10-K 1 trr06302012form10k.htm 10-K TRR 06.30.2012 Form10K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
 
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended June 30, 2012
or
o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from                         to        
Commission file number 1-9947
TRC COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
06-0853807
(I.R.S. Employer Identification No.)
 
 
21 Griffin Road North
Windsor, Connecticut
(Address of principal executive offices)
06095
(Zip Code)

Registrant's telephone number, including area code: (860) 298-9692
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.10 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes o    No ý.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý    NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer ý

Non-accelerated filer o
Smaller reporting company o
 
 
(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 o    No ý.
The aggregate market value of the registrant's common stock held by non-affiliates on December 30, 2011 was approximately $87,800,000.
On August 15, 2012, there were 28,272,174 shares of common stock of the registrant outstanding.



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DOCUMENTS INCORPORATED BY REFERENCE

Portions of our proxy statement for the annual meeting of shareholders to be held on December 5, 2012 are incorporated by reference in Part III hereof.
 


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TRC Companies, Inc.
Index to Annual Report on Form 10-K
Fiscal Year Ended June 30, 2012
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Forward-Looking Statements
Certain information included in this report, or in other materials we have filed or will file with the Securities and Exchange Commission (the "SEC") (as well as information included in oral statements or other written statements made or to be made by us), contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). Such statements are being made pursuant to the 1995 Act and with the intention of obtaining the benefit of the "Safe Harbor" provisions of the 1995 Act. Forward-looking statements are based on information available to us and our perception of such information as of the date of this report and our current expectations, estimates, forecasts and projections about the markets in which we operate and the beliefs and assumptions of our management. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They contain words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "may," "can," "could," "might," or variations of such wording, and other words or phrases of similar meaning in connection with a discussion of our future operating or financial performance, and other aspects of our business, including growth, trends in our business and other characterizations of future events or circumstances. From time to time, forward-looking statements are also included in our other periodic reports on Forms 10-Q and 8-K, in press releases, in our presentations, on our website and in other material released to the public. Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are only predictions and are subject to risks, uncertainties and assumptions, including those identified below in the "Risk Factors" section, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, and other sections of this report. Such risks, uncertainties and assumptions are difficult to predict and beyond our control and may cause actual results to differ materially from those that might be anticipated from our forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q, and 8-K should be consulted.
Part I
Item 1.    Business

General Description
TRC Companies, Inc. (hereinafter collectively referred to as "we" "our" or "us"), was incorporated in 1971. We are a national engineering, consulting and construction management firm that provides integrated services to the environmental, energy, and infrastructure markets, primarily in the United States. A broad range of commercial and governmental clients depend on us to design solutions to their toughest business challenges. Our multidisciplinary project teams help our clients (i) implement complex projects from initial concept to delivery and commissioning, (ii) maintain and operate their facilities in compliance with regulatory standards and (iii) manage their assets through decommissioning, demolition, restoration and disposition.
We are headquartered in Windsor, Connecticut, and our corporate website is www.trcsolutions.com (information on our website has not been incorporated by reference into this Form 10-K). Through a link on the investor center section of our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(d) or 15(d) of the Securities and Exchange Act of 1934 (the "Exchange Act") as well as reports filed pursuant to Section 16 of the Exchange Act. All such filings are available free of charge.
Financial Highlights
We reported net income (loss) applicable to our common shareholders of $33.6 million, $(16.6) million and $(22.9) million for fiscal years ended June 30, 2012, 2011 and 2010, respectively. The net income applicable to our common shareholders reported for fiscal year 2012 was impacted favorably by an $11.1 million net reversal of the previously recorded Arena Towers litigation expense, as well as a $3.9 million net federal and state income tax benefit primarily related to the remeasurement of uncertain tax positions as a result of a settlement with the IRS for fiscal years 2003 through 2008.  During fiscal year 2011, we incurred a $17.3 million charge relating to the Arena Towers litigation expense and $7.3 million of accretion charges related to preferred stock. The net loss applicable to our common shareholders for fiscal year 2010 included $20.2 million for a goodwill impairment charge and $6.4 million of accretion charges related to preferred stock which were partially offset by a net tax benefit of $4.2 million and a $1.7 million gain on extinguishment of debt. We generated cash from operations of $19.4 million, $12.5 million and $11.1 million in fiscal years 2012, 2011 and 2010, respectively.

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Business Strategy
We understand our clients' goals and embrace them as our own, applying creativity, experience, integrity and dedication to deliver superior solutions to the world's energy, environmental, and infrastructure challenges. We have continued to unify the Company on a national basis within our operating segments and national sales and marketing organization, giving us the ability to respond to customer challenges and current, dynamic market conditions. We are committed to safety, quality, client satisfaction, excellence in project management, and financial performance to help us win work in areas where our success rate is highest and maintain a growing presence in the future direction of our markets.
In support of our clients and shareholders, we maintain our focus on technical excellence in all areas of the project cycle including bidding, safe execution, performance, quality, and collections.
Our objectives for fiscal year 2013 are:
Continue profitable growth in our operating segments.  Fiscal year 2012 was the second full year of our transition to a nationally focused model for each operating segment and each of our three operating segments now operates on a national platform. Our profitable growth objectives incorporate elements of geographic expansion, service expansion, and strategic market development. The service expansion element is an area where we believe our program management and engineer, procure, construct services can be extended throughout the power industry to address upcoming capital programs in the market such as air pollution control projects. Service expansion will also be focused on development of differentiated or higher value-added capabilities particularly where our strategic market development effort has targeted new or emerging markets such as that served by our RE Power® program. Our national operating platform is linked to our corporate sales and marketing organization, providing information exchange on project opportunities and execution, regulatory trends, and market feedback to facilitate better communication and service delivery to our clients.
Continue focus on improvement of operating margins and increase positive operating cash flow.  We will continue our disciplined focus on efficiency and effectiveness by controlling and reducing operating costs. In the past several years, we have taken steps to consolidate and reduce our general and administrative expenses as a percentage of revenues as well as improve our project margins through increased productivity and more efficient execution. This has created a foundation for maintaining or exceeding our current levels of operating margins in the midst of adverse economic conditions. In fiscal year 2013, project margins in our largest operating segment, the environmental operating segment, will be a primary focus.
Attract and retain top talent.  We continue to add top performers to expand our expertise and depth. Our objective is to maintain a workplace where top performers in our industry will be challenged by meaningful projects, rewarded for successful performance, and motivated to develop their entrepreneurial and project management skills for the benefit of the entire Company. Our recent acquisitions of the Environmental Business Unit of RMT, Inc. ("RMT-EBU"), a subsidiary of Alliant Energy, and The Payne Firm, Inc. ("Payne") have added over 200 professional and support staff, expanding our resource base, technical expertise and market services. Our plan is to expand our employee base by acquisitions and targeted hiring to achieve profitable growth objectives.
Services
Our services are focused on three operating segments: Energy, Environmental, and Infrastructure.
In the course of performing our work 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.
Energy
The Energy operating segment is strategically positioned to serve key areas within the energy market which is currently investing in modernization, expansion, enhancement and replacement of outdated facilities. Currently within the United States, 70% of transmission lines and larger transformers are 25 years or older, and 60% of circuit breakers are more than 30 years old according to the Department of Energy. According to the Edison Electric Institute, transmission line capital expenditures are forecast to exceed $12 billion annually. The country has recently seen shifts in public policy intended to stimulate energy development, to develop a smarter and more robust power grid, to improve the distribution of electricity, and to better manage

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end-user demand. TRC is one of the leading firms supporting the significant investment associated with the development of new sources of energy and the infrastructure required to deliver new and existing energy sources to consumers. This market, like all other markets dependent upon large capital investment, is influenced by cost and access to capital. Access to private sources of credit and capital was somewhat constrained through calendar year 2010, but beginning in 2011 we have observed a more favorable capital investment environment for many of the customers we serve. The American Recovery and Reinvestment Act of 2009 ("ARRA" or "stimulus bill"), targeted, among other investments, those specific areas in which we concentrate our Energy service offerings: energy efficiency, renewable generation, and transmission and distribution. While we believe ARRA may have helped bridge the gap observed in 2010, the credit markets for new energy-related capital projects must be carefully monitored in coming years to maintain confidence in the health of these markets.
Our energy service offerings have evolved over the past decade to include support in the licensing and engineering design of new sources of power generation and electrical transmission and distribution system upgrades. Approximately 30% of our total employee base is dedicated to providing energy services to our customers. As major investor owned utilities continue to consolidate and downsize their engineering and environmental staffs, we expect to continue to see long-term growth in these service areas. In addition, we expect to see continued expansion of our energy efficiency and demand management business.
Key markets for our Energy operating segment are:
Energy Efficiency.  An integral part of the nation's energy plan will consist of more effectively managing our use of finite resources through efficiency, conservation, load management and shifting to renewable energy sources.
We develop and manage state supported energy efficiency programs in New York, New Hampshire, Maine, California and New Jersey that reduce energy use and cost-effectively manage demand. We provide comprehensive services including program design, program management, quality control, engineering, and financial tracking and reporting. In addition to our statewide programs, we also design and manage portfolio energy efficiency programs including a broad range of services from program management to engineering, quality control and construction inspection for a spectrum of end users including commercial office buildings, hospitality chains, educational facilities, residential complexes and military installations.
We are also actively focused on the relationship of energy conservation measures to the reduction in carbon footprints, and we are assisting a number of utilities in "greening" their operations against quantifiable objectives.
Electric Transmission.  Investment in electric transmission and distribution infrastructure represents one of the largest financial commitments facing utilities over the upcoming decade. The age of the transmission and distribution network, combined with continuing electric load growth and the deployment of renewable generating sources has resulted in heightened concern over the reliability and efficiency of the nation's transmission grid.
We are one of the leading engineering and environmental licensing service providers supporting the extensive upgrade underway to the nation's electric transmission grid. We provide full scope engineering design, material procurement and construction management services. We also provide essential operations and management support to utilities as the trend towards outsourcing engineering functions continues. Our ability to provide integrated energy and environmental services has proven to be a key factor to our success in obtaining these projects.
Environmental
The Environmental operating segment represents our largest operating segment. We are a national market leader in the areas of air quality modeling, air emissions testing and monitoring, cultural and natural resource management, permitting of energy facilities and remediation of contaminated sites.
The demand for environmental services originally arose in response to the significant environmental legislation of the 1970's. While regulatory compliance has been a significant market driver since that time, mergers and acquisitions and real estate development have created economic drivers as well. We have served those markets on many fronts including support of property owners and operators on a wide range of issues, including support to buyers and sellers in the pre-acquisition due diligence and asset valuation process.
The markets for our environmental services are dynamic and include:
Investigation, Remediation, and Compliance of Contaminated Sites.  The number of contaminated properties across the United States remains significant. These sites could be economically-driven "brownfield" sites or sites with regulatory-driven activity under laws such as Superfund. The large number of sites combined with the emergence of economically distressed assets into the market provides a strong impetus for assessing and resolving environmentally impaired real estate assets.

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Natural Gas Related Energy Strategies.  Natural gas is becoming a preferred fuel source for domestic energy initiatives. While investment in development of new supplies, transmission pipelines and storage facilities is a function of price and economic conditions, we believe it will become increasingly important in the domestic energy mix. The development of domestic shale reserves in particular should increase demand for environmental activities associated with the permitting, production, transportation, and consumption of natural gas, natural gas liquids and oil. As an example, we continue to be an industry leader in serving this market based upon our staff experience which includes Federal Energy Regulatory Commission ("FERC") licensing; federal and state media specific environmental permitting; electrical supply interconnection engineering; and construction management and oversight for natural gas transmission. With one of the most experienced national teams of environmental scientists, we have been responsible for the licensing and construction oversight of several of the largest multi-state gas transmission pipeline projects in development. We are also providing a range of services to midstream companies in the development of shale resource-based oil, liquids, and natural gas projects. We are also currently providing services for the permitting of both land-based and offshore Liquefied Natural Gas ("LNG") terminals.
Power and Generation Source Licensing and Permitting.  The demand for licensing services and electrical interconnection for new electrical generation sources continues to increase due to several strong market factors. In load congested areas such as the Mid-Atlantic, Northeast, and California, utilities are pursuing development of new sources of electrical supply. Recognizing the importance of fuel diversity, fossil fuel plant development is focusing on the now more abundant supply of natural gas. It is expected that electricity generated from coal will be reduced with natural gas and renewable energy capturing this lost share.
The U.S. Energy Information Administration estimated that 20% of U.S. coal-fired power plants could ultimately be retired under new Environmental Protection Agency ("EPA") rules. These EPA rules cover coal combustion residuals, greenhouse gas emissions and cooling water intake as well as levels of air pollution emissions of nitrous oxide, sulfur dioxide and mercury. These regulatory drivers, in conjunction with the economic attractiveness of natural gas, could help support a wave of future projects associated with power generation licensing, plant fuel supply, and power transmission and distribution.
Over half of the States are implementing renewable portfolio standards, and we are providing licensing and engineering support to a number of wind and solar power projects. The renewable market will be impacted by the scheduled expiration of federal development incentives in the short term, but there is still market activity supported by on-going state initiatives.
We have provided due diligence and best management practices consulting support with respect to energy assets to a number of leading financial institutions, equity firms and diversified energy companies.
Air Quality Legislation.  Recent EPA rule-making has led to a series of new maximum achievable control technology ("MACT") standards and new source performance standards ("NSPS") for a range of industries and emission sources including utility power generation, commercial and industrial boilers, solid waste incinerators, diesel engines, petroleum refineries, cement kilns, iron and steel foundries, gold mining operations, polyvinyl chloride production, and others. These new regulations require air quality emission assessments, permitting evaluations, installation of new control technologies, performance demonstration testing and long-term monitoring.  Additionally, new national ambient air quality standards ("NAAQS") are requiring substantial increases in client services for air quality modeling, and air quality monitoring and consulting to meet those stricter standards. Our long-term market leadership in integrated air quality permitting, modeling and measurement has us well-positioned to meet our client's evolving needs in these areas.  
Solid Waste Management. We offer a full spectrum of solid waste and landfill management services including, siting and permitting, site investigations, planning, alternatives analysis, design, construction, operation, closure and post-closure. According to the EPA, the United States generates approximately 250 million tons of solid waste annually, and all current facilities have finite capacity. We will be leveraging existing professional expertise with our acquisition of RMT-EBU to continue expansion into this market in fiscal year 2013.
Transaction Support.  Our ability to evaluate environmental and regulatory risk in real property and business transfers continues to be one of our core strengths. We support public and private equity investors, financial institutions, regulatory agencies, and property owners with due diligence and compliance counseling services as properties and businesses change ownership.
Environmental, Health and Safety ("EHS") Regulatory Compliance.  Industrial and commercial projects must comply with regulations covering, among other things, air quality, water quality, solid and hazardous waste requirements, land use, wildlife, wetlands, cultural resources, natural resource conservation, and health and safety. Many of these requirements are independent of economic circumstances.

