. Goodwill of $1.0 million, none of which is expected to be tax deductible, and other intangible assets of $0.6 million were recorded as a result of this acquisition. The goodwill is primarily attributable to the synergies and ancillary growth opportunities expected to arise after the acquisition. The fair values of assets and liabilities of the Covino acquisition have been recorded in the Environmental operating segment. The impact of this acquisition was not material to our condensed consolidated balance sheets and results of operations.

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 government agencies. Our Energy services include program management, engineer/procure/construct projects, design, and consulting. Our typical Energy projects involve upgrades, design and new construction for electric transmission and distribution systems and substations; energy efficiency program design and management; and renewable energy development and power generation.

Environmental:  The Environmental operating segment provides services to a range of clients including industrial, transportation, energy and natural resource companies, as well as federal, state and municipal agencies. The Environmental operating segment is organized to focus on key areas of demand including: environmental management of buildings and facilities; air quality measurements and modeling of potential air pollution impacts; water quality and water resource management; assessment and remediation of contaminated sites and buildings; hazardous waste management; construction monitoring, inspection and management; environmental, health and safety management and sustainability advisory services; compliance auditing and strategic due diligence; environmental licensing and permitting of a wide variety of projects; and natural and cultural resource assessment, protection and management.

Infrastructure:  The Infrastructure operating segment provides services related to the expansion of infrastructure capacity, the rehabilitation of overburdened and deteriorating infrastructure systems, and the management of risks related to security of public and private facilities. Our client base is predominantly state and municipal governments as well as select commercial developers. In addition, we provide infrastructure services on projects originating in our Energy and Environmental operating segments. Primary services include: roadway, bridge and related surface transportation design; structural design and inspection of bridges; program management; construction engineering inspection and construction management for roads and bridges; civil engineering for municipalities and public works departments; geotechnical engineering services; and security assessments, design and construction management.
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

28


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, and stock-based compensation expense. Depreciation expense is primarily allocated to operating segments based upon their respective use of total operating segment office space. Assets solely used at the Corporate level 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 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 27, 2015 and March 28, 2014:

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Energy
 
36
%
 
40
%
 
36
%
 
38
%
Environmental
 
51
%
 
48
%
 
52
%
 
49
%
Infrastructure
 
13
%
 
12
%
 
12
%
 
13
%
 
 
100
%
 
100
%
 
100
%
 
100
%
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 distribution of sources of generation. Years of underinvestment coupled with a favorable regulatory environment have provided a good business opportunity for those serving this market. According to the Edison Electric Institute, electric utilities throughout the United States will be investing over $60 billion in the performance of this work over the next several years. Economic impacts have slowed the pace of this investment, yet they do not appear to have affected the long term plan of investment. Demand for energy efficiency services continues to be supported by increasing state and federal funds targeted at energy efficiency. The American Recovery and Reinvestment Act of 2009, Regional Green House Gas Initiative and system benefit charges at the state or utility level have expanded 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 growing our presence in the Southeast and in Texas and California where demand for services is the highest.

Environmental: Although there had been signs of growth in this market following a slowdown caused by general economic conditions, market demand for environmental services continues to be mixed. The last decade saw growth in nearly all aspects of this market. The fundamental market drivers remain in place, and this market also benefits from evolving regulatory developments particularly with respect to air quality, the clean power plant program and the continuing need to enhance our aging transportation and energy infrastructure. Nevertheless, recent indicators suggest that certain elements of this marketplace continue to take a cautious approach to expenditures, slowing a return to the long-term pattern of growth historically enjoyed by this operating segment. Shale gas, renewables and other energy source initiatives present important market opportunities but are linked to federal and state policy changes which will be required for the markets to commit long-term capital to projects such as pipelines and related infrastructure. Demand from oil and gas customers for midstream-related services has recently been strong.

Infrastructure: Although long-term prospects should be favorable, demand for infrastructure services is expected to continue to be flat to slightly negative. The overall infrastructure construction markets did benefit from the federal funding certainty provided by the MAP-21 federal transportation bill that was signed into law in July 2012 but that legislation expired September 30, 2014. A new $302 billion, four year transportation bill has been proposed by President Obama's administration but has not yet been adopted. As a result of increased tax revenues and improved budgets, some states are moving forward with additional funding for infrastructure improvement programs, although other states continue to experience budget challenges and are more dependent on federal or private funding mechanisms.