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Strategic EHS Management. Optimizing the environmental and health and safety management programs for industrial clients, particularly those with multiple locations, is an area of focus. Through a comprehensive approach to addressing EHS matters, we assist our clients in realizing improved business performance from the sharing of best practices across facilities; developing standardized procedures and expectations of individual facilities; designing and implementing auditing programs; and leveraging the points of interconnection between the various EHS requirements.
Sustainability Advisory Services. As a strategic adviser on sustainability matters, we work with our clients to customize sustainability solutions to meet their business objectives. Our services include: sustainability strategy development; public report design, development, and validation (Global Reporting Initiative, Carbon disclosure project); life cycle inventory analysis; carbon/greenhouse gas management strategies and reporting; eco-efficiency audits, inventories, and strategies; stakeholder mapping and engagement strategies; pollution prevention/waste minimization and beneficial reuse.
Infrastructure Modernization.  Modernizing our national transportation and energy delivery systems continues to be a focus of both the public and the private sectors. Investment in these areas will require the assessment of related environmental impacts and the permitting to allow such development.
Climate Change.  The market for climate change related services is being driven domestically from many fronts, most of which are not regulatory in nature. We have seen demand for services emerge in the areas of carbon emission assessment and verification, renewable energy development, business process optimization, and public and private sector programs which are designed around energy conservation and other green initiatives. We believe our expertise in air modeling and measurement, renewable energy project licensing, project environmental impact assessment and project engineering, as well as program design and management, provides us an advantage in this market.
Opportunities exist in the following areas:
Control technology requirements under the Clean Air Act, e.g., the Best Available Retrofit Technology requirements for certain air emission sources.
Continued litigation over a variety of air issues such as facility compliance and operations, discharge enforcement and toxic tort claims.
Indoor environmental exposure items such as PCBs, asbestos, and microbial (mold).
The primary demand for environmental assessment and remediation services is driven by the regulatory obligations of our clients at operating facilities and by the real estate transfer and redevelopment process. The trend is for companies to adopt newer, more aggressive environmental management strategies as part of evolving corporate philosophies embracing sustainability and environmental accountability. These strategies require voluntary, accelerated assessment and remediation to lower costs and to improve environmental conditions which meet increased societal and stakeholder demands for better stewardship. While the market for this type of service has been somewhat reinvigorated due to some positive economic trends, the need for cleanup at affected sites in support of economic redevelopment opportunities continue to lag due to the continued slow conditions in the real estate market. Opportunities to support private sector development-related cleanup projects should expand when economic conditions in the real estate and the associated transactional markets improve. We expect our assessment and remediation services market to continue to grow in support of the power generation industry as older facilities are retired or re-powered. Special services we offer are:
Exit Strategy®.  Our Exit Strategy program is one of the most innovative services we offer our clients. We pioneered and remain the market leader in structuring environmental risk transfers for contaminated properties. We help resolve our clients' environmental cleanup risk and uncertainty through options which include insurance-backed remediation, guaranteed fixed-price contracts, risk sharing and performance based contracting. Our services are especially applicable to situations where our clients are seeking certainty with respect to environmental remediation liabilities such as: mergers, acquisitions and divestitures; discontinued operations; asset transfers in bankruptcy and otherwise; real estate transactions involving single sites or portfolios of properties; multi-party Superfund sites; and brownfield real estate development.
RE Power®.  RE Power is a program where we, in conjunction with a decommissioning and demolition company, provide comprehensive dismantling, cleanup, liability transfer and asset optimization solutions to power and utility companies that elect to decommission and reposition their aging power plant assets. The goal of RE Power is to provide energy companies with a one-stop resource to gain maximum value for power plant assets at the end of their useful life. This can include safely removing plants from service through demolition and environmental cleanup, and potentially into a redevelopment phase, or preparing the existing power plant for re-powering with more economically viable fuel sources or more efficient generating equipment. In addition we offer support in project design and oversight for RE Power projects.

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Infrastructure
We offer a wide variety of services to our infrastructure clients primarily related to: (1) rehabilitation of overburdened and deteriorating infrastructure systems; (2) design, construction engineering inspection and construction management associated with new infrastructure projects; and (3) management of risks related to security of public and private facilities. We have a strong geographic presence in the Northeast corridor of the United States as well as Texas, West Virginia, Tennessee, Louisiana and California. The following is a listing of the general types of infrastructure services we offer:
Construction Management.  We provide support to our clients in the areas of program management, project management, construction engineering and inspection, fabrication plant inspections for both concrete and steel, construction management, estimating and scheduling.
Transportation.  We provide planning, design and construction management services in support of work on roads, highways, bridges and aviation facilities. In addition to performing basic design engineering, we also incorporate activities associated with completing environmental studies, marine engineering, seismic analysis, and traffic engineering.
General Civil Engineering Services.  We provide civil engineering services associated with development support for commercial and residential real estate development projects by providing master planning, traffic studies, storm water design and management, utility design, and site engineering. We also can provide the basic engineering needs of small municipalities, and our civil engineering expertise is utilized on projects such as the planning, design and construction management of potable water and wastewater treatment systems; master drainage planning; street, roadway and site drainage; dam analysis and design; and master drainage planning.
Structural Engineering and Inspections. We provide full-service structural engineering design services for bridges, embankments and certain building structures. In addition, we provide structural inspection services primarily on existing bridge structures.
Geotechnical and Materials Engineering.  We provide full-service subsurface exploration, laboratory testing, geotechnical engineering, and seismic engineering and quality assurance testing.
Hydraulics and Hydrological Studies.  We provide aquifer tests, ground water modeling and yield analysis, scour and erosion studies, design and analysis of storage and distribution systems, Federal Emergency Management Agency studies and watershed modeling.
Security.  We provide vulnerability assessments, design engineering and structural improvements for public and private infrastructure facilities, design and implementation of security and surveillance systems, blast resistance design, disaster recovery planning, and force protection analysis. Our market emphasis has shifted from providing these services in commercial buildings to a focus upon public and quasi-public infrastructure and energy-related facilities such as transit systems, utility companies and ports.
Geographic Information Systems, Surveying & Mapping.  We provide, among other services, data modeling, terrain analysis, shoreline management analysis, total station mapping and resource mapping.
We believe that the long-term market for our infrastructure services will be stable and driven by a Federal transportation bill extension that was signed into law in July 2012. The bill, MAP-21, authorizes over $100 billion in spending through the end of the Federal government's fiscal year ending September 30, 2014. This is the first major new legislation for transportation funding since the 2005 bill ran out in September 2009 and was subsequently extended in nine short increments to take funding through June 30, 2012. The new law provides more certainty to transportation-related programs nationwide but represents no dramatic change in policy.
Additional market drivers include population growth in certain geographic regions, continued aging and obsolescence of existing infrastructure, capacity shortfalls, and future federal stimulus funding for state and municipal projects. However, spending by both private and government clients has continued to decline in recent years, reflecting economic conditions, and these conditions have not materially improved in the current calendar year.






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Clients
No single client accounted for 10% or more of our NSR during fiscal years ended 2012, 2011 and 2010.
Representative clients during the past five years include:
AES Enterprises
 
ExxonMobil
 
PSE&G
AIMCO, Inc.
 
Goodyear Tire and Rubber Company
 
Sempra Energy
Baker Hughes
 
Hoffman La Roche, Inc.
 
Spectra Energy
BNSF
 
Iberdrola USA

 
SPX Corporation
British Petroleum
 
J-Power
 
Transwestern Pipeline Company, LLC
Canadian Northern Railway
 
Kinder Morgan
 
Waste Management
Central Maine Power Company
 
LS Power
 
State Transportation/Power Authorities:
CenterPoint Energy
 
Lower Manhattan Development Corporation
 
•       California
Chevron
 
Magellan Midstream Partners
 
•       Massachusetts
Competitive Power Ventures
 
National Grid
 
•       New Hampshire
Connecticut Resources Recovery
 
New York State Energy Research and
 
•       New Jersey
  Authority
 
  Development Authority
 
•       New York
ConocoPhillips
 
Nexterra
 
•       Pennsylvania
Consolidated Edison
 
Northeast Utilities
 
•       Texas
Constellation Energy
 
NRG
 
•       West Virginia
Covanta
 
Orange County Transportation Authority
 
•       Louisiana
Domtar
 
PEPCO
 
U.S. Government:
Dominion
 
PolyOne
 
•       Environmental Protection Agency
DCP Midstream
 
PG&E Corporation
 
•       Department of Defense
El Paso Electric
 
PPL
 
•       Federal Aviation Administration
Entergy
 
Public Service of New Hampshire
 
•       General Services Administration

Competition
The markets for many of our services are highly competitive. There are numerous engineering and consulting firms and other organizations that offer many of the same services offered by us. These firms range in size from small local firms to large national firms that have substantially greater resources than we do. Competitive factors include reputation, performance, price, geographic location and availability of skilled technical personnel. As a mid-size firm, we compete with both the large international firms and the small niche or geographically focused firms.
The majority of our work comes from repeat orders from long-term clients, especially where we are one of the leading service providers in the markets we address. For example, we believe that we are one of the top providers of licensing services for large energy projects. We also believe we are the market leader in structuring of environmental risk transfers through our Exit Strategy program. By continuing to stay in front of emerging trends in our markets we believe our competitive position will remain strong.
Backlog
As of June 30, 2012, our contract backlog based on gross revenue was approximately $387 million, compared to approximately $367 million as of June 30, 2011. Our contract backlog based on net service revenue ("NSR") was approximately $235 million as of June 30, 2012, compared to approximately $230 million as of June 30, 2011. The increase in contract backlog can be most directly attributed to increased activity on electric transmission and distribution projects driven by our utility clients continuing to increase investments in the modernization and replacement of outdated facilities. Approximately 60% of backlog is typically completed in one year. In addition to this contract backlog, we hold open-order contracts from various clients and government agencies. As work under these contracts is authorized and funded, we include this portion in our contract backlog. While most contracts contain cancellation provisions, we are unaware of any material work included in backlog that will be canceled or delayed.





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The following table sets forth the gross revenue and NSR contract backlog amounts of our operating segments at June 30, 2012 and 2011:
 
Gross Revenue Backlog
 
NSR Backlog
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
 
(in millions)
 
(in millions)
Energy
$
79

 
$
59

 
$
60

 
$
40

Environmental
239

 
229

 
131

 
138

Infrastructure
69

 
79

 
44

 
52

 
$
387

 
$
367

 
$
235

 
$
230

Employees
As of June 30, 2012, we had approximately 2,600 full- and part-time employees. Approximately 90% of these employees are engaged in performing professional services for clients. Many of these employees have advanced degrees. Our professional staff includes program managers, project managers, professional engineers and scientists, construction specialists, computer programmers, systems analysts, attorneys and others with degrees and experience that enable us to provide a diverse range of services. Other employees are engaged in executive, administrative and support activities. We consider the relationships with our employees to be favorable.
Contracts with the United States Government and Agencies of State and Local Governments
We have contracts with agencies of the United States government and various state agencies that are subject to examination and renegotiation. We believe that adjustments resulting from such examination or renegotiation proceedings, if any, will not have a material impact our business, financial condition, results of operations or cash flows.
Regulatory Matters
Our businesses are subject to various rules and regulations at the federal, state and local government levels. We believe that we are in substantial compliance with these rules and regulations. We have the appropriate licenses to bid and perform work in the locations in which we operate. We have not experienced any significant limitations on our business as a result of regulatory requirements. We do not believe any currently proposed changes in law or anticipated changes in regulatory practices would limit bidding on future projects.
Trademarks, Patents and Licenses
We have a number of trademarks, patents, copyrights and licenses. None of these are considered material to our business as a whole.
Environmental and Other Considerations
We do not believe that our own compliance with federal, state and local laws and regulations relating to the protection of the environment will have any material effect on our capital expenditures, earnings or competitive position.

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Item 1A.    Risk Factors
The risk factors listed below, in addition to those described elsewhere in this report, could materially and adversely affect our business, financial condition, results of operations or cash flows.
Risks Related to Our Company
Our business and operating results could be adversely affected by our inability to accurately estimate the overall risks, revenue or costs on a contract.
We generally enter into three principal types of contracts with our clients: fixed-price, time-and-materials, and cost-plus. Under our fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur in performing the work, and, consequently, we are exposed to a number of risks. These risks include: underestimation of costs, problems with new technologies, unforeseen costs or difficulties, delays, price increases for materials, poor project management or quality problems, and economic and other changes that may occur during the contract period. Under our time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for other expenses. Profitability on these contracts is driven by billable headcount and cost control. Many of our time-and-materials contracts are subject to maximum contract values, and, accordingly, revenue relating to these contracts is recognized as if these contracts were fixed-price contracts. Under our cost-plus contracts, some of which are subject to contract ceiling amounts, we are reimbursed for allowable costs and fees which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain reimbursement for all such costs. Accounting for a fixed-price contract requires judgments relative to assessing the contract's estimated risks, revenue and estimated costs as well as technical issues. The uncertainties inherent in the estimating process make it possible for actual costs to vary from estimates, or estimates to change, resulting in reductions or reversals of previously recorded revenue and profit. Such differences could be material.
Our engagements involve a variety of projects, some of which are large-scale and complex. Our performance on projects depends in large part upon our ability to manage the relationship with our clients and to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner. If we miscalculate, or fail to properly manage, the resources or time we need to complete a project with capped or fixed fees, or the resources or time we need to meet contractual obligations, our operating results could be adversely affected. Furthermore, any defects, errors or failures to meet our clients' expectations could result in claims against us.
Exit Strategy projects typically involve complex multi-year environmental remediation which must be approved by regulators both as to remedial approach as well as the achievement of the final result. Exit Strategy projects were typically funded by a deposit by the client of most of the contract price into a restricted account with an insurer as well as an insurance layer to cover costs above the restricted account up to a monetary policy limit. The policies were also limited to a fixed term of years. To the extent the costs to complete a project exceed the amount in the restricted account or policy limit or the project is not completed within the policy term, we could incur an uncovered loss on such a project.
If we miss a required performance standard, fail to timely complete, or otherwise fail to adequately perform on a project, we may incur a loss on that project, which may reduce or eliminate our overall profitability.
 We may commit to a client that we will complete a project by a scheduled date. We may also commit that a project, when completed, will achieve specified performance standards. If the project is not completed by the scheduled date or fails to meet required performance standards, we may incur significant additional costs or be held responsible for the costs incurred by the client to rectify damages due to late completion or failure to achieve the required performance standards. The uncertainty of the timing of a project can present difficulties in planning the amount of personnel and resources needed for the project. If the project is delayed or canceled, we may bear the cost of an underutilized workforce that was dedicated to fulfilling the project. In addition, performance of projects can be affected by a number of factors beyond our control, including unavoidable delays from weather conditions, changes in the project scope of services requested by clients, or labor or other disruptions. In some cases, should we fail to meet the required schedule or performance standards, we may also be subject to agreed-upon financial damages, which are determined by the contract. To the extent that these events occur, the total costs of the project could exceed our estimates or, in some cases, cause a loss, which may reduce or eliminate our overall profitability.
Subcontractor performance and pricing could expose us to loss of reputation and additional financial or performance obligations that could result in reduced profits or losses.
We often hire subcontractors for our projects. The success of these projects depends, in varying degrees, on the satisfactory performance of our subcontractors and our ability to successfully manage subcontractor costs and pass them through to our customers. If our subcontractors do not meet their obligations or we are unable to manage or pass through costs, we may be unable to profitably perform and deliver our contracted services. Under these circumstances we may be required to make additional