29


The states continue to face long-term infrastructure needs, including the need for maintenance, repair and upgrade of existing critical infrastructure as well as the need to build new facilities.

Critical Accounting Policies

Our condensed consolidated 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 condensed consolidated financial statements and related notes. Actual results could differ from these estimates and assumptions. We use our best judgment in the assumptions used to compile these estimates, which are based on current facts and circumstances, prior experience and other assumptions that are believed to be reasonable. 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 notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, as filed with the Securities Exchange Commission ("SEC") on September 10, 2014. No material changes concerning our critical accounting policies have occurred since June 30, 2014.


Results of Operations

Consolidated Results of Operations

The following table presents the dollar and percentage changes in the condensed consolidated statements of operations for the three and nine months ended March 27, 2015 and March 28, 2014:

 
Three Months Ended
 
Nine Months Ended
 
Mar. 27,
 
Mar. 28,
 
Change
 
Mar. 27,
 
Mar. 28,
 
Change
(Dollars in thousands)
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Gross revenue
$
130,777

 
$
120,836

 
$
9,941

 
8.2
 %
 
$
397,030

 
$
350,002

 
$
47,028

 
13.4
 %
Less subcontractor costs and other direct reimbursable charges
29,783

 
32,755

 
(2,972
)
 
(9.1
)
 
103,579

 
89,538

 
14,041

 
15.7

Net service revenue
100,994

 
88,081

 
12,913

 
14.7

 
293,451

 
260,464

 
32,987

 
12.7

Interest income from contractual arrangements
23

 
73

 
(50
)
 
(68.5
)
 
67

 
26

 
41

 
157.7

Insurance recoverables and other income
753

 
5,008

 
(4,255
)
 
(85.0
)
 
6,238

 
17,613

 
(11,375
)
 
(64.6
)
Cost of services (exclusive of costs shown separately below)
83,486

 
80,127

 
3,359

 
4.2

 
247,275

 
234,914

 
12,361

 
5.3

General and administrative expenses
8,927

 
8,363

 
564

 
6.7

 
25,360

 
24,642

 
718

 
2.9

Depreciation and amortization
2,208

 
2,161

 
47

 
2.2

 
7,114

 
6,587

 
527

 
8.0

Operating income
7,149

 
2,511

 
4,638

 
184.7

 
20,007

 
11,960

 
8,047

 
67.3

Interest expense
(73
)
 
(22
)
 
(51
)
 
231.8

 
(125
)
 
(152
)
 
27

 
(17.8
)
Income from operations before taxes
7,076

 
2,489

 
4,587

 
184.3

 
19,882

 
11,808

 
8,074

 
68.4

Provision for income taxes
(1,916
)
 
(1,060
)
 
(856
)
 
80.8

 
(7,244
)
 
(4,830
)
 
(2,414
)
 
50.0

Net income
5,160

 
1,429

 
3,731

 
261.1

 
12,638

 
6,978

 
5,660

 
81.1

Net loss applicable to noncontrolling interest
5

 
2

 
3

 
150.0

 
14

 
36

 
(22
)
 
(61.1
)
Net income applicable to TRC Companies, Inc.
$
5,165

 
$
1,431

 
$
3,734

 
260.9
 %
 
$
12,652

 
$
7,014

 
$
5,638

 
80.4
 %







30


Three Months Ended March 27, 2015

Gross revenue increased $9.9 million, or 8.2%, to $130.8 million for the three months ended March 27, 2015 from $120.8 million for the same period in the prior year. Organic activities accounted for $5.1 million, or 50.9%, of the growth in gross revenue, and acquisitions accounted for the remaining $4.8 million, or 49.1%, of the increase. The growth in organic gross revenue was largely driven by our Environmental operating segment, where gross revenue increased $5.1 million due to increased demand from our oil and gas clients for services primarily related to midstream activities. Organic gross revenue increased $2.5 million in our Infrastructure operating segment, primarily driven by the receipt of several large change orders in the current quarter for which costs were expended in a prior period. By contrast, current quarter organic gross revenue decreased $2.8 million in our Energy operating segment primarily due to the timing of work on larger projects.

NSR increased $12.9 million, or 14.7%, to $101.0 million for the three months ended March 27, 2015 from $88.1 million for the same period in the prior year. Organic activities accounted for $9.6 million, or 74.0%, of the growth in NSR, and acquisitions accounted for the remaining $3.3 million, or 26.0%, of the increase. The increase in organic NSR was primarily attributable to our Environmental operating segment where NSR increased $5.9 million due to the same factors that led to the increase in gross revenue. The Infrastructure operating segment organic NSR increased $2.0 million due to the same factors that led to the increase in gross revenue. Organic NSR in our Energy operating segment increased $1.8 million primarily due to better project performance in current quarter. In the prior year quarter, particularly for our locations in the Northeast, Midwest and Mid-Atlantic regions, our project field work, within the Environmental and Infrastructure operating segments, was limited by adverse weather conditions which resulted in fewer billable hours worked on projects and, correspondingly, approximately $1.7 million less NSR.

Insurance recoverables and other income decreased $4.3 million, or 85.0%, to $0.8 million for the three months ended March 27, 2015 from $5.0 million for the same period in the prior year. In the three months ended March 28, 2014, an Exit Strategy project had estimated cost increases which were not expected to be funded by the project-specific restricted investments and, therefore, was projected to be funded by the project specific insurance policy. We did not experience the same level of estimated cost increases in the current quarter.

COS increased $3.4 million, or 4.2%, to $83.5 million for the three months ended March 27, 2015 from $80.1 million for the same period in the prior year. Acquisitions accounted for $2.9 million of the increase in COS, while organic COS increased by $0.5 million. The increase in organic COS was primarily attributable to costs incurred to support current and projected demand for our Environmental operating segment clients. These costs were offset, in large part, by lower contract and health insurance costs. As aforementioned, during the prior year quarter, we recorded estimated cost increases on an Exit Strategy contract which increased COS by $3.0 million. We did not experience the same level of estimated cost increases in the current quarter. In addition, we experienced lower health insurance costs, resulting in a $1.3 million decrease in the current quarter compared to the same period in the prior year. We are self-insured for the first $150 thousand of health claims per employee each calendar year. Consequently, employee health insurance costs can vary significantly from period to period. As a percentage of NSR, COS were 82.7% and 91.0% for the three months ended March 27, 2015 and March 28, 2014, respectively. The decrease in COS as a percentage of NSR was largely attributable to the prior year impact of the Exit Strategy and health insurance costs noted above.

G&A expenses increased $0.6 million, or 6.7%, to $8.9 million for the three months ended March 27, 2015 from $8.4 million for the same period in the prior year. The increase was primarily attributable to increased headcount to support our current and expected growth, offset in part by lower legal and litigation related costs. As a percentage of NSR, G&A expenses were 8.8% and 9.5% for the three months ended March 27, 2015 and March 28, 2014, respectively.

Our effective tax rate was approximately 27.1% for the three months ended March 27, 2015, compared to approximately 42.6% for the same period in the prior year. The primary reconciling items between the federal statutory rate of 35.0% and our overall effective tax rate for the three months ended March 27, 2015 were the effect of state income taxes offset by discrete tax benefits related to the U.S. Research and Development credit. The discrete impact of research and development credits was the result of a change in estimate resulting from the finalization of a new research and development credit study during the three months ended March 27, 2015. A tax benefit for the change in estimate was

31


reflected in its entirety in the three months ended March 27, 2015. For the three months ended March 28, 2014, the primary reconciling item between the federal statutory rate of 35.0% and our overall effective tax rate was the effect of state income taxes.

Nine Months Ended March 27, 2015

Gross revenue increased $47.0 million, or 13.4%, to $397.0 million for the nine months ended March 27, 2015 from $350.0 million for the same period in the prior year. Organic activities accounted for $33.9 million, or 72.1%, of the growth in gross revenue, and acquisitions accounted for the remaining $13.1 million, or 27.9%, of the increase. The growth in organic gross revenue was largely driven by our Environmental operating segment, where gross revenue increased $26.6 million due to increased demand from our oil and gas clients for services primarily related to midstream activities. Organic gross revenue increased $6.5 million in our Infrastructure operating segment, due to increased demand from state transportation and commercial clients. For comparative purposes, during the nine months ended March 28, 2014, we recorded estimated cost increases on two Exit Strategy contracts which reduced gross revenue by approximately $6.9 million. We did not have similar adjustments in the current period.