11


investments and expend additional resources to ensure the adequate performance and delivery of the contracted services. In the past, these additional obligations have resulted in reduced profits or, in some cases, significant losses for us with respect to certain projects. In addition, the inability of our subcontractors to adequately perform or our inability to manage subcontractor costs on certain projects could hurt our competitive reputation and ability to obtain future projects.
We incurred significant losses in fiscal years 2011 and 2010, and may incur such losses in the future. If we incur significant losses or are unable to generate sufficient working capital from our operations or our revolving credit facility, we may have to seek additional external financing.
As reflected in our consolidated financial statements, in fiscal year 2012 we reported net income applicable to our common shareholders of $33.6 million, but in fiscal years 2011 and 2010 we reported net losses of $(16.6) million and $(22.9) million, respectively. Major factors in those losses were the Arena Towers litigation expense incurred in fiscal year 2011 and non-cash goodwill and intangible asset impairment charges in fiscal year 2010. In addition we recorded significant non-cash preferred stock accretion charges in fiscal years 2011 and 2010. Operating performance has, however, improved, and we are continuing to take actions to maintain and increase profitability. Nevertheless, if we are unable to maintain operating performance we may incur additional losses. We depend on our core businesses to generate profits and cash flow to fund our working capital growth.
We finance our operations through cash generated by operating activities and borrowings under our revolving credit facility with Wells Fargo Capital Finance. While we have rarely used the credit facility since the $15.5 million preferred stock offering in fiscal year 2010, we are dependent on the revolving credit facility for any short term liquidity needs when available cash and cash equivalents and cash provided by operations are not adequate to support working capital requirements. The credit facility contains covenants which, among other things, require us to maintain minimum levels of earnings before interest, taxes, depreciation, and amortization as defined in the credit agreement ("EBITDA"), maintain a minimum fixed charge coverage ratio, maintain a minimum level of backlog, and limit capital expenditures.
If we must write off a significant amount of intangible assets or long-lived assets, our earnings will be negatively impacted.
Goodwill was approximately $24.9 million as of June 30, 2012. We also had other identifiable intangible assets of $5.0 million, net of accumulated amortization, as of June 30, 2012. Goodwill and identifiable intangible assets are assessed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We recorded goodwill and intangible asset impairment charges of $20.2 million in fiscal year 2010. A decline in the estimated future cash flows of our reporting units, declines in market multiples of comparable companies and other factors could result in additional impairments of goodwill or other assets which would negatively impact our earnings or result in a net loss.
We are and will continue to be involved in litigation. Legal defense and settlement expenses can have a material adverse impact on our operating results.
We have been, and likely will be, named as a defendant in legal actions claiming damages and other relief in connection with engineering and construction projects and other matters. These are typically actions that arise in the normal course of business, including employment-related claims, contractual disputes, professional liability, or claims for personal injury or property damage. We have substantial deductibles on several of our insurance policies, and not all claims are insured. In addition, we have also incurred legal defense and settlement expenses related to prior acquisitions. Accordingly, defense costs, settlements and potential damage awards may have a material adverse effect on our business, financial condition, results of operations or cash flows in future periods.
Our operations could require us to utilize large sums of working capital, sometimes on short notice and sometimes without the ability to recover the expenditures.
Circumstances or events which could create large cash outflows include losses resulting from fixed-price contracts, remediation of environmental liabilities, legal expenses and settlements, project completion delays, failure of clients to pay, income tax assessments and professional liability claims, among others. We cannot provide assurance that we will have sufficient liquidity or the credit capacity to meet all of our cash needs if we encounter significant working capital requirements as a result of these or other factors.
Our services expose us to significant risks of liability, and it may be difficult or more costly to obtain or maintain adequate insurance coverage.
Our services involve significant risks that may substantially exceed the fees we derive from our services. Our business activities expose us to potential liability for professional negligence, personal injury and property damage among other things. We cannot always predict the magnitude of such potential liabilities. In addition, our ability to perform certain services is dependent on the availability of adequate insurance.
We obtain insurance from insurance companies to cover a portion of our potential risks and liabilities subject to specified

12


policy limits, deductibles or coinsurance. It is possible that we may not be able to obtain adequate insurance to meet our needs or may have to pay an excessive amount for the insurance coverage we want. In addition, we may not be able to acquire any insurance for certain types of business risks. Almost all of the cost cap and related insurance purchased by Exit Strategy clients has been underwritten by Chartis. The Exit Strategy related policies all tend to be long term; many are ten years or more. Some policies also serve to satisfy state and federal financial assurance requirements for certain projects, and without these policies, alternative financial assurance arrangements for these projects would need to be arranged. Additionally, most of our Exit Strategy projects require us to perform the work in the event insurance limits are exhausted, directly exposing us to financial risks.
We are self-insured or carry deductibles for a significant portion of our claims exposure, which could materially and adversely affect our operating income and profitability.
 We are self-insured or carry deductibles for a significant portion of our claims exposure. Because of these deductibles and self-insured retention amounts, we have significant exposure to fluctuations in the number and severity of claims. As a result, our insurance and claims expense could increase in the future. Under certain conditions, we may elect or be required to increase our self-insured or deductible amounts, which would increase our already significant exposure to expense from claims. If any claim exceeds our coverage, we would bear the excess expense, in addition to our other self-insured amounts. If the frequency or severity of claims or our expenses increase, our operating income and profitability could be materially adversely affected.
Our profitability could suffer if we are not able to maintain adequate utilization of our workforce.
  As a service organization, the percentage of our employees' time that is chargeable to clients (utilization) is a key factor. The rate at which we utilize our workforce is affected by a number of factors, including:
Our ability to transition employees from completed projects to new assignments and to hire and assimilate new employees;
Our ability to forecast demand for our services and thereby maintain an appropriate headcount in each of our geographies and workforces;
Our ability to manage attrition;
Our need to devote time and resources to training, business development, professional development and other non-chargeable activities; and
Our ability to match the skill sets of our employees to the needs of the marketplace.
Our backlog is subject to cancellation and unexpected adjustments and is an uncertain indicator of future operating results.
Our contract backlog based on NSR as of June 30, 2012 was approximately $235.0 million. We cannot guarantee that the NSR projected in our backlog will be realized or, if realized, will result in profits. In addition, project cancellations or scope adjustments may occur from time to time with respect to contracts reflected in our backlog. These types of backlog reductions could adversely affect our revenue and margins. Accordingly, our backlog as of any particular date is an uncertain indicator of our future revenue or earnings.
Acquisitions, joint ventures and strategic alliances may have an adverse effect on our business.
We expect to continue making acquisitions or entering into joint ventures and strategic alliances as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy; that we don't realize a satisfactory return on our investment; that we experience difficulty integrating new employees, business systems, technology, and cultures; or that management's attention is diverted from our other businesses. It may take longer than expected to realize the full benefits of acquisitions, such as increased revenue, enhanced efficiencies, or market share, or those benefits may ultimately be smaller than anticipated, or may not be realized. These events could harm our operating results or financial condition.
If we are not able to successfully manage our growth strategy, our business and results of operations may be adversely affected.
Our expected future growth presents numerous managerial, administrative, operational and other challenges. Our ability to manage the growth of our operations will require us to increase the capacity of our management information systems and maintain strong internal systems and controls. In addition, our growth will increase our need to attract, develop, motivate and retain management and professional employees. The inability of our management to effectively manage our growth or the inability of our employees to achieve anticipated performance could have a material adverse effect on our business.
Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address.

13


The current uncertain state of the domestic economy and the possibility that economic conditions could continue to be uncertain or deteriorate may affect businesses such as ours in a number of ways. While management cannot directly measure it or predict it, variability in the economy and any corollary impact on the availability of credit could affect the ability of our customers and vendors to obtain financing for significant purchases and operations and could result in a decrease in their business with us which could adversely affect our ability to generate profits and cash flows.
General worldwide economic conditions have experienced a downturn resulting in adverse business conditions. These conditions make it extremely difficult for our clients and our vendors to accurately forecast and plan future business activities and could cause businesses to slow spending on services, and these conditions have also made it difficult for us to estimate the short-term and long-term impacts on our business. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery worldwide or in our industry. If the economy or markets in which we operate deteriorate from the level experienced in fiscal year 2012, our business, financial condition and results of operations may be materially and adversely affected.

Risks Related to Our Industry
Changes in existing environmental laws, regulations and programs or reductions in the level of regulatory enforcement could reduce demand for our environmental services which could cause our revenue to decline.
While we pursue markets for our services that are strongly tied to the overall health of the domestic economy, our business is also materially dependent on the continued enforcement by federal, state and local governments of various environmental regulations. A significant amount of our business is generated either directly or indirectly as a result of existing federal and state laws, regulations and programs related to pollution and environmental protection. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could result in a decline in demand for environmental services that may have a material adverse effect on our revenue and business prospects.
We operate in highly competitive industries.
The markets for many of our services are highly competitive. There are numerous professional architectural, engineering and consulting firms and other organizations which offer many of the services offered by us. We compete with many companies, some of which have greater resources. Competitive factors include reputation, performance, price, geographic location and availability of technically skilled personnel. In addition, many clients also use in-house staff to perform the same types of services we do.
We are materially dependent on contracts with federal, state and local governments. Our inability to continue to win or renew government contracts could result in material reductions in our revenues and profits.
We have increased our contract activity with the federal, state and local governments in recent years and are materially dependent on such contracts. We estimate that contracts with agencies of the United States government and various state and local governments represented approximately 23% of our NSR in fiscal year 2012. Companies engaged in government contracting are subject to certain unique business risks. Among these risks are dependence on appropriations and administrative allotment of funds as well as changing policies and regulations. These contracts may also be subject to renegotiation of profits or termination at the option of the government. The stability and continuity of that portion of our business depends on the periodic exercise by the government of contract renewal options, our continued ability to negotiate favorable terms and the continued awarding of task orders to us. We cannot control whether those clients will fund or continue funding our outstanding projects.
We are subject to procurement laws and regulations associated with our government contracts. If we do not comply with these laws and regulations, we may be prohibited from completing our existing government contracts or suspended from government contracting and subcontracting for some period of time or debarred.  
Our compliance with the laws and regulations relating to the procurement, administration, and performance of our government contracts is dependent upon our ability to ensure that we properly design and execute compliant procedures. Our termination from any of our larger government contracts or suspension from future government contracts for any reason would result in material declines in expected revenue. Because government agencies have the ability to terminate a contract for convenience, the agencies could terminate or decide not to renew our contracts with little or no prior notice.
 Our government contracts are subject to audit. These audits may result in the determination that certain costs claimed as reimbursable are not allowable or have not been properly allocated to government contracts according to government regulations. We are subject to audits for several years after payment for services has been received. Based on these audits, government entities may adjust or seek reimbursement for previously paid amounts. None of the audits performed to date on our government contracts have resulted in any significant adjustments to our financial statements. It is possible, however, that an audit in the future could

14


have an adverse effect on our business, financial condition, results of operations or cash flows. 
Reductions in state and local government budgets could negatively impact their capital spending and adversely affect our business, financial condition and results of operations.
Several of our state and local government clients are currently facing budget deficits, resulting in smaller budgets and reduced capital spending. Our state and local government clients may continue to face budget deficits that prohibit them from funding new or existing projects. In addition, existing and potential clients may either postpone entering into new contracts or request price concessions. If we are not able to reduce our costs quickly enough to respond to the revenue decline from these clients that may occur, our operating results would be adversely affected. Accordingly, these factors affect our ability to accurately forecast our future revenue and earnings from business areas that may be adversely impacted by market conditions.
 
Other Risks
Our actual business and financial results could differ from the estimates and assumptions that we use to prepare our financial statements, which may significantly reduce or eliminate our profits.
  To prepare financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions as of the date of the financial statements. These estimates and assumptions affect the reported values of assets, liabilities, revenue and expenses, as well as disclosures of contingent assets and liabilities. For example, we typically recognize revenue over the life of a fixed-price contract based on the proportion of costs incurred to date compared to the total costs estimated to be incurred for the entire project. Changes in those cost estimates can reduce or increase the percentage of the revenue recognized at any point in time.
Areas requiring significant estimates by our management include:
The application of the percentage-of-completion method of accounting and revenue recognition on contracts, change orders and contract claims;
Provisions for uncollectible receivables and client claims and recoveries of costs from subcontractors, vendors and others;
Provisions for income taxes and uncertain tax positions;
Value of goodwill and recoverability of other intangible assets;
Valuations of assets acquired and liabilities assumed in connection with business combinations;
Estimated earnout payments due in connection with business combinations;
Valuation of self insured reserves;
Valuation of stock-based compensation expense; and
Accruals for estimated liabilities, including litigation and insurance reserves.
We are highly dependent on key personnel.
The success of our business depends on our ability to attract and retain qualified employees. We need talented and experienced personnel in a number of areas to support our core business activities. An inability to attract and retain sufficient qualified personnel could harm our business. Turnover among certain critical staff could have a material adverse effect on our ability to implement our strategies and on our results of operations.
Safety related issues could result in significant losses.  
Safety is a primary focus of our business. We often work on large-scale and complex projects, sometimes in geographically remote locations which can place our employees and others near large equipment, dangerous processes or highly regulated materials, and in challenging environments. Many of our clients require that we meet certain safety criteria to be eligible to bid on contracts, and some of our contract fees or profits are subject to satisfying safety criteria. Unsafe work conditions also have the potential of increasing employee turnover, increasing project costs and raising our operating costs. We are responsible for the safety of our employees at work, and, on occasion on certain projects, we take on expanded site safety responsibilities. If our employees or others become injured, or if we fail to implement appropriate health and safety procedures, we could be subject to claims and liability. In addition, if our overall safety performance falls below certain levels we may be foreclosed from bidding on work with certain clients.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, investors could lose confidence in our financial reporting, which could harm our business and the trading price of our stock.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide

15


reliable financial reports or prevent fraud, our operating results could be harmed. We devote significant attention to establishing and maintaining effective internal controls. Implementing changes to our internal controls has entailed substantial costs in order to modify our existing accounting systems. Although these measures are designed to do so, we cannot be certain that such measures and future measures will guarantee that we will successfully maintain adequate controls over our financial reporting processes and related reporting requirements. Internal controls that are found to not be operating effectively could affect our operating results or cause us to fail to meet our reporting obligations and could result in a breach of a covenant in our revolving credit facility in future periods. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the market price of our stock.
We rely on third-party internal and outsourced software to run our critical accounting, project management and financial information systems. As a result, any sudden failure, unavailability, disruption or unexpected costs to maintain these systems could significantly increase our operational expense and disrupt the management of our business operations.
We rely on third-party software to run our critical accounting, project management and financial information systems. We also depend on our software vendors to provide long-term software maintenance support for our information systems. Software vendors may decide to discontinue further development, integration or long-term software maintenance support for our information systems, in which case we may need to abandon one or more of our current information systems and migrate some or all of our accounting, project management and financial information to other systems, thus increasing our operational expense as well as disrupting the management of our business operations.
The Company's information technology systems, processes, and sites may suffer interruptions, failures, or systematic attacks by computer which may affect the Company's ability to conduct its business.
The Company's information technology systems provide critical data connectivity, information and services for internal and external users. These interactions include, but are not limited to, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements, and other processes necessary to manage the business. Our computer systems face the threat of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions. The Company has adopted security precautions for its critical systems, including establishment of back-up data centers. However, if the Company's information technology systems are damaged, or cease to function properly due to any number of causes, such as catastrophic events, power outages or security breaches resulting in unauthorized access, and the Company's business continuity plans and security precautions do not effectively compensate on a timely basis, the Company may suffer interruptions in its operations or the loss of information, which could have a negative impact on our business, financial condition, results of operations or cash flows.
We may experience adverse impacts on our results of operations as a result of adopting new accounting standards or interpretations.
Our adoption of, and compliance with, changes in accounting rules, including new accounting rules and interpretations, could adversely affect our operating results or cause unanticipated fluctuations in our operating results.
The value of our equity securities could continue to be volatile.
Our stock is thinly traded, and over time has experienced substantial price volatility. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many companies that have been unrelated to the operating performance of these companies. The overall market and the price characteristics of our common stock may continue to fluctuate greatly. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain or attract key employees. Many of these key employees are granted stock options and restricted stock as an element of compensation, the value of which is dependent on our stock price.
Extraordinary events, including natural disasters and terrorist actions could negatively impact the economies in which we operate or disrupt our operations, which may affect our business, financial condition, results of operations or cash flows.
Extraordinary events beyond our control, such as natural and man-made disasters, as well as terrorist actions, could negatively impact us by causing the closure of offices, interrupting projects and forcing the relocation of employees. If we are not able to react quickly to these sorts of events, our operations may be affected significantly, which could have a negative impact on our business, financial condition, results of operations or cash flows.

16


Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
We provide our services through a network of approximately 100 offices located nationwide. We lease approximately 700,000 square feet of office and commercial space to support these operations. In addition, a subsidiary of ours owns a 26,000 square foot office/warehouse building in Austin, Texas. This property is subject to a deed of trust in favor of the lenders under our principal credit facility. All properties are adequately maintained and are suitable and adequate for the business activities conducted therein. In connection with the performance of certain Exit Strategy or real estate projects, some of our subsidiaries have taken title to sites on which environmental remediation activities are being performed.
Item 3.    Legal Proceedings
See Note 17—Commitments and Contingencies - Legal Matters of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for information regarding legal proceedings in which we are involved.
Item 4.    Mine Safety Disclosures
Not Applicable.