NSR increased $33.0 million, or 12.7%, to $293.5 million for the nine months ended March 27, 2015 from $260.5 million for the same period in the prior year. Organic activities accounted for $22.5 million, or 68.1%, of the growth in NSR, and acquisitions accounted for the remaining $10.5 million, or 31.9%, of the increase. The increase in organic NSR was primarily attributable to our Environmental operating segment where NSR increased $18.4 million due to the same factors that led to the increase in gross revenue. The balance of the organic NSR growth was primarily attributable to strong current quarter performance on fixed priced projects within our Energy operating segment. As noted above, during the nine months ended March 28, 2014, we recorded estimated cost increases on two Exit Strategy contracts which reduced NSR by approximately $6.9 million. We did not experience the same level of estimated cost increases in the current quarter. As aforementioned, in the prior year quarter, particularly for our locations in the Northeast, Midwest and Mid-Atlantic regions, our project field work, within the Environmental and Infrastructure operating segments, was limited by adverse weather conditions which resulted in fewer billable hours worked on projects and, correspondingly, approximately $1.7 million less NSR.

Insurance recoverables and other income decreased $11.4 million, or 64.6%, to $6.2 million for the nine months ended March 27, 2015 from $17.6 million for the same period in the prior year. In the nine months ended March 28, 2014, two Exit Strategy projects had estimated cost increases which were not expected to be funded by the project-specific restricted investments and, therefore, were projected to be funded by the project-specific insurance policy. As a result, we increased insurance recoverables by $12.4 million in the prior year first quarter on one project, and increased insurance recoverables by $4.9 million in the prior year third quarter on another project to account for the projected recovery of the increased cost estimates. We did not experience similar contract adjustments in the current period.

COS increased $12.4 million, or 5.3%, to $247.3 million for the nine months ended March 27, 2015 from $234.9 million for the same period in the prior year. Acquisitions accounted for $8.7 million of the increase in COS, while organic COS increased by $3.7 million. The increase in organic COS was primarily attributable to costs incurred to support current and projected demand from our Environmental operating segment clients. These costs were offset, in part, by the aforementioned estimated cost increases on two Exit Strategy contracts which increased COS by $10.4 million for the nine months ended March 28, 2014. We did not experience the same level of estimated cost increases in the current period. As a percentage of NSR, COS were 84.3% and 90.2% for the nine months ended March 27, 2015 and March 28, 2014, respectively. The decrease in COS as a percentage of NSR was largely attributable to the prior year impact of the Exit Strategy adjustments noted above.

G&A expenses increased $0.7 million, or 2.9%, to $25.4 million for the nine months ended March 27, 2015 from $24.6 million for the same period in the prior year. The increase was primarily attributable to increased headcount to support our current and expected growth, offset in part by lower legal and litigation related costs. As a percentage of NSR, G&A expenses decreased to 8.6% for the nine months ended March 27, 2015 compared to 9.5% for the nine months ended March 28, 2014.


32


Our effective tax rate was approximately 36.4% for the nine months ended March 27, 2015, compared to approximately 40.8% for the same period in the prior year. The primary reconciling items between the federal statutory rate of 35.0% and our overall effective tax rate were the effect of state income taxes offset by discrete tax benefits related to research and development tax credits for the nine months ended March 27, 2015, as well as the effect of state income taxes for nine months ended March 28, 2014.


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 27, 2015 and March 28, 2014:            

 
Three Months Ended
 
Nine Months Ended
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Net service revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Interest income from contractual arrangements

 
0.1

 

 

Insurance recoverables and other income
0.7

 
5.7

 
2.1

 
6.8

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of services (exclusive of costs shown separately below)
82.7

 
91.0

 
84.3

 
90.2

General and administrative expenses
8.8

 
9.5

 
8.6

 
9.5

Depreciation and amortization
2.2

 
2.5

 
2.4

 
2.5

Total operating costs and expenses
93.7

 
102.9

 
95.3

 
102.2

Operating income
7.1

 
2.9

 
6.8

 
4.6

Interest expense
(0.1
)
 

 

 
(0.1
)
Income from operations before taxes
7.0

 
2.8

 
6.8

 
4.5

Provision for income taxes
(1.9
)
 
(1.2
)
 