17


Part II
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
On September 3, 2011, we issued 61,387 shares of unregistered common stock with a market value of $0.3 million as consideration for the purchase of The Payne Firm, Inc. This offering was made pursuant to the exemption from registration provided in Regulation D, Rule 506, under Section 4 (2) of the Securities Act of 1933 as amended (the "Act").
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "TRR." The following table sets forth the high and low per share prices for the common stock for fiscal years 2012 and 2011 as reported on the NYSE:
 
Fiscal 2012
 
Fiscal 2011
 
High
 
Low
 
High
 
Low
First Quarter
$
6.83

 
$
2.95

 
$
3.25

 
$
2.65

Second Quarter
6.39

 
2.48

 
3.98

 
2.20

Third Quarter
7.20

 
4.27

 
5.14

 
3.45

Fourth Quarter
7.05

 
5.15

 
9.01

 
4.30

As of July 13, 2012, there were 271 shareholders of record, and, as of that date, we estimate there were approximately 1,987 beneficial owners holding our common stock in nominee or "street" name.
To date we have not paid any cash dividends on our common stock, and the payment of dividends in the future will be subject to financial condition, capital requirements and earnings. The terms of our credit agreement also prohibit the payment of cash dividends. Future earnings are expected to be used for expansion of our operations, and cash dividends are not currently anticipated.





















18


Stock Performance Graph
Comparison of Five-Year Cumulative Total Return Among TRC, S&P 500 Total Return Index and Peer Companies
The annual changes for the five-year period shown in the graph below are based upon the assumption (as required by SEC rules) that $100 had been invested in our Common Stock on June 30, 2007. The figures presented assume that all dividends, if any, paid over the performance periods were reinvested.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 2012
Data and graph provided by Zacks Investment Research, Inc. Copyright© 2012, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. All rights reserved.
 
Year Ended June 30,
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
TRC
$
100

 
$
27

 
$
27

 
$
21

 
$
47

 
$
45

S&P 500 Index
100

 
87

 
64

 
73

 
96

 
101

Peer Group
100

 
98

 
112

 
78

 
83

 
92

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


19


Item 6.    Selected Financial Data
The following table provides summarized information with respect to our operations and financial position. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto contained herein.
Statements of Operations Data, for the fiscal years ended June 30,
2012
 
2011
 
2010
 
2009
 
2008
 
(in thousands, except per share data)
Gross revenue
$
419,959

 
$
333,209

 
$
330,575

 
$
432,517

 
$
465,079

Less subcontractor costs and other direct reimbursable charges
118,179

 
87,298

 
100,476

 
177,713

 
196,870

Net service revenue
301,780

 
245,911

 
230,099

 
254,804

 
268,209

Interest income from contractual arrangements
295

 
411

 
596

 
1,859

 
3,944

Insurance recoverables and other income
614

 
(1,573
)
 
8,844

 
19,539

 
6,123

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of costs shown separately below)
246,506

 
202,265

 
203,221

 
227,217

 
241,647

General and administrative expenses
31,025

 
26,286

 
26,028

 
32,936

 
38,660

Provision for doubtful accounts
755

 
1,763

 
2,344

 
3,952

 
3,708

Depreciation and amortization (1)
5,508

 
4,729

 
8,049

 
7,322

 
8,051

Goodwill and intangible asset impairments (2)

 

 
20,249

 
21,438

 
77,267

Arena Towers litigation (reversal) expense (3)
(11,061
)
 
17,278

 
1,100

 

 
1,417

Total operating costs and expenses
272,733

 
252,321

 
260,991

 
292,865

 
370,750

Operating income (loss)
29,956

 
(7,572
)
 
(21,452
)
 
(16,663
)
 
(92,474
)
Interest expense
(668
)
 
(761
)
 
(1,003
)
 
(2,925
)
 
(3,936
)
Gain on extinguishment of debt (4)

 

 
1,716

 

 

Income (loss) from operations before taxes and equity in earnings (losses)
29,288

 
(8,333
)
 
(20,739
)
 
(19,588
)
 
(96,410
)
Federal and state income tax benefit (provision) (5)
3,930

 
(1,127
)
 
4,210

 
(3,871
)
 
(12,296
)
Income (loss) from operations before equity in earnings (losses)
33,218

 
(9,460
)
 
(16,529
)
 
(23,459
)
 
(108,706
)
Equity in earnings (losses) from unconsolidated affiliates, net of taxes
270

 
30

 
(45
)
 
(449
)
 
(505
)
Net income (loss)
33,488

 
(9,430
)
 
(16,574
)
 
(23,908
)
 
(109,211
)
Net loss applicable to noncontrolling interest
87

 
58

 
125

 

 
62

Net income (loss) applicable to TRC Companies, Inc.
33,575

 
(9,372
)
 
(16,449
)
 
(23,908
)
 
(109,149
)
Accretion charges on preferred stock (6)

 
(7,261
)
 
(6,431
)
 
(215
)
 

Net income (loss) applicable to TRC Companies, Inc.'s common shareholders
$
33,575

 
$
(16,633
)
 
$
(22,880
)
 
$
(24,123
)
 
$
(109,149
)
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
1.21

 
$
(0.69
)
 
$
(1.17
)
 
$
(1.25
)
 
$
(5.84
)
Diluted earnings (loss) per common share
$
1.16

 
$
(0.69
)
 
$
(1.17
)
 
$
(1.25
)
 
$
(5.84
)
 


 


 


 


 


Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
27,781

 
24,107

 
19,548

 
19,272

 
18,700

Diluted
28,822

 
24,107

 
19,548

 
19,272

 
18,700

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share

 

 

 

 

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data at June 30:
 
 
 
 
 
 
 
 
 
Total assets
$
275,128

 
$
276,060

 
$
287,795

 
$
336,896

 
$
397,319

Long-term debt and capital lease obligations, including current portion
5,904

 
9,176

 
9,444

 
12,501

 
39,310

Preferred stock

 

 
8,239

 
1,808

 

Total equity
68,048

 
29,672

 
27,953

 
48,623

 
57,671

_________________________________
(1)
During fiscal year 2010, we recorded amortization expense of $1.9 million of which $1.6 million was due to the acceleration of amortization expense relating to certain customer relationship intangible assets.
(2)
During fiscal year 2010, we recorded an impairment charge of $20.2 million related to goodwill. During fiscal year 2009, we recorded impairment charges of $19.3 million related to goodwill and $2.1 million related to certain customer relationships intangible assets. During fiscal year 2008, we recorded impairment charges of $76.7 million related to goodwill and $0.6 million related to certain customer relationships intangible assets.
(3)
During fiscal year 2011, the jury in the Arena Towers case returned a verdict against us in the amount of $15.4 million plus $2.9 million for pre-judgment interest. We incurred approximately $17.3 million, $1.1 million and $1.4 million of litigation reserve expenses relating to this case in fiscal years 2011,

20


2010 and 2008, respectively. During fiscal year 2012, we filed a post-trial motion to disregard the late fee portion of the verdict, resulting in an $11.1 million partial reversal of the previously recorded expense. A judgment was entered in the case on October 10, 2011, and on January 3, 2012 we paid $8.7 million in full satisfaction of the judgment and interest.
(4)
During fiscal year 2010, we recorded a $1.7 million gain on extinguishment of debt in connection with the dissolution of Co-Energy LLC, a consolidated entity.
(5)
During fiscal year 2012, we recorded a tax benefit of $3.9 million primarily related to the remeasurement of uncertain tax positions as a result of a settlement with the IRS for fiscal years 2003 through 2008. During fiscal year 2010, we recorded a net tax benefit of $4.2 million primarily due to: (i) the Worker, Homeownership, and Business Assistance Act of 2009 which amended I.R.C. §172(b)(1)(H), allowing taxpayers to elect to carry back an applicable net operating loss ("NOL") for a period of 3, 4, or 5 years, to offset taxable income in those preceding years and enabling us to carry back our fiscal year 2008 NOL for a tax benefit of $2.8 million, which amount was collected in January 2010; and (ii) the re-assessment of our uncertain tax positions based on communications with the IRS relating to our examination including the impact of the NOL law change. During fiscal year 2008, we determined that it was more likely than not that our deferred tax assets would not be realized as a result of insufficient expected future taxable income or reversals of existing temporary differences and recorded a valuation allowance of $12.1 million to fully reserve for our deferred tax assets as of such date.
(6)
We incurred charges of approximately $7.3 million, $6.4 million and $0.2 million in fiscal years 2011, 2010 and 2009, respectively, related to the accretion of the beneficial conversion feature related to the preferred stock issued in June 2009.


21


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our results of operations and financial condition in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based upon current expectations and assumptions that are subject to risks and uncertainties. Actual results and the timing of certain events may differ materially from those projected in such forward-looking statements due to a number of factors, including those discussed in Item 1A. "Risk Factors" and in the section entitled "Forward-Looking Statements" on page 3.
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 derive our revenue from fees for professional and technical services. As a service company, we are more labor-intensive than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding service to our clients and execute projects successfully. Our income from operations is derived from our ability to generate revenue and collect cash under our contracts in excess of our direct costs, subcontractor costs, other contract costs, and general and administrative ("G&A") expenses.
In the course of providing our services we routinely subcontract services. Generally these subcontractor costs are passed through to our clients and, in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and consistent with industry practice, are included in gross revenue. Because subcontractor services can change significantly from project to project, changes in gross revenue may not be indicative of business trends. Accordingly, we also report net service revenue ("NSR"), which is gross revenue less subcontractor costs and other direct reimbursable charges, and our discussion and analysis of financial condition and results of operations uses NSR as a primary point of reference.
The following table presents the approximate percentage of NSR by contract type:
 
Fiscal Year
 
2012
 
2011
 
2010
Time-and-materials
60
%
 
60
%
 
58
%
Fixed-price
36
%
 
36
%
 
41
%
Cost-plus
4
%
 
4
%
 
1
%
 
100
%
 
100
%
 
100
%
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;
Seasonality of the spending cycle, notably for state and local government entities, and the spending patterns of our commercial sector clients;
Budget constraints experienced by our federal, state and local government clients;
Divestitures or discontinuance of operating units;
Employee hiring, utilization and turnover rates;
The number and significance of client contracts commenced and completed during the period;
Creditworthiness and solvency of clients;
The ability of our clients to terminate contracts without penalties;
Delays incurred in connection with contracts;
The size, scope and payment terms of contracts;
Contract negotiations on change orders and collection of related accounts receivable;

22


The timing of expenses incurred for corporate initiatives;
Competition;
Litigation;
Changes in accounting rules;
The credit markets and their effect on our customers; and
General economic or political conditions.
We experience seasonal trends in our business. Our revenue is typically lower in the second and third fiscal quarters, as our business is, to some extent, dependent on field work and construction scheduling and is also affected by federal holidays. 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 occasionally cause some of our offices to close temporarily and can significantly affect our project field work. Conversely, our business generally benefits from milder weather conditions in our first and fourth fiscal quarters which allow for more productivity from our field services.
Acquisitions and Divestitures

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 U.S. markets.

On September 3, 2011, we acquired 100% of the stock of privately-held The Payne Firm, Inc. ("Payne") through a combination of cash and stock. Headquartered in Cincinnati, Ohio, Payne is an environmental consulting firm that specializes in providing a range of services to the legal and financial communities and industries ranging from manufacturing and health care to higher education. Payne has been integrated into the Company's business processes and systems as a part of our Environmental operating segment. The purchase price of approximately $4.8 million consisted of cash of $3.5 million payable at closing, 61,387 shares of our common stock valued at $0.3 million (based on the closing price of our common stock on the date of the transaction), future earnout consideration with an estimated fair value of $0.9 million, and a net working capital adjustment of $0.2 million. Goodwill of $3.9 million, and other intangible assets of $0.8 million were recorded as a result of this acquisition. The goodwill is the result of expected synergies from combining the operations of the acquired business with our operations and intangible assets that do not qualify for separate recognition, such as an assembled workforce. The impact of this acquisition was not material to our consolidated balance sheets and results of operations.
On June 6, 2011, we acquired the Environmental Business Unit of RMT, Inc. ("RMT-EBU"), a subsidiary of Alliant Energy, headquartered in Madison, Wisconsin. RMT-EBU specializes in consulting, development, engineering and construction through remediation and restoration; environmental, health and safety management; air pollution control; and solid waste management. RMT-EBU consists of approximately 200 consultants and ten primary locations. RMT-EBU was integrated into our business processes and systems as a part of our Environmental operating segment. The purchase price of approximately $13.9 million consisted of cash of $13.3 million paid at closing and a working capital adjustment of $0.6 million. Goodwill of $4.2 million, all of which is expected to be tax deductible, and other intangible assets of $3.8 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 our acquisition of RMT-EBU.
On February 25, 2011, we acquired 100% of the stock of privately-held Alexander Utility Engineering, Inc. ("AUE") through a combination of cash, stock and subordinated debt. Headquartered in San Antonio, Texas, AUE is a professional engineering and design firm that specializes in providing a range of services to the electric utility marketplaces. AUE is integrated into our business processes and systems as a part of our Energy operating segment. The purchase price of approximately $2.3 million consisted of cash of $0.7 million payable at closing, a $0.9 million subordinated note, 79,787 shares of our common stock valued at $0.3 million (based on the closing price of our common stock on the date of the transaction), and future earnout consideration with an estimated fair value of $0.4 million. Goodwill of $1.8 million, none of which is expected to be tax deductible, and other intangible assets of $0.5 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 our acquisition of AUE.
Divestitures.  From time to time, we may divest certain non-core businesses and reallocate our resources to businesses that better align with our long-term strategic direction. In June 2010 we sold our 50% ownership position in Environmental Restoration, LLC, an unconsolidated affiliate formed to develop a habitat mitigation bank. We received a cash payment of $25 thousand and a $0.3 million five-year promissory note. Profit on the transaction was deferred as the buyer's initial financial commitment was insufficient to provide economic substance to the transaction. In December 2011, the debt payments received were deemed adequate to allow for the full recognition of the sale. Accordingly, we recognized the remaining deferred gain on the sale of approximately $0.3 million.