(2.5
)
 
(1.9
)
Net income
5.1

 
1.6

 
4.3

 
2.7

Net loss applicable to noncontrolling interest

 

 

 

Net income applicable to TRC Companies, Inc.
5.1
 %
 
1.6
 %
 
4.3
 %
 
2.7
 %


Additional Information by Reportable Operating Segment

Energy Operating Segment Results

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 27,
 
March 28,
 
Change
 
March 27,
 
March 28,
 
Change
(Dollars in thousands)
 
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Gross revenue
 
$
41,643

 
$
44,480

 
$
(2,837
)
 
(6.4
)%
 
$
122,124

 
$
118,050

 
$
4,074

 
3.5
%
Net service revenue
 
$
36,413

 
$
34,632

 
$
1,781

 
5.1
 %
 
$
104,789

 
$
98,339

 
$
6,450

 
6.6
%
Segment profit
 
$
8,676

 
$
7,908

 
$
768

 
9.7
 %
 
$
22,224

 
$
19,313

 
$
2,911

 
15.1
%

Gross revenue decreased $2.8 million, or 6.4%, and increased $4.1 million, or 3.5%, for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. Acquisitions provided $2.5 million of gross revenue for the nine months ended March 27, 2015, and had no impact to the current year quarter. Organic gross revenue decreased $2.8 million and increased $1.6 million for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. The decrease in organic gross revenue during the three

33


months ended March 27, 2015 was primarily attributable to the timing of work on larger projects. Specifically, in the prior year quarter we had a large number of projects in the capital phase which resulted in significant subcontractor and procurement activities and generated higher levels of gross revenue. In the current quarter, we had a larger number of projects in the engineering phase, which resulted in higher levels of self-performance and generated lower gross revenue yet higher NSR. The growth in organic gross revenue for the nine months ended March 27, 2015 was primarily attributable to better performance on fixed priced projects and increased demand for services from existing clients due to their continued investment in electric transmission and distribution offset, in part, by the timing of work, as noted above.

NSR increased $1.8 million, or 5.1%, and $6.5 million, or 6.6%, for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. Acquisitions provided $0.0 million and $2.4 million of NSR growth while organic NSR increased $1.8 million and $4.0 million during the three and nine months ended March 27, 2015 compared to the same period in the prior year. The increase in organic NSR during the three months ended March 27, 2015 was primarily due to strong current quarter performance on large fixed priced projects. The increase in organic NSR for the nine months ended March 27, 2015 was primarily due to the same factors that led to the increase in organic gross revenue.

The Energy operating segment's profit increased $0.8 million, or 9.7%, and $2.9 million, or 15.1%, for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. Organic segment profit increased $0.8 million and $2.8 million while acquisitions provided $0.0 million and $0.1 million of segment profit growth for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. The increase in organic segment profit for the three and nine months ended March 27, 2015 largely corresponded to the increase NSR. As a percentage of NSR, the Energy operating segment's profit increased to 23.8% from 22.8% and to 21.2% from 19.6% for the three and nine months ended March 27, 2015 compared to the same periods of the prior year. These increases were primarily related to improved labor utilization and performance on fixed fee projects.

Environmental Operating Segment Results

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 27,
 
March 28,
 
Change
 
March 27,
 
March 28,
 
Change
(Dollars in thousands)
 
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Gross revenue
 
$
70,711

 
$
60,750

 
$
9,961

 
16.4
%
 
$
219,960

 
$
182,692

 
$
37,268

 
20.4
%
Net service revenue
 
$
51,172

 
$
41,939

 
$
9,233

 
22.0
%
 
$
151,383

 
$
124,860

 
$
26,523

 
21.2
%
Segment profit
 
$
9,942

 
$
7,787

 
$
2,155

 
27.7
%
 
$
30,252

 
$
25,898

 
$
4,354

 
16.8
%

Gross revenue increased $10.0 million, or 16.4%, and $37.3 million, or 20.4%, for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. Organic gross revenue increased $5.1 million and $26.6 million while acquisitions provided $4.9 million and $10.6 million of gross revenue growth for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. The increase in organic gross revenue for the three and nine months ended March 27, 2015 was due to increased demand from our oil and gas clients for services primarily related to midstream activities, and, in particular, pipeline permitting services. Additionally, during the first and third quarter of fiscal 2014, we recorded adjustments to the estimate at completion on two Exit Strategy contracts which reduced gross revenue by approximately $5.1 million and $1.8 million, respectively.

NSR increased $9.2 million, or 22.0%, and $26.5 million, or 21.2%, for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. Organic NSR increased $5.9 million and $18.4 million while acquisitions provided $3.3 million and $8.1 million of NSR growth for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. The increase in organic NSR was primarily due to the same factors that led to the increase in gross revenue. Moreover, organic NSR was also adversely impacted in the prior year quarter due to the severe weather conditions which limited our ability to access project work

34


sites. We estimate the weather related impact to NSR was approximately $1.4 million for the three and nine months ended March 28, 2014.

The Environmental operating segment's profit increased $2.2 million, or 27.7%, and $4.4 million, or 16.8%, for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. Organic segment profit increased $2.1 million and $3.6 million while acquisitions provided $0.1 million and $0.8 million of segment profit growth for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. The increase in organic segment profit was primarily attributable to the same factors that led to the increase in NSR, with the increase in the three months ended March 27, 2015 also benefiting from improved performance on fixed fee projects. As a percentage of NSR, the Environmental operating segment's profit increased to 19.4% from 18.6% and decreased slightly to 20.0% from 20.7% for the three and nine months ended March 27, 2015, respectively, compared to the same periods of the prior year.

Infrastructure Operating Segment Results

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 27,
 
March 28,
 
Change
 
March 27,
 
March 28,
 
Change
(Dollars in thousands)
 
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Gross revenue
 
$
16,696

 
$
14,223

 
$
2,473

 
17.4
%
 
$
53,142

 
$
46,692

 
$
6,450

 
13.8
%
Net service revenue
 
$
12,425

 
$
10,403

 
$
2,022

 
19.4
%
 
$
36,978

 
$
34,430

 
$
2,548

 
7.4
%
Segment profit
 
$
2,806

 
$
1,413

 
$
1,393

 
98.6
%
 
$
6,483

 
$
6,238

 
$
245

 
3.9
%

Gross revenue increased $2.5 million, or 17.4%, and $6.5 million, or 13.8%, for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. The increase in gross revenue in the three months ended March 27, 2015 was primarily due to the receipt of several large change orders for which costs were expensed in prior periods, as well as an adjustment to an estimate at completion on a large fixed price contract which reduced gross revenue by approximately $0.6 million in the prior year quarter. The increase in gross revenue in the nine months ended March 27, 2015 was primarily driven by increased demand from state transportation and commercial clients.

NSR increased $2.0 million, or 19.4%, and increased $2.5 million, or 7.4%, for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. The increases in NSR were largely attributable to the same factors that led to the increases in gross revenue. In addition, severe winter weather in the prior year quarter resulted in a loss of billable production and correspondingly less NSR. We estimate the weather related impact to NSR was approximately $0.3 million in the three and nine months ended March 28, 2014.

The Infrastructure operating segment's profit increased $1.4 million, or 98.6%, and $0.2 million, or 3.9%, for the three and nine months ended March 27, 2015, respectively, compared to the same periods in the prior year. As a percentage of NSR, the Infrastructure operating segment's profit increased to 22.6% from 13.6% and decreased to 17.5% from 18.1% for the three and nine months ended March 27, 2015, respectively, compared to the same periods of the prior year. The increase during the three months ending March 27, 2015 was primarily attributable to the receipt of change orders as aforementioned.

Backlog by Operating Segment

As of March 27, 2015, our contract backlog based on gross revenue was approximately $435 million, compared to approximately $379 million as of March 28, 2014. Our contract backlog based on NSR was approximately $289 million as of March 27, 2015, compared to approximately $245 million as of March 28, 2014. Typically about 60% of backlog is completed in one year. In addition to this contract backlog, we hold open-order contracts from various commercial clients and government agencies. As work under these contracts is authorized and funded, we include this portion in our contract backlog. While most contracts contain cancellation provisions, we are unaware of any material work included in backlog that will be canceled or delayed.