23


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 entities. Our services include program management, engineer/procure/construct projects, design, and consulting. Our typical projects involve upgrades and new construction for electric transmission and distribution systems, energy efficiency program design and management, renewable energy development, power generation and gas transmission.
Environmental:  The Environmental operating segment provides services to a wide range of clients including industrial, transportation, energy and natural resource companies, as well as federal, state and municipal agencies. The Environmental operating segment is organized to focus on key areas of demand including: environmental management of buildings; air quality measurements and modeling of potential air pollution impacts; assessment and remediation of contaminated sites and buildings; solid waste 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 segments. We do not track our assets by operating segment, and consequently, it is not practical to show assets by operating segment. Segment profit includes all operating expenses except the following: costs associated with providing corporate shared services (including certain depreciation and amortization), goodwill and intangible asset write-offs, stock-based compensation expense and amortization of intangible assets. Depreciation expense is primarily allocated to operating segments based upon their respective use of total operating segment office space. Assets solely used by Corporate are not allocated to the operating segments. Inter-segment balances and transactions are not material. The accounting policies of the operating segments are the same as those for us as a whole except as discussed herein.
The following table presents the approximate percentage of our NSR by operating segment:
 
Fiscal Year
 
2012
 
2011
 
2010
Energy
32
%
 
30
%
 
26
%
Environmental
53
%
 
53
%
 
53
%
Infrastructure
15
%
 
17
%
 
21
%
 
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 an increasingly 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 $50.0 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. Energy efficiency services continue to benefit from 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

24


charges at the state or utility level are expanding the marketplace for energy efficiency program management services. Investment within the renewable portfolios also remains strong. We are well established in the Northeast and Mid-Atlantic regions and are focused on growing our presence in the Texas and California markets where demand for services is the highest.
Environmental:  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 sluggish. The fundamental market drivers for environmental services remain in place, including evolving regulatory developments particularly with respect to air quality and the continuing need to enhance our aging transportation and energy infrastructure. Nevertheless, recent indicators suggest that certain elements of this marketplace continue to defer action in light of current economic and political uncertainty, stalling a return to the long-term pattern of growth historically enjoyed by this operating segment. Shale gas and other energy source initiatives present important market opportunities but are linked to policy changes which will be required for the markets to commit long-term capital to projects such as pipelines and related infrastructure.
Infrastructure:  Demand for infrastructure services is expected to continue to be flat for fiscal year 2013 due to general economic conditions, heavy budget cuts and deficit issues and revenue shortfalls at state and municipal levels. Nevertheless, the overall construction markets are believed to be poised for growth and investment as a result of a Federal transportation bill that was recently signed into law in July 2012. The bill, MAP-21, authorizes over $100 billion in spending through the end of the Federal government's fiscal year that ends September 30, 2014. This is the first major new legislation for transportation funding since the 2005 bill ran out in September 2009 and was subsequently extended in nine short increments to take funding through June 30, 2012. In addition, U.S. macroeconomic factors such as positive gross domestic product growth, increasing population base, and improvements in the lending environment should help drive the Infrastructure business. Recent estimates indicate that approximately $2.0 trillion needs to be invested in national infrastructure alone to restore the system to a state of good repair. The long-term prospect may also be benefited by alternative funding mechanisms; potential additional economic stimulus initiatives; and the continued need to upgrade, replace or repair aging transportation infrastructure.
Critical Accounting Policies
Our financial statements have been prepared in accordance with U.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates and assumptions. We use our best judgment in the assumptions used to compile these estimates, which are based on current facts and circumstances, prior experience and other assumptions that are believed to be reasonable. Our accounting policies are described in Note 2 to the consolidated financial statements contained in Item 8 of this report. We believe the following critical accounting policies reflect the more significant judgments and estimates used in preparation of our consolidated financial statements and are the policies which are most critical in the portrayal of our financial position and results of operations:
Revenue Recognition:    We recognize contract revenue in accordance with Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition. Specifically, we follow the guidance in ASC Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts.
Fixed-Price Contracts
We recognize revenue on fixed-price contracts using the percentage-of-completion method. Under this method of revenue recognition, we estimate the progress towards completion to determine the amount of revenue and profit to recognize on all significant contracts. We generally utilize an efforts-expended, cost-to-cost approach in applying the percentage-of-completion method under which revenue is earned in proportion to total costs incurred divided by total costs expected to be incurred.
Under the percentage-of-completion method, recognition of profit is dependent upon the accuracy of a variety of estimates including engineering progress, materials quantities, achievement of milestones and other incentives, 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.
We have entered into fixed-price Exit Strategy contracts to remediate environmental conditions at contaminated sites. Under most Exit Strategy contracts, the majority of the contract price was deposited by the client into a restricted account with an insurer. The funds in the restricted account are held by the insurer and used to pay us as work is performed. The arrangement with the insurer provides for the deposited funds to earn interest at the one-year constant maturity United States Treasury Bill rate. The interest is recorded when earned and reported as interest income from contractual arrangements on the consolidated statements of operations. On certain Exit Strategy projects we have taken title to the underlying properties in order to facilitate access, remedial construction, performance of operations monitoring and maintenance activities and the overall execution of the cleanup. As these

25


properties are distressed, they have no value.
The Exit Strategy funds held by the insurer, including any interest growth thereon, are recorded as an asset (current and long-term restricted investment) on our consolidated balance sheets, with a corresponding liability (current and long-term deferred revenue) related to the funds. Consistent with our other fixed-price contracts, we recognize revenue on Exit Strategy contracts using the percentage-of-completion method. When determining the extent of progress towards completion on Exit Strategy contracts, prepaid insurance premiums and fees are amortized, on a straight-line basis, to cost incurred over the life of the related insurance policy. Certain Exit Strategy contracts were classified as pertaining to either remediation or operation, maintenance and monitoring. In addition, certain Exit Strategy contracts were segmented such that the remediation and operation portion of the contract is separately accounted for from the maintenance and monitoring portion.
Under most Exit Strategy contracts, additional payments were made by the client to the insurer, typically through an insurance broker, for insurance premiums and fees for a policy to cover potential costs in excess of the original estimates and other factors such as third party liability. For Exit Strategy contracts where we establish that (1) costs exceed the contract value and interest growth thereon and (2) such costs are covered by insurance, we record an estimated insurance recovery up to the amount of insured costs. An insurance gain, that is, an amount to be recovered in excess of our recorded costs, is not recognized until the receipt of insurance proceeds. Insurance recoveries are reported as insurance recoverables and other income on our consolidated statements of operations. If estimated total costs on any contract indicate a loss, we charge the entire estimated loss to operations in the period the loss first becomes known.
Unit price contracts are a subset of fixed-price contracts. Under unit price contracts, our clients pay a set fee for each unit of service or production. We recognize revenue under unit price contracts as we complete the related service transaction for our clients. If our costs per service transaction exceed original estimates, our profit margins will decrease, and we may realize a loss on the project unless we can receive payment for the additional costs.
Time-and-Materials Contracts
Under time-and-materials contracts we negotiate hourly billing rates and charge our clients based on the actual time that we expend on a project. In addition, clients reimburse us for actual out-of-pocket costs of materials and other direct reimbursable expenses that we incur in connection with our performance under the contract. Our profit margins on time-and-materials contracts fluctuate based on actual labor and overhead costs that we directly charge or allocate to contracts compared to negotiated billing rates. Revenue on time-and-materials contracts is recognized based on the actual number of hours we spend on the projects plus any actual out-of-pocket costs of materials and other direct reimbursable expenses that we incur on the projects.
Cost-Plus Contracts
Cost-Plus Fixed Fee Contracts.  Under our cost-plus fixed fee contracts we charge clients for our costs, including both direct and indirect costs, plus a fixed negotiated fee. In negotiating a cost-plus fixed fee contract we estimate all recoverable direct and indirect costs and then add a fixed profit component. The total estimated cost plus the negotiated fee represents the total contract value. We recognize revenue based on the actual labor and non-labor costs we incur plus the portion of the fixed fee we have earned to date. Revenue is recognized as we invoice for our services or in accordance with agreed upon billing schedules.
Cost-Plus Fixed Rate Contracts.  Under our cost-plus fixed rate contracts we charge clients for our costs plus negotiated rates based on our indirect costs. In negotiating a cost-plus fixed rate contract we estimate all recoverable direct and indirect costs and then add a profit component, which is a percentage of total recoverable costs, to arrive at a total dollar estimate for the project. We recognize revenue based on the actual total costs we have expended plus the applicable fixed rate. If the actual total costs are lower than the total costs we have estimated, our revenue from that project will be lower than originally estimated.
Change Orders/Claims
Change orders are modifications to an original contract that change the provisions of the contract. Change orders typically result from changes in scope, specifications or design, manner of performance, facilities, equipment, materials, sites, or period of completion of the work. Claims are amounts in excess of the agreed contract price that we seek to collect from our clients or others for delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes.
Costs related to change orders and claims are recognized when they are incurred. Change orders are included in total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated. Claims are included in total estimated contract revenues only to the extent that contract costs related to the claims have been incurred and when it is probable that the claim will result in a bona fide addition to contract value which can be reliably estimated. No profit is recognized on claims until final settlement occurs. For the fiscal years ended June 30, 2012, 2011 and 2010, we did not recognize any revenue related to claims.

26


Other Contract Matters
Federal Acquisition Regulations ("FAR"), which are applicable to our federal government contracts and may be incorporated in many local and state agency contracts, limit the recovery of certain specified indirect costs on contracts. Cost-plus contracts covered by FAR or with certain state and local agencies also require an audit of actual costs and provide for upward or downward adjustments if actual recoverable costs differ from billed recoverable costs. Most of our federal government contracts are subject to termination at the discretion of the client. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination.
Contracts with the federal government are subject to audit, primarily by the Defense Contract Audit Agency ("DCAA"), which reviews our overhead rates, operating systems and cost proposals. During the course of its audits, the DCAA may disallow costs if it determines that we have accounted for such costs in a manner inconsistent with Cost Accounting Standards or FAR. Our last incurred cost audit was for fiscal year 2004 and resulted in a $14 thousand adjustment. Incurred cost proposals have been submitted to DCAA for fiscal years 2005 through 2011 and are pending DCAA audit. Historically we have not had any material cost disallowances by the DCAA as a result of audit, however there can be no assurance that DCAA audits will not result in material cost disallowances in the future.
Allowance for Doubtful Accounts—An allowance for doubtful accounts is maintained for estimated losses resulting from the failure of our clients to make required payments. The allowance for doubtful accounts has been determined through reviews of specific amounts deemed to be uncollectible and estimated write-offs as a result of clients who have filed for bankruptcy protection plus an allowance for other amounts for which some loss is determined to be probable based on current circumstances. If the financial condition of clients or our assessment as to collectability were to change, adjustments to the allowances may be required.
Income Taxes—We are required to estimate the provision for income taxes, including the current tax expense together with assessing temporary differences resulting from differing treatments of assets and liabilities for tax and financial accounting purposes. These differences between the financial statement and tax bases of assets and liabilities, together with net operating loss ("NOL") carryforwards and tax credits are recorded as deferred tax assets or liabilities on the consolidated balance sheets. An assessment is required to be made of the likelihood that the deferred tax assets will be recovered from future taxable income. To the extent that we determine that it is more likely than not that the deferred asset will not be utilized, a valuation allowance is established. Taxable income in future periods significantly above or below that projected will cause adjustments to the valuation allowance that could materially decrease or increase future income tax expense.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial statements.
Goodwill and Other Intangible Assets—In accordance with ASC Topic 350, Intangibles—Goodwill and Other, goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to impairment testing at least annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. We perform impairment tests for our reporting units with recorded goodwill utilizing valuation methods, including the discounted cash flow method, the guideline company approach, and the guideline transaction approach, as the best evidence of fair value. The valuation methodology used to estimate the fair value of the total Company and our reporting units requires inputs and assumptions (i.e. revenue growth, operating profit margins and discount rates) that reflect current market conditions. The estimated fair value of each reporting unit is compared to the carrying amount of the reporting unit, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the goodwill of the reporting unit is potentially impaired, and we then determine the implied fair value of goodwill, which is compared to the carrying value of goodwill to determine if impairment exists.
We performed our most recent annual goodwill impairment review as of April 27, 2012, and noted the fair value of each of our reporting units with goodwill exceeded its carrying value. Therefore no further analysis was required. As of June 30, 2012, we had $24.9 million of goodwill. We do not believe there were any events or changes in circumstances since our April 2012 annual assessment that would indicate the fair value of goodwill was more likely than not reduced to below its carrying value. In making this assessment, we relied on a number of factors including operating results, business plans, anticipated future cash flows, transactions and market data.
Other intangible assets are included in other assets on the consolidated balance sheets and consist primarily of purchased

27


customer relationships and other intangible assets acquired in acquisitions. The costs of intangible assets with determinable useful lives are amortized on a basis approximating the economic value derived from those assets. We review the economic lives of our intangible assets annually.
Management judgment and assumptions are required in performing the impairment tests for all reporting units with goodwill and in measuring the fair value of goodwill, indefinite-lived intangibles and long-lived assets. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values or the amount of the recognized impairment losses.
Insurance Matters, Litigation and Contingencies—In the normal course of business, we are subject to certain contractual guarantees and litigation. Generally, such guarantees relate to project schedules and performance. Most of the litigation involves us as a defendant in contractual disputes, professional liability, personal injury and other similar lawsuits. We maintain insurance coverage for various aspects of our business and operations, however, we have elected to retain a portion of losses that may occur through the use of substantial deductibles, exclusions and retentions under our insurance programs. This practice may subject us to some future liability for which we are only partially insured or are completely uninsured. In accordance with ASC Topic 450, Contingencies, we record in our consolidated balance sheets amounts representing our estimated losses from claims and settlements when such losses are deemed probable and estimable. Otherwise, these losses are expensed as incurred. Costs of defense are expensed as incurred. We undertake an overall assessment of risk, and if the estimate of a probable loss is a range, and no amount within the range is a more reasonable estimate, we accrue the lower limit of the range. As additional information about current or future litigation or other contingencies becomes available, management will assess whether such information warrants the recording of changes in the expenses relating to those contingencies. Additional expenses could potentially have a material impact on our business, financial condition, results of operations or cash flows.
Results of Operations
We reported net income (loss) applicable to our common shareholders of $33.6 million, $(16.6) million and $(22.9) million for fiscal years 2012, 2011 and 2010, respectively.
Fiscal Year 2012
The net income applicable to our common shareholders for fiscal year 2012 of $33.6 million was positively impacted by the following:
an $11.1 million net reversal of the previously recorded Arena Towers litigation expense; and
$3.9 million net federal and state income benefit primarily related to the remeasurement of uncertain tax positions as a result of a settlement with the IRS for fiscal years 2003 through 2008.
Arena Towers Litigation:  A jury verdict was rendered against us and our subsidiary in the fourth quarter of fiscal year 2011, and, as a result, we took a charge of $17.3 million which included the full value of the verdict as well as pre-judgment interest. Subsequently, we filed a post-trial motion to disregard the late fee portion of the verdict, which was granted on October 5, 2011, resulting in an $11.2 million partial reversal of the previously recorded expense in the fiscal quarter ended September 30, 2011. In addition $0.1 million of expense was recorded in the quarter ended December 30, 2011 resulting in a net benefit of $11.1 million for fiscal year 2012. A judgment was entered in the case on October 10, 2011, and on January 3, 2012 we paid $8.7 million in full satisfaction of the judgment and interest.
Federal and State Income Tax Benefit: The net federal and state income tax benefit of $3.9 million for fiscal year 2012 is comprised of a benefit of $4.2 million attributable to the remeasurement of uncertain tax positions and a benefit of $1.0 million related to the release of a valuation allowance in conjunction with the acquisition of Payne, net of federal and state income tax expense of $1.3 million. The $4.2 million reduction in tax expense is directly attributable to the remeasurement of uncertain tax positions due to the settlement of the IRS examination for fiscal years 2003 through 2008, which resulted in a refund of approximately $0.1 million in federal taxes and interest.
In addition to the benefit from the two aforementioned items, our financial results for fiscal year 2012 reflected continued strong operational performance. Our operating results for fiscal year 2012 improved compared to the prior year. NSR increased 22.7% for fiscal year 2012 as compared to the prior year. Growth was balanced with equal contributions from acquisitions and organic activities. In addition, our margin improvement initiatives proved to be successful as all three operating segments increased segment profit margins during the year, and G&A increased at a lesser rate than NSR.
Fiscal Year 2011
The net loss applicable to our common shareholders for fiscal year 2011 of $16.6 million was adversely impacted by the following:

28


a $17.3 million charge incurred relating to the Arena Towers litigation expense; and
$7.3 million of accretion charges on preferred stock.
 
Arena Towers Litigation:  A case titled The Arena Group v. TRC Environmental Corporation and TRC Companies, Inc., was filed in September 2007 and involved a former landlord seeking damages for alleged breach of a lease for certain office space in Houston, Texas that a subsidiary had vacated. The jury in that case returned an adverse verdict against us and our subsidiary TRC Environmental Corporation that was significantly in excess of our previously established litigation expense. As a result, the consolidated statement of operations for the fiscal year ended June 30, 2011 included a charge of $17.3 million which included the full value of the verdict as well as pre-judgment interest.
Accretion Charges on Preferred Stock:    On June 1, 2009, we sold 7,209 shares of a new Series A Convertible Preferred Stock, $0.10 par value (the "Preferred Stock"), for $2,150 per share (the "2009 Private Placement") pursuant to a stock purchase agreement by and among us and three of our existing shareholders and related entities. The 2009 Private Placement resulted in proceeds of $15.3 million, net of issuance costs of $0.2 million of which $0.1 million were paid as of June 30, 2009. In accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options, and ASC 470-20-55-20, it was determined that the conversion price was at a discount to fair value. The value of this discount (the beneficial conversion feature) was $13.7 million. The beneficial conversion feature, a non-cash item, was deducted from the carrying value of the Preferred Stock and was accreted over 18 months, the period at the end of which the Preferred Stock converted to common stock on December 1, 2010. The accretion was treated as a preferred stock dividend. During fiscal year 2011 we recorded accretion charges on preferred stock of $7.3 million. The preferred stock converted to common stock on December 1, 2010, and, as of that date, no further preferred stock accretion charges were recorded.
Fiscal Year 2010
The net loss applicable to our common shareholders for fiscal year 2010 of $22.9 million included:
a $20.2 million impairment charge for goodwill and a $1.6 million charge due to the acceleration of amortization expense relating to certain customer relationship intangible assets;
$6.4 million of accretion charges on preferred stock;
a $4.2 million tax benefit; and
a $1.7 million gain on extinguishment of debt.
 