35



The following table sets forth the gross revenue and NSR contract backlog amounts of our operating segments at March 27, 2015 and March 28, 2014 (in millions):
 
Gross Revenue Backlog
 
NSR Backlog
 
March 27,
 
March 28,
 
Change
 
March 27,
 
March 28,
 
Change
(Dollars in millions)
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Energy
$
97

 
$
88

 
$
9

 
10.2
%
 
$
86

 
$
74

 
$
12

 
16.2
%
Environmental
235

 
216

 
19

 
8.8
%
 
133

 
126

 
7

 
5.6
%
Infrastructure
103

 
75

 
28

 
37.3
%
 
70

 
45

 
25

 
55.6
%
  Total
$
435

 
$
379

 
$
56

 
14.8
%
 
$
289

 
$
245

 
$
44

 
18.0
%

Revisions in Estimates
We have numerous contracts in progress at any time, all of which are at various stages of completion. Our recognition of profit is dependent upon the accuracy of a variety of estimates including engineering progress, materials quantities, achievement of milestones and other incentives, liquidated-damages provisions, labor productivity and cost estimates. Such estimates are based on various judgments we make with respect to those factors and can be difficult to accurately determine until the project is significantly underway. Due to uncertainties inherent in the estimation process, actual completion costs often vary from estimates. If estimated total costs on any contract indicate a loss, we charge the entire estimated loss to operations in the period the loss first becomes known. If actual costs exceed the original fixed contract price, recognition of any additional revenue will be pursuant to a change order, contract modification, or claim.
The following table summarizes the number of projects that experienced estimated contract profit revisions relating to the revaluation of work performed in prior periods:
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
March 27,
 
March 28,
 
March 27,
 
March 28,
(Dollars in thousands)
 
2015
 
2014
 
2015
 
2014
Number of projects
 
1,243

 
1,644

 
1,688

 
1,673

Net (reduction) increase in project profitability
 
$
3,943

 
$
(878
)
 
$
(205
)
 
$
42

 
 
 
 
 
 
 
 
 
 
 
Net (reduction) increase in project profitability by operating segment:
 
 
 
 
 
 
 
 
Energy
 
 
$
1,130

 
$
(1,374
)
 
$
(857
)
 
$
(2,911
)
Environmental
 
1,145

 
771

 
837

 
2,616

Infrastructure
 
1,668

 
(275
)
 
(185
)
 
337

 
Total
 
 
$
3,943

 
$
(878
)
 
$
(205
)
 
$
42


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

36


operating and investing activities and to service debt. We believe that our available cash, cash flows from operations and borrowing capacity under our revolving credit facility, discussed under "Revolving Credit Facility" below, will be sufficient to fund our operations for at least the next twelve months.
The following table provides summarized information with respect to our cash balances and cash flows as of and for the nine months ended March 27, 2015 and March 28, 2014 (in thousands):
 
 
Nine Months Ended
 
 
March 27,
 
March 28,
 
Change
(Dollars in thousands)
 
2015
 
2014
 
$
 
%
Net cash provided by operating activities
 
$
12,580

 
$
3,177

 
$
9,403

 
296.0
 %
Net cash used in investing activities
 
(15,285
)
 
(6,278
)
 
9,007

 
143.5
 %
Net cash used in financing activities
 
(3,549
)
 
(3,634
)
 
(85
)
 
(2.3
)%

As of March 27, 2015, cash and cash equivalents decreased by $6.3 million, or 22.7%, to $21.3 million, compared to the fiscal year ended June 30, 2014. The decrease was primarily due to net cash used in investing activities for the acquisitions of businesses and property and equipment.

Net cash provided by operating activities increased by $9.4 million, or 296.0%, to $12.6 million for the nine months ended March 27, 2015, compared to $3.2 million of cash provided for the same period of the prior year. The increase was due to higher income, adjusted for non-cash charges, in the nine months ended March 27, 2015 compared to the same period of the prior year, as well as the favorable impact in fiscal 2015 from changes in our working capital 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 accounts receivable 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 90 days as of March 27, 2015 from 84 days as of June 30, 2014, and decreased from 92 days when compared to March 28, 2014. Our goal is to maintain DSO at less than 80 days.

Net cash used in investing activities increased by $9.0 million, or 143.5%, to $15.3 million for the nine months ended March 27, 2015, compared to $6.3 million of cash used for the same period of the prior year. The increase was primarily attributable to a $7.4 million increase in cash paid for acquisitions.