Goodwill and Intangible Assets:  During fiscal year 2010, we recorded a charge of $20.2 million for the impairment of goodwill related to reporting units within our Environmental and Energy operating segments. The key factor contributing to the goodwill impairment was a decline in actual and forecasted financial performance as a result of weak economic conditions as our clients took a cautious approach to starting large-scale capital improvement projects. During fiscal year 2010, we incurred $1.6 million of accelerated amortization expense relating to certain customer relationship intangible assets.
Accretion Charges on Preferred Stock:  On June 1, 2009, we sold 7,209 shares of a new Series A Convertible Preferred Stock, $0.10 par value (the "Preferred Stock"), for $2,150 per share (the "2009 Private Placement") pursuant to a stock purchase agreement by and among us and three of our existing shareholders and related entities. The 2009 Private Placement resulted in proceeds of $15.3 million, net of issuance costs of $0.2 million of which $0.1 million were paid as of June 30, 2009. In accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options, and ASC 470-20-55-20, it was determined that the conversion price was at a discount to fair value. The value of this discount (the beneficial conversion feature) was $13.7 million. The beneficial conversion feature, a non-cash item, was deducted from the carrying value of the Preferred Stock and was accreted over 18 months, the period at the end of which the Preferred Stock converted to common stock. The accretion was treated as a preferred stock dividend. During the fiscal year 2010 we recorded accretion charges on preferred stock of $6.4 million.
Federal and State Income Tax Benefit:  We recognized a net tax benefit of $4.2 million in fiscal year 2010 primarily due to: (i) the Worker, Homeownership, and Business Assistance Act of 2009 which amended I.R.C. §172(b)(1)(H), allowing taxpayers to elect to carry back an applicable NOL for a period of 3, 4, or 5 years, to offset taxable income in those preceding years and enabling us to carry back our fiscal year 2008 NOL for a tax benefit of $2.8 million, which amount was collected in fiscal year 2010; and (ii) the re-assessment of our uncertain tax positions based on communications with the IRS relating to its examination including the impact of the NOL law change which resulted in an income tax benefit of $1.9 million.
Gain on Extinguishment:  In fiscal year 2001 we made an investment in a privately held energy services contracting company ("Co-Energy LLC") that specialized in the installation of ground source heat pump systems. Over its history, Co-

29


Energy LLC incurred significant losses. During December 2009, in connection with the dissolution of Co-Energy LLC, a consolidated entity, we were legally released from an aggregate of $1.7 million of loans extended to Co-Energy LLC by a party unrelated to us. The loans were extinguished because Co-Energy LLC had no assets at the time of dissolution. The lender did not have an equity interest in us and received no claims, rights or enhancement as a result of the extinguishment. Consequently, we recognized a $1.7 million gain on extinguishment of debt during fiscal year 2010.
Fiscal Year 2012 Compared to Fiscal Year 2011
Consolidated Results of Operations
The following table presents the dollar and percentage changes in certain items in the consolidated statements of operations for fiscal years 2012 and 2011:
 
Years Ended June 30,
 
Change
(Dollars in thousands)
2012
 
2011
 
$
 
%
Gross revenue
$
419,959

 
$
333,209

 
$
86,750

 
26.0
 %
Less subcontractor costs and other direct reimbursable charges
118,179

 
87,298

 
30,881

 
35.4

Net service revenue
301,780

 
245,911

 
55,869

 
22.7

Interest income from contractual arrangements
295

 
411

 
(116
)
 
(28.2
)
Insurance recoverables and other income
614

 
(1,573
)
 
2,187

 
NM
Cost of services (exclusive of costs shown separately below)
246,506

 
202,265

 
44,241

 
21.9

General and administrative expenses
31,025

 
26,286

 
4,739

 
18.0

Provision for doubtful accounts
755

 
1,763

 
(1,008
)
 
(57.2
)
Depreciation and amortization
5,508

 
4,729

 
779

 
16.5

Arena Towers litigation (reversal) expense
(11,061
)
 
17,278

 
(28,339
)
 
NM
Operating income (loss)
29,956

 
(7,572
)
 
37,528

 
NM
Interest expense
(668
)
 
(761
)
 
93

 
(12.2
)
Income (loss) from operations before taxes and equity in earnings
29,288

 
(8,333
)
 
37,621

 
NM
Federal and state income tax benefit (provision)
3,930

 
(1,127
)
 
5,057

 
NM
Income (loss) from operations before equity in earnings
33,218

 
(9,460
)
 
42,678

 
NM
Equity in earnings from unconsolidated affiliates, net of taxes
270

 
30

 
240

 
NM
Net income (loss)
33,488

 
(9,430
)
 
42,918

 
NM
Net loss applicable to noncontrolling interest
87

 
58

 
29

 
50.0

Net income (loss) applicable to TRC Companies, Inc.
33,575

 
(9,372
)
 
42,947

 
NM
Accretion charges on preferred stock

 
(7,261
)
 
7,261

 
(100.0
)
Net income (loss) applicable to TRC Companies, Inc.'s common shareholders
$
33,575

 
$
(16,633
)
 
$
50,208

 
NM
 
 
 
 
 
 
 
 
NM - Not Meaningful
 
 
 
 
 
 
 
Gross revenue increased $86.8 million, or 26.0%, to $420.0 million for fiscal year 2012 from $333.2 million for fiscal year 2011. Organic activities provided $46.2 million, or 53.2%, of gross revenue growth for fiscal year 2012, and acquisitions provided the remaining $40.6 million, or 46.8%. Excluding the effects of acquisitions, our organic gross revenue increased 13.9%, driven primarily by increased demand for our Energy services, which increased $34.0 million. We also experienced higher levels of subcontracting and procurement activity in our Environmental operating segment which generated higher gross revenues and other direct costs ("ODC's").
NSR increased $55.9 million, or 22.7%, to $301.8 million for fiscal year 2012 from $245.9 million for fiscal year 2011. Organic activities provided $25.0 million, or 44.8%, of NSR growth for fiscal year 2012, and acquisitions provided the remaining $30.9 million, or 55.2%. Excluding the effect of acquisitions, our organic NSR increased 10.2%, primarily driven by increased demand in our Energy operating segment. This increased demand was primarily due to our utility clients continuing to invest in the modernization and replacement of outdated facilities and to a lesser extent increased demand from the energy efficiency related market.

30


Interest income from contractual arrangements decreased $0.1 million, or 28.2%, to $0.3 million for fiscal year 2012 from $0.4 million for fiscal year 2011 primarily due to lower one−year constant maturity T−Bill rates and a lower average balance of restricted investments in fiscal year 2012 compared to the prior year.
Insurance recoverables and other income increased $2.2 million, or 139.0%, to $0.6 million for fiscal year 2012 from $(1.6) million for fiscal year 2011. During fiscal year 2011, we reduced our cost estimate on one project as we currently expect to complete our contractual obligation sooner than previously anticipated, resulting in less projected recoveries from the project-specific insurance policy. We did not have a similar contract adjustment in fiscal year 2012.
COS increased $44.2 million, or 21.9%, to $246.5 million for fiscal year 2012 from $202.3 million for fiscal year 2011. Acquisitions accounted for approximately $26.4 million, or 59.8%, of the increase while organic COS increased $17.8 million, or 40.2%. Excluding the effects of acquisitions, COS increased approximately $17.8 million primarily to support the aforementioned growing customer demand from our Energy operating segment clients. To serve this increase in demand, we increased our billable headcount and incurred additional facility related costs. As a percentage of NSR, COS was 81.7% and 82.3% for fiscal years 2012 and 2011, respectively.
G&A expenses increased $4.7 million, or 18.0%, to $31.0 million for fiscal year 2012 from $26.3 million for fiscal year 2011. The increase is primarily attributable to increased costs related to our performance based stock compensation plan; higher incentive compensation costs associated with our improved performance; and additional technology costs to support recent acquisitions. As a percentage of NSR, G&A expenses were 10.3% and 10.7% for fiscal years 2012 and 2011, respectively.
The provision for doubtful accounts decreased $1.0 million, or 57.2%, to $0.8 million for fiscal year 2012 from $1.8 million for fiscal year 2011. The decrease was primarily attributable to our continued focus on credit and collections.
Depreciation and amortization increased $0.8 million, or 16.5%, to $5.5 million for fiscal year 2012 from $4.7 million for fiscal year 2011. The increase in depreciation and amortization expense is primarily the result of additional amortization being incurred on intangible assets in connection with businesses acquired.
Arena Towers litigation expense decreased $28.3 million to a net gain of $11.1 million for fiscal year 2012 from a $17.3 million expense for fiscal year 2011. A jury verdict was rendered against us and our subsidiary in the fourth quarter of fiscal year 2011, and, as a result, we took a charge of $17.3 million which included the full value of the verdict as well as pre-judgment interest. Subsequently, we filed a post-trial motion to disregard the late fee portion of the verdict, which was granted on October 5, 2011, resulting in an $11.2 million partial reversal of the previously recorded expense in the quarter ended September 30, 2011. In addition $0.1 million of expense was recorded in the quarter ended December 30, 2011 resulting in a net benefit of $11.1 million for fiscal year 2012. A judgment was entered in the case on October 10, 2011, and on January 3, 2012 we paid $8.7 million in full satisfaction of the judgment and interest.
The federal and state income tax benefit was $3.9 million for fiscal year 2012 compared to a tax provision of $1.1 million for the same period in the prior fiscal year. The tax benefit of $3.9 million is comprised of a benefit of $4.2 million attributable to the remeasurement of uncertain tax positions and a benefit of $1.0 million related to the release of a valuation allowance in conjunction with the acquisition of Payne, net of federal and state income tax expense, of $1.3 million. The $4.2 million reduction in tax expense is directly attributable to the remeasurement of uncertain tax positions due to the settlement of the IRS examination for fiscal years 2003 through 2008, which resulted in a refund of approximately $0.1 million in federal taxes and interest.

Operating Segment Results of Operations
Energy Operating Segment Results
 
Fiscal Year
 
 
 
 
(Dollars in thousands)
2012
 
2011
 
Change
Gross revenue
$
125,219

 
$
87,372

 
$
37,847

 
43.3
%
Net service revenue
$
96,018

 
$
71,625

 
$
24,393

 
34.1
%
Segment profit
$
23,517

 
$
15,744

 
$
7,773

 
49.4
%
Gross revenue increased $37.8 million, or 43.3%, to $125.2 million for fiscal year 2012 from $87.4 million for fiscal year 2011. Organic activities provided $34.0 million, or 90.0%, of gross revenue growth for fiscal year 2012 with acquisitions providing the remaining $3.8 million, or 10.0%. The organic increase in gross revenue was primarily the result of increased activity on electric transmission and distribution projects driven by our utility clients continuing to increase investments in the modernization and replacement of outdated facilities.

31


NSR increased $24.4 million, or 34.1%, to $96.0 million for fiscal year 2012 from $71.6 million for fiscal year 2011. Organic activities provided $21.6 million, or 88.4%, of NSR growth for fiscal year 2012 with acquisitions providing the remaining $2.8 million, or 11.6%. The organic NSR growth was primarily the result of enhanced capital investments by utilities to upgrade their electric transmission and distribution systems and to a lesser extent increased activity in the energy efficiency markets.
The Energy operating segment's profit increased $7.8 million or 49.4%, to $23.5 million for fiscal year 2012 from $15.7 million for fiscal year 2011. Organic activities provided $6.9 million, or 89.2%, of operating segment profit growth for fiscal year 2012 with acquisitions providing the remaining $0.9 million, or 10.8%. The increase in the Energy operating segment's organic profit for fiscal year 2012 was primarily related the continued improvement in general market conditions as described above. For fiscal year 2012, the Energy operating segment's profit, as a percentage of NSR, increased to 24.5% from 22.0% compared to the prior year.

Environmental Operating Segment Results
 
Fiscal Year
 
 
 
 
(Dollars in thousands)
2012
 
2011
 
Change
Gross revenue
$
235,089

 
$
187,412

 
$
47,677

 
25.4
%
Net service revenue
$
159,016

 
$
129,396

 
$
29,620

 
22.9
%
Segment profit
$
31,955

 
$
24,764

 
$
7,191

 
29.0
%
Gross revenue increased $47.7 million, or 25.4%, to $235.1 million for fiscal year 2012 from $187.4 million for fiscal year 2011. Acquisitions provided $35.7 million, or 74.9% of gross revenue growth for fiscal year 2012 with organic activities providing the remaining $12.0 million, or 25.1%. The increase was primarily related to higher levels of subcontracting and procurement activity which generated higher gross revenues and ODC's.
NSR increased $29.6 million, or 22.9%, to $159.0 million for fiscal year 2012 from $129.4 million for fiscal year 2011. Acquisitions provided $26.9 million, or 90.9%, of NSR growth for fiscal year 2012. Organic NSR increased $2.7 million, or 9.1% for fiscal year 2012 primarily due to an increase in the demand for our environmental services which was bolstered by the mild winter.
The Environmental operating segment's profit increased $7.2 million, or 29.0%, to $32.0 million for fiscal year 2012 from $24.8 million for fiscal year 2011. Acquisitions provided $3.1 million, or 43.3%, of operating segment profit growth for fiscal year 2012. Organic operating segment profit increased $4.1 million, or 56.7%, for fiscal year 2012. The increase in the Environmental operating segment's organic profit for fiscal year 2012 was primarily due to additional NSR and improvements in project performance. For fiscal year 2012, the Environmental operating segment's profit, as a percentage of NSR, increased to 20.1% from 19.1% as compared to the prior year.

Infrastructure Operating Segment Results
 
Fiscal Year
 
 
 
 
(Dollars in thousands)
2012
 
2011
 
Change
Gross revenue
$
56,712

 
$
56,050

 
$
662

 
1.2
%
Net service revenue
$
43,528

 
$
42,278

 
$
1,250

 
3.0
%
Segment profit
$
7,738

 
$
5,823

 
$
1,915

 
32.9
%
Gross revenue increased $0.7 million, or 1.2%, to $56.7 million for fiscal year 2012 from $56.1 million for fiscal year 2011. The increase in gross revenue during fiscal year 2012 was primarily related to increased demand in design services.
NSR increased $1.3 million, or 3.0%, to $43.5 million for fiscal year 2012 from $42.3 million for fiscal year 2011. For fiscal year 2012, NSR grew at a higher rate than gross revenue primarily due to increased self-performed construction inspections and design work and reduced work on civil engineering projects which required higher levels of subcontractor services.
The Infrastructure operating segment's profit increased $1.9 million, or 32.9%, to $7.7 million for fiscal year 2012 from $5.8 million for fiscal year 2011. For fiscal year 2012, the Infrastructure operating segment's profit increased, as a percentage of NSR, to 17.8% from 13.8% as compared to the prior year. The stronger profit performance was due to improved project execution, the previously noted lower reliance on subcontractor services, and further improvements to our cost structure.

32


Fiscal Year 2011 Compared to Fiscal Year 2010
Consolidated Results of Operations
The following table presents the dollar and percentage changes in certain items in the consolidated statements of operations for fiscal years 2011 and 2010:
 
Years Ended June 30,
 
Change
(Dollars in thousands)
2011
 
2010
 
$
 
%
Gross revenue
$
333,209

 
$
330,575

 
$
2,634

 
0.8
 %
Less subcontractor costs and other direct reimbursable charges
87,298

 
100,476

 
(13,178
)
 
(13.1
)
Net service revenue
245,911

 
230,099

 
15,812

 
6.9

Interest income from contractual arrangements
411

 
596

 
(185
)
 
(31.0
)
Insurance recoverables and other income
(1,573
)
 
8,844

 
(10,417
)
 
NM
Cost of services (exclusive of costs shown separately below)
202,265

 
203,221

 
(956
)
 
(0.5
)
General and administrative expenses
26,286

 
26,028

 
258

 
1.0

Provision for doubtful accounts
1,763

 
2,344

 
(581
)
 
(24.8
)
Depreciation and amortization
4,729

 
8,049

 
(3,320
)
 
(41.2
)
Goodwill and intangible asset impairments

 
20,249

 
(20,249
)
 
(100.0
)
Arena Towers litigation expense
17,278

 
1,100

 
16,178

 
NM
Operating loss
(7,572
)
 
(21,452
)
 
13,880

 
(64.7
)
Interest expense
(761
)
 
(1,003
)
 
242

 
(24.1
)
Gain on extinguishment of debt

 
1,716

 
(1,716
)
 
(100.0
)
Loss from operations before taxes and equity in earnings (losses)
(8,333
)
 
(20,739
)
 
12,406

 
(59.8
)
Federal and state income tax (provision) benefit
(1,127
)
 
4,210

 
(5,337
)
 
NM
Loss from operations before equity in earnings (losses)
(9,460
)
 
(16,529
)
 
7,069

 
(42.8
)
Equity in earnings (losses) from unconsolidated affiliates, net of taxes
30

 
(45
)
 
75

 
NM
Net loss
(9,430
)
 
(16,574
)
 
7,144

 
(43.1
)
Net loss applicable to noncontrolling interest
58

 
125

 
(67
)
 
(53.6
)
Net loss applicable to TRC Companies, Inc. 
(9,372
)
 
(16,449
)
 
7,077

 
(43.0
)
Accretion charges on preferred stock
(7,261
)
 
(6,431
)
 
(830
)
 
12.9

Net loss applicable to TRC Companies, Inc.'s common shareholders
$
(16,633
)
 
$
(22,880
)
 
$
6,247

 
(27.3
)%
 
 
 
 
 
 
 
 
NM - Not Meaningful
 
 
 
 
 
 
 
Gross revenue increased $2.6 million, or 0.8%, to $333.2 million for fiscal year 2011 from $330.6 million for fiscal year 2010. Fiscal year 2011 gross revenue in our Energy operating segment increased $10.3 million primarily due to increased activity on electric transmission and distribution projects as a number of our clients have begun to resume investments that were deferred over the past few years. This increase was offset, in large part, by decreased gross revenue in our Environmental and Infrastructure operating segments. The $7.9 million decrease in our Environmental operating segment was primarily due to a decline in work performed by our subcontractors. Throughout fiscal year 2010, our projects experienced higher levels of subcontracting and procurement activity and, therefore, generated higher gross revenues and subcontractor costs and ODCs. Fiscal year 2011 gross revenue in our Infrastructure operating segment decreased $3.4 million primarily due to the wind-down of a large transportation design project, certain actions taken in fiscal year 2010 to eliminate lower margin work and lower overall demand primarily due to revenue shortfalls at state and municipal levels.
NSR increased $15.8 million, or 6.9%, to $245.9 million for fiscal year 2011 from $230.1 million for fiscal year 2010. NSR in our Energy operating segment increased $12.1 million for fiscal year 2011 primarily due to the above-mentioned increased activity on electric transmission and distribution projects. Fiscal year 2011 NSR in our Environmental operating segment also increased $9.0 million primarily due to improved project performance on certain Exit Strategy contracts and a moderate increase in demand for our environmental services as the market for environmental services began to recover following a decline as a result

33


of general economic conditions. These increases were offset, in part, by a $4.4 million decrease in our Infrastructure operating segment which was result of the wind-down of a significant transportation design project and lower overall demand from state and municipal clients which have experienced significant revenue shortfalls.
Interest income from contractual arrangements decreased $0.2 million, or 31.0%, to $0.4 million for fiscal year 2011 from $0.6 million for fiscal year 2010 primarily due to lower one year constant maturity T−Bill rates and a lower average balance of restricted investments in fiscal year 2011 compared to fiscal year 2010.
Insurance recoverables and other income decreased $10.4 million, or 117.8%, to $(1.6) million for fiscal year 2011 from $8.8 million for fiscal year 2010. During fiscal year 2010, three 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 policies procured at project inception to cover, among other things, costs in excess of the original estimates. Conversely, during fiscal year 2011, we reduced our cost estimate on one project as we expected to complete our contractual obligation sooner than previously anticipated, resulting in less projected recoveries from the project-specific insurance policy.
COS decreased $1.0 million, or 0.5%, to $202.3 million for fiscal year 2011 from $203.2 million for fiscal year 2010. The decrease was principally due to a $6.9 million decrease in Exit Strategy contract loss reserves offset by costs as described below. As discussed above, increases to our Exit Strategy cost estimates did not occur at the same level in fiscal year 2011 as in fiscal year 2010. Additionally, we reduced the loss reserve on one Exit Strategy project in fiscal year 2011 as we expected to complete our contractual obligation sooner than previously anticipated. The decrease in COS related to decreases to our Exit Strategy loss reserves was offset, in part, by additional costs incurred to support growth in NSR in our Environmental and Energy operating segments. Specifically, labor and bonus costs increased $4.0 million and travel, outside consultants and project chargeable equipment increased $1.5 million. In addition, during the fiscal year 2011 we incurred a $0.4 million charge for the early termination of an office lease. As a percentage of NSR, COS was 82.3% and 88.3% for fiscal years 2011 and 2010, respectively.
G&A expenses increased $0.3 million, or 1.0%, to $26.3 million for fiscal year 2011 from $26.0 million for fiscal year 2010. The increase was primarily attributable to increased legal fees related to the Arena Towers case. As a percentage of NSR, G&A expenses were 10.7% and 11.3% for fiscal years 2011 and 2010, respectively.
The provision for doubtful accounts decreased $0.6 million, or 24.8%, to $1.8 million for fiscal year 2011 from $2.3 million for fiscal year 2010. The decrease was primarily due to the collection of certain amounts previously determined to be uncollectible.
Depreciation and amortization decreased $3.3 million, or 41.2%, to $4.7 million for fiscal year 2011 from $8.0 million for fiscal year 2010. The decrease in depreciation expense was principally related to technology equipment becoming fully depreciated since fiscal year 2010. Also, amortization expense decreased during fiscal year 2011 due to accelerated amortization expense on certain intangible assets in the fourth quarter of fiscal year 2010.
We assessed the recoverability of goodwill as of April 29, 2011. The fair value of each of our reporting units with goodwill exceeded its carrying value, and therefore no further analysis was required. We did not believe there were any events or changes in circumstances since our April 2011 annual assessment that indicated the fair value of goodwill was more likely than not reduced to below its carrying value. We assessed the recoverability of goodwill during the first, second and fourth quarters of fiscal year 2010. In performing the goodwill assessments, we utilized valuation methods, including the discounted cash flow method, the guideline company approach, and the guideline transaction approach as the best evidence of fair value. The aggregate fair value of our reporting units declined from the December 25, 2009 valuation to the April 26, 2010 valuation primarily due to a decline in the estimated future cash flows of the reporting units and declines in market multiples of comparable companies. These declines were primarily driven by the U.S recession and its negative impact on several of our key markets, resulting in delays, curtailments and cancellations of proposed and existing projects, which decreased the overall demand for our services. The fair value of three of our reporting units with goodwill did not exceed its carrying value in the fourth quarter of fiscal year 2010, resulting in a goodwill impairment charge of $20.2 million.
Management judgment and assumptions are required in performing the impairment tests for all reporting units with goodwill and in measuring the fair value of goodwill, indefinite-lived intangibles and long-lived assets. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values or the amount of the recognized impairment losses.
Arena Towers litigation expenses increased $16.2 million to $17.3 million for fiscal year 2011 from $1.1 million for fiscal year 2010. During fiscal year 2011, the jury in that case returned an adverse verdict against us and our subsidiary TRC Environmental Corporation that was significantly in excess of our litigation reserve. As a result, the consolidated statement of operations for the fiscal year ended June 30, 2011 included a charge of $17.3 million which included the full value of the verdict as well as pre-judgment interest.
Interest expense decreased $0.2 million, or 24.1%, to $0.8 million for fiscal year 2011 from $1.0 million for fiscal year 2010.

34


The decrease was primarily due to lower interest expense incurred on the CAH loan due to the modification agreement entered into in June 2010 that reduced the interest rate from 10.0% to 6.5% in return for principal payments made on the loan.
The federal and state income tax provision was $1.1 million for fiscal year 2011 compared to a tax benefit of $4.2 million for fiscal year 2010 primarily related to uncertain tax positions. We incurred a tax provision of $1.1 million during fiscal year 2011 due to penalties and interest as well as expense from state income tax liabilities incurred which we were unable to offset with NOL carryforwards. We recognized a net tax benefit of $4.2 million in fiscal year 2010 primarily due to: (i) the Worker, Homeownership, and Business Assistance Act of 2009 which amended I.R.C. §172(b)(1)(H), allowing taxpayers to elect to carry back an applicable NOL for a period of 3, 4, or 5 years to offset taxable income in those preceding years and enabling us to carry back our fiscal year 2008 NOL for a tax benefit of $2.8 million, which amount was collected in fiscal year 2010; and (ii) the re-assessment of our uncertain tax positions based on communications with the IRS relating to its examination including the impact of the NOL law change which resulted in an income tax benefit of $1.9 million.

Operating Segment Results of Operations
Energy Operating Segment Results
 
Fiscal Year
 
 
 
 
(Dollars in thousands)
2011
 
2010
 
Change
Gross revenue
$
87,372

 
$
77,035

 
$
10,337

 
13.4
%
Net service revenue
$
71,625

 
$
59,554

 
$
12,071

 
20.3
%
Segment profit
$
15,744

 
$
8,572

 
$
7,172

 
83.7
%
Gross revenue increased $10.3 million, or 13.4%, to $87.4 million for fiscal year 2011 from $77.0 million for fiscal year 2010. The increase in gross revenue in fiscal year 2011 was due to the return of some of our clients to more typical electric transmission and distribution spending levels following a period of budgetary constraints.
NSR increased $12.1 million, or 20.3%, to $71.6 million for fiscal year 2011 from $59.6 million for fiscal year 2010. The increase in NSR was primarily due to increased activity on electric transmission and distribution projects as our clients began to resume investments in capital projects that were previously on hold.
The Energy operating segment's profit increased $7.2 million, or 83.7%, to $15.7 million for fiscal year 2011 from $8.6 million for fiscal year 2010. The increase in the Energy operating segment's profit during fiscal year 2011 was primarily related to the increase in NSR. As a percentage of NSR, the Energy operating segment's profit increased to 22.0% in fiscal year 2011 from 14.4% in fiscal year 2010.

Environmental Operating Segment Results
 
Fiscal Year
 
 
 
 
(Dollars in thousands)
2011
 
2010
 
Change
Gross revenue
$
187,412

 
$
195,332

 
$
(7,920
)
 
(4.1
)%
Net service revenue
$
129,396

 
$
120,431

 
$
8,965

 
7.4
 %
Segment profit
$
24,764

 
$
25,170

 
$
(406
)
 
(1.6
)%
Gross revenue decreased $7.9 million, or 4.1%, to $187.4 million for fiscal year 2011 from $195.3 million for fiscal year 2010. The decline was primarily due to the wind-down of subcontractor activity on two large environmental projects, which resulted in both decreased gross revenue and subcontractor costs. This decrease was offset by increased demand for work performed by our employees.
NSR increased $9.0 million, or 7.4%, to $129.4 million for fiscal year 2011 from $120.4 million for fiscal year 2010. The increase in NSR for fiscal year 2011 was primarily related to increased revenue from Exit Strategy contracts due to improved project performance, and, in particular, a favorable project close-out related to a large commercial development project recorded in fiscal year 2011. In addition, the market for our environmental services began to recover following a decline related to general economic conditions.
Insurance recoverables and other income decreased $10.4 million, or 117.8%, to $(1.6) million for fiscal year 2011 from $8.8

35


million for fiscal year 2010. During fiscal year 2010, three 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 policies procured at project inception to cover, among other things, costs in excess of the original estimates. Conversely, during fiscal year 2011, we reduced our cost estimate on one project as we expected to complete our contractual obligation sooner than previously anticipated, resulting in less projected recoveries from the project-specific insurance policy.
The Environmental operating segment's profit decreased $0.4 million, or 1.6%, to $24.8 million for fiscal year 2011 from $25.2 million for fiscal year 2010. The decrease in the Environmental operating segment's profit for fiscal year 2011 was related to decreases in insurance recoverables, offset, by higher NSR. As a percentage of NSR, the Environmental operating segment's profit decreased to 19.1% in fiscal year 2011 from 20.9% in fiscal year 2010.

Infrastructure Operating Segment Results
 
Fiscal Year
 
 
 
 
(Dollars in thousands)
2011
 
2010
 
Change
Gross revenue
$
56,050

 
$
59,446

 
$
(3,396
)
 
(5.7
)%
Net service revenue
$
42,278

 
$
46,636

 
$
(4,358
)
 
(9.3
)%
Segment profit
$
5,823

 
$
4,565

 
$
1,258

 
27.6
 %
Gross revenue decreased $3.4 million, or 5.7%, to $56.1 million for fiscal year 2011 from $59.4 million for fiscal year 2010. The decrease in gross revenue for our Infrastructure operating segment was primarily due to the wind-down of a large transportation design project and lower overall demand for our services driven by uncertainties in federal policy and funding.
NSR decreased $4.4 million, or 9.3%, to $42.3 million for fiscal year 2011 from $46.6 million for fiscal year 2010. The decrease in NSR for our Infrastructure operating segment was due to the reasons described above in addition to lower overall demand related primarily to revenue shortfalls at state and municipal levels.
The Infrastructure operating segment's profit increased $1.3 million, or 27.6%, to $5.8 million for fiscal year 2011 from $4.6 million for fiscal year 2010. Our Infrastructure operating segment experienced stronger performance for fiscal year 2011, as compared to fiscal 2010, despite a reduction in the overall volume of business, as we continue to reduce low margin work. As a percentage of NSR, the Infrastructure operating segment's profit increased to 13.8% in fiscal year 2011 from 9.8% in fiscal year 2010.
