Net cash used in financing activities decreased by $0.1 million, or 2.3%, to $3.5 million for the nine months ended March 27, 2015, compared to $3.6 million of cash used for the same period of the prior year. The decrease was primarily due to a $3.8 million decline in payments made on long-term debt and capital lease obligations, and $0.5 million of cash paid to settle tax withholding obligations relating to shares repurchased; offset by a $3.1 million decline in excess tax benefits from stock-based awards, and an increase of $1.8 million in payments related to prior acquisitions.

Long-Term Debt

Revolving Credit Facility

See a discussion of our revolving credit facility (the "Credit Agreement"), other notes payable and capital lease obligations in Note 9 - Long-Term Debt and Capital Lease Obligations, under Part I, Item 1, Notes to Condensed Consolidated Financial Statements.

Management presents Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") and Consolidated Adjusted EBITDA, which are non-U.S. GAAP measures, because we believe they are useful tools for us, our lenders and our investors to measure our ability to meet debt service, capital expenditure and working capital

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requirements. Consolidated EBITDA and Consolidated Adjusted EBITDA, as presented, may not be comparable to similarly titled measures reported by other companies, because not all companies calculate EBITDA in an identical manner. Consolidated EBITDA and Consolidated Adjusted EBITDA are not intended to represent cash flows for the period or funds available for management's discretionary use, nor are they represented as an alternative to operating income 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 U.S. GAAP. Our Consolidated EBITDA and Consolidated Adjusted EBITDA should be evaluated in conjunction with U.S. GAAP measures such as operating income, net income, cash flows from operations and other measures of equal or greater importance. Consolidated EBITDA is presented below based on both the definition used in our Credit Agreement (Consolidated Adjusted EBITDA) as well as a more typical calculation method. Set forth below is a reconciliation of Net Income applicable to TRC Companies, Inc. to Consolidated EBITDA and Consolidated Adjusted EBITDA, as calculated under the Credit Agreement, for the trailing twelve-month period ended March 27, 2015 (in thousands):
 
 
Trailing Twelve-Months Ended
(Dollars in thousands)
March 27,
2015
 
March 28,
2014
Net income applicable to TRC Companies, Inc.
$
17,689

 
$
31,793

 
Interest expense
142

 
219

 
Provision (benefit) for income taxes
11,156

 
(13,836
)
 
Depreciation and amortization
9,327

 
8,531

 
Net loss applicable to noncontrolling interest
(19
)
 
(52
)
Consolidated EBITDA
38,295

 
26,655

 
Less: Interest expense on excluded indebtedness
(61
)
 
(76
)
 
Less: Interest and penalties on income taxes
11

 
(42
)
 
Add: Non-cash losses and expenses - Stock-Based Compensation Expense
4,891

 
4,560

Consolidated Adjusted EBITDA under the Credit Agreement
$
43,136

 
$
31,097


The actual results as compared to the covenant requirements under the Credit Agreement as of March 27, 2015 for the measurement periods described below are as follows (in thousands):
(Dollars in thousands)
Measurement Period
 
Actual
 
Required
Minimum consolidated adjusted EBITDA
Trailing 12 months
 
$
43,136

 
Must exceed
$
20,000

Maximum leverage ratio
Trailing 12 months
 
0.07 to 1.00

 
Not to exceed
 2.00 to 1.00

Minimum fixed charge coverage ratio
Trailing 12 months
 
43.03 to 1.00

 
Must exceed
 1.25 to 1.00


Item 3. Quantitative and Qualitative Disclosures about Market Risk

We do not currently 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 at the Base Rate (as defined, generally the prime rate) plus a margin of 1.00% to 1.50% or at LIBOR plus a margin of 2.00% to 2.50%, based on the ratio of consolidated total debt to EBITDA measured over a trailing four-quarter period.

Borrowings at these rates have no designated term and may be repaid without penalty any time prior to the credit facility's maturity date. Our credit facility has a maturity date of April 16, 2018, 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 27, 2015. 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 27, 2015.

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 27, 2015 that has materially 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 Legal Matters in Note 14 - Commitments and Contingencies, 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 4.    Mine Safety Disclosures

Not Applicable.

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 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


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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 6, 2015
By:
/s/ Thomas W. Bennet, Jr.
 
 
 
 
 
Thomas W. Bennet, Jr.
 
 
Senior Vice President and Chief Financial Officer
 
 
(Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)


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