36


Costs and Expenses as a Percentage of NSR
The following table presents the percentage relationships of items in the consolidated statements of operations to NSR for fiscal years 2012, 2011 and 2010:
 
2012
 
2011
 
2010
Net service revenue
100.0
 %
 
100.0
 %
 
100.0
 %
Interest income from contractual arrangements
0.1

 
0.2

 
0.3

Insurance recoverables and other income
0.2

 
(0.6
)
 
3.8

Operating costs and expenses:
 
 
 
 
 
Cost of services (exclusive of costs shown separately below)
81.7

 
82.3

 
88.3

General and administrative expenses
10.3

 
10.7

 
11.3

Provision for doubtful accounts
0.3

 
0.7

 
1.0

Depreciation and amortization
1.8

 
1.9

 
3.5

Goodwill and intangible asset impairments

 

 
8.8

Arena Towers litigation (reversal) expense
(3.7
)
 
7.0

 
0.5

Total operating costs and expenses
90.4

 
102.6

 
113.4

Operating income (loss)
9.9

 
(3.1
)
 
(9.3
)
Interest expense
(0.2
)
 
(0.3
)
 
(0.4
)
Gain on extinguishment of debt

 

 
0.7

Income (loss) from operations before taxes and equity in earnings (losses)
9.7

 
(3.4
)
 
(9.0
)
Federal and state income tax benefit (provision)
1.3

 
(0.5
)
 
1.8

Income (loss) from operations before equity in earnings (losses)
11.0

 
(3.8
)
 
(7.2
)
Equity in earnings (losses) from unconsolidated affiliates, net of taxes
0.1

 

 

Net income (loss)
11.1

 
(3.8
)
 
(7.2
)
Net loss applicable to noncontrolling interest

 

 
0.1

Net income (loss) applicable to TRC Companies, Inc.
11.1

 
(3.8
)
 
(7.1
)
Accretion charges on preferred stock

 
(3.0
)
 
(2.8
)
Net income (loss) applicable to TRC Companies, Inc.'s common shareholders
11.1
 %
 
(6.8
)%
 
(9.9
)%

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





37


The following table provides summarized information with respect to of our cash balances and cash flows as of and for the fiscal years ended June 30, 2012, 2011 and 2010 (in thousands):
 
 
June 30, 2012
 
June 30, 2011
 
June 30, 2010
Cash flows provided by operating activities
 
$
19,438

 
$
12,537

 
$
11,077

Cash flows used in investing activities
 
(9,100
)
 
(15,115
)
 
(2,677
)
Cash flows used in financing activities
 
(4,606
)
 
(1,302
)
 
(2,160
)
Cash and cash equivalents as of the end of the fiscal year
 
16,561

 
10,829

 
14,709

Fiscal Year 2012 Compared to Fiscal Year 2011
Cash flows provided by operating activities were $19.4 million for fiscal year 2012, compared to $12.5 million of cash provided for fiscal year 2011. Cash used in operating assets and liabilities during fiscal year 2012 totaled $43.8 million consisting primarily of the following: (1) a $17.2 million decrease in other accrued liabilities, primarily the result of our payment related to the Arena Towers litigation judgment and a decrease to Exit Strategy related contract loss reserves; (2) a $13.5 million decrease in deferred revenue primarily related to revenue earned on Exit Strategy projects; (3) a $5.4 million increase in accounts receivable due to the increase in gross revenue in fiscal year 2012; and (4) a $5.2 million decrease in income taxes payable primarily due to a reduction in tax expense related to the uncertain tax position as a result of reaching a settlement with the IRS for fiscal years 2003 through 2008.
Cash used in operating assets and liabilities during fiscal year 2012 was offset by cash provided by operating assets and liabilities totaling $29.9 million and primarily consisted of the following: (1) a $9.3 million decrease in restricted investments primarily due to work performed on Exit Strategy projects; (2) a $7.4 million increase in accrued compensation and benefits due primarily to increased bonus accruals driven by our operating results; (3) a $5.1 million decrease in environmental remediation insurance recoverables; and (4) a $5.0 million increase in accounts payable due to the timing of payments to vendors. In addition, non-cash items for fiscal year 2012 resulted in net expenses of $0.2 million consisting primarily of $11.1 million of a net gain recorded on the reversal of the Arena Towers litigation expense in fiscal year 2012 which was offset by $6.6 million for stock-based compensation expense and $5.5 million for depreciation and amortization.
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, decreased to 78 days as of June 30, 2012 from 85 days as of June 30, 2011.
Cash used in investing activities was $9.1 million during fiscal year 2012, compared to $15.1 million used in fiscal year 2011. The decrease in cash used in investing activities was primarily the result of cash paid for the acquisitions of RMT-EBU and AUE in fiscal year 2011, partially offset by investment in equipment at the RMT-EBU entity during fiscal year 2012.
Cash used in financing activities was $4.6 million during fiscal year 2012, compared to $1.3 million used in fiscal year 2011. The increase in cash used in financing activities was primarily the result of cash paid of $5.0 million to repay the Federal Partners subordinated note and additional cash used to pay tax withholding obligations on behalf of employees related to restricted stock vesting in fiscal year 2012, which was partially offset by the financing of a three year software licensing agreement.
Fiscal Year 2011 Compared to Fiscal Year 2010
Cash flows provided by operating activities were $12.5 million for fiscal year 2011, compared to $11.1 million of cash provided for fiscal year 2010. Sources of cash provided by operating assets and liabilities for fiscal year 2011 totaled $31.0 million and primarily consisted of the following: (1) an $8.5 million decrease in restricted investments primarily due to work performed on Exit Strategy projects; (2) a $7.1 million decrease in prepaid insurance attributable to continued amortization of policies on Exit Strategy projects; (3) a $4.9 million increase in accrued compensation and benefits due primarily to the one additional accrual day at the current year end and increased bonus accruals driven by our operating results net of the Arena Towers litigation reserve; and (4) a $4.5 million decrease in accounts receivable due to timing of collections and a favorable reduction in days sales outstanding. Sources of cash provided by operating assets and liabilities during fiscal year 2011 were offset by cash used in operating assets and liabilities totaling $35.0 million which consisted primarily of the following: (1) an $18.8 million decrease in deferred revenue primarily related to revenue earned on Exit Strategy projects; and (2) an $11.4 million decrease in accounts payable primarily due to the timing of payments to vendors. In addition, non-cash items for fiscal year 2011 resulted in net expenses of $26.0 million consisting primarily of the following: (1) a $17.3 million charge related to the Arena Towers litigation reserve; (2) $4.7 million

38


for depreciation and amortization; (3) $2.5 million for stock-based compensation expense; and (4) $1.8 million for the provision for doubtful accounts.
Cash used in investing activities was $15.1 million during fiscal year 2011, compared to $2.7 million used in fiscal year 2010. The increase in cash used in investing activities was primarily the result of cash paid for the acquisitions of RMT-EBU and AUE during fiscal year 2011.
Cash used in financing activities was $1.3 million during fiscal year 2011, compared to $2.2 million used in fiscal year 2010. Cash used consisted of $3.6 million for payments made on long-term debt and the short-term insurance financing related to fiscal year 2011 insurance premiums which was offset by $2.6 million of short-term financing related to fiscal year 2011 insurance premiums which had been repaid as of June 30, 2011.
Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations as of June 30, 2012 and 2011 were comprised of the following (in thousands):
 
2012
 
2011
Revolving credit facility
$

 
$

Subordinated debt:
 
 
 
Federal Partners note payable

 
5,000

CAH note payable
2,448

 
2,450

AUE note payable
450

 
900

Other notes payable
1,906

 
277

Lease financing obligations
371

 
549

Capital lease obligations
729

 

 
5,904

 
9,176

Less current portion
(1,582
)
 
(3,139
)
Long-term debt and capital lease obligations
$
4,322

 
$
6,037


Revolving Credit Facility
We and substantially all of our subsidiaries (the "Borrower"), have entered into a secured credit agreement (the “Credit Agreement”) and related security documentation with Wells Fargo Capital Finance ("Wells Fargo"). The Credit Agreement, as amended, most recently as of February 28, 2012, provides the Borrower with a senior revolving credit facility of up to $65.0 million (which includes an uncommitted $15.0 million syndication reserve) based upon a borrowing base formula on accounts receivable. The Credit Agreement expires on July 17, 2014. Any amounts outstanding under the Credit Agreement bear interest at the prime rate plus a margin of 2.00% to 2.75%, or at LIBOR plus a margin of 3.00% to 3.50%, based on Trailing Twelve Month Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), as defined. Our obligations under the Credit Agreement are secured by a pledge of substantially all of our assets and guaranteed by substantially all of our subsidiaries that are not borrowers. The Credit Agreement also contains cross-default provisions which become effective if we default on other indebtedness.
Under the Credit Agreement, we must maintain average monthly backlog of $190.0 million and, depending on available borrowing capacity, maintain a minimum fixed charge coverage ratio of 1.00 to 1.00. A fixed charge coverage ratio covenant is applicable only if available borrowing capacity under the facility plus qualified cash, measured on a trailing 30 days average basis, is less than $20.0 million, or at any point during the most recent fiscal quarter, is less than $15.0 million. The Credit Agreement also requires us to achieve minimum levels of Consolidated Adjusted EBITDA of $3.0 million, $6.0 million, $10.0 million and $12.5 million, for the three months ended September 30, 2011, the six months ended December 31, 2011, the nine months ended March 31, 2012 and the twelve months ended June 30, 2012, respectively, and $12.5 million for each 12 month period ending each fiscal quarter thereafter. The Credit Agreement limits maximum annual capital expenditures to $7.5 million for fiscal year 2012 and $8.5 million for fiscal year 2013. We can issue up to $15.0 million in letters of credit under the Credit Agreement.
Management presents Consolidated Adjusted EBITDA, which is a non-U.S. GAAP measure, because we believe it is a useful tool for us, our lenders and our investors to measure our ability to meet debt service, capital expenditure and working capital requirements. Consolidated Adjusted EBITDA, as presented, may not be comparable to similarly titled measures reported by other companies, because not all companies calculate EBITDA in an identical manner. Consolidated Adjusted EBITDA is not intended to represent cash flows for the period or funds available for management's discretionary use, nor is it represented as an alternative to operating income (loss) as an indicator of operating performance and should not be considered in isolation or as a substitute

39


for measures of performance prepared in accordance with generally accepted accounting principles. Our Consolidated Adjusted EBITDA should be evaluated in conjunction with U.S. GAAP measures such as operating income (loss), net income (loss), cash flows from operations and other measures of equal or greater importance. Consolidated Adjusted EBITDA is presented below based on both the definition used in our Credit Agreement as well as the typical calculation method. Set forth below is a reconciliation of Consolidated Adjusted EBITDA, as calculated under the Credit Agreement, to operating income for the trailing twelve month periods ended June 30, 2012, 2011 and 2010 (in thousands):
 
Trailing Twelve Months
 
June 30, 2012
 
June 30, 2011
 
June 30, 2010
Operating income (loss)
$
29,956

 
$
(7,572
)
 
$
(21,452
)
Depreciation and amortization
5,508

 
4,729

 
8,049

  EBITDA
35,464

 
(2,843
)
 
(13,403
)
Goodwill and intangible asset impairments

 

 
20,249

Permitted discretionary cost reduction efforts

 
836

 
1,722

Permitted discretionary litigation reserve

 
17,278

 

  Consolidated Adjusted EBITDA under the Credit Agreement
$
35,464

 
$
15,271

 
$
8,568

The actual covenant results as compared to the covenant requirements under the Credit Agreement as of June 30, 2012 for the measurement periods described below are as follows (in thousands):
 
Measurement Period
 
Actual
 
Required
Minimum Consolidated Adjusted EBITDA
Trailing 12 months
 
$
35,464

 
Must Exceed
 
$
12,500

Average Monthly Backlog
Trailing 3 months
 
$
386,081

 
Must Exceed
 
$
190,000

Capital Expenditures
Fiscal year 2012
 
$
7,114

 
Not to Exceed
 
$
7,500

Minimum Fixed Charge Coverage Ratio (1)
Trailing 12 months
 
 Not Applicable

 
Must Exceed
 
 1.00 to 1.00

_________________________

(1)
As of June 30, 2012, the minimum fixed charge coverage ratio covenant is not applicable as the available borrowing capacity under the facility, measured on a trailing 30 day average basis, was greater than $20.0 million and, at no point during the most recent fiscal quarter, was less than $15.0 million.

As of June 30, 2012 and 2011, we had no borrowings outstanding pursuant to the Credit Agreement. Letters of credit outstanding were $4.2 million and $3.8 million as of June 30, 2012 and 2011, respectively. Based upon the borrowing base formula, the maximum availability under the Credit Agreement was $49.1 million and $35.0 million as of June 30, 2012 and 2011, respectively. Funds available to borrow under the Credit Agreement, after consideration of the letters of credit outstanding, were $44.9 million and $31.2 million as of June 30, 2012 and 2011, respectively.
Federal Partners Note Payable
On July 19, 2006, we and substantially all of our subsidiaries entered into a three-year subordinated loan agreement with Federal Partners, L.P., a stockholder of ours, pursuant to which we borrowed $5.0 million. The loan bore interest at a fixed rate of 9.0% per annum. The loan was amended on June 1, 2009 in connection with our preferred stock offering to extend the maturity date from July 19, 2009 to July 19, 2012. We repaid this loan in full on April 11, 2012.
CAH Note Payable
In fiscal year 2007, we formed a limited liability company, Center Avenue Holdings, LLC ("CAH"), to purchase and remediate certain property in New Jersey. We maintain a 70% ownership position in CAH. CAH entered into a term loan agreement with a commercial bank in the amount of approximately $3.2 million which bore interest at a fixed rate of 10.0% annually. The loan is secured by the CAH property and is non-recourse to the members of CAH. The proceeds from the loan were used to purchase, and are currently funding the remediation of, the property. In June 2010, we entered into a modification of the credit agreement that (i) reduced the interest rate from 10.0% to 6.5% in return for a principal payment of $0.5 million made upon consummation of the modification followed by a second principal payment of $0.25 million made on December 1, 2010 and (ii) extended the maturity date of the loan from January 31, 2010 until April 1, 2011. We have entered into several modifications of the credit

40


agreement further extending the maturity date of the loan, the latest being in November 2011, which extended the maturity date until October 1, 2013. As of June 30, 2012, the balance outstanding under this loan was $2.4 million.
AUE Note Payable
In February 2011, in connection with the purchase of AUE, we entered into a two year subordinated promissory note with the seller pursuant to which we agreed to pay $0.9 million. The note bears interest at a fixed rate of 3.25% per annum. The principal amount outstanding under this note is due and payable in two equal installments of $0.45 million on each of the first and second anniversaries of the note. As of June 30, 2012, the balance outstanding under this loan was $0.45 million.
Other Notes Payable
In March 2012, we financed $2.2 million for a three year software licensing agreement payable in twelve equal quarterly installments of approximately $0.2 million each, including a finance charge of 2.74%. As of June 30, 2012, the balance outstanding under this agreement was $1.8 million.
In July 2011, we financed $2.4 million of insurance premiums payable in nine equal monthly installments of approximately $0.3 million each, including a finance charge of 2.34%. As of June 30, 2012, the balance has been repaid.
Capital Lease Obligations
In fiscal year 2012 we financed $0.8 million of furniture, office equipment, and computer equipment under capital lease agreements expiring in fiscal years 2014 and 2015. 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 lower of their related lease terms or their estimated useful lives. Amortization of assets under capital leases is included in depreciation and amortization in the consolidated statements of operations. The cost of assets under capital leases was $0.8 million, and accumulated amortization was $48 thousand at June 30, 2012. The average interest rates on the capital leases is 2.6% and is imputed based on the lower of our incremental borrowing rate at the inception of each lease or the implicit rate of the respective lease.
Future Minimum Long-Term Debt and Capital Lease Obligation Payments
Future minimum long-term debt and capital lease obligation payments as of June 30, 2012 were as follows (in thousands):
Fiscal Year
 
Debt
 
Lease
Financing
Obligations
 
Capital Lease Obligations
 
Total
2013
 
$
1,171

 
$
144

 
$
267

 
$
1,582

2014
 
3,193

 
97

 
253

 
3,543

2015
 
416

 
97

 
209

 
722

2016
 
24

 
33

 

 
57

2017
 

 

 

 

Thereafter
 

 

 

 

 
 
$
4,804

 
$
371

 
$
729

 
$
5,904

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








41


Contractual Obligations
The following table sets forth, as of June 30, 2012, certain information concerning our obligations to make future principal and interest payments (variable interest components used interest rates for estimating future interest payment obligations of between 2.29% to 8.00%) under contracts, such as debt and lease agreements (in thousands).
 
Payments due by period (1)
Contractual Obligations
Total
 
Year 1
 
Years 2 - 3
 
Years 4 - 5
 
Beyond
Revolving credit facility
$

 
$

 
$

 
$

 
$

Subordinated debt:
 
 
 
 
 
 
 
 
 
CAH note payable
2,660

 
159

 
2,501

 

 

AUE note payable
465

 
465

 

 

 

Other notes payable
1,999

 
780

 
1,201

 
18

 

Operating leases
49,314

 
10,964

 
17,002

 
10,996

 
10,352

Lease financing obligations
371

 
144

 
194

 
33

 

Capital lease obligations
756

 
283

 
473